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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

     [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2002

or

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

From the transition period from            to            

Commission file number 000-31255

ISTA PHARMACEUTICALS, INC.

15279 Alton Parkway, Suite 100, Irvine, California 92618
(Address of principal executive offices)

(949) 788-6000
(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)

     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. Yes [X] No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [  ]

     As of June 28, 2002, the aggregate market value of the Registrant’s voting stock held by non-affiliates was approximately $11,525,000.

     As of February 18, 2003 there were 13,291,017 shares of Common Stock outstanding.

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

DOCUMENTS INCORPORATED BY REFERENCE

     Part III of this Form 10-K incorporates information by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2002.

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PART I

     This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 7 of Part II – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements.”

Item 1: Business

Overview

     ISTA Pharmaceuticals, Inc. (the “Company” or “ISTA”) was founded to discover, develop and market new remedies for diseases and conditions of the eye. Some of the products that we are developing involve the use of highly purified formulations of hyaluronidase. Our lead ovine hyaluronidase-based product candidate, Vitrase®, is a proprietary drug we are developing for the treatment of vitreous hemorrhage and diabetic retinopathy. We are also developing products that are designed to treat glaucoma, hyphema, and ocular inflammation.

     In December 2001, we announced our strategic plan to transition from a development organization to a fully-integrated, specialty pharmaceutical company, with a primary focus on ophthalmology. We intend to execute this plan by continuing to advance products currently under development, and by acquiring complementary products, either already marketed or in late-stage development.

     In March 2002, we announced the preliminary results for our Phase III clinical studies of Vitrase® for the treatment of vitreous hemorrhage. The data from the two Phase III studies did not show a statistically significant improvement in the primary (surrogate) endpoint. However, further analysis has shown that for the 55 IU dose of Vitrase®, in both studies, there was a clinically meaningful and statistically significant decrease in the density of vitreous hemorrhage and a statistically significant difference in the proportion of patients with an improvement in best-corrected visual acuity at one and two months, which extended to the three-month post-treatment visit in the study conducted outside North America. Based on these improvements in visual function, and our review and discussions with the Food and Drug Administration (“FDA”) regarding the data from the two studies, we submitted the clinical section and the chemistry, manufacturing and controls (“CMC”) section of the New Drug Application (“NDA”) for Vitrase® for the treatment of vitreous hemorrhage in October 2002. The FDA accepted those sections of the Vitrase® NDA for review in December 2002, along with the pre-clinical pharmacology and toxicology section that was submitted in January 2002. We plan to submit the final component of the Vitrase® NDA for the treatment of vitreous hemorrhage, concerning manufacturing validation, in the first half of 2003. The FDA’s Dermatologic and Ophthalmic Drug Advisory Committee (the “FDA Advisory Committee”) has scheduled a meeting on March 17, 2003, to consider the Company’s NDA for Vitrase® for the treatment of vitreous hemorrhage.

     In May 2002, we acquired substantially all of the assets of AcSentient, Inc. The assets include United States marketing rights for a new formulation of timolol, which we have named ISTALOL™, a beta-blocking agent for treating glaucoma. AcSentient previously acquired rights to this compound from Senju Pharmaceutical Co., Ltd. Senju is headquartered in Osaka, Japan and has a diverse portfolio including ophthalmic, central nervous system, cardiovascular, circulatory, gastro-intestinal, respiratory, oncology and dermatological products. Senju submitted the NDA for ISTALOL™ to the FDA in September 2002. That NDA included data from pre-clinical studies conducted in Japan, combined with data from a Phase I clinical study conducted in the United States and a multi-center Phase III clinical study recently completed in the United States. The assets acquired from AcSentient also included United States product rights to bromfenac, a topical non-steroidal anti-inflammatory compound for the treatment of ocular inflammation, and worldwide marketing rights for Caprogel®, a novel compound for the treatment of hyphema, or bleeding into the front of the eye. AcSentient previously acquired the rights to these two compounds from Senju and the Eastern Virginia School of Medicine, respectively. Under the terms of the transaction, we have assumed payment and other obligations and responsibility for final development of bromfenac and Caprogel®.

     We anticipate initiating a Phase III study of bromfenac in the United States in the first half of 2003. We believe that data from this Phase III study, combined with preclinical and clinical study data from trials previously conducted in Japan, will be sufficient for us to submit an NDA for bromfenac in late 2003. We intend to initiate a Phase III study of Caprogel® in the second half of 2003. We believe that this Phase III study, in combination with a Phase III study of Caprogel® previously completed in the United States, will support our preparation and submission of an NDA in 2004. However, our timing for clinical development of Caprogel® may change based on our assessment, from time to time, of this product candidate's market potential, other product opportunities and our corporate priorities.

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     We anticipate incurring additional research and development expenses in connection with the final development of bromfenac and Caprogel®, and if these compounds are approved for sale in the United States, we expect to incur significant marketing and sales expenses. In addition, we will also be responsible for certain milestone payments to a third party in connection with the marketing approval in the United States for these compounds.

     On November 19, 2002, the Company consummated a private investment in public equity (or “PIPE”) transaction, involving a private placement of $40.0 million of its common stock and warrants exercisable for an additional $6.0 million of common stock. Investors in the PIPE transaction included persons and entities affiliated with The Sprout Group, Sanderling Venture Partners, Investor Growth Capital Limited, Gund Investment Corporation, KBL Healthcare, MDS Capital, and Ontario Teachers’ Pension Plan Board. In addition, $4.0 million of promissory notes previously issued to several of the same investors in ISTA’s September 2002 bridge financing were converted into shares of ISTA common stock concurrently with the consummation of the PIPE transaction. We believe this funding will enable us to execute on our plans to complete development work on our late-stage product candidates and introduce these products to the ophthalmic marketplace if they are approved by the FDA.

     We also took significant steps in 2002 to scale up ISTA’s manufacturing and marketing capabilities, in order to further enhance our ability to execute our strategic plan. We entered into two key manufacturing agreements for the supply of finished product from Cardinal Health and Bausch & Lomb Incorporated. We also added two senior management executives to bolster our operations and marketing capabilities: Thomas A. Mitro, Vice President, Sales and Marketing, and Kirk McMullin, Vice President, Operations.

Anatomy of the Eye

     The human eye is approximately one inch in diameter and functions much like a camera. The eye incorporates a lens system (the cornea and the lens) that focuses light, a variable aperture system (the iris) that controls the amount of light passing through the eye and a film (the retina) that records the image. The cornea, lens and iris operate to focus light rays on the retina, which contains the receptors that transmit images through the optic nerve to the brain.

     The cavity between the lens and the retina is filled with the vitreous humor, a clear, gel-like substance. The vitreous humor is nearly solid in children and undergoes a natural transition to liquid as one ages.

[ANATOMY OF THE EYE DIAGRAM]

Hyaluronidase

     The term hyaluronidase describes a group of naturally occurring enzymes that can digest certain forms of carbohydrate molecules called proteoglycans. The primary role of hyaluronidase is to digest proteoglycans such as hyaluronan, hyaluronic acid and

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chondroitin sulphate, substances that are part of various connective tissues in the body, including connective tissues in the eye. Physicians have used bovine-derived hyaluronidase safely and extensively for over 50 years to enhance the absorption of drugs.

     In the eye, pharmacological applications of hyaluronidase exploit the properties of this enzyme to modify the structure of the eye for therapeutic purposes. In our development work, we have focused on applications of ovine-derived hyaluronidase to take advantage of its ability to digest proteoglycans to treat a variety of eye diseases and conditions, including vitreous hemorrhage, diabetic retinopathy and corneal opacification. For treatment of serious conditions of the eye, or ophthalmic indications, only highly purified and specially formulated ovine hyaluronidase can be used. Hyaluronidase that is less pure or formulated with preservatives has been shown to be dangerous to the eye and may cause blindness.

Product Development Programs

     We have five product candidates in clinical development. The following is a summary of our clinical product candidates:

Vitrase®

     We are developing Vitrase®, a proprietary formulation of ovine hyaluronidase, for the treatment of vitreous hemorrhage and diabetic retinopathy. When injected into the vitreous humor, Vitrase® breaks down the proteoglycan matrix, causing the vitreous humor to liquefy. We believe that this also results in the separation of the vitreous humor from the retina and that, together, these effects are beneficial for the treatment of vitreous hemorrhage and diabetic retinopathy. Vitrase® is administered directly into the vitreous humor through a single-dose injection. The procedure is performed in several minutes in an ophthalmologist’s office and is virtually painless due to the application of a topical anesthetic.

Vitreous Hemorrhage

     A vitreous hemorrhage occurs when retinal blood vessels rupture and bleed into the vitreous humor. These hemorrhages result from leakage from abnormal, weak blood vessels and are associated with diabetic retinopathy, trauma and other factors. The immediate consequence of a vitreous hemorrhage is a reduction in the amount of light that can pass through the normally clear vitreous humor to the retina. The effects of a hemorrhage can be limited to a few dark spots in vision or, in the case of a severe vitreous hemorrhage, can result in completely obscured vision. Depending on the severity of the vitreous hemorrhage, it may take several months or significantly longer for the body to reabsorb the blood and for the patient to regain vision. In addition to obstructing the patient’s vision, a vitreous hemorrhage often prevents physicians from seeing into the back of the eye to diagnose or treat the cause of the hemorrhage. If extensive or repeated bleeding occurs, fibrous tissue or scarring can form on the retina, which can lead to a detachment of the retina and permanent vision loss or blindness.

     Patients who seek medical care for a vitreous hemorrhage often visit a physician, who then refers them to a retinal specialist. Treatment options for patients with a vitreous hemorrhage are limited. Currently, there is no drug treatment for vitreous hemorrhage and most retinal specialists initially recommend a “watchful waiting” period, during which the attending physician provides no medical treatment in the hope that the hemorrhage will clear on its own. The risks related to watchful waiting may include continued bleeding and, if caused by diabetic retinopathy, disease progression during the time it takes for the blood to clear on its own, if at all. An alternative to watchful waiting is a surgical procedure called a vitrectomy, in which the vitreous humor and hemorrhage are surgically removed and replaced with a balanced salt solution. There are serious risks associated with a vitrectomy, including both cataract formation and possible loss of vision associated with retinal detachment. These risks contribute to the limited use of vitrectomy as an initial treatment option for vitreous hemorrhage patients.

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     We believe that a substantial opportunity exists to establish Vitrase® as the initial therapy for a vitreous hemorrhage. Vitrase®, when injected into a blood-filled vitreous humor, promotes clearance by causing the vitreous humor to liquefy and the blood to settle to the bottom of the eye. Vitrase® also stimulates the cells responsible for engulfing and breaking down the blood, accelerating the reabsorption of the blood. This clears the path for light to reach the retina enabling the patient to regain vision. In addition, clearing the hemorrhage permits the retinal specialist to visualize, diagnose and treat the underlying cause of the vitreous hemorrhage.

     Hemorrhage density can vary significantly between patients who experience vitreous hemorrhage, but even a mild hemorrhage indicates the existence of a serious problem. Because of the absence of a validated and generally accepted medical definition of the various densities of vitreous hemorrhage, we classify a vitreous hemorrhage as either mild, moderate or severe depending on the density of the vitreous hemorrhage as observed by the physician:

	•		mild vitreous hemorrhage is characterized by trace blurring of retinal blood vessels
	•		moderate vitreous hemorrhage is characterized by partial obscuration of retinal blood vessels and/or the optic nerve
	•		severe vitreous hemorrhage is characterized by complete obscuration of retinal blood vessels and/or the optic nerve

     Market Opportunity. Based on market research that we commissioned in February 1999, we believe that approximately 450,000 cases of vitreous hemorrhage occur each year in the United States, a total of 400,000 cases occur each year in the five largest European markets and 190,000 cases occur each year in Japan. Approximately 60% of all of these cases are due to diabetic retinopathy, 15% are due to trauma and 25% are due to other factors. As a result of the natural history of the disease, we believe Vitrase®, if approved, is unlikely to be used in all cases of vitreous hemorrhage. As a result, we believe that approximately half of all cases are candidates for treatment using Vitrase®.

     Clinical/Regulatory Status. In October 1998, the FDA granted fast-track designation for Vitrase® for the treatment of vitreous hemorrhage. The FDA’s provision for “fast-track” designated drugs, such as Vitrase®, provides for early submission of completed sections of the NDA. In January 2002, as a part of our rolling NDA for Vitrase® for the treatment of vitreous hemorrhage, we submitted the pre-clinical pharmacology and toxicology section.

     We have completed two Phase III trials of Vitrase® for the treatment of vitreous hemorrhage. These trials were prospective, randomized, parallel, placebo-controlled and double-masked studies. We conducted one of the trials, our North American trial, in the United States, Mexico and Canada with an enrollment of 750 patients. We conducted the other trial in Europe, Brazil, Australia and South Africa with an enrollment of 556 patients. Patients enrolled in the studies will continue to be monitored in 2003.

     In both studies, we enrolled patients who had both a vitreous hemorrhage that had been present for at least one month and a Best Corrected Visual Acuity (“BCVA”) of less than 20/200 at initial screening. After enrollment, patients were randomly assigned to either a test group or a control group. Patients in the test group received either a 7.5 (North America only), 55 or 75 international unit, or IU, injection of Vitrase®. Patients in the control group received a saline injection. Treatment success in both studies was defined by the clearance of the vitreous hemorrhage sufficient to allow for the occurrence of any one of the following, which must have occurred within three months following treatment with Vitrase®:

	•		panretinal laser photocoagulation surgery to slow or stop the cause of the vitreous hemorrhage
	•		other surgical treatment not specifically indicated for the clearance of the vitreous hemorrhage (for example, vitrectomy to enable treatment of retinal detachment)
	•		documented medical evidence that the clinical cause of the vitreous hemorrhage has been resolved without the need for further therapy

     Additionally, at each study visit and specifically at months one, two and three following treatment, BCVA was assessed using an eye chart in both studies.

     In March 2002, we announced the preliminary results for our Phase III clinical studies of Vitrase®. The data from the two Phase III studies did not show a statistically significant improvement in the primary (surrogate) endpoint. However, further analysis

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has shown that for the 55 IU dose of Vitrase®, in both studies, there was a clinically meaningful and statistically significant decrease in the density of vitreous hemorrhage and a statistically significant difference in the proportion of patients with an improvement in BCVA at one and two months, which extended to the three-month post-treatment visit in the study conducted outside North America. Based on these improvements in visual function and our review and discussions with the FDA regarding the data from the two studies, we submitted the clinical section and the CMC section of the Vitrase® NDA for the treatment of vitreous hemorrhage in October 2002. The FDA accepted those sections of the Vitrase® NDA for review in December 2002, along with the pre-clinical pharmacology and toxicology section that was submitted in January 2002. We plan to submit the final component of the Vitrase® NDA for the treatment of vitreous hemorrhage, concerning manufacturing validation, in the first half of 2003. The FDA Advisory Committee has scheduled a meeting on March 17, 2003, to consider the Company’s NDA for Vitrase® for the treatment of vitreous hemorrhage.

Diabetic Retinopathy

     Abnormal changes and/or damage to the blood vessels in the eye due to diabetes are known as diabetic retinopathy. Diabetic retinopathy is a progressive disease consisting of two stages, nonproliferative and proliferative. Nonproliferative diabetic retinopathy is the first stage of diabetic retinopathy and occurs when the retinal blood vessels swell and leak fluid and small amounts of blood into the eye. Under current practice, physicians do not generally treat patients at the nonproliferative stage of the disease because there is no effective treatment available. If untreated, nonproliferative diabetic retinopathy will likely progress into the more dangerous, proliferative stage of diabetic retinopathy. Proliferative diabetic retinopathy occurs when normal retinal blood vessels become obstructed and new, abnormal blood vessels begin to grow, or proliferate, on the surface of the retina or into the vitreous humor. The growth of these new, abnormal blood vessels creates a dangerous condition because they are weak and grow beyond the supporting structure of the retina. These blood vessels are prone to bleed and hemorrhage, and can lead to serious problems, including retinal tears and retinal detachment, both of which can severely impair vision and cause blindness. There is no cure for diabetic retinopathy.

     The most common treatment for patients with proliferative diabetic retinopathy is panretinal laser photocoagulation. In this treatment, a laser makes hundreds of tiny burns to the retina to reduce the growth of the abnormal blood vessels into the vitreous humor. Panretinal laser photocoagulation surgery has been shown to be effective in slowing the progression of proliferative diabetic retinopathy. Panretinal laser photocoagulation surgery frequently leads to increased loss of night vision and can make night driving more difficult. Also, after panretinal laser photocoagulation surgery, peripheral, or side vision, is often not as good as before the surgery.

     We believe that Vitrase® can treat diabetic retinopathy at the nonproliferative stage. Following injection into the vitreous humor, Vitrase® acts to separate the vitreous humor from the retina, thereby limiting growth of retinal blood vessels into the vitreous humor. We believe that Vitrase® achieves this by breaking down the proteoglycan component of the substance that binds the vitreous humor to the retina and by liquefying the vitreous humor. This process allows the vitreous humor to detach from the retina. Retinal specialists consider this detachment to be beneficial to diabetic retinopathy patients because it may delay the progression of the disease.

     Market Opportunity. Diabetes continues to be a major healthcare problem in the United States and is projected to continue growing rapidly in many regions outside the United States. Eye disease is commonly associated with diabetes, and the risk of blindness to individuals with diabetes is 25 times greater than in the general population. Of the nearly eight million individuals in the United States diagnosed with diabetes, four to six million have some form of diabetic retinopathy. The majority of individuals with diabetic retinopathy are in the nonproliferative stage of the disease. We believe that these people are potential candidates for treatment using Vitrase®.

     Clinical/Regulatory Status. We have completed a 60 patient pilot Phase IIa clinical trial in Mexico City to evaluate the safety and efficacy of a single-dose injection of Vitrase® to cause a detachment of the vitreous humor from the retina and the impact on slowing the progression of diabetic retinopathy over a one-year period. This trial was a prospective, randomized, placebo controlled, double masked study. Patients with nonproliferative diabetic retinopathy were randomly assigned to one of four groups; a control group who received a saline injection, a test group who received a 75 IU injection of Vitrase®, a test group who received a 0.3 ml injection of a gas called sulphur-hexafluroride or SF6, and a test group who received a 75 IU injection of Vitrase® and a 0.3 ml injection of SF6 at 4 weeks following Vitrase® injection if a complete detachment of the vitreous humor from the retina had not occurred.

     Interim study results at 16 weeks post-treatment demonstrated that complete detachment of the vitreous humor from the retina was documented in 60% of eyes treated with a single dose of Vitrase®. This is compared with only 6% of patients in the saline

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control group. In the study’s two additional treatment groups, detachment of the vitreous humor from the retina was documented in 53% of eyes treated with SF6 gas and in 50% of eyes treated with a combination of Vitrase® and SF6 gas.

     To assess and measure the progression of diabetic retinopathy for study patients, seven-field fundus photographs (photographs of the retina) were taken at approximately 16 weeks following study entry and again 12 months later. The fundus photographs were reviewed in a masked fashion by an independent reading center to determine an Early Treatment for Diabetic Retinopathy Study (ETDRS) retinopathy severity scale score assigned for each patient’s study eye. These ETDRS retinopathy severity scores were then evaluated to identify any changes in the patients’ diabetic retinopathy over the one-year evaluation period. Of the study’s 60 patients, complete sets of fundus photographs were available, analyzed and scored for 46 patients.

     Although the study was not designed to demonstrate statistical significance for progression of diabetic retinopathy among study groups, evaluation of ETDRS retinopathy severity scores did highlight trends for slowing the progress of diabetic retinopathy. Of the 46 patients with fundus photographs that were analyzed and scored, 67% of patients treated with Vitrase® (10 of 15) had stable ETDRS scores, indicating no measurable progression of diabetic retinopathy over the one-year evaluation period. This compares to stable ETDRS scores for the one-year evaluation period of 38% of patients treated with saline (6 of 16); 40% of patients treated with SF6 gas (6 of 15) and 43% of patients treated with Vitrase® plus SF6 gas (6 of 14). Worsening of ETDRS scores, indicating a progression of diabetic retinopathy over the one-year evaluation period was seen in 13% of patients treated with Vitrase® (2 of 15); 38% of patients treated with saline (6 of 16); 20% of patients treated with SF6 gas (3 of 15) and 21% of patients treated with Vitrase® plus SF6 gas (3 of 14).

     The continued development of Vitrase® for the treatment of diabetic retinopathy will be dependent upon a number of factors including, among others, the FDA’s evaluation of the Vitrase® NDA for the treatment of vitreous hemorrhage, the successful completion of any additional clinical trials for the diabetic retinopathy indication and the continuing assessment of the market opportunity for this indication as compared to other product opportunities we may be pursuing at the time.

ISTALOL™

     ISTALOL™ is the Company’s once daily, topical solution of timolol, a beta-blocking agent for the treatment of glaucoma. The product was developed by Senju in Japan. In May 2002, as part of the AcSentient asset acquisition, ISTA acquired marketing rights for ISTALOL™ in the United States.

     Glaucoma is a disease that gradually reduces eyesight without warning and often without symptoms. Vision loss is caused by damage to the optic nerve. It was once thought that high intraocular pressure (“IOP”) was the main cause of this damage. It is now believed that other factors must also be involved since people with “normal” IOP can experience vision loss from glaucoma. Glaucoma is a chronic disease that must be treated for life. Currently, its causes are not well understood and there is no cure.

     The most common form of glaucoma, Primary Open Angle Glaucoma, affects about three million Americans. It happens when the eye’s drainage canals become clogged over time. The IOP rises because the correct amount of fluid cannot drain out of the eye. With open angle glaucoma, the entrances to the drainage canals are clear and should be working correctly. The clogging problem occurs inside the drainage canals. ISTALOL™ is a beta-blocker that improves drainage of aqueous humor from the eyeball.

     Market Opportunity. According to published reports, the United States pharmaceutical market for the treatment of glaucoma exceeds $1.1 billion per year. As such, ISTALOL™ represents an important opportunity for the Company, with potential for excellent market penetration within a few years after product launch.

     Clinical/Regulatory Status. Senju submitted an NDA for ISTALOL™ to the FDA in September 2002 and was accepted for review in November 2002. The NDA is based on data from a Phase I clinical study and a multi-center Phase III clinical trial conducted in the United States, as well as results from preclinical studies and Phase I and Phase II studies conducted in Japan.

     In the clinical trials, ISTALOL™ has shown efficacy and safety comparable to timolol maleate, which is the leading beta-blocker to treat glaucoma in the United States. Advantages of ISTALOL™ include enhanced corneal penetration and once-daily administration. Third party formulations of timolol currently on the market are twice-daily solutions or gel formulations, which are known to cause blurring of patients’ vision.

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Bromfenac

     Bromfenac is a topical non-steroidal anti-inflammatory compound for the treatment of ocular inflammation. The product was developed by Senju in Japan. Senju launched bromfenac in Japan in 2000 and its rapid sales growth is principally due to its superior potency and twice-daily dosing regimen as compared to the requirement of four doses-per-day for most other anti-inflammatory products on the Japanese market. In May 2002, as part of our AcSentient asset acquisition, ISTA acquired marketing rights for bromfenac in the United States.

     Market Opportunity. Based on market research, the Company estimates the current global ophthalmic anti-inflammatory and allergies markets to be approximately $500 million and $630 million per year, respectively.

     Clinical/Regulatory Status. Phase I, Phase II and Phase III clinical studies of bromfenac have been completed in Japan and the product has been approved and was launched in 2000 in Japan. ISTA expects to initiate a Phase III study in the United States during the first half of 2003. Based on a successful completion of the Phase III study, ISTA expects to file a corresponding NDA to the FDA by the end of 2003.

Caprogel®

     Caprogel®, a topical gel form of amniocaproic acid, is a new compound for treating hyphema, which typically results from trauma to the eye. The product was initially licensed from the Eastern Virginia School of Medicine. In May 2002, as part of our AcSentient asset acquisition, ISTA acquired worldwide marketing rights for Caprogel®.

     Hyphema is a term used to describe bleeding in the anterior chamber, the space between the cornea and the iris, of the eye. It occurs when blood vessels in the iris bleed and leak into the clear aqueous fluid. Hyphemas are usually characterized by pooling of blood in the anterior chamber that may be visible to the naked eye. The red blood cells of very small hyphemas are visible only with magnification. Even the slightest amount of blood in the anterior chamber will cause decreased vision when mixed in the clear aqueous fluid.

     Some of the symptoms of hyphema are decreased vision, depending on the amount of blood in the eye, pool of blood in the anterior chamber and elevated intraocular pressure. A doctor will assess visual acuity, measure intraocular pressure and examine the eye with a split lamp microscope and ophthalmoscope.

     The treatment is dependent on the cause and severity of the hyphema. Frequently, the blood is reabsorbed over a period of days to weeks. During this time, the doctor will carefully monitor the intraocular pressure for signs of the blood preventing normal flow of the aqueous through the eye’s angle structures. If the eye pressure becomes elevated, eye drops may be prescribed to control it. The pupils are also evaluated to rule out damage to the iris.

     In some cases, a procedure is performed to irrigate the blood from the anterior chamber to prevent secondary complications such as glaucoma and bloodstains on the cornea.

     Market Opportunity. Based on review of publicly available disease related data, Hyphema is estimated to affect approximately 50,000 patients per year in the United States and currently there is no available pharmaceutical agent approved for its treatment.

     Clinical/Regulatory Status. Phase II and Phase III studies for Caprogel® were completed in the United States prior to ISTA acquiring the marketing rights to the product. ISTA expects to initiate an additional Phase III study in the United States in the second half of 2003. Based on a successful completion of the Phase III study, the Company expects to file an NDA with the FDA in 2004. However, our timing for clinical development of Caprogel® may change based on our assessment, from time to time, of this product candidate's market potential, other product opportunities and our corporate priorities. Caprogel® has received an orphan drug designation for the treatment of hyphema from the FDA, which may result in the Company receiving a seven-year market exclusivity privilege.

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     We continually evaluate new opportunities for late-stage or currently marketed complementary product candidates and, if and when appropriate, intend to pursue such opportunities through further product acquisitions and related development activities. ISTA’s ability to execute on such opportunities in some circumstances will be dependant upon our ability to raise additional capital on commercially reasonable terms.

Collaboration With Allergan

     In March 2000, we began a collaboration with Allergan, Inc. with respect to the development and commercialization of Vitrase® worldwide (other than in Mexico until April 2004 and Japan) for certain ophthalmic uses, including a license agreement for the marketing, sale and distribution of Vitrase®, a supply agreement for Vitrase® and a stock purchase agreement for $10.0 million of our Series D preferred stock. Allergan is a leading provider of eye care and specialty pharmaceutical products throughout the world. A joint operating committee has been constituted and consists of an equal number of members from each company who will oversee development, regulatory and marketing activities with respect to Vitrase®, as more fully described below.

     Under the terms of our agreements with Allergan:

	•		Development. We are responsible for all product development, preclinical studies and clinical trials in support of marketing approvals of Vitrase® for the treatment of vitreous hemorrhage in the United States and Europe. We are also responsible for all preclinical studies and clinical trials to demonstrate the safety and efficacy of Vitrase® for the treatment of diabetic retinopathy.
	•		Regulatory Approvals. We are responsible for applying for and obtaining regulatory approval of Vitrase® in the United States and in the European Union. Allergan will be responsible for applying for and obtaining regulatory approvals of Vitrase® in markets outside the United States and the European Union where it deems appropriate, other than Mexico (until April 2004) and Japan.
	•		Manufacturing. We are responsible for the manufacture of Vitrase® and, if approved, for supplying all of Allergan’s requirements for Vitrase® during the term of the license agreement.
	•		Marketing. In the United States, Allergan will be responsible for the overall management of marketing, sale and distribution activities for Vitrase® through its established sales and marketing organization. Under the terms of the license agreement, we will employ medical specialists in the United States to assist in physician training and usage development. In all markets outside the United States, except Mexico and Japan, Allergan will be solely responsible for the marketing, sale and distribution of Vitrase®.
	•		Milestone Payments. Allergan has agreed to pay us up to $35.0 million in milestone payments based on our achievement of specified regulatory and development objectives with respect to Vitrase® for the treatment of vitreous hemorrhage and diabetic retinopathy. To date, we have not earned any milestone payments from Allergan.
	•		Profit Sharing and Royalties. In the United States, we will share profits on the sale of Vitrase® with Allergan on a 50/50 basis during the term of the license agreement. In all markets outside the United States, except Mexico (until April 2004) and Japan, we will receive a royalty on all sales of Vitrase® by Allergan.
	•		Term and Termination. Allergan’s license to market, sell and distribute Vitrase® in the United States will expire ten full calendar years following the date of its first commercial sale, at which time all commercial rights for Vitrase® in the United States will revert to us. Allergan’s obligation to pay royalties will terminate on a country-by-country basis upon the latest of 10 full calendar years following the date of the first commercial sale in each particular country and the expiration date of the last-to-expire licensed patent relating to Vitrase® in that country. Allergan may terminate the license agreement at any time with three months notice to us. We may terminate the license agreement on a country-by-country basis in certain countries if Allergan fails to commercialize Vitrase® within 12 months of regulatory approval in that country.
	•		Board of Director Representation and Visitation Rights. Allergan has the right to request that we nominate an Allergan representative to our Board of Directors. In the event that the Allergan nominee is not elected to the Board of Directors,

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Allergan has certain visitation rights, which include the designation of an Allergan representative to attend and observe all of our Board of Director meetings.

Collaboration With Otsuka

     In December 2001, we began a collaboration with Otsuka Pharmaceutical Co., Ltd. with respect to the commercialization of Vitrase® in Japan for certain ophthalmic uses, including a license agreement for the clinical development, regulatory approval, marketing, sale and distribution of Vitrase®, a supply agreement for Vitrase® and a stock purchase agreement for $4.0 million of our common stock. Otsuka is part of the Otsuka Group, headquartered in Tokyo, Japan and has a diverse portfolio including ophthalmic, central nervous system, cardiovascular, circulatory, gastro-intestinal, respiratory, oncological and dermatological products.

     Under the terms of our agreements with Otsuka:

	•		Clinical Development. Otsuka is responsible for all preclinical studies and clinical trials in support of marketing approval of Vitrase® for the treatment of vitreous hemorrhage in Japan. Otsuka is also responsible for all preclinical studies and clinical trials for regulatory approvals for additional indications including the treatment of diabetic retinopathy.
	•		Regulatory Approvals. Otsuka is responsible for applying for and obtaining regulatory approval of Vitrase® in Japan. Otsuka will also be responsible for obtaining National Health Insurance pricing approval for Vitrase® from the Japanese Ministry of Health. We will be responsible for providing Otsuka with copies of preclinical and clinical data and study reports and other documents in connection with our regulatory filings for Vitrase® in the United States.
	•		Manufacturing. We are responsible for the manufacture of Vitrase® and for the supply of all of Otsuka’s requirements for clinical trials in Japan. If approved, we will also be responsible for supplying all of Otsuka’s commercial product requirements for Vitrase® during the term of the license agreement.
	•		Marketing. Otsuka will be responsible for the overall management of marketing, sales and distribution activities for Vitrase® in Japan through its established sales and marketing organization.
	•		Milestone Payments. Otsuka paid us a non-refundable license fee as part of the license agreement. Otsuka has also agreed to pay us a milestone payment upon regulatory approval of Vitrase® for the treatment of vitreous hemorrhage in Japan.
	•		Commercial Purchase of Vitrase®. Otsuka is required to purchase Vitrase® from us at a percentage of the annual National Health Insurance price as established for Vitrase® in Japan during the term of the license agreement, unless we are unable to supply Vitrase® to Otsuka. If we are unable to supply Vitrase® to Otsuka and Otsuka, or a third party, is required to manufacture Vitrase® to meet Otsuka’s supply requirements, we will only receive a royalty on sales of Vitrase® by Otsuka.
	•		Term and Termination. Our agreements with Otsuka will terminate upon the latest of 15 full calendar years following the date of the first commercial sale of Vitrase® in Japan and the expiration date of the last-to-expire licensed patent relating to Vitrase® in Japan. Otsuka may terminate the agreements at any time with six months notice to us. We may terminate the agreements if Otsuka fails to submit an application for regulatory approval of Vitrase® in Japan within 12 months of completing all necessary clinical trials and the initial meeting with the Japanese Ministry of Health to review the clinical trial results.

Collaboration With Senju

     In May 2002, the Company expanded its late-stage product portfolio, acquiring three promising therapeutic products with ophthalmic applications from AcSentient. The acquired products were ISTALOL™ and bromfenac. As a result of this acquisition, we began a collaboration with Senju including individual license agreements for the commercialization of ISTALOL™ and bromfenac in the United States. These license agreements were originally executed between Senju and AcSentient. The full rights and obligations of AcSentient under both license agreements were transferred to ISTA as a part of the acquisition agreement between ISTA and AcSentient, with such transfer approved by Senju.

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     Under the terms of our agreements with Senju:

	•		Clinical Development. Senju is responsible for completing development activities for ISTALOL™. ISTA is responsible for completing development activities for bromfenac. We anticipate this will primarily involve a Phase III clinical trial for bromfenac in the United States.
	•		Regulatory Approvals. Senju was responsible for preparing and submitting an NDA to the FDA for ISTALOL™. Senju submitted this NDA in September 2002, and the FDA accepted it for review in November 2002. ISTA is responsible for the preparation and submission of an NDA to the FDA for bromfenac following the successful conclusion of the Phase III clinical study. All follow-up activities with the FDA for both ISTALOL™ and bromfenac will be handled by ISTA.
	•		Manufacturing. ISTA will be responsible for the manufacture of ISTALOL™ and bromfenac.
	•		Marketing. ISTA will be responsible for the overall management of marketing, sales and distribution activities for ISTALOL™ and bromfenac in the United States.
	•		Milestone Payments. ISTA will be required to pay to Senju certain non-refundable milestone payments relating to the development process and regulatory approval of both ISTALOL™ and bromfenac.
	•		Term and Termination. The license agreements with Senju will terminate upon the last-to-expire licensed patent in the United States relating to ISTALOL™ and bromfenac, respectively.

Research and Development

     Since our inception, we have made substantial investments in research and development. During the years ended December 31, 2002, 2001 and 2000, we spent $14.8 million, $15.8 million and $16.2 million, respectively, on research and development activities. We plan to focus our near-term research and development efforts on the continued development of the products in our current development pipeline, which include Vitrase®, ISTALOL™, bromfenac and Caprogel®. Building on this pipeline, ISTA’s goal is to become a fully-integrated specialty pharmaceutical company by developing or acquiring complementary products, either already marketed or in late stage development. Some acquired products may require additional research and development activities prior to regulatory approval and commercialization.

Patents and Proprietary Rights

     Our success will depend in part on our ability to obtain patent protection for our inventions, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. Our strategy is to actively pursue patent protection in the United States and foreign jurisdictions for technology that we believe to be proprietary and that offers a potential competitive advantage for our inventions. To date, we have filed six U.S. patent applications for Vitrase® technologies, two of which have been issued claiming uses of ovine hyaluronidase to clear vitreous hemorrhage, one of which is pending seeking to claim an additional use of ovine hyaluronidase to clear vitreous hemorrhage, and one of which is pending seeking to claim a use of ovine hyaluronidase to treat other vitreoretinal disorders. In addition, we have licensed one U.S. patent and the corresponding European patents for the treatment of certain ophthalmic conditions using enzymes, such as hyaluronidase derived from other sources.

     In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection of these trade secrets and proprietary know-how, in part, through confidentiality and proprietary information agreements. We make efforts to require our employees, directors, consultants and advisors, outside scientific collaborators and sponsored researchers, other advisors and other individuals and entities to execute confidentiality agreements upon the start of employment, consulting or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some other parties, the agreements provide that all inventions conceived by the individual will be our exclusive property. These agreements may not provide meaningful protection for or adequate remedies to protect our technology in the event of unauthorized use or disclosure of information. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors.

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     We also file trademark applications to protect the names of our products. These applications may not mature to registration and may be challenged by third parties.

Competition

     The markets for therapies that treat diseases and conditions of the eye are subject to intense competition and technological change. Many companies, including major pharmaceutical companies and specialized biotechnology companies, are engaged in activities similar to ours. Such companies include Allergan, Inc., Alcon Laboratories, Inc., Bausch & Lomb Incorporated, CIBA Vision (a unit of Novartis AG), Pharmacia/Pfizer and Eli Lilly and Company. Many of these companies have substantially greater financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than ours. Many of these companies have significant experience in preclinical testing, clinical trials and other parts of the regulatory approval process.

     Should we be successful in acquiring or in-licensing currently marketed ophthalmic products, we will be subject to intense competition from major pharmaceutical companies who have extensive marketing and distribution organization and substantially greater financial resources than ours.

     We are not aware of any other drug candidates in clinical trials for the treatment of vitreous hemorrhage or hyphema. Eli Lilly and Company is currently conducting clinical trials for the use of a systemic drug to treat diabetic retinopathy, and several companies are working on drugs and systems to help control diabetes and the consequences of diabetes, including diabetic retinopathy. In addition, numerous companies are working on alternate therapies for ocular inflammation and glaucoma.

     Our success will depend, in part, on our ability to:

	•		demonstrate the safety and efficacy of our products
	•		obtain regulatory approval in a timely manner
	•		demonstrate potential advantages over alternative treatment methods
	•		effectively market and distribute our products, either through our collaborators or by establishing and enhancing our own resources in these areas
	•		obtain reimbursement coverage from insurance companies and other third-party payers
	•		demonstrate cost-effectiveness
	•		obtain patent protection and effectively enforce our patent rights

Marketing and Sales

     Upon receipt of applicable regulatory approvals, we plan to market and distribute Vitrase® in the United States and all international markets, except Mexico (until April 2004) and Japan, through our collaboration with Allergan. We have a distribution agreement with Laboratories Sophia S.A. de C.V. providing for the marketing, sales and distribution of Vitrase® in Mexico until April 2004. We have an agreement with Otsuka providing for the development and commercialization of Vitrase® in Japan. In the United States, the primary target market for Vitrase® will initially be retinal specialists to whom most patients with vitreous hemorrhage are referred.

     We plan to market and distribute ISTALOL™, bromfenac and Caprogel® in the United States through our own resources. We will therefore need to establish our own sales, marketing and distribution capabilities. We will need to devote significant financial and management resources to develop such sales, marketing and distribution capabilities.

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Third-party Reimbursement

     In the United States, physicians, hospitals and other healthcare providers that purchase pharmaceutical products generally rely on third-party payers, principally private health insurance plans and Medicare and, to a lesser extent, Medicaid, to reimburse all or part of the cost of the product and procedure for which the product is being used. We expect that patients with a vitreous hemorrhage who are candidates for Vitrase® treatment will include, primarily due to demographic factors, patients with health insurance coverage provided by Medicare and private insurers, including Medicare health maintenance organizations. Currently, a Medicare reimbursement code has been established for the intravitreal injection of a pharmaceutical agent, which, we believe, will be appropriate for physician billing for a Vitrase® injection. Hospitals and physicians are reimbursed separately for drugs. Typically, the Health Care Financing Administration, or HCFA, the governmental agency responsible for Medicare reimbursement policy, does not issue national coverage guidelines for individual drugs. Drug specific coverage policies are primarily developed by individual health insurance companies following Medicare’s criteria for drug coverage, which include, among other requirements, that the drug be FDA approved, be used in connection with a physician service and be medically reasonable for the treatment of an illness or injury. While reimbursement may be available under existing payment codes for miscellaneous injectable drugs, each Medicare health insurance provider reviews such reimbursement requests separately. Widespread and uniform reimbursement for our injectable drug products will require the establishment of a specific reimbursement code for the injectable drug, which is issued by HCFA following review of an application by the manufacturer. To support our applications for reimbursement coverage with Medicare and other major third-party payers, we intend to use data from clinical trials, including Phase III and Phase IV clinical trials, to demonstrate the clinical utility and potential economic benefits of using Vitrase® for the treatment of vitreous hemorrhage. The lack of satisfactory reimbursement for our drug products will limit their widespread use and lower potential product revenues.

     Reimbursement systems in international markets vary significantly by country and, within some countries, by region. Reimbursement approvals must be obtained on a country-by-country basis. In many foreign markets, including markets in which we anticipate selling our products, the pricing of prescription pharmaceuticals is subject to government pricing control. In these markets, once marketing approval is received, pricing negotiations could take another six to twelve months or longer. As in the United States, the lack of satisfactory reimbursement or inadequate government pricing of our products will limit their widespread use and lower potential product revenues.

Government Regulation

     Our pharmaceutical products are subject to extensive government regulation in the United States. If we distribute our products abroad, these products will also be subject to extensive foreign government regulation. In the United States, the FDA regulates pharmaceutical products. FDA regulations govern the testing, manufacturing, advertising, promotion, labeling, sale and distribution of our products.

     The FDA approval process for drugs includes:

	•		preclinical studies
	•		submission of an Investigational NDA for clinical trials
	•		adequate and well-controlled human clinical trials to establish the safety and efficacy of the product
	•		submission of a NDA
	•		review of the NDA
	•		inspection of the facilities used in the manufacturing of the drug to assess compliance with the current Good Manufacturing Practices regulations

     The NDA includes comprehensive and complete descriptions of the preclinical testing, clinical trials, and the chemical, manufacturing and control requirements of a drug that enables the FDA to determine the drug’s safety and efficacy. An NDA must be submitted by us, and filed and approved by the FDA before any of our drugs can be marketed commercially in the United States.

     The FDA testing and approval process requires substantial time, effort and money. We cannot assure you that any approval will ever be granted.

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     Preclinical studies include laboratory evaluation of the product, as well as animal studies to assess the potential safety and effectiveness of the product. These studies must be performed according to good laboratory practices. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the Investigational New Drug Application (“IND”). Clinical trials may begin 30 days after the IND is received, unless the FDA raises concerns or questions about the conduct of the clinical trials. If concerns or questions are raised, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. We cannot assure you that submission of an IND will result in authorization to commence clinical trials. Nor can we assure you that if clinical trials are approved, that data will result in marketing approval.

     Clinical trials involve the administration of the product that is the subject of the trial to volunteers or patients under the supervision of a qualified principal investigator. Furthermore, each clinical trial must be reviewed and approved by an independent institutional review board at each institution at which the study will be conducted. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Also, clinical trials must be performed according to good clinical practices. Good clinical practices are enumerated in FDA regulations and guidance documents.

     Clinical trials typically are conducted in three sequential phases: Phases I, II and III, with Phase IV studies conducted after approval and generally required for drugs subject to accelerated approval regulations. These phases may overlap. In Phase I clinical trials, the drug is usually tested on healthy volunteers to determine:

	•		safety
	•		any adverse effects
	•		dosage tolerance
	•		absorption
	•		metabolism
	•		distribution
	•		excretion
	•		other drug effects

     In Phase II clinical trials, the drug is usually tested on a limited number of afflicted patients to evaluate the efficacy of the drug for specific, targeted indications, determine dosage tolerance and optimal dosage, identify possible adverse effects and safety risks. In Phase III clinical trials, the drug is usually tested on a larger number of patients, in an expanded patient population and at multiple clinical sites. The FDA may require that we suspend clinical trials at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk.

     In Phase IV clinical trials or other post-approval commitments, additional studies and patient follow-up are conducted to gain experience from the treatment of patients in the intended therapeutic indication. Additional studies and follow-up are also conducted to document a clinical benefit where drugs are approved under accelerated approval regulations and based on surrogate endpoints. In clinical trials, surrogate endpoints are alternative measurements of the symptoms of a disease or condition that are substituted for measurements of observable clinical symptoms. Failure to promptly conduct Phase IV clinical trials and follow-up could result in expedited withdrawal of products approved under accelerated approval regulations.

     The facilities, procedures, and operations of our contract manufacturers must be determined to be adequate by the FDA before approval of product manufacturing. Manufacturing facilities are subject to inspections by the FDA for compliance with current Good Manufacturing Practices (“cGMP”), licensing specifications, and other FDA regulations before and after an NDA has been approved. Foreign manufacturing facilities are also subject to periodic FDA inspections or inspections by foreign regulatory authorities. Among other things, the FDA may withhold approval of NDAs or other product applications of a facility if deficiencies

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are found at the facility. Vendors that supply us finished products or components used to manufacture, package and label products are subject to similar regulation and periodic inspections.

     Following such inspections, the FDA may issue notices on Form 483 and Warning Letters that could cause us to modify certain activities identified during the inspection. A Form 483 notice is generally issued at the conclusion of a FDA inspection and lists conditions the FDA investigators believe may violate cGMP or other FDA regulations. FDA guidelines specify that a Warning Letter be issued only for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction maybe expected to result in an enforcement action.

     Failure to comply with FDA and other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA ‘s review of NDAs, injunctions and criminal prosecution. Any of these actions could have a material adverse effect on us.

Food and Drug Administration Modernization Act of 1997

     The Food and Drug Administration Modernization Act of 1997 was enacted, in part, to ensure the availability of safe and effective drugs, biologics and medical devices by expediting the FDA review process for new products. The Modernization Act establishes a statutory program for the approval of fast-track products. The fast-track provisions essentially codify the FDA’s accelerated approval regulations for drugs and biologics. A fast-track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the new fast-track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a fast-track product at any time during the clinical development of the product. The Modernization Act specifies that the FDA must determine if the product qualifies for fast-track designation within 60 days of receipt of the sponsor’s request. Fast-track designated products may qualify for accelerated approval and priority review, or review within six months. Accelerated approval will be subject to:

	•		post-approval studies and follow-up to validate the surrogate endpoint or confirm the effect on the clinical endpoint
	•		prior review of all promotional materials

     If a preliminary review of the clinical data suggests that the product is effective, the FDA may initiate review of sections of an application for fast-track designation for a product before the application is complete. This rolling review is available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time period specified in the Prescription Drug User Fees Act, which governs the time period goals the FDA has committed for reviewing an application, does not begin until the complete application is submitted.

     In October 1998, the FDA granted our application for fast-track designation for Vitrase^® for the treatment of vitreous hemorrhage. During 2002 we submitted three sections of the Vitrase^® NDA as they were completed. The pre-clinical pharmacology and toxicology section was submitted in January 2002. The clinical section and the chemistry, manufacturing and controls (“CMC”) section were submitted in October 2002. We anticipate submitting the final section (concerning manufacturing validation) by the end of the first quarter of 2003. The FDA Advisory Committee will meet on March 17, 2003 to consider ISTA’s NDA for Vitrase^® for the treatment of vitreous hemorrhage.

     One of our product candidates, Caprogel^®, for the treatment of hyphema, has been designated by the FDA as an orphan drug. An orphan drug is defined in the 1984 amendments of the Orphan Drug Act as a drug intended to treat a condition affecting fewer than 200,000 persons in the United States. The Orphan Drug Act has numerous incentives including:

	•		seven years of exclusive marketing upon FDA approval
	•		tax credit for clinical research expense
	•		grant support for investigation of rare disease treatments
	•		user fee waiver

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International

     For marketing outside the United States, we also are subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product approval, pricing and reimbursement vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained before manufacturing or marketing the product in those countries. The approval process varies from country to country and the time required for such approvals may differ substantially from that required for FDA approval. We cannot assure you that clinical trials conducted in one country will be accepted by other countries or that approval in one country will result in approval in any other country. For clinical trials conducted outside the United States, the clinical stages are generally comparable to the phases of clinical development established by the FDA.

Manufacturing

     Ovine hyaluronidase, the active pharmaceutical ingredient used in Vitrase®, is sourced from ovine testes and processed in several stages to produce a highly purified raw material for formulation. We have a supply agreement with Biozyme Laboratories Limited (Biozyme) for cGMP-grade ovine hyaluronidase for use in ophthalmic applications. The ovine hyaluronidase is lyophilized, or freeze dried, by Biozyme and delivered to our contract manufacturer for formulation and filling of dose specific vials. Vitrase® is currently required to be stored under refrigerated conditions prior to its use. We have entered into an agreement with Cardinal Health (formerly SP Pharmaceuticals, Inc.) to manufacture commercial quantities of Vitrase®. Under the terms of the agreement, Cardinal Health Sterile Technologies, a member of Cardinal Health’s Pharmaceutical Technologies & Services group, will manufacture, package and perform certain manufacturing quality assurance and quality control tests on the product in accordance with specifications provided by us. Currently, Biozyme and Cardinal Health are our sole sources for ovine hyaluronidase and finished product, respectively. We are seeking additional manufacturing sources for these products.

     We have supply agreements with Bausch & Lomb Incorporated to manufacture commercial quantities of ISTALOL™ and bromfenac. Under the terms of the agreements, Bausch & Lomb will manufacture, package and perform certain manufacturing quality assurance and quality control tests on the two products in accordance with specifications provided by the Company. Currently, Bausch & Lomb is our sole source for ISTALOL™ and bromfenac. We are seeking additional manufacturing sources for these products.

Human Resources

     As of February 18, 2003, we had 39 full-time employees. Approximately 32 of our employees are involved in research and clinical development activities. Six of our employees hold Ph.D. or M.D. degrees and eight other employees hold other advanced degrees. Our employees do not have a collective bargaining agreement. We consider our relations with our employees to be good.

General Information

     We incorporated in California in February 1992 as Advanced Corneal Systems, Inc. In March 2000, we changed our name to ISTA Pharmaceuticals, Inc. and we reincorporated in Delaware in August 2000. Our corporate headquarters and principal research laboratories are located at 15279 Alton Parkway, Building 100, Irvine, California 92618, and our telephone number is (949) 788-6000. Vitrase®, ISTALOL™, Caprogel®, ISTA, ISTA Pharmaceuticals and the ISTA logo are our trademarks.

     We maintain an Internet website at www.istavision.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as reasonably practicable following the time they are filed with or furnished to the SEC.

RISK FACTORS

     In addition to other information included in this report, the following factors should be considered in evaluating our business and future prospects:

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

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

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

     For example, we recently announced that the FDA Advisory Committee plans to meet to consider the Company’s NDA for Vitrase® for the treatment of vitreous hemorrhage on March 17, 2003. FDA advisory committees provide independent opinions and recommendations to the FDA on applications to market new drugs. Advisory committees consist of medical professionals, scientists and researchers who are recognized as experts in their fields, as well as industry leaders, consumer representatives and patient representatives. The committees receive summary information about the applications and copies of the FDA’s review of the application documents. Based on this information, advisory committees may recommend approval or disapproval on a drug’s marketing application, or ask for additional information. Although committees provide recommendations to the FDA, and the FDA generally follows such committee’s recommendations, final decisions regarding a drug’s marketing application are made by the FDA. The recommendations of the Advisory Committee and the final decision by the FDA with regard to Vitrase® will have a dramatic impact on the Company’s future.

     Clinical testing of pharmaceutical products is also a long, expensive and uncertain process. Even if initial results of preclinical studies or clinical trial results are positive, we may obtain different results in later stages of drug development, including failure to show desired safety and efficacy. Our bromfenac and Caprogel® products are currently undergoing clinical trials.

     For example, our preliminary efficacy and safety results for our two Phase III clinical trials of Vitrase® for the treatment of vitreous hemorrhage, did not show a statistically significant improvement in the primary (surrogate) endpoint. However, the results did include statistically significant and clinically relevant improvements in other parameters such as Best Corrected Visual Acuity (“BCVA”) and a decrease of the density of the vitreous hemorrhage. The clinical trials of any of our product candidates could be unsuccessful, which would prevent us from obtaining regulatory approval and commercializing the product.

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

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

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

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

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

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

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

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

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

     We have only a limited operating history upon which you can evaluate our business. We have never been profitable, and we might never become profitable. As of December 31, 2002, our accumulated deficit was $122.4 million, including a net loss of approximately $23.0 million for the year ended December 31, 2002. We have not generated any revenue from product sales to date, and we may never generate revenues from product sales in the future. Even if we do achieve significant revenues from product sales, we expect to incur significant operating losses over the next several years.

We may be unable to execute our strategic plan to transi