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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Mark One



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

or



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



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Commission File Number: 333-34120

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

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

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

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

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

The number of shares of the registrants common stock, $.001 par value,
outstanding as of October 31, 2001 was 15,600,259.

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TABLE OF CONTENTS



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



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Table of Contents

|        |                                                                                       |                                                                                                                              |    |        
|------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | -- | -------
|        |                                                                                       |                                                                                                                              |    | Page No
|PART I  | FINANCIAL INFORMATION                                                                 |                                                                                                                              |   
|Item 1  | Financial Statements                                                                  |                                                                                                                              | 3 
|        |                                                                                       | Condensed Consolidated Balance Sheets - December 31, 2000 and
September 30, 2001 (unaudited)                                 |    | 3      
|        |                                                                                       | Condensed Consolidated Statements of Operations (unaudited) -
Three and Nine Month Periods Ended September 30, 2001 and 2000 |    | 4      
|        |                                                                                       | Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Month Periods Ended September 30, 2001 and 2000           |    | 5      
|        |                                                                                       | Notes to Unaudited Condensed Consolidated Financial Statements                                                               |    | 6      
|Item 2  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                              | 7 
|Item 3  | Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                                              | 14
|PART II | OTHER INFORMATION                                                                     |                                                                                                                              |   
|Item 1  | Legal Proceedings                                                                     |                                                                                                                              | 14
|Item 2  | Change in Securities and Use of Proceeds                                              |                                                                                                                              | 14
|Item 3  | Defaults upon Senior Securities                                                       |                                                                                                                              | 15
|Item 4  | Submission of Matters to a Vote of Security Holders                                   |                                                                                                                              | 15
|Item 5  | Other Information                                                                     |                                                                                                                              | 15
|Item 6  | Exhibits and Reports on Form 8-K                                                      |                                                                                                                              | 15
|        | Signatures                                                                            |                                                                                                                              | 16

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PART I FINANCIAL INFORMATION




Item 1 Financial Statements




ISTA Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)

|                                     |                                                    |                                            |     |               |        |              |     |         |        | 
|------------------------------------ | -------------------------------------------------- | ------------------------------------------ | --- | ------------- | ------ | ------------ | --- | ------- | ------ | 
|                                     |                                                    |                                            |     | September 30, |        | December 31,
|                                     |                                                    |                                            |     | 2001          |        | 2000        
|                                     |                                                    |                                            |     |               |        |             
|                                     |                                                    |                                            |     | (Unaudited)   |        |              |     |        
|ASSETS                              
|Current assets:                      |                                                    |                                            |     |               |        |              |     |        
|                                     | Cash and cash equivalents                          |                                            | $   | 6,817         |        |              | $   | 8,772   |       
|                                     | Short-term investments, available for sale         |                                            |     | 5,064         |        |              |     | 16,957  |       
|                                     | Advance payments  clinical trials                 |                                            |     | 40            |        |              |     | 433     |       
|                                     | Other current assets                               |                                            |     | 623           |        |              |     | 669     |       
|                                     |                                                    |                                            |     |               |        |              |     |        
|                                     |                                                    | Total current assets                       |     |               | 12,544 |              |     |         | 26,831 | 
|Property and equipment, net          |                                                    |                                            | 802 |               |        |              | 912 |        
|Note receivable from officer         |                                                    |                                            | 170 |               |        |              | 162 |        
|Deposits and other assets            |                                                    |                                            | 44  |               |        |              | 116 |        
|                                     |                                                    |                                            |     |               |        |              |     |        
|                                     |                                                    | Total Assets                               |     | $             | 13,560 |              |     | $       | 28,021 | 
|                                     |                                                    |                                            |     |               |        |              |     |        
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                    |                                            |     |               |        |              |     |        
|                                     | Accounts payable                                   |                                            | $   | 598           |        |              | $   | 606     |       
|                                     | Accrued compensation and related expenses          |                                            |     | 266           |        |              |     | 364     |       
|                                     | Accrued expenses  clinical trials                 |                                            |     | 887           |        |              |     | 1,241   |       
|                                     | Other accrued expenses                             |                                            |     | 1,447         |        |              |     | 1,219   |       
|                                     | Current portion of obligation under capital lease  |                                            |     |              |        |              |     | 15      |       
|                                     |                                                    |                                            |     |               |        |              |     |        
|                                     |                                                    | Total current liabilities                  |     |               | 3,198  |              |     |         | 3,445  | 
|Deferred rent                        |                                                    |                                            |    |               |        |              | 12  |        
|Stockholders equity:                |                                                    |                                            |     |               |        |              |     |        
|                                     | Common stock                                       |                                            |     | 16            |        |              |     | 15      |       
|                                     | Additional paid in capital                         |                                            |     | 103,537       |        |              |     | 103,942 |       
|                                     | Deferred compensation                              |                                            |     | (999          | )      |              |     | (2,585  | )     
|                                     | Cumulative foreign currency translation adjustment |                                            |     | (33           | )      |              |     | (27     | )     
|                                     | Accumulated unrealized gain on investments         |                                            |     | 37            |        |              |     | 149     |       
|                                     | Deficit accumulated during the development stage   |                                            |     | (92,196       | )      |              |     | (76,930 | )     
|                                     |                                                    |                                            |     |               |        |              |     |        
|                                     |                                                    | Total stockholders equity                 |     |               | 10,362 |              |     |         | 24,564 | 
|                                     |                                                    |                                            |     |               |        |              |     |        
|                                     |                                                    | Total Liabilities and Stockholders Equity |     | $             | 13,560 |              |     | $       | 28,021 | 
|                                     |                                                    |                                            |     |               |        |              |     |        

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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 |       | Nine Months Ended |   | (Inception)  
|                                                                                |                            |   | September 30,      |       | September 30,     |   | Through      
|                                                                                |                            |   |                    |       |                   |   | September 30,
|                                                                                |                            |   | 2001               |       | 2000              |   | 2001          |       | 2000 |   | 2001   
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |        
|Operating expenses:                                                             |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|                                                                                | Research and development   |   | $                  | 3,929 |                   |   | $             | 4,075 |      |   | $       | 11,501 |  |   | $       | 11,655 |  |   | $              | 54,443 | 
|                                                                                | General and administrative |   |                    | 1,364 |                   |   |               | 1,590 |      |   |         | 4,518  |  |   |         | 4,801  |  |   |                | 20,509 | 
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Total operating expenses                                                        |                            |   | 5,293              |       |                   |   | 5,665         |       |      |   | 16,019  |        |  |   | 16,456  |        |  |   | 74,952         |       
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Loss from operations                                                            |                            |   | (5,293             | )     |                   |   | (5,665        | )     |      |   | (16,019 | )      |  |   | (16,456 | )      |  |   | (74,952        | )     
|Interest income                                                                 |                            |   | 131                |       |                   |   | 124           |       |      |   | 778     |        |  |   | 255     |        |  |   | 2,366          |       
|Interest expense                                                                |                            |   |                   |       |                   |   | (2            | )     |      |   | (25     | )      |  |   | (48     | )      |  |   | (320           | )     
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Net loss                                                                        |                            |   | (5,162             | )     |                   |   | (5,543        | )     |      |   | (15,266 | )      |  |   | (16,249 | )      |  |   | (72,906        | )     
|Deemed dividend for preferred stockholders                                      |                            |   |                   |       |                   |   |              |       |      |   |        |        |  |   | (19,245 | )      |  |   | (19,245        | )     
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Net loss attributable to common stockholders                                    |                            | $ | (5,162             | )     |                   | $ | (5,543        | )     |      | $ | (15,266 | )      |  | $ | (35,494 | )      |  | $ | (92,151        | )     
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Net loss per common share, basic and diluted                                    |                            | $ | (0.33              | )     |                   | $ | (0.70         | )     |      | $ | (0.98   | )      |  | $ | (8.98   | )      |  |   |                |       
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Shares used in computing net loss per
common share, basic and diluted           |                            |   | 15,599             |       |                   |   | 7,954         |       |      |   | 15,533  |        |  |   | 3,954   |        |  |   |                |       
|Pro forma net loss per common share, basic
and diluted                          |                            |   |                    |       |                   | $ | (0.42         | )     |      |   |         |        |  | $ | (3.18   | )      |  |   |                |       
|                                                                                |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                |       
|Shares used in computing pro forma net loss
per common share, basic and diluted |                            |   |                    |       |                   |   | 13,265        |       |      |   |         |        |  |   | 11,167  |        |  |   |                |       

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

|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |       |   |                |   | 
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | - | --------------------------------------------------- | ----- | - | ----------------- | ------- | ---------------- | - | ------- | ------- | ----- | - | -------------- | - | 
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |       |   | For the Period
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |       |   | From          
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |       |   | February 13,  
|                                                                                                                |                                                               |   |                                                     |       |   | Nine Months Ended |         | 1992
(Inception)
|                                                                                                                |                                                               |   |                                                     |       |   | September 30,     |         | Through         
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         | September 30,   
|                                                                                                                |                                                               |   |                                                     |       |   | 2001              |         | 2000             |   | 2001   
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |        
|Operating Activities                                                                                            |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|Net loss attributable to common stockholders                                                                    |                                                               | $ | (15,266                                             | )     |   | $                 | (35,494 | )                |   | $       | (92,151 | )    
|Deemed dividend for preferred stockholders                                                                      |                                                               |   |                                                    |       |   |                   | 19,245  |                  |   |         | 19,245  |      
|Adjustments to reconcile net loss attributable to common
stockholders to net cash used in operating activities: |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|                                                                                                                | Amortization of deferred compensation                         |   |                                                     | 1,078 |   |                   |         | 2,552            |   |         |         | 5,577 |  
|                                                                                                                | Common stock issued for services                              |   |                                                     |      |   |                   |         | 113              |   |         |         | 113   |  
|                                                                                                                | Loss on disposal of property and equipment                    |   |                                                     | 9     |   |                   |         |                 |   |         |         | 9     |  
|                                                                                                                | Depreciation and amortization                                 |   |                                                     | 254   |   |                   |         | 225              |   |         |         | 1,239 |  
|Changes in operating assets and liabilities:                                                                    |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|                                                                                                                | Advanced payments  clinical trials and other current assets  |   |                                                     | 439   |   |                   |         | 322              |   |         |         | (663  | )
|                                                                                                                | Note receivable from officer                                  |   |                                                     | (8    | ) |                   |         | (8               | ) |         |         | (170  | )
|                                                                                                                | Accounts payable                                              |   |                                                     | (8    | ) |                   |         | 470              |   |         |         | 598   |  
|                                                                                                                | Accrued compensation and related expenses                     |   |                                                     | (98   | ) |                   |         | (11              | ) |         |         | 266   |  
|                                                                                                                | Accrued expenses  clinical trials and other accrued expenses |   |                                                     | (126  | ) |                   |         | (2,502           | ) |         |         | 2,458 |  
|                                                                                                                | Deferred rent                                                 |   |                                                     | (12   | ) |                   |         | (7               | ) |         |         |      |  
|                                                                                                                | License fee received from Visionex                            |   |                                                     |      |   |                   |         |                 |   |         |         | 5,000 |  
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|                                                                                                                |                                                               |   | Net cash used in operating activities               |       |   | (13,738           | )       |                  |   | (15,095 | )       |       |   | (58,479        | )
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|Investing Activities                                                                                            |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|Purchase of marketable investment securities                                                                    |                                                               |   | (12,346                                             | )     |   |                   | (20,275 | )                |   |         | (32,236 | )    
|Sale of marketable investment securities                                                                        |                                                               |   | 24,129                                              |       |   |                   | 2,000   |                  |   |         | 27,211  |      
|Purchase of equipment                                                                                           |                                                               |   | (154                                                | )     |   |                   | (112    | )                |   |         | (2,043  | )    
|Deposits and other assets                                                                                       |                                                               |   | 72                                                  |       |   |                   | 112     |                  |   |         | (44     | )    
|Proceeds from refinancing under capital leases                                                                  |                                                               |   |                                                    |       |   |                   |        |                  |   |         | 827     |      
|Cash acquired from Visionex transaction                                                                         |                                                               |   |                                                    |       |   |                   | 4,403   |                  |   |         | 4,403   |      
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|                                                                                                                |                                                               |   | Net cash provided by (used in) investing activities |       |   | 11,701            |         |                  |   | (13,872 | )       |       |   | (1,882         | )
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|Financing Activities                                                                                            |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|Payments on obligation under capital lease                                                                      |                                                               |   | (15                                                 | )     |   |                   | (204    | )                |   |         | (827    | )    
|Proceeds from exercise of stock options                                                                         |                                                               |   | 78                                                  |       |   |                   | 297     |                  |   |         | 559     |      
|Proceeds from exercise of warrants                                                                              |                                                               |   |                                                    |       |   |                   |        |                  |   |         | 41      |      
|Proceeds from bridge loans with related parties                                                                 |                                                               |   |                                                    |       |   |                   | 1,250   |                  |   |         | 5,047   |      
|Payments on bridge loans with related parties                                                                   |                                                               |   |                                                    |       |   |                   | (1,750  | )                |   |         | (3,755  | )    
|Proceeds from issuance of preferred stock                                                                       |                                                               |   |                                                    |       |   |                   | 10,000  |                  |   |         | 34,215  |      
|Repurchase of preferred stock                                                                                   |                                                               |   |                                                    |       |   |                   |        |                  |   |         | (56     | )    
|Proceeds from issuance of common stock                                                                          |                                                               |   | 25                                                  |       |   |                   | 31,812  |                  |   |         | 31,987  |      
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|                                                                                                                |                                                               |   | Net cash provided by financing activities           |       |   | 88                |         |                  |   | 41,405  |         |       |   | 67,211         |  
|Effect of exchange rate changes on cash                                                                         |                                                               |   | (6                                                  | )     |   |                   | (29     | )                |   |         | (33     | )    
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|(Decrease) increase in cash and cash equivalents                                                                |                                                               |   | (1,955                                              | )     |   |                   | 12,409  |                  |   |         | 6,817   |      
|Cash and cash equivalents at beginning of period                                                                |                                                               |   | 8,772                                               |       |   |                   | 709     |                  |   |         |        |      
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      
|Cash and cash equivalents at end of period                                                                      |                                                               | $ | 6,817                                               |       |   | $                 | 13,118  |                  |   | $       | 6,817   |      
|                                                                                                                |                                                               |   |                                                     |       |   |                   |         |                  |   |         |         |      

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ISTA Pharmaceuticals, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2001

1. The Company

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

2. Basis of Presentation

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

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

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

3. Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income,requires reporting and
displaying comprehensive income (loss) and its components, which, for ISTA,
includes net loss and unrealized gains and losses on investments and foreign
currency translation gains and losses. In accordance with SFAS No. 130, the
accumulated balance of unrealized gains/(losses) on investments and the
accumulated balance of foreign currency translation adjustments are disclosed
as separate components of stockholders equity.

4. Net Loss Per Share

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

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

Included in net loss per common share, basic and diluted, and pro forma
net loss per common share, basic and diluted, for the nine months ended
September 30, 2000 is the deemed dividend for preferred stockholders of

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approximately $19,245,000, which relates to the Companys acquisition of
Visionex on March 8, 2000. The deemed dividend represents the excess of the
estimated value of the preferred shares issued to purchase Visionex over the
net tangible assets acquired.

5. New Accounting Pronouncements

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

In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.

SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.

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

We are currently evaluating our intangible assets in relation to the
provisions of SFAS No. 142 to determine the impact, if any, the adoption of
SFAS No. 142 will have on our results of operations or financial position.




Item 2 Managements Discussion And Analysis Of Financial Condition And Results Of Operations

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

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

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

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Overview

ISTA was founded to discover, develop and market new remedies for diseases
and conditions of the eye. Our product development efforts are focused on
using highly purified formulations of the enzyme hyaluronidase to treat
diseases and conditions such as vitreous hemorrhage, diabetic retinopathy,
corneal opacification and keratoconus. Our lead product candidate, Vitrase,
currently in Phase III clinical trials, is a proprietary drug for the treatment
of severe vitreous hemorrhage. Enrollment in both Vitrase Phase III
clinical trials has been completed and ISTA and certain contract
research organizations are in the process of completing the
collection of data for all study participants. Preliminary efficacy
results for these studies are expected to be announced by the end of
the fourth quarter of 2001.

We currently have no products available for sale. We have incurred losses
since our inception and had an accumulated deficit through September 30, 2001
of $92.2 million. Our losses have resulted primarily from research and
development activities, including clinical trials, related general and
administrative expenses and a deemed dividend for preferred stockholders. We
expect to continue to incur operating losses for the foreseeable future as we
continue our research and development and clinical testing activities, and seek
regulatory approval for our product candidates.

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

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

In June 2001, ISTA
entered into a non-binding letter of intent
with a new contract manufacturer to provide for the manufacturing
scale up for the formulation and filling of dose specific vials of
Vitrase. In the event Vitrase receives regulatory
approval, we believe the manufacturing services of this particular
contract manufacturer will be required to support the
commercialization of Vitrase.

Results of Operations

Three Months Ended September 30, 2001 and 2000

Research and development expenses.Research and development expenses were
$3.9 million for the three months ended September 30, 2001 compared to $4.1
million for the three months ended September 30, 2000. The
$200,000 decrease was primarily attributable to lower manufacturing and pre-clinical
expenses. In connection with our preparations for submission of a New Drug
Application for Vitrase, we anticipate an increase in manufacturing
related expenses. We will need to purchase equipment and
incur certain expenses in order to improve the manufacturing
operations of Biozyme Laboratories, Ltd., our contract supplier of
the enzyme hyaluronidase, and conduct non-commercial manufacturing
activities at our new contract manufacturer to support the New Drug
Application for Vitrase.

General and administrative expenses.General and administrative expenses
were $1.4 million for the three months ended September 30, 2001 compared to
$1.6 million for the three months ended September 30, 2000.
The $200,000 decrease was primarily attributable to a reduction in the amortization of
non-cash, stock based compensation expense.

Interest income.Interest income was $131,000 for the three months ended
September 30, 2001 compared to $124,000 for the three months ended September
30, 2000. The $7,000 increase was attributable to higher cash
balances for the full third quarter of 2001 compared to 2000, when cash
balances were lower prior to our initial public offering in August 2000.

Nine Months Ended September 30, 2001 and 2000

Research and development expenses.Research and development expenses were
$11.5 million for the nine months ended September 30, 2001 compared to $11.7
million for the nine months ended September 30, 2000. The
$200,000 decrease was attributable to lower manufacturing and pre-clinical expenses.

General and administrative expenses.General and administrative expenses
were $4.5 million for the nine months ended September 30, 2001 compared to $4.8
million for the nine months ended September 30, 2000. The

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$300,000 decrease was attributable to a reduction in the amortization
of non-cash, stock based compensation expense.

Interest income.Interest income was $778,000 for the nine months ended
September 30, 2001 compared to $255,000 for the nine months ended September 30,
2000. The $523,000 increase was directly attributable to higher cash
balances in 2001 due to the investment of the proceeds from our initial public
offering in August 2000.

Interest expense.Interest expense was $25,000 for the nine months ended
September 30, 2001 compared to $48,000 for the nine months ended September 30,
2000. The $23,000 decrease was primarily attributable to interest on loans
from shareholders that were repaid in March 2000.

Liquidity and Capital Resources

As of September 30, 2001, we had approximately $11.9 million in cash and
short-term investments, compared to $25.7 million at December 31, 2000.

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

For the nine months ended September 30, 2001, we used $13.7 million of
cash for operations principally as a result of the net loss of $15.3 million
partially offset by non-cash compensation expense of approximately $1.1
million. We used approximately $15.1 million of cash for operations in the
nine months ended September 30, 2000.

For the nine months ended September 30, 2001, $11.7 million of cash was
provided by investing activities, primarily from the sale of marketable
investment securities. For the nine months ended September 30, 2000, $13.9
million of cash was used for investing activities, primarily for the purchase
of marketable securities offset by $4.4 million of cash received from the
acquisition of Visionex.

Net cash provided by financing activities totaled $88,000 for the nine
months ended September 30, 2001 compared to $41.4 million for the nine ended
September 30, 2000. During 2000, $10.0 million was received for the issuance
of preferred stock and $31.8 million was received for the issuance of common
stock in connection with our initial public offering.

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

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



| |  |  | the rate of progress of, and spending on, our research and development programs
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | the results of our clinical trials                                             
|
| |  |  | the time and expense necessary to obtain regulatory approvals                  
|
| |  |  | our ability to establish and maintain collaborative relationships              
|
| |  |  | receiving milestone payments from Allergan                                     
|
| |  |  | competitive, technological, market and other developments                      

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

Factors that May Effect Results of Operations and Financial Condition.

We have a history of net losses; we expect to continue to incur net losses and
we may never achieve or maintain profitability.

We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
September 30, 2001, our accumulated deficit was $92.2 million, including a net
loss of approximately $41.1 million for the year ended December 31, 2000 and a
net loss of $15.3 million for the nine months ended September 30, 2001. We
have not generated any revenue from product sales to date, and it is possible
that we will never generate revenues from product sales in the future. Even if
we do achieve significant revenues from product sales, we expect to incur
significant operating losses over the next several years. It is possible that
we will never achieve profitable operations.

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

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

Our Phase III clinical trial results for Vitrase are uncertain. If trial
results are not satisfactory, we may be forced to terminate development of
Vitrase.

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

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

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

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



| |  |  | a product candidate may not be safe or effective                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | even if we believe data from preclinical testing and clinical trials
should justify approval, FDA officials may disagree

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| |  |  | the FDA might not approve our manufacturing processes or facilities
or the processes or facilities of our contract manufacturers or raw
material suppliers
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the FDA may change its approval policies or adopt new regulations                                                                                         
|
| |  |  | the FDA may approve a product candidate for indications that are
narrow, which may limit our sales and marketing activities                               

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

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

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

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

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

We have a supply agreement with Biozyme pursuant to which Biozyme supplies
our contract manufacturer with all of our ovine hyaluronidase requirements for
use in our clinical trials. We have entered into a letter of intent
with a new contract manufacturer to scale up production and are in
the process of negotiating a definitive agreement for the manufacture
of commercial quantities of Vitrase. There can be no assurance that
we will be able to complete an agreement with this new contract
manufacturer on favorable terms, or at all.

The manufacturing
facilities of our contract manufacturer must comply with current Good
Manufacturing Practice regulations, which the FDA strictly enforces.
Furthermore, the facilities of the contract manufacturer must undergo
a pre-approval inspection before any of our products can
be approved for manufacture.

If we fail to reach
an agreement with a new contract manufacturer, we will have to
negotiate with Prima Pharm to improve Prima Pharms manufacturing
facilities in order to comply with current Good Manufacturing
Practice regulations. Such improvements will require a substantial
capital commitment on our part. Difficulties in our relationship with
Prima Pharm could limit our ability to insure that the required
improvements are made. Failure to complete an agreement with a new
contract manufacturer on a timely basis, or alternatively,
successfully implement improvements to the manufacturing facilities
of Prima Pharm, will adversely affect our ability to provide
sufficient quantities of our products for commercial sales.

If Allergan does not perform its duties under our agreements, our ability to
commercialize Vitrase may be significantly impaired.

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

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

We have a supply
agreement with Biozyme pursuant to which Biozyme supplies our
contract manufacturer with all of our ovine hyaluronidase
requirements for use in our clinical trials. Biozyme is currently our
only source for

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highly purified hyaluronidase, which is extracted from sheep in New
Zealand. Difficulties in our relationship with Biozyme could limit our ability
to provide sufficient quantities of our products for clinical trials and
commercial sales.

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

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

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

We may not be able to negotiate additional agreements with strategic partners,
which could limit out ability to commercialize our product candidates.

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

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

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



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

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

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

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

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

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

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

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

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

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

We may not discover new product candidates if hyaluronidase is not safe and
effective for numerous applications in the eye.

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

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

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

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

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




Item 3 Quantitative and Qualitative Disclosures about Market Risk

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

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




PART II OTHER INFORMATION




Item 1 Legal Proceedings

None




Item 2 Change in Securities and Use of Proceeds

Initial Public Offering

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

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

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




Item 3 Defaults upon Senior Securities

None




Item 4 Submission of Matters to a Vote of Security Holders

None




Item 5 Other Information

None




Item 6 Exhibits and Reports on Form 8-K

None

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, ISTA
Pharmaceuticals, Inc. has duly caused this 10-Q report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
County of Orange, State of California, on this 14th day of November 2001.



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



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

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