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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

Commission file number 0-22332

Registrant’s telephone number, including area code (510) 865-8800

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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.

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

APPLICABLE ONLY TO CORPORATE ISSUERS:

          The number of shares of Registrant’s common stock, $0.01 par value, outstanding as of April 30, 2003: 25,136,786.

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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2003

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PART I     FINANCIAL INFORMATION

Item 1.      Financial Statements

InSite Vision Incorporated
Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)

Note 1 - Basis of Presentation

          The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  Operating results for the three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for any future period.

          The Company’s consolidated financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and assumes the Company will continue as a going concern.  Except for 1999, the Company has incurred losses since its inception, including a net loss of $2.3 million for the quarter ended March 31, 2003, and the Company expects to incur substantial additional development costs, including costs related to clinical trials and manufacturing expenses.  The Company has incurred negative cash flows from operations since inception, including net cash used in operations of $2.3 million for the quarter ended March 31, 2003.  As of March 31, 2003, the Company had an accumulated deficit of $111.1 million and a cash and cash equivalents balance of $856,000.  In these circumstances, and not withstanding any expense reduction measures the Company is undertaking, the Company expects it will not have sufficient funds to meet its various cash needs beyond approximately the middle of June 2003 unless the Company is able to obtain additional funding from outside sources.  The Company’s plans in this regard include active pursuit of various sources of additional funds, including new license and collaboration agreements and securing additional debt or equity financing.  There is no assurance that such additional funds will be available for the Company to finance its operations on acceptable terms, if at all.  If such funds are not available, management will be required to cease operations altogether. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

          We have undertaken a number of measures to reduce our short term operating expenses to allow us to continue operations without additional financing through approximately the middle of June 2003, including: placing approximately 75% of our employees on unpaid furlough, voluntary salary reductions by our senior management team, ceasing work on all non-critical external activities, working with our landlord to restructure our lease obligations, and other cost containment measures. There is no assurance that we will be able to successfully implement these expense reduction plans or that we will be able to do so without significantly harming our business, financial condition or results of operations.

          These financial statements and notes should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Critical Accounting Policies and Use of Estimates

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

          The following are items in our financial statements that require significant estimates and judgments:

          Inventory.  Our inventories are stated at the lower of cost or market.  The cost of the inventory is based on the first-in first-out method.  If the cost of the inventory exceeds the expected market value a provision is recorded for the difference between cost and market.  At March 31, 2003, our inventories solely consisted of OcuGene kits.

          Property and Equipment.  Property and equipment is stated at cost, less accumulated depreciation.  Depreciation of property and equipment is provided over the estimated useful lives of the respective assets, which range from three to five years, using the straight-line method.  Leasehold improvements are amortized over the lives of the related leases or their estimated useful lives, whichever is shorter, using the straight-line method.  It is our policy to write-off our fully depreciated assets. 

          Additionally, we record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. 

          Revenue Recognition.  We recognize up-front fees over the expected term of the related research and development services using the straight-line method.  When changes in the expected term of ongoing services are identified, the amortization period for the remaining fees is appropriately modified.

          Revenue related to performance milestones is recognized when the milestone is achieved based on the terms set forth in the related agreements.

          We directly reduce expenses for amounts reimbursed due to cost sharing agreements.  We recognize the received cost sharing payments when persuasive evidence of an arrangement exists, the services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured.

          We receive royalties from licensees based on third-party sales and the royalties are recorded as earned in accordance with contract terms, when third party results are reliably measured and collectibility is reasonably assured.

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          Revenue related to the sales of our product, the OcuGene glaucoma genetic test, is recognized when all related services have been rendered and collectibility is reasonably assured.

          Cost of goods.  We recognize the cost of inventory shipped and other costs related to our OcuGene glaucoma genetic test when they are incurred.

          Research and Development (R&D) Expenses.  R&D expenses include salaries, benefits, facility costs, services provided by outside consultants and contractors, administrative costs and materials for our research and development activities.  We also fund research at a variety of academic institutions based on agreements that are generally cancelable.  We recognize such costs as they are incurred.

          Selling, General and Administrative (SG&A) Expenses.  SG&A expenses include salaries, benefits, facility costs, services provided by outside consultants and contractors, advertising and marketing, investor relations, financial reporting, materials and other expenses related to general corporate and sales and marketing activities.

          Stock-Based Compensation.  We have elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB 25), “Accounting for Stock Issued to Employees,” to account for employee and director stock options.  Accordingly, we do not recognize compensation expense for options granted to employees and directors at an exercise price equal to the fair value of the underlying common stock.

          The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting requirements and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

          Pro forma information regarding net loss and loss per share is required by Statement of Financial Standards (SFAS) No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, and has been determined as if we had accounted for our employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the quarter ended March 31, 2003 and 2002, respectively: risk-free interest rates ranging from 1.02% to 5.83%; volatility factors for the expected market price of our common stock of 1.06 and 1.14; and a weighted-average expected life for the options of 4 years.

          The following table illustrates the effect on net loss and net loss per share as if we had applied the fair value recognition provisions of SFAS 123 to stock based employee compensation (in thousands, except per share amounts):