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, 2000

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

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

Commission File Number: 333-34120

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

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

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

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

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

The number of shares of the registrant's common stock, $.001 par value,
outstanding as of October 31 was 15,342,224.

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TABLE OF CONTENTS

Page No

PART I FINANCIAL INFORMATION

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

Condensed Balance Sheets - December 31, 1999 and
September 30, 2000 (unaudited) . . . . . . . . . . . . . . . . . 3

Condensed Statements of Operations (unaudited) - Three and
Nine Months Periods Ended September 30, 2000 and 1999 . . . . . . . . . . 4

Condensed Statement of Cash Flows (unaudited) - Nine Month
Periods Ended September 30, 2000 and 1999 . . . . . . . . . . . . . . 5

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

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

Item 3 Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . 13

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

Index of Exhibits . . . . . . . . . . . . . . . . . . . . . . 17

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PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

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

September 30 December 31
2000 1999
------------ -----------
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents $ 13,118 $ 709
Short-term investments, available for sale 18,271 --
Receivable from related party 105 --
Advance payments - clinical trials 444 877
Other current assets 170 59
--------- --------
Total current assets 32,108 1,645

Property and equipment, net 890 984
Note receivable from officer 160 152
Deposits and other assets 127 239
--------- --------
Total Assets $ 33,285 $ 3,020
========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,293 $ 823
Accrued compensation and related expense 63 74
Accrued expenses - clinical trials 1,217 4,783
Other accrued expenses 1,272 208
Current portion of obligation under capital lease 62 250
Notes payable to stockholders -- 500
--------- --------
Total current liabilities 3,907 6,638

Obligation under capital lease -- 15
Deferred rent 15 22
License fee received from Visionex -- 5,000
Stockholders' equity (deficit):
Preferred stock -- 25,496
Common stock 15 3,891
Additional paid in capital 103,908 --
Deferred compensation (3,206) (2,215)
Cumulative foreign currency translation adjustment (29) --
Accumulated unrealized loss on investments (4) --
Deficit accumulated during the development stage (71,321) (35,827)
--------- --------
Total stockholders' equity (deficit) 29,363 (8,655)
--------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 33,285 $ 3,020
========= ========

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ISTA PHARMACEUTICALS, INC.
CONDENSED STATEMENT 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,
2000 1999 2000 1999 2000
-------- ------- -------- ------- --------------

Operating expenses:
Research and development $ 4,075 $ 2,341 $ 11,655 $ 7,597 $ 38,397
General and administrative 1,590 458 4,801 1,379 14,337
-------- ------- -------- ------- --------
Total operating expenses 5,665 2,799 16,456 8,976 52,734
-------- ------- -------- ------- --------
Loss from operations (5,665) (2,799) (16,456) (8,976) (52,734)
Interest income 124 27 255 61 995
Interest expense (2) (12) (48) (39) (293)
-------- ------- -------- ------- --------
Net loss (5,543) (2,784) (16,249) (8,954) (52,032)

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

Net loss attributable to common stockholders $ (5,543) $(2,784) $(35,494) $(8,954) $(71,277)
======== ======= ======== ======= ========

Net loss per common share, basic and diluted $ (0.70) $ (1.84) $ (8.98) $ (6.05)
======== ======= ======== =======

Shares used in computing net loss per
common share, basic and diluted 7,954 1,512 3,954 1,480

Pro forma net loss per common share, basic
and diluted $ (0.42) $ (0.37) $ (3.18) $ (1.29)
======== ======= ======== =======

Shares used in computing pro forma net loss
per common share, basic and diluted 13,265 7,610 11,167 6,940

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

For the Period
From
February 13,
1992
Nine Months Ended (Inception)
September 30 Through
--------------------- September 30,
2000 1999 2000
-------- ------- --------------

OPERATING ACTIVITIES
Net loss $(35,494) $(8,954) $(71,277)
Deemed dividend for preferred stockholders 19,245 -- 19,245
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation 2,552 6 3,887
Common stock issued for services 113 -- 113
Depreciation and amortization 225 171 895
Changes in operating assets and liabilities:
Accounts receivable -- 1 --
Advanced payments - clinical trials 433 (109) (503)
Other current assets (111) -- (111)
Note receivable from officer (8) (8) (160)
Deposits and other assets 112 (39) (127)
Accounts payable 470 836 1,293
Accrued compensation and related expenses (11) (117) 63
Accrued expenses - clinical trials (3,566) -- 1,424
Other accrued expenses 1,064 -- 1,064
Deferred rent (7) (3) 15
License fee received from Visionex -- -- 5,000
-------- ------- --------
Net cash used in operating activities (14,983) (8,216) (39,179)
-------- ------- --------

INVESTING ACTIVITIES
Purchase of marketable investment securities (20,275) -- (20,275)
Sale of marketable investment securities 2,000 -- 2,000
Purchase of equipment (112) (136) (1,758)
Proceeds from refinancing under capital leases -- -- 827
Cash acquired from Visionex transaction 4,403 -- 4,403
-------- ------- --------
Net cash used in investing activities (13,984) (136) (14,803)
-------- ------- --------

FINANCING ACTIVITIES
Payments on obligation under capital leases (204) (158) (766)
Proceeds from exercise of stock options 297 -- 416
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 8,205 34,215
Repurchase of preferred stock -- -- (56)
Proceeds from issuance of common stock 31,812 70 32,028
-------- ------- --------
Net cash provided by financing activities 41,405 8,117 67,129

Effect of exchange rate changes on cash (29) -- (29)
-------- ------- --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,409 (235) 13,118

Cash and cash equivalents at beginning of period 709 2,393 --
-------- ------- --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,118 $ 2,158 $ 13,118
======== ======= ========

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ISTA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000

1. THE COMPANY

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

2. BASIS OF PRESENTATION

The unaudited financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals 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. These unaudited financial statements should be read in
conjunction with the Company's 1999 audited financial statements and footnotes
included in the Company's Final Prospectus dated August 21, 2000 (the "Final
Prospectus").

On March 8, 2000, ISTA acquired all the outstanding shares of Visionex Pte. Ltd.
in a transaction accounted for as a purchase. The operations of Visionex are
included in the condensed financial statements since the date of acquisition.
All intercompany accounts have been eliminated in consolidation.

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

3. COMPREHENSIVE INCOME (LOSS)

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

4. NET LOSS PER SHARE

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

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

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

Included in net loss per common share, basic and diluted, and pro forma net loss
per common share, basic and diluted, for the nine months ended September 30,
2000 is the deemed dividend for preferred stockholders of approximately
$19,245,000, which relates to the Company's acquisition of Visionex on March 8,
2000. The deemed dividend 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 we will
adopt 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
is not anticipated to have an impact on our results of operations or financial
condition when adopted as we currently hold no derivative financial instruments
and do not currently engage in hedging activities.

In March 2000, the Financial Accounting Standards Board issued Financial
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an interpretation of APB Opinion No. 25". FIN 44 clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees", the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 became effective on July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occur after either December 15,
1998 or January 12, 2000. Management believes that FIN 44 will not have a
material effect on our financial position or results of operations.

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 Final Prospectus.

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

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to treat diseases and conditions such as vitreous hemorrhage, diabetic
retinopathy, corneal opacification and keratoconus. Our lead product candidate,
Vitrase, currently in Phase III clinical trials, is a proprietary drug for the
treatment of severe vitreous hemorrhage.

We currently have no products available for sale. We have incurred losses since
our inception and had an accumulated deficit through September 30, 2000 of $71.3
million. Our losses have resulted primarily from research and development
activities, including clinical trials, related general and administrative
expenses and a deemed dividend for preferred stockholders. We expect to continue
to incur operating losses for the foreseeable future as we continue our research
and development and clinical testing activities, and seek regulatory approval
for our product candidates.

In March 2000, we completed the acquisition of Visionex, a Singapore
corporation, which is conducting a Phase II clinical trial of Vitrase in
Singapore. Visionex was a related party through common ownership by some of our
stockholders. We currently plan for Visionex to continue to conduct our ongoing
Phase II clinical trial 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. 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.

RESULTS OF OPERATIONS

Three months Ended September 30, 2000 and 1999

Research and development expenses. Research and development expenses were $4.1
million for the three months ended September 30, 2000 compared to $2.3 million
for the three months ended September 30, 1999. The increase of $1.8 million was
primarily attributable to the expansion of our preclinical and clinical
development activities, particularly expenses directly related to the Phase III
clinical trials of Vitrase for severe vitreous hemorrhage, two Phase II trials
and related infrastructure and support. We expect research and development
expenses to increase in aggregate dollar terms in future periods primarily as a
result of payments to contract research organizations.

General and administrative expenses. General and administrative expenses were
$1.6 million for the three months ended September 30, 2000 compared to $460,000
for the three months ended September 30, 1999. The $1.1 million increase was
primarily attributable to non-cash stock based compensation expense related to
stock options granted prior to our initial public offering.

Interest income. Interest income was $124,000 for the three months ended
September 30, 2000 compared to $27,000 for the three months ended September 30,
1999. The increase of $97,000 was directly attributable to the investment of the
proceeds from our initial public offering in August 2000.

Interest expense. Interest expense was $2,000 for the three months ended
September 30, 2000 and $12,000 for the three months ended September 30, 1999.
The decrease of $10,000 was primarily attributable to the reduced outstanding
balances of our capital leases.

Nine Months Ended September 30, 2000 and 1999

Research and development expenses. Research and development expenses were $11.7
million for the nine months ended September 30, 2000 compared to $7.6 million
for the nine months ended September 30, 1999. The increase of $4.1 million was
primarily attributable to the expansion of our preclinical and clinical
development activities, primarily consisting of expenses directly related to our
two Phase III clinical trials of Vitrase for severe vitreous hemorrhage and two
Phase II trials, including expenses associated with clinical research
organizations and consultants assisting us with the conduct of these trials.

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General and administrative expenses. General and administrative expenses were
$4.8 million for the nine months ended September 30, 2000 compared to $1.4
million for the nine months ended September 30, 1999. The $3.4 million increase
was primarily attributable to non-cash compensation expense related to stock
option grants and increasing our staff in support of our expanding operations.

Interest income. Interest income was $255,000 for the nine months ended
September 30, 2000 compared to $61,000 for the nine months ended September 30,
1999. The increase of $194,000 was attributable to higher cash balances and the
investment of the proceeds from our initial public offering in August 2000.

Interest expense. Interest expense was $48,000 for the nine months ended
September 30, 2000 and $39,000 for the nine months ended September 30, 1999. The
increase of $9,000 was primarily attributable interest on loans from some
stockholders that were repaid in March 2000.

Deemed dividend. During the nine months ended September 30, 2000, we acquired
Visionex and accounted for the acquisition under the purchase method of
accounting. At the time of the acquisition, we recorded $4.4 million of tangible
assets acquired and recorded a deemed dividend of $19.2 million for the excess
of the estimated value of the shares issued over the net tangible assets
acquired.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2000, we had approximately $31.4 million in cash and
short-term investments.

We have financed our operations since inception primarily through the sale of
our common stock in our initial public offering in August 2000 and private sales
of our preferred stock. We received net proceeds of $10.0 million from the
private sale of preferred stock and $31.8 million from our initial public
offering during the nine-month period ended September 30, 2000.

During January and February 2000, we borrowed an aggregate of $1.3 million from
certain of our stockholders. We repaid this amount, together with accrued
interest, in March 2000.

For the nine months ended September 30, 2000, we used $15.0 million of cash for
operations principally as a result of the net loss of $35.5 million partially
offset by the non-cash deemed dividend for preferred stockholders of
approximately $19.2 million and non-cash compensation expense of approximately
$2.6 million. We used approximately $8.2 million of cash for operations in the
nine months ended September 30, 1999.

For the nine months ended September 30, 2000, we used approximately $14.0
million of cash for investing activities compared to approximately $136,000 for
the nine months ended September 30, 1999. These expenditures were primarily for
the purchase of marketable securities and equipment to support our operations.
These expenditures were partially offset by our receipt in March 2000 of
approximately $4.4 million in cash from the acquisition of Visionex.

Net cash provided by financing activities totaled $41.4 million for the nine
months ended September 30, 2000 compared to $8.1 million for the nine months
ended September 30, 1999. The increase in net cash provided by financing
activities in 2000 is primarily attributable to completion of our initial public
offering in August 2000.

We believe that cash on hand will be sufficient to support our operations for
approximately the next twenty one months. We will need to raise additional funds
to continue the development and commercialization of our 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 delay, scale back or eliminate some or all
of our product development efforts or may limit our ability to operate as a
going concern. If additional funds are raised by issuing equity securities,
substantial dilution to existing stockholders may result.

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

o the rate of progress of our research and development programs

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o the results of our clinical trials

o the time and expense necessary to obtain regulatory approvals

o our ability to establish and maintain collaborative relationships

o competitive, technological, market and other developments

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

FACTORS THAT MAY EFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

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

We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
September 30, 2000, our accumulated deficit was $71.3 million, including a net
loss of approximately $14.3 million for the year ended December 31, 1999 and a
net loss of $35.5 million for the nine months ended September 30, 2000. 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.

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 CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE MAY 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 twenty one months. However,
we will need to raise additional funds to continue the development and
commercialization of our product candidates beyond this period.

If we experience unanticipated cash requirements, we may need to raise
additional funds to continue the development and commercialization of our
product candidates. These funds may not be available on favorable terms, or at
all. If we do not succeed in raising additional funds, we may need to curtail
our operations significantly.

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

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

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

o a product candidate may not be safe or effective

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

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

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

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

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

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

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

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

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 THE THIRD PARTIES THAT WE DEPEND UPON TO MANUFACTURE OUR PRODUCTS ARE NOT
ABLE TO SATISFY OUR REQUIREMENTS, OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION
EFFORTS COULD BE DELAYED OR STOPPED.

We have a supply agreement with Biozyme Laboratories, Ltd. pursuant to which
Biozyme supplies Prima Pharm, our contract manufacturer, with all of our ovine
hyaluronidase requirements for use in our clinical trials. We then rely on Prima
Pharm for formulation and filling of dose specific vials of hyaluronidase.
Biozyme is currently our only source for highly purified hyaluronidase, which is
extracted from sheep in New Zealand.

To date, Prima Pharm has produced only small quantities of our product for use
in clinical trials. Prima Pharm may be unable to scale up production when
necessary or accurately and reliably manufacture

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commercial quantities of our products at reasonable costs. Moreover, the
manufacturing facilities of Prima Pharm must comply with current Good
Manufacturing Practices regulations, which the FDA strictly enforces.
Difficulties in our relationship with Biozyme or Prima Pharm, or any other
future contract manufacturer, could limit our ability to provide sufficient
quantities of our products for clinical trials and commercial sales.

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

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

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

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

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

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

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

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

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

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

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

We are in negotiations with a third party for our acquisition of rights to
patent applications owned by such party related to our Keraform product in
development. If we are not successful in finalizing this acquisition, 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

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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 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 1999 and for the first nine months of 2000 was less
than one year. Due to the short-term

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nature of these investments, we believe we have no material exposure to interest
rate risk arising from our investments.

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

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

None

ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS

INITIAL PUBLIC OFFERING

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

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

The net proceeds from our initial public offering are primarily being used to
fund our clinical trials and preclinical research, with a particular focus on
Vitrase for the treatment of severe vitreous hemorrhage, and for general
corporate purposes, including working capital. We may use a portion of the net
proceeds to acquire or invest in technologies, products or businesses
complementary to our business. We are in negotiations with a third party for our
acquisition of rights to patent applications owned by such third party related
to our Keraform product. We do not anticipate that the costs of acquiring these
rights will be material. 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.

On the closing date of the initial public offering, all of the Company's
convertible preferred stock converted into 8,783,627 shares of common stock.

1993 STOCK PLAN

During the three months ended September 30, 2000 and prior to the completion of
the initial public offering on August 25, 2000, the Company granted options to
purchase 161,481 shares of common stock under our 1993 Stock Plan. During the
three months ended September 30, 2000 eligible optionees under the 1993 Stock
Plan exercised options for 209,567 shares of common stock. Upon completion of
the initial public

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offering, the 1993 Stock Plan terminated. All shares reserved but not yet issued
under the 1993 Stock Plan are now available for grant under the 2000 Stock Plan.

CAPITAL STRUCTURE

On September 30, 2000, the Company's authorized capital consisted of 100,000,000
shares of common stock, $0.001 par value, 15,342,224 shares outstanding; and
5,000,000 shares of convertible preferred stock, $0.001 par value, no shares
outstanding.

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

(a) Exhibits

Exhibit
Number Description
------ -----------

27.1 Financial Data Schedule

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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 2000.

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

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

EXHIBIT INDEX

Exhibit
Number Description
- ------- -----------

27.1 Financial Data Schedule