ISTA PHARMACEUTICALS INC, S-1/A, 2000-08-09

ISTA PHARMACEUTICALS INC
S-1/A, 2000-08-09
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 2000

REGISTRATION NO. 333-34120
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ISTA PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 2834 33-0511729
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

ISTA PHARMACEUTICALS, INC.
15279 ALTON PARKWAY
BUILDING 100
IRVINE, CA 92618
(949) 788-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

EDWARD H. DANSE
CHIEF EXECUTIVE OFFICER
ISTA PHARMACEUTICALS, INC.
15279 ALTON PARKWAY
BUILDING 100
IRVINE, CA 92618
(949) 788-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
ISSAC J. VAUGHN, ESQ. JEROME L. COBEN, ESQ.
WILSON SONSINI GOODRICH & ROSATI SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
PROFESSIONAL CORPORATION 525 UNIVERSITY AVENUE, SUITE 220
650 PAGE MILL ROAD PALO ALTO, CA 94301
PALO ALTO, CA 94304 (650) 470-4500
(650) 493-9300
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [ ]

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2

SUBJECT TO COMPLETION, DATED AUGUST 9, 2000

THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

4,500,000 SHARES

[ISTA PHARMACEUTICALS LOGO]

COMMON STOCK
$ PER SHARE

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This is an initial public offering of common stock of ISTA Pharmaceuticals, Inc.

We expect that the price to the public in the offering will be between $13.00
and $15.00 per share. The market price of the shares after the offering may be
higher or lower than the offering price.

We have applied to include the common stock on the Nasdaq National Market under
the symbol "ISTA."

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Price to the public.................................... $ $
Underwriting discount..................................
Proceeds to ISTA.......................................
</TABLE>

We have granted an over-allotment option to the underwriters. Under this option,
the underwriters may elect to purchase a maximum of 675,000 additional shares
from us within 30 days following the date of this prospectus to cover
over-allotments.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

CIBC WORLD MARKETS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
THOMAS WEISEL PARTNERS LLC

The date of this prospectus is , 2000.
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 24
Management.................................................. 38
Principal Stockholders...................................... 46
Related Party Transactions.................................. 48
Description of Capital Stock................................ 49
Shares Eligible for Future Sale............................. 52
Underwriting................................................ 54
Legal Matters............................................... 56
Experts..................................................... 56
Where You Can Find More Information......................... 57
Index to Financial Statements............................... F-1
</TABLE>

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PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in the shares. You should read the entire
prospectus carefully.

ISTA PHARMACEUTICALS

OVERVIEW

We discover and develop new remedies for diseases and conditions of the eye. Our
product development efforts involve mixtures, or formulations, of a natural
enzyme called hyaluronidase. We target serious conditions of the eye such as
vitreous hemorrhage, diabetic retinopathy, corneal opacification and
keratoconus. Each of these conditions affects a significant number of patients
and has limited treatment options. We currently have no products available for
sale and have incurred losses since inception. We expect to continue to incur
operating losses for the foreseeable future as we increase our research and
development, preclinical and clinical testing activities, and seek regulatory
approval for our product candidates.

STRATEGY

Our objective is to build a leading biopharmaceutical company that discovers,
develops and commercializes new and superior drug products for treatment of
serious diseases and conditions of the eye. We intend to accomplish this through
the following strategic initiatives:

- targeting diseases and conditions representing large underserved markets for
which there are currently no approved drug treatments

- focusing on bringing our lead product candidate, Vitrase, to market as
quickly as possible and establishing its broad acceptance for treatment of
serious conditions of the eye

- continuing to discover and develop new, safe and effective applications for
hyaluronidase

- forming strategic collaborations with pharmaceutical companies or others to
accelerate commercialization of our products, as appropriate

- seeking to acquire or in-license complementary products and technologies
OUR PRODUCTS IN DEVELOPMENT

Our products are currently in various stages of clinical trials. Phase I, II and
III clinical trials are three successively more difficult and larger studies
that test the safety and effectiveness of an experimental drug.

Vitrase

We are developing Vitrase, a proprietary formulation of hyaluronidase, for
treatment of severe vitreous hemorrhage, a sight threatening condition, and
diabetic retinopathy, the leading cause of adult blindness in the United States.
Vitrase is currently in two Phase III clinical trials for treatment of severe
vitreous hemorrhage. We are also conducting a pilot Phase IIa clinical trial of
Vitrase in Mexico for treatment of diabetic retinopathy.

Vitreous hemorrhage. A vitreous hemorrhage occurs when retinal blood vessels
rupture and bleed into the vitreous humor, the clear, gel-like substance that
fills the back of the eye between the lens and the retina. The blood from the
hemorrhage can obscure vision and prevent ophthalmologists from seeing into the
eye to diagnose or treat the cause of the hemorrhage. The only current treatment
options are a "watchful waiting" period, during which the attending physician
provides no medical treatment in the hope that the hemorrhage will clear on its
own, and an invasive surgical procedure to remove the blood filled vitreous
humor from the eye. Vitrase, when injected into the vitreous humor, causes the
vitreous humor to liquefy and promotes clearance of vitreous hemorrhage. Based
on market research we commissioned in February 1999, we believe that
approximately one million cases of vitreous hemorrhage occur each year in the
United States, Europe and Japan and that approximately half of these cases are
candidates for treatment using Vitrase.

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<PAGE> 5

Diabetic retinopathy. Diabetes can result in abnormal changes to blood vessels
in the eye, a condition known as diabetic retinopathy. Diabetic retinopathy is a
progressive disease consisting of two stages. We are developing Vitrase for
treatment for nonproliferative diabetic retinopathy, the first stage of the
disease, for which there is currently no effective treatment. Vitrase, when
injected into the vitreous humor, causes the vitreous humor to liquefy and
separate from the retina, thereby limiting growth of abnormal blood vessels in
the back of the eye.

We believe that Vitrase may be effective for treating diabetic retinopathy at
the nonproliferative stage. Approximately four to six million people in the
United States with diabetes have some form of diabetic retinopathy, the majority
of whom are in the nonproliferative stage of the disease.

Keratase

We are currently conducting a Phase IIb trial of Keratase, a proprietary
formulation of hyaluronidase, for the treatment of corneal opacification.
Corneal opacification occurs when the cornea, which is normally transparent,
becomes scarred, cloudy or opaque, diminishing the amount of light entering the
eye. The only current treatment for corneal opacification is a corneal
transplant. Risks associated with a corneal transplant include loss of vision,
rejection and creation of astigmatism. We believe that there are approximately
three million people in the United States, Western Europe and Japan that have a
form of vision impairment due to corneal opacification. We believe physicians
can use Keratase to treat corneal opacification with benefits equivalent to
those of corneal transplants but without the associated risks of rejection and
astigmatism.

Keraform

We are developing Keraform, our proprietary system for the treatment of
keratoconus, a degenerative corneal disease that impairs vision. Keratoconus is
a progressive thinning of the cornea and the development of an irregular, cone-
like protrusion of the cornea, which typically occurs in both eyes. We believe
that there are approximately 400,000 people in the United States, Western Europe
and Japan who currently have keratoconus.
COLLABORATION WITH ALLERGAN

In March 2000, we entered into agreements with subsidiaries of Allergan, Inc.
for the marketing, sale and distribution of Vitrase in the United States and all
international markets, except Mexico until April 2004 and Japan. Allergan is a
leading provider of eye care and specialty pharmaceutical products throughout
the world. Allergan has agreed to pay us a royalty on any sales of Vitrase
outside the United States and will split any profits on sales of Vitrase in the
United States on a 50/50 basis. Pursuant to our agreements, Allergan made an
equity investment of $10.0 million in us and may pay us aggregate future
milestone payments of up to $35.0 million.

GENERAL INFORMATION

Since our inception, we have financed our operational losses primarily through
private sales of our preferred stock. 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, Keratase, Keraform, ISTA, ISTA Pharmaceuticals and
the ISTA logo are our trademarks. We also use trademarks of other companies in
this prospectus.

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<PAGE> 6

THE OFFERING

Common stock offered...................... 4,500,000 shares

Common stock to be outstanding after the
offering.................................. 15,926,759 shares

Use of proceeds........................... To fund clinical trials and
preclinical research, with a
particular focus on Vitrase, to
finance the possible acquisition
of complementary technologies,
products or businesses, and for
general corporate purposes.

Proposed Nasdaq National Market symbol.... ISTA

We based the number of shares of common stock to be outstanding after the
offering in the table above on the number of shares outstanding as of June 30,
2000 and have excluded 2,416,933 shares of common stock issuable upon the
exercise of options outstanding as of June 30, 2000, at a weighted average
exercise price of $0.62 per share.

Unless otherwise stated, all information contained in this prospectus assumes:

- no exercise of the over-allotment option granted to the underwriters

- the conversion of all outstanding shares of our preferred stock into shares
of common stock

- the cashless exercise, prior to the offering, of 1,153,877 warrants to
purchase 808,569 shares of our common stock

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<PAGE> 7

SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1997 1998 1999 1999 2000
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Research and development.......... $ 4,969 $ 7,523 $ 11,062 $ 1,930 $ 3,023
General and administrative........ 1,949 2,147 3,240 449 1,500
------- ------- -------- ------- --------
Total costs and expenses............ 6,918 9,670 14,302 2,379 4,523
------- ------- -------- ------- --------
Loss from operations................ (6,918) (9,670) (14,302) (2,379) (4,523)
Interest income (expense), net...... 166 46 18 13 (32)
------- ------- -------- ------- --------
Net loss............................ (6,752) (9,624) (14,284) (2,366) (4,555)
Deemed dividend to preferred
stockholders...................... -- -- -- -- (19,245)
------- ------- -------- ------- --------
Net loss attributable to common
stockholders...................... $(6,752) $(9,624) $(14,284) $(2,366) $(23,800)
======= ======= ======== ======= ========
Net loss per common share, basic and
diluted........................... $ (5.28) $ (7.17) $ (9.50) $ (1.62) $ (13.10)
======= ======= ======== ======= ========
Shares used in computing net loss
per common share, basic and
diluted........................... 1,279 1,342 1,503 1,457 1,817
Pro forma net loss per common share,
basic and diluted................. $ (1.95) $ (2.76)
======== ========
Shares used in computing pro forma
net loss per common share, basic
and diluted....................... 7,333 8,636
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,620 $68,020
Working capital............................................. 5,388 62,788
Total assets................................................ 13,357 70,757
Total stockholders' equity.................................. 7,088 64,488
</TABLE>

We calculated net loss per common share, basic and diluted, and shares used in
computing net loss per common share, basic and diluted, by dividing the net loss
for the period by the weighted average number of common shares outstanding
during the period.

We calculated the pro forma net loss per common share, basic and diluted, and
the shares used in computing pro forma net loss per common share, basic and
diluted, assuming (i) the conversion of all outstanding shares of preferred
stock into common stock as if the shares had converted immediately upon issuance
and (ii) the cashless exercise prior to the offering of 1,153,877 warrants to
purchase 808,569 shares of our common stock as though the exercise had occurred
January 1, 1999.

The pro forma as adjusted balance sheet data above also give effect to the sale
of 4,500,000 shares in this offering at an assumed initial public offering price
of $14.00 per share, less the underwriting discount and other offering expenses.

The statement of operations data for the year ended December 31, 1999 and the
three months ended March 31, 2000 would not be materially affected on a pro
forma basis had the acquisition of Visionex Pte. Ltd. on March 8, 2000 occurred
on January 1, 1999. The pro forma net loss per common share would have been
$1.46 and $2.28 for the year ended December 31, 1999 and the three months ended
March 31, 2000, respectively.

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RISK FACTORS

You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares.

RISKS RELATED TO OUR BUSINESS

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
March 31, 2000, our accumulated deficit was approximately $59.6 million,
including a net loss of approximately $14.3 million for the year ended December
31, 1999 and a net loss of approximately $4.6 million for the three months ended
March 31, 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 FDA will attempt
to complete review of our application within six months of filing. If we obtain
fast-track approval, we will need to continue following patients who participate
in the trial or initiate additional clinical trials to document improvement in
visual acuity or other related objective clinical benefit. This may require
several years of follow-up. If there is significant patient drop-out from the
study after treatment or if patients fail to participate in follow-up
procedures, we will be unable to document improvement in visual acuity or other
related objective clinical benefit. If we fail to document an improvement in
visual acuity or other related objective clinical benefit, the FDA may withdraw
our approval on an expedited basis.

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

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

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

- a product candidate may not be safe or effective

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

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

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

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

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

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

Many of our research and development programs are at an early stage and clinical
testing is a long, expensive and uncertain process. We may not

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complete our clinical trials on schedule. 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. As a result of
our agreements, we are 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 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:

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

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

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

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

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

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

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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.

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 which 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.

IF WE CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE MAY NEED TO
SIGNIFICANTLY CURTAIL OUR OPERATIONS.

Until we receive regulatory approval and commercialize one or more of our
products, we will need to fund all of our operations and capital expenditures
from the net proceeds of this offering and cash on hand. We expect the assumed
net proceeds of $57.4 million from this offering and cash on hand will be
sufficient to meet our working capital and capital expenditure needs for at
least the next two years.

However, if we experience unanticipated cash requirements, we may need to raise
additional funds to continue the development and commercialization of our
products. These funds may not be available on favorable terms, or at all.

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If we do not succeed in raising additional funds, we may need to curtail our
operations significantly.

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.

RISKS RELATED TO THE OFFERING

IF WE DO NOT WISELY ALLOCATE THE PROCEEDS FROM THIS OFFERING, OUR BUSINESS MAY
FAIL TO GROW.

We have broad discretion to allocate the net proceeds of this offering. The
timing and amount of our actual expenditures are subject to change and will
depend on many factors, including:

- the rate of progress of our research and development programs

- the results of our clinical trials

- the time and expense necessary to obtain regulatory approvals

- our ability to establish and maintain collaborative relationships

- competitive, technological, market and other developments

Our management will determine, in its sole discretion without the need for
stockholder approval, how to allocate these proceeds. If we do not wisely
allocate the proceeds, we will limit our ability to carry out our business plan.

PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR OUR COMMON STOCK,
AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC
OFFERING PRICE.

An active public market for our common stock may not develop or be sustained
after the offering. We will negotiate the initial public offering price with the
underwriters. The initial public offering price is not indicative of future
market prices.

OUR STOCK PRICE MAY BE VOLATILE, AND YOUR INVESTMENT IN OUR COMMON STOCK COULD
DECLINE IN VALUE.

The market prices for securities of healthcare companies in general have been
highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this section,
may cause the market price of our common stock to fall:

- competitors announcing technological innovations or new commercial products

- developments concerning proprietary rights, including patents

- competitors publicity regarding actual or potential products under
development

- regulatory developments in the United States and foreign countries

- period-to-period fluctuations in our financial results

- litigation

- economic and other external factors, including disasters and other crises

11
<PAGE> 12

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.

Following this offering, our directors, entities affiliated with our directors
and our executive officers will beneficially own, in the aggregate,
approximately 39% of our outstanding common stock. These stockholders as a group
will be able to substantially influence our management and affairs. This
concentration of ownership may also delay or prevent a change in our control at
a premium price if these stockholders oppose it.

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR
OUR COMMON STOCK.

Provisions in our certificate of incorporation and bylaws may have the effect of
delaying or preventing an acquisition or merger in which we are not the
surviving company or changes in our management. These provisions could
discourage acquisitions or other changes in our control, including those in
which our stockholders might otherwise receive a premium for their shares over
then-current market prices.

AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE
NET TANGIBLE BOOK VALUE OF YOUR SHARES.

The initial public offering price of the shares of common stock in this offering
will significantly exceed the net tangible book value per share of our common
stock. Any shares of common stock that investors purchase in this offering will
have a net tangible book value that is $9.89 less per share than the initial
public offering price paid, assuming an initial public offering price per share
of $14.00 and based on our pro forma net tangible book value as of March 31,
2000. In addition, investors who purchase shares in the offering will contribute
approximately 48% of the amount of consideration paid for the outstanding
capital stock of ISTA, but will own only approximately 29% of the shares
outstanding.

IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK AFTER THE
OFFERING, THE MARKET PRICE OF OUR COMMON STOCK MAY FALL.

If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of our
common stock may fall. These sales also may make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.

At June 30, 2000, approximately 11,427,000 shares of common stock, representing
approximately 72% of our common stock outstanding after the offering, were
unregistered and eligible for sale, subject to compliance with Rule 144 under
the Securities Act.

Of the 2,416,933 shares that we may issue upon the exercise of options
outstanding as of June 30, 2000, approximately 2,213,000 shares will be vested
and eligible for sale 180 days after the date of this prospectus.

While the holders of over 95% of our outstanding shares are subject to lock-up
agreements with the underwriters in this offering for 180 days after the date of
this prospectus, CIBC World Markets Corp., in its sole discretion, may release
any portion or all of these shares from the lock-up restrictions. In addition,
sales of a substantial number of shares could occur at any time after the
expiration of the 180-day period. These sales could have an adverse effect on
the price of our common stock and could impair our ability to raise capital in

the future.

12
<PAGE> 13

FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus contains forward-looking statements.
You can find these statements under "Prospectus Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus.

We typically identify forward-looking statements by using terms such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue" or similar words, although we
express some forward-looking statements differently. You should be aware that
actual events could differ materially from those suggested in the
forward-looking statements due to a number of factors, including:

- our failure to develop safe and efficacious drugs

- our failure to achieve positive results in clinical trials

- our failure to successfully commercialize our products

- changes in relationships with our collaborators

- the variability of royalty, license and other revenues

- our inability to enter into future collaborations

- competition and technological change

- regulations affecting our business

You should also consider carefully the statements under "Risk Factors" and other
sections of this prospectus, which address additional factors that could cause
actual events to differ from those suggested in the forward-looking statements.

13
<PAGE> 14

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the shares of common stock we
are offering will be approximately $57,400,000. If the underwriters fully
exercise their over-allotment option, the net proceeds from the offering will be
approximately $66,188,500. "Net proceeds" are what we expect to receive after
paying the underwriting discount and other expenses of the offering. For the
purpose of estimating net proceeds, we are assuming that the initial public
offering price will be $14.00 per share.

We intend to use the net proceeds of this offering primarily to fund our
clinical trials and preclinical research, with a particular focus on Vitrase for
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 currently are negotiating the acquisition of technologies similar to
technologies related to one of our product candidates under development. We do
not anticipate that the costs of acquiring these technologies will be material.

Our management has broad discretion over the use of the net proceeds of this
offering. The timing and amount of our actual expenditures are subject to change
and will be based on many factors, including:

- the rate of progress of our research and development programs

- the results of our clinical trials

- the time and expense necessary to obtain regulatory approvals

- our ability to establish and maintain collaborative relationships

- competitive, technological, market and other developments

Until we use the net proceeds of the offering, we will invest the funds in
short-term, investment grade, interest-bearing securities.

DIVIDEND POLICY

We have never paid any cash dividends on our capital stock. We anticipate that
we will retain earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
in the foreseeable future.

14
<PAGE> 15

CAPITALIZATION

The following table shows as of March 31, 2000:

- our actual capitalization

- our pro forma capitalization reflecting:

- the cashless exercise, prior to the offering, of 1,153,877 warrants to
purchase 808,569 shares of our common stock

- the conversion of 12,251,776 shares of our preferred stock outstanding as
of March 31, 2000 into 8,527,737 shares of our common stock

- our pro forma as adjusted capitalization, assuming the pro forma adjustments
described above and the completion of the offering at an assumed initial
public offering price of $14.00 per share for net proceeds of $57.4 million.

<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock: no par value; 24,820,688
shares authorized, 12,251,776 shares issued
and outstanding, actual; $0.001 par value;
24,820,688 shares authorized, no shares
issued and outstanding, pro forma and pro
forma as adjusted........................... 64,269 -- --
Common stock: no par value; 32,750,000 shares
authorized, 1,864,977 shares issued and
outstanding, actual; $0.001 par value;
100,000,000 shares authorized, 11,201,282
shares issued and outstanding, pro forma,
and 15,701,282 shares issued and
outstanding, pro forma as adjusted.......... 7,495 12 16
Additional paid-in capital..................... -- 71,752 129,148
Deferred compensation.......................... (5,022) (5,022) (5,022)
Foreign currency translation adjustment........ (26) (26) (26)
Deficit accumulated during the development
stage....................................... (59,628) (59,628) (59,628)
-------- -------- --------
Total stockholders' equity.................. 7,088 7,088 64,488
-------- -------- --------
Total capitalization...................... $ 7,088 $ 7,088 $ 64,488
======== ======== ========
</TABLE>

The number of shares of our common stock outstanding excludes 2,416,933 shares
of common stock issuable upon the exercise of outstanding options as of June 30,
2000, at a weighted average exercise price of $0.62 per share.

15
<PAGE> 16

DILUTION

The pro forma net tangible book value of our common stock as of March 31, 2000
was $7.1 million, or approximately $0.63 per share. Pro forma net tangible book
value per share represents the amount of our stockholders' equity divided by
shares of common stock outstanding assuming:

- the cashless exercise, prior to the offering, of 1,153,877 warrants to
purchase 808,569 shares of our common stock

- the conversion of 12,251,776 shares of our preferred stock outstanding as
of March 31, 2000 into 8,527,737 shares of our common stock

Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to the sale of 4,500,000 shares of common stock in this offering at an assumed
initial public offering price of $14.00 per share and after deducting the
underwriting discount and other offering expenses and the application of the
estimated net proceeds, our pro forma net tangible book value as of March 31,
2000 would have been $4.11 per share to existing stockholders and an immediate
and substantial dilution in net tangible book value of $9.89 per share to
purchasers of common stock in this offering, as illustrated in the following
table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
------
Pro forma net tangible book value per share as of March 31,
2000...................................................... $0.63
Increase in net tangible book value per share attributable
to the offering........................................... 3.48
-----
Pro forma net tangible book value per share as of March 31,
2000 after giving effect to the offering.................. 4.11
------
Dilution per share to new investors in the offering......... $ 9.89
======
</TABLE>

The following table shows the total consideration paid and the average price
paid per share by the existing stockholders and by new investors, after
deducting the underwriting discount and other offering expenses payable by us,
at an assumed initial public offering price of $14.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 11,201,282 71.3% $ 68,228,821 52.0% $ 6.09
New investors............. 4,500,000 28.7 63,000,000 48.0 14.00
---------- ----- ------------ -----
Total................ 15,701,282 100.0% $131,228,821 100.0%
========== ===== ============ =====
</TABLE>

In the discussion and tables above, we assume no exercise of outstanding options
to purchase shares of our common stock. As of June 30, 2000, there were
outstanding options to purchase a total of 2,416,933 shares of our common stock,
at a weighted average exercise price of $0.62 per share. To the extent
optionholders exercise their outstanding options, there will be further dilution
to new investors.

16
<PAGE> 17

SELECTED FINANCIAL DATA

This section presents our historical financial data. You should read carefully
the financial statements included in this prospectus, including the notes to the
financial statements. We do not intend the selected financial data in this
section to replace the financial statements.

We derived the statement of operations data for the years ended December 31,
1997, 1998 and 1999, and the balance sheet data as of December 31, 1998 and
1999, from the audited financial statements included in this prospectus. Ernst &
Young LLP, independent auditors, audited those financial statements. We derived
the statement of operations data for the years ended December 31, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 from our
audited financial statements that are not included in this prospectus. We
derived the statement of operations data for the three months ended March 31,
1999 and 2000 and the balance sheet data as of March 31, 2000 from our unaudited
financial statements. These data include all adjustments, consisting only of
normal recurring adjustments, which management considers necessary for a fair
presentation of the financial data for these periods and as of March 31, 2000.
Historical results are not necessarily indicative of results that may be
expected in the future.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Research and development... $ 493 $ 1,828 $ 4,969 $ 7,523 $ 11,062 $ 1,930 $ 3,023
General and
administrative........... 389 1,405 1,949 2,147 3,240 449 1,500
------ ------- ------- ------- -------- ------- --------
Total costs and
expenses............... 882 3,233 6,918 9,670 14,302 2,379 4,523
------ ------- ------- ------- -------- ------- --------
Loss from operations......... (882) (3,233) (6,918) (9,670) (14,302) (2,379) (4,523)
Interest income.............. 59 208 251 133 69 32 55
Interest expense............. (64) -- (85) (87) (51) (19) (87)
------ ------- ------- ------- -------- ------- --------
Net loss..................... (887) (3,025) (6,752) (9,624) (14,284) (2,366) (4,555)
Deemed dividend to preferred
stockholders............... -- -- -- -- -- -- (19,245)
------ ------- ------- ------- -------- ------- --------
Net loss attributable to
common stockholders........ $ (887) $(3,025) $(6,752) $(9,624) $(14,284) $(2,366) $(23,800)
====== ======= ======= ======= ======== ======= ========
Net loss per common share,
basic and diluted.......... $(0.73) $ (2.41) $ (5.28) $ (7.17) $ (9.50) $ (1.62) $ (13.10)
====== ======= ======= ======= ======== ======= ========
Shares used in computing net
loss per common share,
basic and diluted.......... 1,222 1,253 1,279 1,342 1,503 1,457 1,817
Pro forma net loss per common
share, basic and diluted... $ (1.95) $ (2.76)
======== ========
Shares used in computing pro
forma net loss per common
share, basic and diluted... 7,333 8,636
</TABLE>

17
<PAGE> 18

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 2000
------------------------------------------------ -------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
------- ------- ------- ------- -------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 5,116 $ 1,963 $ 5,896 $ 2,393 $ 709 $10,620 $68,020
Working capital (deficit)......... 5,125 1,639 4,820 (260) (4,993) 5,388 62,788
Total assets...................... 5,401 3,083 7,400 4,115 3,020 13,357 70,757
License fee received from
Visionex........................ -- -- 5,000 5,000 5,000 -- --
Other long term obligations....... -- 310 508 294 38 20 20
Total stockholders' equity
(deficit)....................... 5,324 2,304 774 (4,053) (8,656) 7,088 64,488
</TABLE>

The pro forma as adjusted balance sheet data above also give effect to the sale
of 4,500,000 shares to be sold in the offering at an assumed initial public
offering price of $14.00 per share, less the underwriting discount and other
offering expenses.

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with the financial statements and other
financial information included in this 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 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
inception and had an accumulated deficit through March 31, 2000 of $59.6
million. Our losses have resulted primarily from research and development
activities, including clinical trials, and related general and administrative
expenses. We expect to continue to incur operating losses for the foreseeable
future as we increase our research and development, preclinical 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 has been conducting our 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, under which
Allergan will be responsible for the marketing, sale and distribution of Vitrase
in the United States and all international markets, except Mexico 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 March 31, 2000 and 1999

Research and development expenses. Research and development expenses were $3.0
million for the three months ended March 31, 2000 and $1.9 million for the three
months ended March 31, 1999. The increase of $1.1 million was primarily
attributable to the expansion of our preclinical and clinical development
activities, including expenses directly related to our Phase III clinical trials
of Vitrase for severe vitreous hemorrhage.

General and administrative expenses. General and administrative expenses were
$1.5 million for the three months ended March 31, 2000 and $449,000 for the
three months ended March 31, 1999. The $1.1 million increase was primarily
attributable to non-cash compensation expense of $330,000 related to stock
option grants and increasing our staff in support of our expanding operations.

Stock-based compensation. Deferred compensation for stock options granted to
employees and directors is the difference between the exercise price and the
deemed fair value of the underlying common stock for financial reporting
purposes on the date the options were granted.

19
<PAGE> 20

Compensation for stock options granted to non-employees has been determined in
accordance with Statement of Financial Accounting Standards No. 123 and the
Emerging Issues Task Force Consensus No. 96-18, as the fair value of the equity
instrument issued. Stock option compensation for non-employees is recorded as
the related services are rendered and the value of compensation is periodically
remeasured as the underlying options vest.

For the three months ended March 31, 2000, we granted stock options to employees
to purchase 493,333 shares of our common stock at an exercise price of $0.76 per
share. We did not grant non-employee stock options during this period. For the
three months ended June 30, 2000, we granted no additional stock options to
purchase shares of our common stock. We anticipate recording compensation
expense of approximately $3.2 million, $1.6 million, $700,000 and $200,000 for
the years ended December 31, 2000, 2001, 2002 and 2003, respectively.

Deemed dividend. During the three months ended March 31, 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
value of the shares issued over the net tangible assets acquired.

Interest income. Interest income for the three months ended March 31, 2000 was
$54,000 and interest income for the three months ended March 31, 1999 was
$32,000.

Interest expense. Interest expense for the three months ended March 31, 2000 was
approximately $87,000 and interest expense for the three months ended March 31,
1999 was $19,000. The increase in interest expense for the three months ended
March 31, 2000 was primarily attributable to the payment of interest on loans
from some stockholders that were repaid in March 2000.

Years Ended December 31, 1999, 1998 and 1997

Research and development expenses. Research and development expenses were $11.1
million in 1999, $7.5 million in 1998, and $5.0 million in 1997. The $3.6
million increase in 1999 was primarily attributable to expansion of our
preclinical and clinical development activities, including employee and
consultant expenses. These expenses related primarily to our development of
Vitrase for treatment of severe vitreous hemorrhage, which entered Phase III
clinical trials in late 1998. The $2.5 million increase in 1998 was attributable
to the expenses associated with the Phase IIb clinical trials of Vitrase.
Employee costs and preclinical development expenses also contributed to the
increase in research and development expenses in 1998 as compared to 1997.

General and administrative expenses. General and administrative expenses were
$3.2 million in 1999, $2.1 million in 1998, and $1.9 million in 1997. The $1.1
million increase in 1999 was primarily attributable to non-cash compensation
expense of $1.3 million in 1999 related to stock option grants, as compared to a
nominal amount in 1998. The increase in general and administrative expenses in
1998 was primarily attributable to increasing our staff in support of our
expanding operations.

Stock-based compensation. In connection with the grant of stock options to
employees and directors, we recorded deferred compensation of approximately $3.5
million during the year ended December 31, 1999, of which $1.3 million was
amortized during the year. We recorded approximately $112,000 in non-employee
deferred compensation during the year ended December 31, 1999, of which $37,000
was amortized in 1999.

Interest income. Interest income was $69,000 in 1999, $133,000 in 1998, and
$251,000 in 1997. Decreases in interest income in 1999 and 1998 were primarily
attributable to lower cash balances.

Interest expense. Interest expense was approximately $52,000 in 1999, $87,000 in
1998, and $86,000 in 1997. These interest expenses were incurred in connection
with our capital leases.

20
<PAGE> 21

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2000, we had approximately $10.6 million in cash.

We have financed our operations since inception primarily through private sales
of our preferred stock. Prior to this offering, we received total net proceeds
of approximately $35.5 million from the sale of:

- an aggregate 1,951,753 shares of our Series A preferred stock in November,
1992, February 1993 and October 1995, raising total net proceeds of
approximately $2.0 million

- an aggregate 1,955,555 shares of our Series B preferred stock in October
1995, raising total net proceeds of approximately $5.4 million

- an aggregate 3,248,906 shares of our Series C preferred stock in June 1997,
November and December 1998, and April and June 1999, raising total net
proceeds of approximately $18.1 million

- an aggregate 1,776,199 shares of our Series D preferred stock in March 2000,
raising total net proceeds of approximately $10.0 million

Shares of our Series A, B, C and D preferred stock issued for cash will convert
into 8,527,737 shares of our common stock upon completion of this offering,
assuming an initial public offering price per share of $14.00 and an
underwriting discount of 7.0%.

During December 1999 and January and February 2000, we borrowed an aggregate of
$1.8 million from some of our stockholders. We repaid this amount, together with
accrued interest, in March 2000 following the Visionex acquisition.

In 1999, we used $10.2 million of cash for operations principally as a result of
the net loss of $14.2 million offset by a non-cash compensation expense of
approximately $1.3 million and an increase in accrued expenses of $2.9 million
related to clinical trials. We used approximately $7.8 million of cash for
operations in 1998.

In 1999, we used cash of approximately $100,000 for investing activities
compared to approximately $232,000 in 1998. These expenditures were for the
purchase of equipment to support our operations. Additionally, in March 2000 we
obtained approximately $4.4 million from the acquisition of Visionex.

In 1999 and 1998, we generated approximately $8.7 million and $4.6 million,
respectively, of cash from financing activities primarily from sales of our
preferred stock. Additionally, in March 2000 we raised approximately $10.0
million from the sale of our Series D preferred stock.

We believe that the proceeds from this offering together with our existing cash
resources will be sufficient to support our operations for at least the next two
years. Our actual future capital requirements will depend on many factors,
including the following:

- the rate of progress of our research and development programs

- the results of our clinical trials

- the time and expense necessary to obtain regulatory approvals

- our ability to establish and maintain collaborative relationships

- 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. If we require additional
financing due to unanticipated developments, 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 research and development programs, 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.

21
<PAGE> 22

Income taxes. We incurred net operating losses in 1999, 1998 and 1997 and
consequently did not pay any federal, state or foreign income taxes. At December
31, 1999, we had federal and state net operating loss carryforwards of
approximately $17.3 million and $14.8 million which we have fully reserved at
December 31, 1999 due to the uncertainty of realization. Our federal net
operating loss and credit carryforwards will begin to expire in 2007. Our state
of California net operating losses will begin to expire in 2000.

VISIONEX ACQUISITION

Visionex Pte, Ltd was established in 1997 under the laws of Singapore to engage
in clinical, regulatory and marketing activities. During 1997, Visionex obtained
from us the exclusive rights to register, import, market, sell and distribute
Vitrase and Keraform in East Asian markets, excluding Japan and Korea, for which
Visionex paid us $5.0 million. Although we had no ownership interest in
Visionex, their incorporation was funded concurrently with our June 27, 1997
Series C preferred stock financing round at which time three of the Visionex
investors were already existing shareholders of Ista. The three investors
collectively owned 87.3% of us at that time.

Upon incorporation of Visionex, we entered into a Call Option Agreement with
Visionex and its shareholders whereby we could have required the shareholders to
exchange their outstanding shares of Visionex stock for our stock. The Visionex
shares would have been exchanged at a rate ranging, depending upon the annual
revenues of Visionex, as defined in the agreement, from 1,668,662 up to
2,458,786 shares of our common stock or, if we had not yet completed an initial
public offering, our Series C preferred stock. The call option could have been
exercised by us at any time during the two-year period beginning June 27, 2000,
but could have been deferred for a period of up to two years by a majority of
the holders of the Visionex shares.

The Call Option Agreement also provided for a put option whereby each of the
Visionex shareholders could have required us to purchase the outstanding
preference shares of Visionex held by such shareholder. The per share purchase
price to be paid by us under the put option was 0.1689 shares of our common
stock or, if we had not yet completed an initial public offering, our Series C
preferred stock (up to a maximum of 2,252,694 shares). The put option was
exercisable at any time in the three-year period beginning June 27, 1999.

On March 8, 2000, we negotiated an agreement with the Visionex shareholders and
issued 3,319,363 shares of our Series C preferred stock, convertible into
2,458,787 shares of our common stock, to acquire all of the outstanding capital
stock of Visionex. We assigned a fair value of $11.70 per share to the 3,319,363
shares of Series C preferred stock issued to effect the acquisition, at which
time we recorded a deemed dividend of $19.2 million to recognize the excess of
the value of the shares issued over the net assets acquired.

Visionex intends to continue its efforts to develop and commercialize
therapeutic ophthalmic drugs and non-surgical vision correction systems and to
manufacture and distribute such systems and products. Based upon historical
operations, we do not expect that Visionex's operations will materially affect
our consolidated financial statements.

RECENTLY ISSUED ACCOUNTING STANDARDS

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.

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<PAGE> 23

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 noncompensatory 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.

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 was less than one year. Due to the short-term
nature of these investments, we believe we have no material exposure to interest
rate risk arising from our investments. Therefore, no quantitative tabular
disclosure is included in this prospectus.

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.

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<PAGE> 24

BUSINESS

OVERVIEW

ISTA was founded to discover, develop and market new remedies for diseases and
conditions of the eye. Our product development efforts are focused on using
highly purified formulations of the enzyme hyaluronidase to treat diseases and
conditions such as vitreous hemorrhage, diabetic retinopathy, corneal
opacification and keratoconus. Each of these conditions affects a significant
number of patients worldwide and can impair vision and potentially cause
blindness.

Our lead product candidate, Vitrase, is in Phase III clinical trials for the
treatment of severe vitreous hemorrhage. Vitrase has received "fast-track"
designation by the FDA requiring completion of agency review within six months
from acceptance of the filing of a New Drug Application for Vitrase. We are also
conducting a pilot Phase IIa clinical trial of Vitrase in Mexico for the
treatment of diabetic retinopathy, the leading cause of adult blindness in the
United States. In March 2000, we entered into a collaboration with Allergan,
under which Allergan will be responsible for the marketing, sale and
distribution of Vitrase in the United States and all international markets,
except Mexico and Japan. We are also developing Keratase and Keraform for the
treatment of corneal opacification and keratoconus, abnormalities of the cornea.

STRATEGY

Our objective is to build a leading biopharmaceutical company that discovers,
develops and commercializes new and superior drug products for treatment of
diseases and conditions of the eye. The key elements of our strategy are to:

- Focus on diseases and conditions representing large underserved markets in
ophthalmology. We are targeting diseases and conditions, including vitreous
hemorrhage, diabetic retinopathy, corneal opacification and keratoconus, for
which there are currently no approved drug treatments. Surgical procedures,
when available for these conditions, carry significant risks. These
conditions represent a substantial market opportunity in the United States,
Europe and Japan. We are developing Vitrase to address diseases and
conditions in the back of the eye, an area where few therapies are currently
available.

- Maximize the market opportunity for Vitrase. We are focused on bringing
Vitrase to market as quickly as possible and ensuring that it gains broad
acceptance for treatment of serious conditions of the eye. We recently
entered into a collaboration with Allergan, under which Allergan has agreed
to use its extensive marketing capabilities to commercialize Vitrase. We are
currently in Phase III clinical trials of Vitrase for treatment of severe
vitreous hemorrhage and are conducting a pilot Phase IIa clinical trial for
treatment of diabetic retinopathy.

- Leverage our expertise and proprietary position with the enzyme
hyaluronidase. We believe that the unique properties of hyaluronidase make
it suitable to be used safely and effectively for numerous applications in
the eye. We have a successful track record of discovering and patenting new
applications for hyaluronidase. All three of our clinical stage product
candidates include hyaluronidase. We plan to continue our research and
development efforts with hyaluronidase to identify additional applications
for this enzyme.

- Form strategic collaborations to accelerate commercialization of our
products. To enable us to capitalize more quickly on commercialization
opportunities for our products, we will continue to explore additional
collaborative opportunities with pharmaceutical companies or others that
have domestic and international sales and marketing expertise. As we pursue
future collaborations, we may choose to retain some strategic sales and
marketing rights.

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<PAGE> 25

- Identify, in-license and acquire complementary products and technologies. In
addition to our internal development efforts, we will seek to acquire or
in-license complementary products and technologies. We believe that our
substantial expertise in the development of ophthalmic products positions us
well to attract, evaluate and secure future opportunities.

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.

[ILLUSTRATION OF EYE]

<TABLE>
<S> <C>
Cornea: The clear, transparent outer portion of the front of the eye
that provides most of the eye's focusing power.
Iris: The colored part of the eye that helps control the amount of
light that enters the eye.
Pupil: The dark hole in the middle of the iris through which light
enters the eye.
Lens: The transparent structure inside the eye (behind the cornea
and iris) that also focuses light rays onto the retina.
Vitreous humor: The clear, gel-like substance that fills the back of the eye
between the lens and the retina.
Retina: The nerve layer that lines the back of the eye. The retina
senses light and transmits impulses that are sent through
the optic nerve to the brain.
Optic nerve: The nerve that connects the eye to the brain and carries the
impulses formed by the retina.
</TABLE>

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

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<PAGE> 26

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 hyaluronidase to take
advantage of its ability to digest proteoglycans to treat a variety of eye
diseases and conditions, including vitreous hemorrhage, diabetic retinopathy,
corneal opacification and keratoconus. For treatment of serious conditions of
the eye, or ophthalmic indications, only highly purified and specially
formulated 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 three product candidates in clinical development as well as other
product candidates that we are evaluating in preclinical studies. The following
is a summary of our clinical stage product candidates:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
PRODUCT INDICATION DEVELOPMENT STATUS MARKETING RIGHTS
------- ---------- ------------------ ----------------
<S> <C> <C> <C>
Vitrase Severe vitreous hemorrhage Phase III Allergan
Diabetic retinopathy Phase IIa Allergan
Keratase Corneal opacifications Phase IIb --
Keraform Keratoconus Phase IIa planned --
Allergan has licensed worldwide rights for Vitrase, except for Mexico and Japan.
-----------------------------------------------------------------------------------------------------
</TABLE>

VITRASE

We are developing Vitrase, a proprietary formulation of hyaluronidase, for
treatment of severe 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 treatment of severe 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 application of a
topical anesthetic. In March 2000, we entered into a collaboration with Allergan
for the marketing, sale and distribution of Vitrase in the United States and all
international markets, except Mexico and Japan.

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

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<PAGE> 27

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.

We believe that a substantial opportunity exists to establish Vitrase as the
initial therapy for a severe 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. However, 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 these cases are due to diabetic retinopathy, 15% are due to
trauma and 25% are due to other factors. 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 severe vitreous hemorrhage. The FDA
may approve products with fast-track designation based on clinical studies using
surrogate endpoints that are reasonable predictors of a clinical benefit.

We are currently conducting two Phase III trials for the treatment of severe
vitreous hemorrhage. These trials are prospective, randomized, parallel,
placebo-controlled and double-masked studies. We are conducting one trial, our
North American trial, in the United States, Mexico and Canada and will include
up to 680 patients. We are conducting the other trial in Europe, Brazil,
Australia and South Africa and will include up to 510 patients. To date, we have
enrolled over 600 patients in these trials.

In both studies, we are enrolling patients who have both a severe vitreous
hemorrhage that has been present for at least one month and a best corrected
visual acuity of less than 20/200 at initial screening. After enrollment,
patients are randomly assigned to either a test group or a control group.
Patients in the test group receive either a 7.5 (North America only), 55 or 75
international unit, or IU, injection of Vitrase. Patients in the control group
receive a saline injection. Treatment success in both studies is defined by the
occurrence of any one of the following surrogate endpoints, which must occur
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)

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<PAGE> 28

- documented medical evidence that the clinical cause of the vitreous
hemorrhage has been resolved without the need for further therapy

If a surrogate endpoint is achieved, we will be able to file a New Drug
Application with the FDA. We also will have a requirement to validate the
surrogate endpoint by demonstrating that patients treated with Vitrase had a
clinically relevant improvement in visual acuity or other related clinical
benefit. This can be done post New Drug Application approval. Substantiating a
clinical benefit, if any, could be a long process and may be significantly
affected by patient drop-out or patients' unwillingness to undergo potentially
long term post-treatment evaluation.

Prior to the initiation of our Phase III trials, we completed a Phase I, Phase
IIa and two Phase IIb trials of Vitrase. The Phase I trial was conducted in
Mexico and involved 14 patients. Our Phase IIa trial was a pilot safety/efficacy
study involving 18 patients with vitreous hemorrhage, four of whom were
administered a saline injection, 13 of whom were administered a 75 IU dose
injection of Vitrase and one of whom was administered Vitrase in one eye and
saline in the other eye. The primary efficacy variable was time to clearance of
the vitreous, defined as the investigator's ability to view the retina with
sufficient clarity to treat all areas from which the hemorrhage might have
originated. Following the administration of either Vitrase or saline, patients
were observed for a period ranging from 19 to 124 days, with the average being
56 days. Nine of the 14 patients treated with Vitrase experienced clearance of
their vitreous hemorrhage during the period in which these patients were
observed while none of the patients that received saline experienced clearance
of their vitreous hemorrhage.

We have completed two Phase IIb clinical trials of Vitrase in the United States
and Mexico. The two prospective, randomized, double-masked, non-placebo
controlled clinical trials involved a total of 378 patients who had a vitreous
hemorrhage for at least one month due to diabetic retinopathy or spontaneous
bleeding that was sufficiently severe to prevent adequate diagnosis or
treatment. The patients were randomly administered either a 7.5, 37.5 or 75 IU
dose injection of Vitrase. The primary efficacy variable for both clinical
trials was clearance of the vitreous hemorrhage, which was defined as the
ability of the investigator to see the back of the eye with sufficient clarity
to identify the cause and/or begin appropriate treatment.

In our Phase IIb Mexico clinical trial, we evaluated 225 patients for up to
eight weeks following treatment. Hemorrhage clearance was achieved in 48.5% of
patients in the 7.5 IU group, 47.1% of patients in the 37.5 IU group, and 63.2%
of patients in the 75 IU group. There was no statistically significant
difference among any of the dosage groups for the total patient population
analysis. However, in a retrospective analysis we divided the total patient
population into two discrete subsets, mild/moderate and severe, and found that
for patients with a severe vitreous hemorrhage, there was a statistically
significant difference in vitreous hemorrhage clearance in the 75 IU dosage
group (62.7%) when compared to either the 7.5 IU (40.4%) or the 37.5 IU (40.4%)
dosage groups. Although this study was not designed to evaluate visual acuity as
a primary endpoint, visual acuity data was collected. Visual acuity improved an
average of three lines on the eye chart for patients in each of the three
treatment groups who experienced clearance of their vitreous hemorrhage. Visual
acuity in patients with non-cleared eyes was essentially unchanged from baseline
with no improvement shown. A valid statistical analysis comparing the change in
visual acuity between patients with cleared eyes and patients with non-cleared
eyes could not be made since patients had not been prospectively randomized into
these two groups.

In our Phase IIb U.S. clinical trial, we evaluated 153 patients for up to 56
days following treatment. Hemorrhage clearance was achieved in 54.0% of patients
in the 7.5 IU group, 41.5% of patients in the 37.5 IU group, and 56.5% of
patients in the 75 IU group. There was no statistically significant difference
among dosage groups. A retrospective analysis of patients that we classified as
having either a mild/moderate or severe vitreous hemorrhage was not
statistically significant between dosage groups. In this retrospective analysis,
the vitreous hemorrhage clearance rates for severe hemorrhage patients was 56.3%
in the 75 IU group as compared to 36.1% in the 37.5 IU group and 40.0% in the
7.5 IU group.

Despite the absence of a control group in our two Phase IIb clinical trials, we
believe that all three doses used in our Phase IIb clinical trials were active
and showed varying levels of clearance. We believe this is
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<PAGE> 29

the first time that any pharmacological agent has been shown to promote the
clearance of vitreous hemorrhage in patients. Based on the results of our Phase
IIb clinical trials, we commenced our two Phase III clinical trials of Vitrase,
including a placebo control group involving a saline injection, for the
treatment of severe vitreous hemorrhage.

Based on our evaluations to date, there have been no significant safety issues
associated with the use of Vitrase in our clinical trials. Depending on the
Vitrase dose, 0% to 45% of patients typically within a day of injection,
experience an inflammatory response near the front of the eye between the iris
and cornea, which is undetectable to the patient. This condition generally
requires no treatment by the retinal specialist and typically resolves itself
within seven to 10 days. In our clinical trials, some physicians chose to
prescribe topical anti-inflammatory medicine to treat the inflammation.

Diabetic Retinopathy

Abnormal changes and/or damage to the blood vessels in the eye due to diabetes
is 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. 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 bleeding 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.

Under current practice, physicians do not generally treat patients at the
nonproliferative stage of the disease because there is no effective treatment
available. 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 delays 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 conducted a preclinical study using an
animal model to simulate the effects of diabetic retinopathy. In this model, the
growth of abnormal blood vessels in the eye was accelerated by administration of
growth factors. In the treated animals, Vitrase was injected into the vitreous
humor two weeks prior to the administration of the growth factors. Vitrase
significantly reduced the growth of abnormal blood vessels in the
Vitrase-treated group versus the control group.

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<PAGE> 30

In October 1999, we commenced 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. We completed enrollment in this trial in March 2000. In two arms of this
four arm trial, Vitrase is being evaluated versus a saline control in patients
with nonproliferative diabetic retinopathy. In addition to these two arms, we
are studying the ability of a gas called sulfur-hexafluoride, or SF6, when used
as an adjunct to Vitrase, to enhance the efficacy of Vitrase in detaching the
vitreous humor from the retina. A published, preclinical study has shown that
SF6 in combination with Vitrase may be effective in separating the vitreous
humor from the retina in an animal model. This study also includes an
SF6-gas-only, control study arm. We plan to conduct additional trials in the
United States to evaluate the safety and efficacy of Vitrase for treatment of
diabetic retinopathy.

KERATASE

We are developing Keratase, a proprietary formulation of hyaluronidase, for the
nonsurgical treatment of corneal opacification. Keratase is a more concentrated
formulation of hyaluronidase than Vitrase and is delivered in lower volume.
Corneal opacification occurs when the cornea, which is normally transparent,
becomes scarred, cloudy or opaque, diminishing the amount of light entering the
eye. The severity of opacification can range from scars outside the line of
vision to uniformly opaque corneas where light transmission is reduced to the
point of blindness.

A normal, clear cornea contains collagen fibrils that are uniformly spaced and
connected together by proteoglycans. We believe that abnormal deposits of
proteoglycans cause corneal opacification following bacterial, fungal or viral
infection or trauma to the eye. We believe this results in an irregular
rearrangement of the collagen fibrils, which leads to scattering of light and
hazy or blurry vision.

There are currently no approved drug treatment options for corneal
opacification. The only treatment option is a corneal transplant, whereby a
donor cornea is used to replace a damaged cornea. The number of corneal
transplants is limited by cost and availability of donor corneas. The risks
associated with corneal transplants include loss of vision, rejection and
creation of severe astigmatism.

We believe Keratase can be used to treat corneal opacifications with benefits
equivalent to those of corneal transplants but without the associated risks of
rejection and astigmatism. We believe that Keratase digests the abnormal
deposits of proteoglycans that connect the collagen, allowing the collagen to
reorganize, thereby enabling improved vision. Over time, the proteoglycans
reform to connect the corneal collagen in the proper reorganized structure.

Market Opportunity. Based on market research that we commissioned in October
1999, we believe that there are approximately three million people in the United
States, Western Europe and Japan that have a form of vision impairment due to
corneal opacification, with nearly 200,000 new cases of corneal opacification
occurring each year. We believe that the majority of these people are candidates
for treatment using Keratase.

Clinical/Regulatory Status. We have conducted preclinical studies using human
donor corneas with opacification due to scarring. Keratase, when injected into
these corneas, cleared a majority of the corneas with opacification in less than
one week, while a saline control injection was not effective.

In May 2000, we commenced a 30 patient Phase IIb trial of Keratase for the
treatment of corneal opacification due to infection or trauma. The trial
includes five Keratase dose groups and a saline control group. The trial will
evaluate the improvement in aided and unaided visual acuity in patients who have
best corrected vision of no better than 20/100 at entry. The trial is being
conducted in Mexico City under U.S. and Mexico Investigational New Drug
applications. We completed enrollment in this trial in July 2000.

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<PAGE> 31

KERAFORM

We are developing Keraform, a proprietary system for the treatment of
keratoconus. Keratoconus is a degenerative corneal disease that impairs vision
and is characterized by progressive thinning of the cornea and the development
of an irregular, cone-like protrusion of the cornea, typically in both eyes. As
the disease progresses, vision becomes increasingly distorted. Keratoconus
typically has its onset during puberty or early adulthood, and usually
progresses over a 10 to 20 year period. The rate of progression and severity can
vary among patients, ranging from mild astigmatism to severe loss of vision.
Eyeglasses do not help the vision of these patients as the severity of
keratoconus increases. Most patients choose to wear hard contacts lenses with
limited long term effectiveness. Currently, the only permanent treatment for
keratoconus is a corneal transplant.

Due to the lack of permanent, nonsurgical methods to treat keratoconus, we
believe that Keraform, if successfully developed, will be an attractive option
to treat keratoconus. We believe Keraform, a nonsurgical system, can reshape a
patient's cornea to stabilize, improve or correct keratoconus. Treatment with
Keraform involves three steps:

- Step One. In order to make the cornea more malleable, a proprietary
formulation of hyaluronidase is injected into the stroma, the middle layer
of the cornea. The hyaluronidase digests the proteoglycans that bind the
collagen together in the stroma, making the cornea soft and malleable.

- Step Two. A custom fitted, hard contact lens is temporarily worn by the
patient to reshape the cornea.

- Step Three. Topical stabilizing drops containing glycerose are used to set
the cornea to maintain the proper shape once optimal vision correction is
achieved. Glycerose, a naturally occurring chemical found in the body, when
used in the eye crosslinks the collagen to make the cornea more rigid.

Market Opportunity. Based on market research that we commissioned in October
1999, we believe that there are approximately 400,000 people in the United
States, Western Europe and Japan who currently have keratoconus. We believe that
a majority of these people are candidates for treatment using Keraform.

Clinical/Regulatory Status. We plan to conduct a pilot Phase IIa clinical trial
of Keraform for the treatment of keratoconus, with the trial consisting of four
study arms and a total of 24 patients. The primary study objective is to safely
and effectively reshape and stabilize the corneas of keratoconus patients.
Patients enrolled in the trial will receive either a hyaluronidase or a saline
injection, and topical glycerose or saline stabilizing drops.

COLLABORATION WITH ALLERGAN

In March 2000, we entered into a collaboration with wholly-owned subsidiaries of
Allergan, 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. The license agreement provides
for the creation of a joint operating committee, which will consist of an equal
number of members from each company and will oversee development, regulatory and
marketing activities with respect to Vitrase. Allergan is a leading provider of
eye care and specialty pharmaceutical products throughout the world.

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
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 treatment of diabetic
retinopathy.

- Regulatory Approvals. We are responsible for applying for and obtaining
regulatory approval of Vitrase in the United States from the FDA and in the
European Union through a centralized

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application process. 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.

- Manufacturing. We will be responsible for the manufacture of Vitrase and 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 until 2004 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 treatment of vitreous
hemorrhage and diabetic retinopathy. To date, we have not received any
milestone payments from Allergan.

- Profit Sharing and Royalties. In the United States, we will split profits on
the sale of Vitrase with Allergan on a 50/50 basis during the term of the
license agreement. 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. In all markets outside the
United States, except Mexico until 2004 and Japan, we will receive a royalty
on all sales of Vitrase by Allergan. Allergan's obligation to pay royalties
will terminate on a country-by-country basis upon the later of ten 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 in that country.

RESEARCH AND DEVELOPMENT

Since our inception, we have made substantial investments in research and
development. During the years ended December 31, 1999, 1998 and 1997, we spent
$11.1 million, $7.5 million and $5.0 million on research and development
activities. We plan to continue to focus our internal research and development
efforts on the development of novel ophthalmic therapies.

In addition to our product candidates in clinical trials, we have a number of
early stage research programs. We have identified an existing chemical compound
that may help to reduce the risks associated with macular translocation surgery.
Macular translocation surgery is a complex procedure that involves several
steps, including a vitrectomy and the detachment and reattachment of the retina
to treat the wet form of age-related macular degeneration. We have observed that
this existing chemical compound, when injected into the vitreous humor of
animals shortly after liquefying the vitreous humor with hyaluronidase, promotes
spontaneous retinal detachment followed by spontaneous reattachment without
marked retinal damage. We intend to conduct further preclinical trials before
proceeding to human trials of the existing chemical compound as an adjunct to
macular translocation surgery.

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 issued for the use of
hyaluronidase to clear vitreous hemorrhage, and two of which are pending for the
use of 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

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derived from other sources. We hold three issued U.S. patents for the Keraform
technologies and have two additional U.S. patent applications pending. In
addition, we are currently negotiating the acquisition of technologies and
related patent applications similar to our Keraform technology. We have also
filed two other U.S. patent applications, one covering the use of our Keratase
product for clearing corneal opacification and the other covering the use of our
technology for retinal translocation.

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 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.

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
Alcon Laboratories, Inc., Bausch & Lomb Incorporated and CIBA Vision (a unit of
Novatis AG). Some 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.

We are not aware of any other drug candidates in clinical trials for the
treatment of vitreous hemorrhage or corneal opacification. 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 the case of keratoconus, we are aware of a surgically implanted
device being tested in clinical trials by KeraVision, Inc.

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

- obtain marketing and distribution support from our collaborators

- obtain reimbursement coverage from insurance companies and other third-party
payors

- demonstrate cost-effectiveness

- obtain patent protection

MARKETING AND SALES

We plan to market and distribute our Vitrase product in the United States and
all international markets, except Mexico 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. In the United States, the primary target market for Vitrase
will initially be retinal
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specialists to whom most patients with vitreous hemorrhage are referred. We plan
to pursue a collaboration similar to our collaboration with Allergan for the
marketing, sales and distribution of Vitrase in Japan.

For our Keratase and Keraform products under development, we plan to develop our
own sales, marketing and distribution infrastructure to establish these
therapeutic products as the standard of care. To achieve this objective, we will
focus on:

- publishing our research in peer review journals

- developing and increasing awareness of these products by recruiting
opinion-leading ophthalmologists as spokespersons for our products

- using physician and patient education to build awareness of these products

We will need to devote significant financial and management resources to develop
a sales and marketing organization. Our failure to establish effective sales and
marketing capabilities could prevent us from directly marketing and selling
Keratase and Keraform.

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

THIRD-PARTY REIMBURSEMENT

In the United States, physicians, hospitals and other healthcare providers that
purchase pharmaceutical products generally rely on third-party payors,
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 severe 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, such
reimbursement requests are reviewed separately by each Medicare health insurance
provider. 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 payors, we intend to use data from clinical
trials, including Phase III and Phase IV clinical trials, to demonstrate the
healthcare and economic benefits of using Vitrase for severe 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.

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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, pharmaceutical products are regulated by the FDA. 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 New Drug application for clinical trials

- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product

- submission of a New Drug Application

- review of the New Drug Application

- inspection of the facilities used in the manufacturing of the drug to assess
compliance with the current Good Manufacturing Practices regulations

The New Drug Application includes comprehensive, 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. A New Drug Application must be filed and then approved by
the FDA before a drug can be marketed commercially.

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

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. Clinical trials may begin 30 days after the Investigational
New Drug application is received, unless the FDA raises concerns or questions
about the conduct of the clinical trials. If concerns or questions are raised,
the Investigational New Drug application sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. We cannot assure you
that submission of an Investigational New Drug application 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 fast-track designated drugs. 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

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- 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 addition, FDA approval may be
conditioned and limit the indicated uses for our products.

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 fast-track designation 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 fast-track designation.

We expect that we will be required to conduct extended Phase IV clinical
follow-up in patients treated with Vitrase for severe vitreous hemorrhage to
monitor the long term effects of the therapy and assure the FDA that the primary
surrogate endpoints were reasonable predictors of the drug product's clinical
benefits. If we gain fast-track approval for Vitrase for severe vitreous
hemorrhage, we cannot assure you that any post-approval follow-up will validate
an objective clinical benefit or that patients will be willing to participate in
any long term follow-up.

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.
Approval of an application for fast-track designation for a product can be based
on an effect on a clinical endpoint or on a surrogate endpoint that is
reasonably likely to predict clinical benefit. Approval of an application for
fast-track designation 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

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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 severe vitreous hemorrhage. We cannot predict the
ultimate impact, if any, of the fast-track process on the timing or likelihood
of FDA approval of Vitrase or, if fast-track status is granted, any of our other
potential products.

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

Hyaluronidase, the active pharmaceutical ingredient used in Vitrase, Keratase
and Keraform, 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 for cGMP-grade hyaluronidase for use in ophthalmic
applications. The hyaluronidase is lyophilized, or freeze dried, by Biozyme and
delivered to our contract manufacturer, Prima Pharm, for formulation and filling
of dose specific vials. Vitrase is currently required to be stored under
refrigerated conditions prior to its use.

We intend to continue using Biozyme and Prima Pharm as our sole source suppliers
of raw materials and manufacturing services. To date, they have manufactured
only limited quantities of our products for clinical trial use. For commercial
scale production we may need to qualify and validate additional suppliers and
contract manufacturers and hire and train additional employees to supervise
these operations.

FACILITIES

We currently lease approximately 13,000 square feet of laboratory and office
space in Irvine, California. This lease expires on September 30, 2001. We
believe that this facility is adequate for our immediate needs. Additional space
will be required, however, as we expand our research and clinical development
activities. We do not foresee any significant difficulties in obtaining any
required additional facilities close to our current facility.

HUMAN RESOURCES

Including the employees of our Visionex subsidiary, as of June 30, 2000 we had
35 full-time employees, 31 of whom were based in the United States, two of whom
were based in Singapore and two of whom were based in Mexico. Approximately 25
of our employees are involved in research and clinical development activities.
Nine of our employees hold Ph.D. or M.D. degrees and seven 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.

LEGAL PROCEEDINGS

We are not a party to any legal proceedings.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors, executive officers, and their ages and positions as of June 30,
2000 are:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward H. Danse.............................. 47 President, Chief Executive Officer and
Director
J. C. MacRae................................. 48 Executive Vice President, Chief Operating
Officer and Chief Financial Officer
Hampar L. Karageozian........................ 61 Senior Vice President, Discovery and
Chief Technical Officer
Marvin J. Garrett............................ 50 Vice President, Development
William S. Craig, Ph.D. ..................... 49 Vice President, Preclinical Research and
Development
David R. Waltz............................... 48 Vice President, Finance
Robert G. McNeil, Ph.D.(2) .................. 57 Chairman of the Board
David E. Collins(1).......................... 66 Director
Brian H. Dovey(1)(2)......................... 58 Director
George M. Lasezkay........................... 48 Director
Benjamin F. McGraw III(2).................... 51 Director
Charles H. May, O.D. ........................ 79 Director
John H. Parrish.............................. 57 Director
Wayne I. Roe(1).............................. 50 Director
</TABLE>

---------------------------
(1) Member of the compensation committee.

(2) Member of the audit committee.

EDWARD H. DANSE has served as our President and Chief Executive Officer since
June 1997. From 1988 to 1997, Mr. Danse held various senior management positions
at Allergan including President of the Asia Pacific Region from 1996 to 1997.
Prior to 1988, he served in various management positions at Bausch & Lomb
Incorporated and the Cooper Companies, Inc., both ophthalmic companies. Mr.
Danse received a Masters in International Management from the American Graduate
School of International Management, Thunderbird.

J. C. MACRAE has served as our Chief Financial Officer since July 1998 and was
named Executive Vice President and Chief Operating Officer in January 2000. From
1992 until its acquisition by Urohealth Systems in September 1997, Mr. MacRae
was Vice President and Chief Financial Officer for Imagyn Medical, Inc., a
manufacturer of proprietary surgical products for the obstetrics and gynecology
market. On May 3, 1999, the creditors of the successor to Urohealth Systems
filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. Mr.
MacRae received an M.B.A. from the California State University at Fullerton.

HAMPAR L. KARAGEOZIAN has served as our Senior Vice President, Discovery and
Chief Technical Officer since 1996 and served as our Vice President of Research
and Development from 1992 to 1996. From 1970 to 1992, Mr. Karageozian served in
various research and development positions at Allergan, last serving as Senior
Vice President of Research & Development for Allergan Optical. Mr. Karageozian
received a M.Sc. in Nutritional Biochemistry and Metabolism from the
Massachusetts Institute of Technology.

MARVIN J. GARRETT has served as our Vice President, Development since June 1999.
From May 1994 to May 1999, Mr. Garrett was Vice President, Regulatory Affairs
and Clinical Research for Xoma. From 1990 to 1994, he was President and General
Manager of Coopervision Pharmaceutical, a division of the Cooper Companies, Inc.
Mr. Garrett received a B.S. in Microbiology from California State University
Long Beach.

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WILLIAM S. CRAIG, PH.D. has served as our Vice President, Preclinical Research
and Development since March 2000. From 1996 to December 1999, Dr. Craig was Vice
President of Research and Development for Alpha Therapeutics Corporation, a
biotechnology company. From 1988 to 1996 he was Senior Director Research and
Development for Telios Pharmaceuticals, Inc., a biotechnology company. Dr. Craig
received a Ph.D. in chemistry from the University of California, San Diego.

DAVID R. WALTZ has served as Vice President, Finance since June 2000. From 1981
to 1999, Mr. Waltz served in various finance capacities with Beckman-Coulter,
Inc., last serving as Finance Director for the Far East and Latin America
operations. Mr. Waltz received an M.B.A. from California State University at
Northridge.

ROBERT G. MCNEIL, PH.D. has served on our board of directors since 1993 and as
our Chairman of the Board since 1995. Dr. McNeil has been a general partner with
Sanderling Venture Partners, an investment firm specializing in the development
of biomedical companies, since 1979. Dr. McNeil received a Ph.D. in Molecular
Biology, Biochemistry and Genetics from the University of California, Irvine.

DAVID E. COLLINS has served on our board of directors since 1998. He has been
Chief Executive Officer and a member of the board of directors of Calypte
Biomedical, a diagnostics company, since October 1999. From 1989 to 1994, Mr.
Collins was President of Schering-Plough Healthcare Products, Inc., a subsidiary
of Schering-Plough Corporation, a pharmaceutical company. Mr. Collins received a
J.D. from Harvard Law School.

BRIAN H. DOVEY has served on our board of directors since 1995. He has been a
managing member of Domain Associates, L.L.C., a venture capital firm, since
1988. Mr. Dovey is also currently a director of Connetics Corporation, a
specialty pharmaceutical company, Creative Biomolecules, Inc., a biotechnology
company, and Trimeris, Inc. a biotechnology company. Mr. Dovey received an
M.B.A. from Harvard Business School.

GEORGE M. LASEZKAY, PHARM.D. has served on our board of directors since June
2000. Since 1989, Mr. Lasezkay has been employed with Allergan, Inc. and is
currently Corporate Vice President, Corporate Development. Mr. Lasezkay received
a Doctorate of Pharmacy from State University of New York at Buffalo and a J.D.
degree from the University of Southern California.

BENJAMIN F. MCGRAW, III, PHARM.D. has served on our board of directors since
April 2000. He has been President and Chief Executive Officer and Chairman of
the Board of Valentis, Inc., a biotechnology company, since 1994. Mr. McGraw
received a Doctorate of Pharmacy from the University of Tennessee.

CHARLES H. MAY, O.D. has served on our board of directors since 1992 and is one
of our co-founders. Dr. May has managed a private medical practice since 1997.
Dr. May received an O.D. from Northern Illinois College of Optometry.

JOHN H. PARRISH has served on our board of directors since 1992 and is one of
our co-founders. Mr. Parrish was our President and Chief Executive Officer from
our formation in 1992 until June 1997. From June 1997 to present, he has been
Chief Executive Officer of Valley Forge Pharmaceuticals, Inc., an ophthalmic
company. Mr. Parrish received a B.S. in Biology/Chemistry from Wake Forest
University.

WAYNE I. ROE has served on our board of directors since 1998. He has been Senior
Vice President for United Therapeutics, Inc., a biotechnology company, since
November 1999. From 1985 to March 2000, Mr. Roe founded and served in various
management positions at Covance Health Economics and Outcomes Services, Inc., a
clinical research organization, last serving as its Chairman. Mr. Roe is also
currently a director of Aradigm Corporation, a drug delivery company. Mr. Roe
received an M.A. in Political Economy from the State University of New York and
an M.A. in Economics from the University of Maryland.

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BOARD COMPOSITION

Our board of directors currently consists of nine members. Each director holds
office until his term expires or until his successor is duly elected and
qualified. Upon completion of this offering, our amended and restated
certificate of incorporation and bylaws will provide for a classified board of
directors. In accordance with the terms of our certificate, our board of
directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following directors:

- Class I consists of Messrs. May, McNeil and Parrish, who will serve until
the annual meeting of stockholders to be held in 2001;

- Class II consists of Messrs. Collins, Danse and Dovey, who will serve until
the annual meeting of stockholders to be held in 2002; and

- Class III consists of Messrs. Lasezkay, McGraw and Roe, who will serve until
the annual meeting of stockholders to be held in 2003.

At each annual meeting of stockholders beginning with the 2001 annual meeting,
the successors to directors whose terms will then expire will be elected to
serve from the time of election and qualification until the third annual meeting
following election and until their successors have been duly elected and
qualified. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of an equal number of directors.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors currently has two committees: an audit committee and a
compensation committee.

The audit committee makes recommendations to our board of directors regarding
the selection of independent auditors, reviews the results and scope of audit
and other services provided by our independent auditors and reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements.

The compensation committee reviews and makes recommendations to our board of
directors regarding the compensation of officers and other managerial employees.
The compensation committee also considers and recommends grants of stock options
under our stock option plans and administers such plans.

DIRECTOR COMPENSATION

Our directors do not currently receive any cash compensation from us for their
service as members of the board of directors, except Mr. Collins and Mr. Roe who
received $1,500 for each board meeting attended during 1999. Mr. Collins, Mr.
Roe and Mr. McGraw will receive $1,500 for each board meeting attended in the
future. All non-employee directors are reimbursed for certain expenses in
connection with attendance at board and committee meetings. During 1999, we
granted each non-employee director an option to purchase 53,333 shares of common
stock at an exercise price of $0.76 per share. The options vest over a four-year
period and are all currently exercisable.

Our 2000 Stock Plan provides for annual grants of options to purchase common
stock to our directors commencing with our 2001 annual meeting.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee makes decisions concerning salaries, stock options,
incentives and other forms of compensation for directors, officers and other
employees of ours. No interlocking relationship exists between any member of our
board of directors or our compensation committee and any member of the board of
directors or compensation committee of any other company.

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<PAGE> 41

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the annual compensation we paid during 1999 to
the chief executive officer and our four highest paid executive officers whose
total annual salary and bonus exceeded $100,000. These individuals are referred
to as the "named executive officers" here and elsewhere in this prospectus.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------- ----- ------------
<S> <C> <C> <C>
Edward H. Danse..................................... $258,175 $-- $--
President and Chief Executive Officer
J. C. MacRae........................................ 178,879 -- --
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Hampar L. Karageozian............................... 224,991 -- --
Senior Vice President, Discovery
Marvin J. Garrett................................... 112,179 -- --
Vice President, Development
</TABLE>

1999 OPTION GRANTS

The following table sets forth information regarding options granted to each of
our named executive officers during the year 1999. The exercise prices of the
options we granted were the fair market value of our common stock on the date of
grant, as determined by the compensation committee of our board of directors.
Because there has been no public market for our common stock, in determining the
fair value, the compensation committee of the board of directors considered a
number of factors, including the following:

- the share price of our most recent round of preferred stock financing

- the material differences between the rights, preferences and privileges of
the most recently issued series of preferred stock and the rights of common
stock

- the stage of development at our company

- the available cash on hand and financial condition of our company

- other factors that the compensation committee deemed relevant

You should note the disparity between the exercise price of the options in the
table above and the assumed initial public offering price. Because of this
disparity, we have used the assumed initial public offering price to compute the
potential realizable option values in the table below.

The potential realizable value is calculated based on the ten-year term of the
option at the time of grant assuming that the initial public offering price of
our common stock appreciates at 5% and 10% over the option term. Stock price
appreciation of 5% and 10% is assumed pursuant to rules promulgated by the
Securities and Exchange Commission and does not represent our prediction of our
stock price performance. The actual value realized may be greater or less than
the potential realizable value set forth in the table below. The potential
realizable values at 5% and 10% appreciation are calculated by:

- multiplying the number of shares of common stock under the option by $14.00
per share

- assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options

- subtracting from that result the aggregate option exercise price

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<PAGE> 42

The options in this table were granted under our 1993 Stock Plan, have ten-year
terms, will terminate before their expiration dates if the optionee leaves his
or her employment with us, and, unless otherwise noted, vest over a period of
four years. We have not granted any stock appreciation rights.

The percentages of options granted shown below is based on an aggregate of
1,000,074 options we granted to employees and directors during 1999.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM ($)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED (#) 1999 SHARE ($/SH) DATE 5% 10%
---- ----------- ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Edward H. Danse............ 111,111 11.1% $0.76 08/08/09 2,397,009 3,816,836
J. C. MacRae............... 55,555 5.6 0.76 08/08/09 1,198,504 1,908,418
Hampar L. Karageozian...... 37,037 3.7 0.76 08/08/09 799,003 1,272,279
Marvin J. Garrett.......... 148,148 14.8 0.76 08/08/09 3,196,012 5,089,115
</TABLE>

The options granted to Mr. Danse, Mr. MacRae and Mr. Karageozian vest in a
series of monthly installments over the four years of service following July 28,
1999.

The options granted to Mr. Garrett vest as to 25% of the options twelve months
following June 7, 1999 and in a series of monthly installments over the three
years following June 7, 2000.

AGGREGATE OPTION EXERCISES DURING 1999 AND 1999 OPTION VALUES

The following table describes for the named executive officers the number of
shares acquired and the value realized upon exercise of stock options during
1999, and the exercisable and unexercisable options held by them as of December
31, 1999. The "Value of Unexercised In-the-Money Options at December 31, 1999"
shown in the table represents an amount equal to the difference between the
assumed initial public offering price of $14.00 per share, and the option
exercise price multiplied by the number of unexercised in-the-money options.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward H. Danse................ -- -- 154,784 237,808 2,049,959 3,149,529
J. C. MacRae................... -- -- 61,343 142,361 812,427 1,885,429
Hampar L. Karageozian.......... 741 -- 256,512 50,155 3,519,485 664,253
Marvin J. Garrett.............. -- -- 0 148,148 0 1,962,072
</TABLE>

EMPLOYEE BENEFIT PLANS

2000 Stock Plan

The board of directors adopted the 2000 Stock Plan in April 2000, and we will
submit it to our stockholders for their approval prior to the date of this
offering to become effective on the date of this offering. The 2000 Stock Plan
provides for the grant of incentive stock options to employees and for the grant
of nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The stock plan administrator, which is the board of directors
or a committee of the board of directors administers the 2000 Stock Plan. If an
option is intended to qualify as performance-based compensation within the
meaning of the Internal Revenue Code, the committee will consist of two or more
outside

42
<PAGE> 43

directors. The stock plan administrator has the power to determine the terms of
the options or stock purchase rights granted, including the exercise price, the
number of shares subject to each option or stock purchase right, the
exercisability of the options and the form of consideration payable upon
exercise.

As of June 30, 2000, a total of 200,000 shares of common stock were reserved for
issuance under the 2000 Stock Plan. The number of shares available for issuance
increases annually on the first day of each new year beginning with the year
2001 by a number equal to the lesser of 200,000 shares, 1.5% of the outstanding
shares of common stock on the first day of the year or a lesser amount as may be
determined by the board of directors. An optionee generally may not transfer
options and stock purchase rights granted under the 2000 Stock Plan and only an
optionee may exercise an option and stock purchase right during his or her
lifetime. Unless terminated sooner, the 2000 Stock Plan will terminate
automatically in 2010.

Generally, the administrator determines the exercise price of nonstatutory stock
options granted under the 2000 Stock Plan. With respect to nonstatutory stock
options intended to qualify as performance-based compensation within the meaning
of the Internal Revenue Code, the exercise price must at least be equal to the
fair market value of the common stock on the date of grant. The exercise price
of all incentive stock options granted under the 2000 Stock Plan must be at
least equal to the fair market value of the common stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option granted must equal at least 110% of the fair
market value on the grant date and the term of such incentive stock option must
not exceed five years. The term of all other options granted under the 2000
Stock Plan may not exceed ten years.

The administrator determines the exercise price of stock purchase rights granted
under the 2000 Stock Plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement entered into in connection with the exercise
of the stock purchase right shall grant us a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's service with us for
any reason, including death or disability. The purchase price for shares we
repurchase is the original price paid by the purchaser. The 2000 Stock Plan
provides for an automatic grant of an option to purchase common stock to a
director who first becomes an outside director after our initial public
offering. The 2000 Stock Plan defines an outside director as a director who is
not an employee. Twenty-five percent of the shares subject to this option vest
12 months after the date of grant and 1/16 of the shares subject to the option
vest each quarter thereafter.

Each outside director is automatically granted an option to purchase 5,000
shares of our common stock following each of our annual meetings of the
stockholders beginning after 2000, if immediately after such meeting, he or she
shall continue to serve on the board of directors and has served on the board of
directors for at least the preceding six months. These options vest and become
exercisable in full on the fourth anniversary after the date of grant, provided
that in each case the outside director continues to serve on the board of
directors. The exercise price of options granted to outside directors is 100% of
the fair market value of our common stock on the date of grant.

In the event we merge or sell substantially all of our assets, the successor
corporation shall assume or substitute each option or stock purchase right. If
the outstanding options or stock purchase rights are not assumed or substituted,
the administrator shall provide notice to the optionee that he or she has the
right to exercise the option or stock purchase right as to all of the shares
subject to the option or stock purchase right, including shares that would not
otherwise be exercisable, for a period of 15 days from the date of notice. The
option or stock purchase right will terminate upon the expiration of the 15-day
period. In the event of change of control each outstanding option held by an
outside director that was granted pursuant to the automatic grant mechanism,
vests and becomes fully exercisable for a period of 15 days from the date of
notice, after which the option will terminate.

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<PAGE> 44

2000 Employee Stock Purchase Plan

The board of directors adopted our 2000 Employee Stock Purchase Plan, or Stock
Purchase Plan, in April 2000, and we will submit it to our stockholders for
their approval prior to the date of this offering to become effective on the
date of this offering. The board of directors or a committee appointed by the
board of directors administers the Stock Purchase Plan. The board of directors
or its committee has full and exclusive authority to interpret the terms of the
Stock Purchase Plan and determine eligibility.

A total of 200,000 shares of common stock has been reserved for issuance under
the Stock Purchase Plan. In addition, the Stock Purchase Plan provides for
annual increases in the number of shares available for issuance under the plan
on the first day of each year, beginning in 2001, equal to the lesser of 200,000
shares, 1.5% of the outstanding shares of common stock on the first day of the
year, or a lesser amount as the board of directors may determine.

Our employees are eligible to participate if they are customarily employed by us
or any of our participating subsidiaries for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the Stock Purchase Plan if such an employee:

- immediately after the grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock

- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year

The Stock Purchase Plan contains six-month offering periods. The offering
periods generally start on the first trading day on or after January 1 and July
1, except for the first offering period that will start on the first trading day
on or after the effective date of this offering and will end on the last trading
day on or before December 31, 2000. The Stock Purchase Plan permits participants
to purchase common stock through payroll deductions of up to 15% of the
participant's compensation.

Amounts deducted and accumulated by the participant are used to purchase shares
of common stock at the end of each offering period. The price of stock purchased
under the Stock Purchase Plan is 85% of the lower of the fair market value of
the common stock at the beginning of the offering period or end of the offering
period. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us. The maximum number of
shares a participant may purchase during a single offering period is 1,000
shares. A participant may not transfer rights granted under the Stock Purchase
Plan other than by will, the laws of descent and distribution or as otherwise
provided under the Stock Purchase Plan. The Stock Purchase Plan will terminate
in 2010.

1993 Stock Plan

Our 1993 Stock Plan was adopted by our board of directors on January 27, 1993
and subsequently approved by our stockholders. Our 1993 Stock Plan provides for
the grant of incentive stock options and nonstatutory stock options, or stock
purchase rights to employees, directors and consultants. A total of 3,400,000
shares of common stock has been reserved for issuance under the 1993 Stock Plan.

In the event we sell all or substantially all of our assets or merge with or
into another corporation, outstanding options will be assumed or substituted for
by the successor corporation. In the event the successor corporation does not
agree to assume or substitute for outstanding options, the options will be
exercisable for a period of 15 days, after which the options will terminate.

As of March 31, 2000, options to purchase 2,817,874 shares of common stock were
outstanding and 227,609 shares were available for future grant. After March 31,
2000 and through June 30, 2000 we did not grant any options to purchase shares
of our common stock, and options to purchase 225,478 were exercised. Upon
completion of this offering, the 1993 Stock Plan will terminate, no further
option grants

44
<PAGE> 45

will be made under the 1993 Stock Plan, and any shares reserved but not yet
issued under the 1993 Stock Plan will be available for grant under the 2000
Stock Plan.

401(k) Savings Plan

We sponsor a 401(k) Savings Plan covering our employees who are at least 21
years of age. Contributions to the 401(k) Savings Plan and income earned on such
contributions, are not taxable to employees until withdrawn from the 401(k)
Savings Plan. Subject to restrictions imposed by the Internal Revenue Code on
highly compensated employees, employees may generally defer up to 20% of their
pre-tax earnings up to the statutorily prescribed annual limit, which is
$10,500, for the 2000 calendar year, and to have the amount of such reduction
contributed to the 401(k) Savings Plan. The 401(k) Savings Plan permits, but
does not require, additional matching contributions to the 401(k) Savings Plan.
To date, we have not made any matching contributions to the 401(k) Savings Plan.
The 401(k) Savings Plan may be amended or terminated by us at anytime, in our
sole discretion.

EMPLOYMENT AGREEMENTS

We do not have employment agreements with our executive officers, other than
agreements that we maintain with all of our employees and option agreements
under which we issue incentive and non-qualified stock options to employees.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for the following:

- any breach of their duty of loyalty to the corporation or its stockholders

- acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law

- unlawful payments of dividends or unlawful stock repurchases or redemptions

- any transaction from which the director derived an improper personal benefit

This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

Our certificate of incorporation and bylaws provide that we shall indemnify our
directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the bylaws would permit indemnification.

We will enter into agreements to indemnify our directors and executive officers,
in addition to the indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and executive
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our right, arising out of that person's services
as a director or executive officer to us, any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.

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<PAGE> 46

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of our
common stock as of June 30, 2000:

- each stockholder known by us to be the beneficial owner of more than 5% of
the outstanding shares of common stock

- each of our directors

- each of our named executives officers

- all of our directors and executive officers as a group

Beneficial ownership is determined according to the rules of the Securities and
Exchange Commission, and generally means that person has beneficial ownership of
a security if he or she possesses sole or shared voting or investment power of
that security, and includes options that are currently exercisable or
exercisable within 60 days. Each director, officer or 5% or more stockholder, as
the case may be, has furnished us information with respect to beneficial
ownership. Except as otherwise indicated, we believe that the beneficial owners
of the common stock listed below, based on the information each of them has
given to us, have sole investment and voting power with respect to their shares,
except where community property laws may apply.

This table lists applicable percentage ownership based on 11,426,759 shares of
common stock outstanding as of June 30, 2000 and also lists applicable
percentage ownership based on 15,926,759 shares of common stock outstanding
after completion of this offering. Options to purchase shares of our common
stock that are exercisable within 60 days of June 30, 2000 are deemed to be
beneficially owned by the persons holding these options for the purpose of
computing percentage ownership of that person, but are not treated as
outstanding for the purpose of computing any other person's ownership
percentage. Shares underlying options that are deemed beneficially owned are
listed in this table separately in the column labeled "Shares Subject to
Options." These shares are included in the number of shares listed in the column
labeled "Total Number."

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------------------------
TOTAL SHARES SUBJECT PERCENT PERCENT
NAME OF BENEFICIAL OWNER NUMBER TO OPTIONS BEFORE OFFERING AFTER OFFERING
------------------------ --------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Robert G. McNeil, Ph.D.(1)........... 2,989,749 463 26.2% 18.8%
Brian H. Dovey(2).................... 1,585,712 -- 13.9 10.0
Hampar L. Karageozian................ 324,414 268,859 2.8 2.0
John H. Parrish(3)................... 282,469 154,074 2.4 1.8
Edward H. Danse...................... 238,735 238,735 2.0 1.5
Charles H. May, O.D.(4).............. 143,704 15,185 1.3 *
J. C. MacRae......................... 97,993 97,993 * *
Marvin J. Garrett.................... 43,210 43,210 * *
David E. Collins..................... 42,084 4,939 * *
Wayne I. Roe......................... 31,728 31,728 * *
All directors and executive officers
as a group (14 persons)........... 6,547,848 855,185 53.3 39.0
5% STOCKHOLDERS
Invesco Private Capital, Inc.(5)..... 1,006,534 -- 8.8 6.3
3i Bioscience Investment Trust
plc(6)............................ 838,120 -- 7.3 5.3
Allergan Pharmaceuticals (Ireland)
Ltd., Inc.(7) .................... 768,049 -- 6.7 4.8
</TABLE>

-------------------------
* Represents beneficial ownership of less than 1%.

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<PAGE> 47

(1) Consists of 137,003 shares owned by Sanderling IV Biomedical, L.P., 137,295
shares owned by Sanderling IV Limited Partnership, 39,043 shares owned by
Sanderling Feri Trust Venture Partners IV, L.P., 351,924 shares owned by
Sanderling Venture Partners IV, L.P., 407,112 shares owned by Sanderling IV
Biomedical Co-Investment Fund, L.P., 147,451 shares owned by Sanderling III
Biomedical, L.P., 443,751 shares owned by Sanderling III Limited
Partnership, 43,813 shares owned by Sanderling Ventures Management LLC,
41,661 shares owned by Sanderling Ventures Management III, 9,669 shares
owned by Sanderling Ventures Management IV, 853,365 shares owned by
Sanderling Venture Partners III, L.P., 271,399 shares owned by Sanderling
Venture Partners IV Co-Investment Fund, L.P., 36,751 shares owned by
Sanderling Management Company F/B/O McNeil and 4,327 shares owned by
Sanderling Venture Management F/B/O McNeil. Dr. McNeil shares voting and
investment power over all these shares and disclaims beneficial ownership
except to the extent of his proportional interest therein. Dr. McNeil's
business address is c/o Sanderling Venture Partners, 2730 Sand Hill Road,
Suite 200, Menlo Park, California 94024.

(2) Consists of 1,455,855 shares owned by Domain Partners III, L.P. and 50,598
shares owned by DP III Associates, L.P. Brian Dovey is a general partner of
the general partner of Domain Partners III, L.P. and DP III Associates, L.P.
Also includes 79,259 shares owned by Domain Associates, LLC of which Mr.
Dovey is a managing member. Mr. Dovey shares voting and investment power
over all these shares and disclaims beneficial ownership except to the
extent of his proportional interest therein. Mr. Dovey's business address is
c/o Domain Associates, L.L.C., One Palmer Square, Princeton, New Jersey
08542.

(3) Includes 18,519 shares of common stock owned by Christine Parrish, Mr.
Parrish's daughter. Includes 18,519 shares of common stock owned by Phyllis
Parrish, Mr. Parrish's spouse. Includes 48,889 shares of common stock owned
by the Parrish Family Trust of which Mr. Parrish serves as a trustee. Mr.
Parrish's address is 1246 Virginia Way, La Jolla, California 92037.

(4) Includes 100,741 shares of common stock owned by The Charles H. May and
Athena M. May Family Trust of which Dr. May is one of the beneficiaries. Dr.
May's address is 857 Armada Terrace, San Diego, California 92106.

(5) Consists of 38,714 shares owned by KME Venture III, L.P. and 691,299 shares
owned by Drake & Co. for the account of Citiventure III. Invesco Private
Capital, Inc. is a general partner of KME Venture III, L.P. and Drake & Co.
for the account of Citiventure III. Also includes 276,521 shares owned by
Chancellor Venture Capital II, L.P. of which Invesco Private Capital, Inc.
is a general partner of the general partner. The address of Invesco Private
Capital, Inc. is 1166 Avenue of the Americas, 25th Floor, New York, New York
10036.

(6) The address of 3i Bioscience Investment Trust plc is 91 Waterloo RC, London
SEI 8XP.

(7) The address of Allergan Pharmaceuticals (Ireland) Ltd., Inc. is 2525 Dupont
Drive, Irvine, California 92612.

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<PAGE> 48

RELATED PARTY TRANSACTIONS

The following is a description of transactions during the last three years to
which we have been a party, in which the amount involved exceeded $60,000 and in
which any director, executive officer or holder of more than 5% of our capital
stock had or will have a direct or indirect material interest, other than
compensation arrangements that are described under "Management."

The following 5% stockholders and affiliated investors purchased securities in
the amounts set forth, on an as-converted to common stock basis, in the chart
below. We sold shares of our Series C preferred stock between June 1997 and
March 2000. Between April 1997 and September 1998, we entered into note
agreements with some of the purchasers that were converted, including accrued
interest, into shares of Series C preferred stock at the election of the
noteholders. In connection with the Series C preferred stock financing we sold
the purchasers warrants to purchase common stock.

<TABLE>
<CAPTION>
SERIES C SERIES D
PURCHASER FINANCING FINANCING WARRANTS
--------- ---------- ---------- --------
<S> <C> <C> <C>
DIRECTORS AND PRINCIPAL STOCKHOLDERS
Robert G. McNeil, Ph.D.
Sanderling Venture Partners........................... 1,769,031 -- 353,055
Brian H. Dovey
Domain Associates, L.L.C. ............................ 925,573 -- 196,635
Biotechnology Investments Ltd........................... 726,522 -- 96,851
Allergan Pharmaceuticals (Ireland) Ltd., Inc. .......... -- 1,776,199 --

OTHER TRANSACTION INFORMATION
Price................................................... $ 5.63 $ 5.63 $ 0.001
</TABLE>

In connection with the Series C preferred stock financing, we entered into a
call option agreement with some of the purchasers and entered into a license
agreement with Visionex. For a more detailed description see Note 8 to the notes
to the financial statements.

COLLABORATION WITH ALLERGAN

In March 2000, we entered into a collaboration with Allergan for the marketing,
sale and distribution of Vitrase. For a more detailed description of our
collaboration with Allergan, see "Business -- Collaboration with Allergan."

REGISTRATION RIGHTS

We have entered into an Amended and Restated Investor Rights Agreement with each
of the purchasers of our preferred stock pursuant to which these and other
stockholders will have registration rights following this offering with respect
to their shares of common stock issued upon conversion of their preferred stock.

LOAN TO MANAGEMENT

In May 1997, we loaned Edward H. Danse, our Chief Executive Officer, $126,000 at
an interest rate of 8%. The principal and interest is due and payable on May 30,
2002 but may be prepaid without penalty. As of June 30, 2000, Mr. Danse owed us
approximately $158,000.

LOANS FROM STOCKHOLDERS

From December 1999 to January 2000, we borrowed an aggregate principal amount of
$1,750,000 from some of our stockholders at an interest rate of 9.0%. We
borrowed $1,000,000 from entities associated with Sanderling Venture Partners,
$500,000 from entities associated with Domain Associates, L.L.C. and $250,000
from entities associated with Mrs. Gordon Gund. The principal and interest was
due and payable on January 31, 2000 but was not repaid until March 2000.

48
<PAGE> 49

DESCRIPTION OF CAPITAL STOCK

GENERAL

Our certificate of incorporation that will be effective prior to the closing of
this offering authorizes the issuance of 100,000,000 shares of common stock,
$0.001 par value, and the issuance of 5,000,000 shares of undesignated preferred
stock, $0.001 par value. From time to time, our board of directors may establish
the rights and preferences of the preferred stock. As of June 30, 2000,
11,426,759 shares of common stock were issued and outstanding and held by
approximately 148 stockholders, options to purchase 2,416,933 shares of common
stock were issued and outstanding and held by 87 optionholders and warrants to
purchase 808,569 shares of common stock were issued and outstanding and held by
32 warrantholders. The warrants will expire on the consummation of this offering
if not exercised prior to that time.

COMMON STOCK

Each holder of common stock is entitled to one vote for each share held on all
matters to be voted upon by the stockholders; there are no cumulative voting
rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably the
dividends, if any, that are declared from time to time by the board of directors
out of funds legally available for that purpose. See "Dividend Policy." In the
event that we liquidate, dissolve or wind up ISTA, the holders of common stock
are entitled to share in our assets remaining after the payment of liabilities
and the satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any series
of preferred stock that we may designate in the future.

PREFERRED STOCK

The board of directors has the authority, without action by the stockholders, to
designate and issue preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, which may be greater than the
rights of the common stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of this preferred stock. However, the effects might include, among other
things:

- restricting dividends on the common stock

- diluting the voting power of the common stock

- impairing the liquidation rights of the common stock

- delaying or preventing a change in control of Ista without further action by
the stockholders

Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.

REGISTRATION RIGHTS

Pursuant to an investors rights agreement entered into between us and holders of
9,175,277 shares of common stock issuable upon conversion of our preferred
stock, we are obligated, under limited circumstances and subject to specified
conditions and limitations, to use our best efforts to register the registrable
shares.

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<PAGE> 50

We must use our best efforts to register the registrable shares:

- if we receive written notice from holders of 50% or more of the registrable
shares requesting that we effect a registration with respect to not less
than 50% of the registrable shares (or a lesser percentage if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $10.0 million)

- if we decide to register our own securities (except in connection with this
offering)

- if (1) we receive written notice from any holder of registrable shares
requesting that we effect a registration on Form S-3 (a shortened form of
registration statement) with respect to the registrable shares, the
reasonably anticipated price to the public of which is not less than $1.0
million (net of underwriting discounts or commissions) and (2) we are then
eligible to use Form S-3

However, in addition to certain other conditions and limitations, if requested
to register registrable shares, we can delay registration not more than once in
any 12-month period and for not more than 180 days. In any case where we decide
to register our own securities pursuant to an underwritten offering, other than
the initial public offering, the managing underwriter may limit the registrable
shares to be included in the registration to not less than 30% of the total
number of securities to be registered.

These registration rights terminate with respect to each registrable share upon
the earlier of the holder owning less than 1% of our outstanding capital stock
and being able to transfer his or her registrable shares pursuant to Rule 144(k)
and five years after the closing of this offering. In addition, the holders of
these registration rights have entered into lock-up agreements and waived their
registration rights until 180 days following the date of this prospectus.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS

Provisions of Delaware law and our certificate of incorporation and bylaws could
make the following more difficult:

- the acquisition of ISTA by means of a tender offer

- the acquisition of ISTA by means of a proxy contest or otherwise

- the removal of our incumbent officers and directors

These provisions, summarized below, are expected to discourage some types of
coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of us to negotiate
first with our board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging these proposals because negotiation of any
proposals of this type could result in an improvement of their terms.

Election and Removal of Directors. Our board of directors is divided into three
classes. The directors in each class will serve for a three-year term, with our
stockholders electing one class each year. See "Management -- Board of
Directors." This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.

Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board, the chief executive officer or the president may call
special meetings of stockholders.

Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures for stockholder
proposals and for the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board.

50
<PAGE> 51

Delaware Anti-takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an antitakeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years following the date
the person became an interested stockholder, unless the business combination or
the transaction in which the person became an interested stockholder is approved
in the manner specified in Section 203. Generally, a business combination
includes a merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and associates, owns or
within three years prior to the determination of interested stockholder status
did own 15% or more of a corporation's outstanding voting stock. The existence
of this provision may have an antitakeover effect by discouraging takeover
attempts not approved in advance by the board of directors, that might result in
a premium over the market price for the shares of common stock held by
stockholders.

Elimination of Stockholder Action by Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.

No Cumulative Voting. Our certificate of incorporation and bylaws do not provide
for cumulative voting in the election of directors.

Undesignated Preferred Stock. The authorization of undesignated preferred stock
makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of ISTA. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of us.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is ChaseMellon Shareholder
Services LLC. ChaseMellon's telephone number for stockholder inquiries is (800)
777-3694.

LISTING

We have applied to list our common stock on the Nasdaq National Market under the
symbol "ISTA."

51
<PAGE> 52

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock, and we
cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through sale of our equity securities. As described below, no
shares currently outstanding will be available for sale immediately after this
offering because of contractual resale restrictions contained in agreements
between us and our stockholders.

Upon completion of this offering, we will have outstanding 15,926,759 shares of
common stock based upon shares outstanding as of June 30, 2000, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options prior to completion of this offering. Of these shares, the
4,500,000 shares sold in this offering will be freely tradable without
restriction under the Securities Act, except for any shares purchased by our
"affiliates" as defined in Rule 144 under the Securities Act. Of the remaining
11,426,759 shares of common stock, approximately 11,026,822 shares held by
existing stockholders are subject to lock-up agreements with the underwriters
and/or us providing that the stockholder will not offer to sell, contract to
sell or otherwise sell, dispose of, loan, pledge or grant any rights to, any
shares of common stock or any securities that are convertible into common stock,
owned as of the date of this prospectus or subsequently acquired, for a period
of 180 days after the date of this prospectus without the prior written consent
of CIBC World Markets Corp. and/or us. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701 under the Securities Act, none of these shares will be
resellable until 181 days after the date of this prospectus. CIBC World Markets
Corp., in some instances together with us, may, in its sole discretion and at
any time without notice, release all or any portion of the shares subject to
lock-up agreements.

Beginning 181 days after the date of this prospectus, approximately 8,200,000
shares will be eligible for sale in the public market. All of these shares will
be subject to volume limitations under Rule 144, except approximately 2,600,000
shares eligible for sale under Rule 144(k) and approximately 900,000 shares
eligible for sale under Rule 701. In some cases, these shares are subject to
repurchase rights that we hold.

In general, under Rule 144, as currently in effect, beginning 90 days after the
date of this prospectus, a person who has beneficially owned restricted shares
for at least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:

- 1.0% of the number of shares of common stock then outstanding, which will
equal approximately 159,268 shares immediately after this offering and

- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144

Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
ours at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is entitled
to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any employee, officer, director or consultant
of ours who purchased shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell their Rule 701 shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice

52
<PAGE> 53

provisions of Rule 144. All holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before selling their Rule 701
shares. However, all Rule 701 shares are subject to lock-up agreements and will
only become eligible for sale at the earlier of the expiration of the 180-day
lock-up agreements or the receipt of the written consent of CIBC World Markets
Corp. more than 90 days after the date of this prospectus.

After this offering, we intend to file a registration statement on Form S-8
registering shares of common stock subject to outstanding options or reserved
for future issuance under our employee benefit plans. As of June 30, 2000,
options to purchase a total of 2,416,933 shares were outstanding, 603,844 shares
were reserved for future issuance under our stock plans, and 200,000 were
reserved for issuance under our employee stock purchase plan. Common stock
issued upon exercise of outstanding vested options or issued pursuant to our
employee stock purchase plan, other than common stock issued to our affiliates,
will be available for immediate resale in the open market following expiration
of the 180-day lock-up agreements.

Also, beginning six months after the date of this offering, holders of 8,627,423
restricted shares will be entitled to registration rights on these shares for
sale in the public market. See "Description of Capital Stock -- Registration
Rights." Registration of these shares under the Securities Act would result in
their becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration.

53
<PAGE> 54

UNDERWRITING

We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., Prudential Securities Incorporated and Thomas
Weisel Partners LLC are acting as representatives of the underwriters.

The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- -----------------
<S> <C>
CIBC World Markets Corp.....................................
Prudential Securities Incorporated..........................
Thomas Weisel Partners LLC..................................

-----------------
Total..................................................... 4,500,000
=================
</TABLE>

The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated, depending on the circumstances.

The shares should be ready for delivery on or about , 2000 against
payment in immediately available funds. The representatives have advised us that
the underwriters propose to offer the shares directly to the public at the
public offering price that appears on the cover page of this prospectus. In
addition, the representatives may offer some of the shares to other securities
dealers at such price less a concession of $ per share. The underwriters may
also allow, and such dealers may reallow, a concession not in excess of
$ per share to other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.

We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of additional shares from us to
cover over-allotments. If the underwriters exercise all or part of this option,
they will purchase shares covered by the option at the public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to the public
will be $ , and the total proceeds to us will be $ . The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.

The following table provides information regarding the amount of the discount to
be paid by us to the underwriters.

<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- ------------------------- ---------------------------
<S> <C> <C> <C>
ISTA Pharmaceuticals, Inc............. $ $ $
</TABLE>

We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $1,190,000.

54
<PAGE> 55

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.

We and our officers and directors and substantially all other stockholders have
agreed to a 180-day "lock up" with respect to shares of common stock that they
beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that for a period of 180 days following the date of
this prospectus, we and such persons may not offer, sell, pledge or otherwise
dispose of these securities without the prior written consent of CIBC World
Markets Corp.

The representatives have informed us that they do not expect discretionary sales
by the underwriters to exceed 5% percent of the shares offered by this
prospectus.

The underwriters may make sales of up to approximately 12% of the shares being
offered in this offering to some of our existing stockholders. These shares will
be sold at the public offering price that appears on the cover page of this
prospectus and otherwise on the same terms as all other shares offered by this
prospectus. The number of shares available for sale to the general public in the
offering will be reduced to the extent any of these shares are purchased by such
persons.

There is no established trading market for the shares. The offering price for
the shares will be determined by us and the representatives based on the
following factors:

- prevailing market and general economic conditions

- our financial information

- our history and prospects

- Ista and the industry in which we compete

- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues

- the present stage of our development and the above factors in relation to
market values and various valuation measures of other companies engaged in
activities similar to ours

Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:

- Stabilizing transactions -- The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.

- Over-allotment and syndicate covering transactions -- The underwriters may
sell more shares of common stock in connection with this offering than the
number of shares that they have committed to purchase. This over-allotment
creates a short position for the underwriters. This short sales position may
involve either "covered" short sales or "naked" short sales. Covered short
sales are short sales made in an amount not greater than the underwriters'
over-allotment option to purchase additional shares in this offering
described above. The underwriters may close out any covered short position
either by exercising their over-allotment option or by purchasing shares in
the open market. To determine how they will close the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. Naked
short sales are short sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that, in the open market after pricing, there may
be downward pressure on the price of the shares that could adversely affect
investors who purchase shares in this offering.

55
<PAGE> 56

- Penalty bids -- If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group members
who sold those shares as part of this offering.

Similar to other purchase transactions, the underwriters' purchases to cover the
syndicate short sales or to stabilize the market price of our common stock may
have the effect of raising or maintaining the market price of our common stock
or preventing or mitigating a decline in the market price of our common stock.
As a result, the price of the shares of our common stock may be higher than the
price that might otherwise exist in the open market. The imposition of a penalty
bid might also have an effect on the price of the shares if it discourages
resales of the shares.

Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.

Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.

Thomas Weisel Partners LLC, one of the representatives of the underwriters, was
organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 171 filed
public offerings of equity securities, of which 126 have been completed, and has
acted as a syndicate member in an additional 97 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.

LEGAL MATTERS

The validity of the common stock offered will be passed upon for us by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California, is acting as
counsel for the underwriters in connection with various legal matters relating
to this offering. As of June 30, 2000, investment partnerships and a member of
Wilson Sonsini Goodrich & Rosati beneficially owned an aggregate of 30,895
shares of our Series A preferred stock.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial statements
at December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999 and for the period from February 13, 1992 (inception)
through December 31, 1999, and the financial statements of Visionex at December
31, 1998 and 1999, and for the period from May 24, 1997 (inception) through
December 31, 1997, the years ended December 31, 1998 and 1999, and for the
period from May 24, 1997 (inception) through December 31, 1999, as set forth in
their reports. We have included our financial statements (including those of
Visionex) in this prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given upon their authority as experts
in accounting and auditing.

56
<PAGE> 57

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of ours, such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement, including exhibits and schedule
filed therewith, at the Securities and Exchange Commission's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Securities and Exchange
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of these materials from the Public
References Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as ISTA Pharmaceuticals, Inc.,
that file electronically with the Securities and Exchange Commission.

57
<PAGE> 58

ISTA PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ISTA PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1998 and 1999 and March
31, 2000 (unaudited)...................................... F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and the period from February 13, 1992
(inception) through December 31, 1999 and the three months
ended March 31, 1999 and 2000 (unaudited)................. F-4
Statement of Stockholders' Equity (Net Capital Deficiency)
for the period from February 13, 1992 (inception) through
March 31, 2000 (unaudited)................................ F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and the period from February 13, 1992
(inception) through December 31, 1999 and the three months
ended March 31, 1999 and 2000 (unaudited)................. F-8
Notes to Financial Statements............................... F-9

VISIONEX PTE. LTD.
Report of Ernst & Young LLP, Independent Auditors........... F-22
Balance Sheets as of December 31, 1998 and 1999............. F-23
Statements of Operations for the period from May 24, 1997
(inception) through December 31, 1997, the years ended
December 31, 1998 and 1999 and the period from May 24,
1997 (inception) through December 31, 1999................ F-24
Statement of Shareholders' Equity for the period from May
24, 1997 (inception) through December 31, 1999............ F-25
Statements of Cash Flows for the period from May 24, 1997
(inception) through December 31, 1997, the years ended
December 31, 1998 and 1999, and the period from May 24,
1997 (inception) through December 31, 1999................ F-26
Notes to Financial Statements............................... F-27

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Introduction................................................ F-31
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1999 and three
months ended March 31, 2000............................... F-32
</TABLE>

F-1
<PAGE> 59

REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS

The Board of Directors
ISTA Pharmaceuticals, Inc.

We have audited the accompanying balance sheets of ISTA Pharmaceuticals, Inc. (a
development stage company) as of December 31, 1998 and 1999 and the related
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999,
and for the period from February 13, 1992 (inception) through December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ISTA Pharmaceuticals, Inc. (a
development stage company) at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, and for the period from February 13, 1992 (inception) through
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

/s/ ERNST & YOUNG LLP

San Diego, California
March 29, 2000

F-2
<PAGE> 60

ISTA PHARMACEUTICALS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
--------------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,392,790 $ 709,350 $ 10,619,658
Advanced payments -- clinical trials...................... 162,637 876,793 930,400
Other current assets...................................... 58,515 58,742 86,148
------------ ------------ ------------
Total current assets.................................... 2,613,942 1,644,885 11,636,206
Property and equipment, net................................. 966,981 983,600 957,408
Note receivable from officer................................ 141,960 152,040 154,560
Deposits and other assets................................... 392,259 238,977 608,654
------------ ------------ ------------
$ 4,115,142 $ 3,019,502 $ 13,356,828
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 418,579 $ 822,833 $ 2,916,231
Accrued compensation and related expenses................. 187,177 73,501 76,742
Accrued expenses -- clinical trials....................... 1,698,537 4,782,552 2,187,979
Other accrued expenses.................................... 377,275 208,319 859,610
Current portion of obligation under capital lease......... 192,538 250,306 207,755
Notes payable to stockholders............................. -- 500,000 --
------------ ------------ ------------
Total current liabilities............................... 2,874,106 6,637,511 6,248,317
Obligation under capital lease.............................. 265,713 15,406 --
Deferred rent............................................... 27,855 22,441 20,054
License fee received from Visionex.......................... 5,000,000 5,000,000 --
Commitments
Stockholders' equity (net capital deficiency):
Convertible preferred stock, no par value; 19,545,085 and
24,820,688 shares authorized in 1998 and 1999 and
24,820,688 at March 31, 2000, respectively; 5,698,769
and 7,156,214 shares issued and outstanding in 1998 and
1999 and 12,251,776 at March 31, 2000, respectively;
liquidation preference $25,620,870 at December 31, 1999
and $68,977,499 at March 31, 2000; no shares issued and
outstanding pro forma................................... 17,289,922 25,496,068 64,268,676 $ --
Common stock, no par value; 18,518,519 and 32,750,000
shares authorized in 1998 and 1999 and 32,750,000 at
March 31, 2000, respectively; 1,434,162 and 1,717,758
shares issued and outstanding in 1998 and 1999 and
1,864,977 at March 31, 2000, respectively; 32,750,000
shares authorized and 10,392,713 shares issued and
outstanding pro forma................................... 201,665 3,890,939 7,495,558 71,764,234
Preferred and common stock subscribed....................... 1,265,958 -- -- --
Subscriptions receivable.................................... (1,265,958) -- -- --
Deferred compensation....................................... (420) (2,215,421) (5,021,708) (5,021,708)
Foreign currency translation adjustment..................... -- -- (26,230) (26,230)
Deficit accumulated during the development stage............ (21,543,699) (35,827,442) (59,627,839) (59,627,839)
------------ ------------ ------------ ------------
Total stockholders' equity (net capital deficiency)....... (4,052,532) (8,655,856) 7,088,457 $ 7,088,457
------------ ------------ ------------ ============
Total liabilities and stockholders' equity
(net capital deficiency)................................ $ 4,115,142 $ 3,019,502 $ 13,356,828
============ ============ ============
</TABLE>

See accompanying notes.
F-3
<PAGE> 61

ISTA PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

See accompanying notes.
F-4
<PAGE> 62

ISTA PHARMACEUTICALS, INC.

STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
PERIOD FROM FEBRUARY 13, 1992 (INCEPTION) THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
PREFERRED AND
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK SUBSCRIBED
----------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series A preferred stock
at $1.00 per share for cash......... 295,000 $ 295,000 -- $ -- -- $ --
Issuance of common stock at $.0.32 to
$.180 per share for cash............ -- -- 950,000 60,000 -- --
Issuance of common stock at $.0376 per
share for intellectual property..... -- -- 133,333 5,000 -- --
Net loss.............................. -- -- -- -- -- --
--------- ----------- --------- ---------- --------- -----------
Balance at December 31, 1992............ 295,000 295,000 1,083,333 65,000 -- --
Issuance of Series A preferred stock
at $1.00 per share for cash......... 539,375 539,375 -- -- -- --
Net loss.............................. -- -- -- -- -- --
--------- ----------- --------- ---------- --------- -----------
Balance at December 31, 1993............ 834,375 834,375 1,083,333 65,000 -- --
Issuance of common stock at $.21 per
share for cash...................... -- -- 133,333 27,000 -- --
Issuance of common stock at $.21 per
share for services.................. -- -- 5,404 1,088 -- --
Net loss.............................. -- -- -- -- -- --
--------- ----------- --------- ---------- --------- -----------
Balance at December 31, 1994............ 834,375 834,375 1,222,070 93,088 -- --
Issuance of Series A preferred stock
at $1.00 per share for cash......... 1,128,531 1,128,531 -- -- -- --
Issuance of Series B preferred stock
at $2.75 per share for cash and in
exchange for outstanding notes
payable, net of issuance costs of
$15,548............................. 1,955,555 5,362,231 -- -- -- --
Net loss.............................. -- -- -- -- -- --
--------- ----------- --------- ---------- --------- -----------
Balance at December 31, 1995............ 3,918,461 7,325,137 1,222,070 93,088 -- --
Issuance of common stock upon exercise
of options.......................... -- -- 44,446 9,000 -- --
Net loss.............................. -- -- -- -- -- --
--------- ----------- --------- ---------- --------- -----------

<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY (NET
SUBSCRIPTIONS DEFERRED DEVELOPMENT CAPITAL
RECEIVABLE COMPENSATION STAGE DEFICIENCY)
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Issuance of Series A preferred stock
at $1.00 per share for cash......... $ -- $ -- $ -- $ 295,000
Issuance of common stock at $.0.32 to
$.180 per share for cash............ -- -- -- 60,000
Issuance of common stock at $.0376 per
share for intellectual property..... -- -- -- 5,000
Net loss.............................. -- -- (120,913) (120,913)
------------ ----------- ------------ ------------
Balance at December 31, 1992............ -- -- (120,913) 239,087
Issuance of Series A preferred stock
at $1.00 per share for cash......... -- -- -- 539,375
Net loss.............................. -- -- (470,998) (470,998)
------------ ----------- ------------ ------------
Balance at December 31, 1993............ -- -- (591,911) 307,464
Issuance of common stock at $.21 per
share for cash...................... -- -- -- 27,000
Issuance of common stock at $.21 per
share for services.................. -- -- -- 1,088
Net loss.............................. -- -- (618,939) (618,939)
------------ ----------- ------------ ------------
Balance at December 31, 1994............ -- -- (1,210,850) (283,387)
Issuance of Series A preferred stock
at $1.00 per share for cash......... -- -- -- 1,128,531
Issuance of Series B preferred stock
at $2.75 per share for cash and in
exchange for outstanding notes
payable, net of issuance costs of
$15,548............................. -- -- -- 5,362,231
Net loss.............................. -- -- (887,198) (887,198)
------------ ----------- ------------ ------------
Balance at December 31, 1995............ -- -- (2,098,048) 5,320,177
Issuance of common stock upon exercise
of options.......................... -- -- -- 9,000
Net loss.............................. -- -- (3,025,236) (3,025,236)
------------ ----------- ------------ ------------
</TABLE>

See accompanying notes.

F-5
<PAGE> 63

ISTA PHARMACEUTICALS, INC.

STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
PERIOD FROM FEBRUARY 13, 1992 (INCEPTION) THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
PREFERRED AND
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK SUBSCRIBED
----------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 3,918,461 $ 7,325,137 1,266,516 $ 102,088 -- $ --
Issuance of Series C preferred stock
at $5.63 per share for cash, net of
issuance costs of $66,735.......... 947,295 5,266,536 -- -- -- --
Issuance of common stock upon
exercise of options................ -- -- 51,852 11,400 -- --
Repurchase and retirement of Series A
preferred stock.................... (11,153) (11,153) -- -- -- --
Net loss............................. -- -- -- -- -- --
--------- ----------- ---------- ---------- --------- -----------
Balance at December 31, 1997........... 4,854,603 $12,580,520 1,318,368 $ 113,488 -- $ --
Issuance of Series C preferred stock
and warrants at $5.63 per share in
exchange for conversion of bridge
loans of $1,000,000 and cash, net
of issuance costs of $43,676....... 844,166 4,709,402 -- -- -- --
Preferred and common stock
subscribed......................... -- -- -- -- 1,265,958
Issuance of common stock for
exercisable options................ -- -- 21,913 5,683 -- --
Issuance of common stock at $.76 per
share for cash..................... -- -- 93,881 70,974 -- --
Deferred compensation related to
stock options...................... -- -- -- 11,520 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- --
Net loss............................. -- -- -- -- -- --
--------- ----------- ---------- ---------- --------- -----------

<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY (NET
SUBSCRIPTIONS DEFERRED DEVELOPMENT CAPITAL
RECEIVABLE COMPENSATION STAGE DEFICIENCY)
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996........... $ -- $ -- $(5,123,284) $ 2,303,941
Issuance of Series C preferred stock
at $5.63 per share for cash, net of
issuance costs of $66,735.......... -- -- -- 5,266,536
Issuance of common stock upon
exercise of options................ -- -- -- 11,400
Repurchase and retirement of Series A
preferred stock.................... -- -- (44,612) (55,765)
Net loss............................. -- -- (6,752,300) (6,752,300)
------------ ----------- ------------ ------------
Balance at December 31, 1997........... $ -- $ -- $(11,920,196) $ 773,812
Issuance of Series C preferred stock
and warrants at $5.63 per share in
exchange for conversion of bridge
loans of $1,000,000 and cash, net
of issuance costs of $43,676....... -- -- -- 4,709,402
Preferred and common stock
subscribed......................... (1,265,958) -- -- --
Issuance of common stock for
exercisable options................ -- -- -- 5,683
Issuance of common stock at $.76 per
share for cash..................... -- -- -- 70,974
Deferred compensation related to
stock options...................... -- (11,520) -- --
Amortization of deferred
compensation....................... -- 11,100 -- 11,100
Net loss............................. -- -- (9,623,503) (9,623,503)
------------ ----------- ------------ ------------
</TABLE>

See accompanying notes.

F-6
<PAGE> 64

ISTA PHARMACEUTICALS, INC.

STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
PERIOD FROM FEBRUARY 13, 1992 (INCEPTION) THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
PREFERRED AND
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK SUBSCRIBED
------------------------ ----------------------- ----------------------- SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE
---------- ----------- ---------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998....................... 5,698,769 $17,289,922 1,434,162 $ 201,665 -- $ 1,265,958 $ (1,265,958)
Issuance of Series C
preferred stock and
warrants at $5.63 per
share in exchange for
conversion of bridge
loans and cash, net of
issuance costs of
$41,929.................. 1,235,894 6,958,814 -- -- -- -- --
Issuance of preferred and
common stock
subscribed............... 221,551 1,247,332 24,638 18,626 (1,265,958) 1,265,958
Issuance of common stock
for exercisable
options.................. -- -- 206,835 92,758 -- -- --
Issuance of common stock at
$.76 per share for
cash..................... -- -- 52,123 39,405 -- -- --
Deferred compensation
related to stock
options.................. 3,538,485 -- -- --
Amortization of deferred
compensation............. -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- --
---------- ----------- ---------- ---------- --------- ----------- ------------
Balance at December 31,
1999....................... 7,156,214 25,496,068 1,717,758 3,890,939 -- -- --
---------- ----------- ---------- ---------- --------- ----------- ------------
Issuance of Series C
preferred stock at $11.70
per share for acquisition
of VisionEx.............. 3,319,363 $28,772,608 -- -- -- -- --
Issuance of Series D
preferred stock at $5.63
per share................ 1,776,199 10,000,000 -- -- -- -- --
Issuance of common stock
for exercisable
options.................. -- -- 147,219 69,206 -- -- --
Deferred compensation
related to stock
options.................. -- -- -- 3,535,413 -- -- --
Amortization of deferred
compensation............. -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- --
Deemed dividend for
preferred stockholders... -- -- -- -- -- -- --
Foreign currency
translation adjustment... -- -- -- -- -- -- --
Comprehensive loss......... -- -- -- -- -- -- --
---------- ----------- ---------- ---------- --------- ----------- ------------
Balance at March 31, 2000
(unaudited)................ 12,251,776 $64,268,676 1,864,977 $7,495,558 -- -- --
========== =========== ========== ========== ========= =========== ============

<CAPTION>
DEFICIT TOTAL
ACCUMULATED ACCUMULATED STOCKHOLDERS'
OTHER DURING THE EQUITY (NET
DEFERRED COMPREHENSIVE DEVELOPMENT CAPITAL
COMPENSATION LOSS STAGE DEFICIENCY)
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1998....................... $ (420) -- $(21,543,699) $ (4,052,532)
Issuance of Series C
preferred stock and
warrants at $5.63 per
share in exchange for
conversion of bridge
loans and cash, net of
issuance costs of
$41,929.................. -- -- -- 6,958,814
Issuance of preferred and
common stock
subscribed............... -- -- -- 1,265,958
Issuance of common stock
for exercisable
options.................. -- -- -- 92,758
Issuance of common stock at
$.76 per share for
cash..................... -- -- -- 39,405
Deferred compensation
related to stock
options.................. (3,538,485) -- -- --
Amortization of deferred
compensation............. 1,323,484 -- -- 1,323,484
Net loss................... -- -- (14,283,743) (14,283,743)
----------- -------- ------------ ------------
Balance at December 31,
1999....................... (2,215,421) -- (35,827,442) (8,655,856)
----------- -------- ------------ ------------
Issuance of Series C
preferred stock at $11.70
per share for acquisition
of VisionEx.............. -- -- -- $ 28,772,608
Issuance of Series D
preferred stock at $5.63
per share................ -- -- -- 10,000,000
Issuance of common stock
for exercisable
options.................. -- -- -- 69,206
Deferred compensation
related to stock
options.................. (3,535,413) -- -- --
Amortization of deferred
compensation............. 729,126 -- -- 729,126
Net loss................... -- -- (4,555,320) (4,555,320)
Deemed dividend for
preferred stockholders... -- -- (19,244,567) (19,244,567)
Foreign currency
translation adjustment... -- (26,230) -- (26,230)
------------
Comprehensive loss......... -- -- -- --
----------- -------- ------------ ------------
Balance at March 31, 2000
(unaudited)................ $(5,021,708) $(26,230) $(59,627,839) $ 7,088,457
=========== ======== ============ ============
</TABLE>

See accompanying notes.

F-7
<PAGE> 65

ISTA PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
FEBRUARY 13,
1992 (INCEPTION) THREE MONTHS ENDED
THROUGH MARCH 31,
YEARS ENDED DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ---------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................... $(6,752,300) $(9,623,503) $(14,283,743) $(35,782,830) $(2,366,088) $(23,800,397)
Deemed dividend for preferred
shareholders......................... -- -- -- -- -- 19,244,567
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred
compensation....................... -- 11,100 1,323,484 1,334,584 -- 729,126
Depreciation and amortization........ 174,584 209,060 237,182 669,724 56,310 67,812
Changes in operating assets and
liabilities:
Advanced payments -- clinical
trials and other current
assets........................... 103,546 (184,963) (714,383) (935,535) 22,472 52,092
Note receivable from officer....... (126,000) (10,080) (10,080) (152,040) (2,520) (2,520)
Accounts payable................... 346,205 (57,218) 404,254 822,833 (1,019,461) 2,073,392
Accrued compensation and related
expenses......................... 56,579 34,020 (113,676) 73,501 (60,592) 3,241
Accrued expenses -- clinical trials
and other accrued expenses....... 134,871 1,775,414 2,915,059 4,990,871 162,047 (1,943,282)
Deferred rent...................... 5,091 (60) (5,415) 22,441 (1,008) (2,387)
License fee received from
Visionex......................... 5,000,000 -- -- 5,000,000 -- --
----------- ----------- ------------ ------------ ----------- ------------
Net cash used in operating
activities..................... (1,057,424) (7,846,230) (10,247,318) (23,956,451) (3,208,840) (3,578,356)
INVESTING ACTIVITIES
Purchase of equipment.................. (562,803) (109,175) (253,800) (1,646,323) (88,587) (27,970)
Proceeds from refinancing under capital
leases............................... 454,380 -- -- 826,786 -- --
Deposits and other assets.............. 26,578 (122,858) 153,282 (238,977) -- (371,788)
Cash acquired from Visionex
transaction.......................... -- -- -- -- -- 4,403,403
----------- ----------- ------------ ------------ ----------- ------------
Net cash provided by (used in)
investing activities........... (81,845) (232,033) (100,518) (1,058,514) (88,587) 4,003,645
FINANCING ACTIVITIES
Payments on obligation under capital
leases............................... (149,605) (211,053) (192,539) (561,986) (46,595) (57,957)
Proceeds from exercise of stock
options.............................. 11,400 5,683 92,758 118,841 -- 69,206
Proceeds from bridge loans with related
parties.............................. 1,000,000 1,000,000 500,000 3,797,222 -- --
Payments on bridge loans with related
parties.............................. (1,000,000) (1,000,000) -- (2,005,000) (500,000)
Proceeds from issuance of preferred
stock................................ 5,266,536 4,709,402 8,206,146 24,214,999 1,247,332 10,000,000
Repurchase of preferred stock.......... (55,765) -- -- (55,765) -- --
Proceeds from issuance of common
stock................................ -- 70,974 58,031 216,004 18,737 --
----------- ----------- ------------ ------------ ----------- ------------
Net cash provided by financing
activities........................... 5,072,566 4,575,006 8,664,396 25,724,315 1,219,474 9,511,249
Effect of exchange rate changes on
cash................................. -- -- -- -- -- (26,230)
----------- ----------- ------------ ------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents.......................... 3,933,297 (3,503,257) (1,683,440) 709,350 (2,077,953) 9,910,308
Cash and cash equivalents at beginning
of period............................ 1,962,750 5,896,047 2,392,790 -- 2,392,790 709,350
----------- ----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of
period............................... $ 5,896,047 $ 2,392,790 $ 709,350 $ 709,350 $ 314,837 $ 10,619,658
=========== =========== ============ ============ =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................. $ 86,242 $ 86,310 $ 51,578 $ 246,707
=========== =========== ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Preferred stock issued in exchange for
bridge loans with stockholders and
accrued interest..................... $ -- $ 1,000,000 $ -- $ 2,356,811 -- --
=========== =========== ============ ============
Extinguishment of liability through
acquisition of Visionex.............. $ 5,000,000
============
Series C preferred stock issued for
acquisition of Visionex.............. $ 28,772,608
============
</TABLE>

See accompanying notes.
F-8
<PAGE> 66

ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO
MARCH 31, 2000 AND THE THREE MONTHS ENDED MARCH 31, 1999
AND 2000 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY

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

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

The Company reincorporated in Delaware on August 4, 2000.

BASIS OF PRESENTATION

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Since inception, the Company has been primarily
engaged in research and development, and through March 31, 2000, the Company has
incurred accumulated losses of $40,383,272 which do not include the deemed
dividend to preferred stockholders of $19,244,567. Successful completion of the
Company's clinical trials and continuation of operations is dependent upon the
Company's ability to obtain adequate financing. Management believes the funds on
hand at March 31, 2000, combined with the funds received from the Allergan line
of credit (Note 10) are adequate to sustain operations through December 31,
2000.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash in banks, certificates of deposit and
short-term investments with original maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost, which management
believes approximates fair value because of the short-term maturity of these
instruments.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Equipment and furniture are
depreciated using the straight-line method over their estimated useful lives
(generally 5 to 7 years) and leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset or the lease
term, whichever is shorter. Equipment acquired under capital leases is amortized
over the estimated useful life of the assets.
F-9
<PAGE> 67
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the flows associated with the use of the
asset. While the Company's current and historical operating and cash flow losses
are indicators of impairment, the Company believes the future cash flows to be
received from the long-lived assets will exceed the assets' carrying value, and
accordingly, the Company has not recognized any impairment losses through March
31, 2000.

RESEARCH AND DEVELOPMENT COSTS

Expenditures relating to research and development are expensed in the period
incurred. The Company also expenses costs incurred to obtain and prosecute
patents as recoverability of such expenditures is not assured. Approximately
$360,000 and $136,000 of patent-related costs were included in research and
development expense in 1998 and 1999, respectively. From February 13, 1992
through December 31, 1999 the Company expensed approximately $496,000 related to
these costs.

STOCK-BASED COMPENSATION

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for stock-based employee compensation. Under APB 25, if the
exercise price of the Company's employee and director stock options equals or
exceeds the estimated fair value of the underlying stock on the date of grant,
no compensation expense is recognized.

When the exercise price of the employee or director stock options is less than
the estimated fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense in accordance with FASB Interpretation No. 28 over the vesting period of
the options.

Options or stock awards issued to non-employees are recorded at their fair value
as determined in accordance with SFAS No. 123 and EITF 96-18 and recognized over
the related service period. Deferred charges for options granted to
non-employees are periodically remeasured as the options vest.

USE OF ESTIMATES

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.

EFFECT OF NEW ACCOUNTING STANDARDS

Effective January 1, 2001, the Company will adopt SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The adoption of SFAS No. 133 is
not anticipated to have an impact on the

F-10
<PAGE> 68
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's results of operations or financial condition as the Company holds no
derivative financial instruments and does not currently invest in derivative
instruments or 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 an employee for purposes of applying Accounting Practice Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), the
criteria for determining whether a plan qualifies as a noncompensatory 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 this Interpretation 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 the financial position
or results of operations of the Company.

NET LOSS PER SHARE

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

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

Pro forma net loss per common share in the Statement of Operations has been
computed as described above and also gives effect to common equivalent shares
arising from preferred stock that will automatically convert upon the closing of
the initial public offering contemplated by this prospectus (using the as-if
converted method from the original date of issuance).

The Company has excluded all preferred stock, outstanding options and warrants,
and shares subject to repurchase from the calculation of diluted loss per common
share because all such securities are antidilutive for all periods presented.
The total number of shares excluded from the calculation of diluted net loss per
share, prior to application of the treasury stock method for options and
warrants, was 5,281,742, 6,551,123 and 8,595,271 for the years ended December
31, 1997, 1998 and 1999, respectively, and 6,330,029 and 12,154,179 for the
three months ended March 31, 1999 and 2000, respectively.

Included in the three months ended March 31, 2000 net loss per common share,
basic and diluted, and pro forma net loss per common share, basic and diluted,
is the deemed dividend for preferred stockholders of $19,244,567 (note 8).

UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

The unaudited pro forma stockholders' equity at March 31, 2000 reflects the
conversion of 12,251,776 shares of convertible preferred stock outstanding as of
March 31, 2000 into 8,527,737 shares of common stock.

F-11
<PAGE> 69
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS

Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.

2. BALANCE SHEET DETAILS

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements and related accumulated depreciation and
amortization are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment................................................. $ 648,509 $1,115,641
Furniture and fixtures.................................... 538,025 324,693
Leasehold improvements.................................... 206,359 206,359
---------- ----------
1,392,893 1,646,693
Less accumulated depreciation and amortization.............. (425,912) (663,093)
---------- ----------
$ 966,981 $ 983,600
========== ==========
</TABLE>

Total depreciation and amortization expense amounted to $174,584, $209,060,
$237,182 and $669,724 for the years ended December 31, 1997, 1998 and 1999 and
for the period from February 13, 1992 (inception) through December 31, 1999,
respectively.

3. RELATED PARTY TRANSACTIONS

A stockholder of the Company is also a stockholder of a supplier with which the
Company entered into an agreement in 1996. The supplier provides certain
manufacturing services to the Company. For the years ended December 31, 1997,
1998 and 1999 and the period from February 13, 1992 (inception) through December
31, 1999, the Company purchased $171,502, $148,138, $108,162 and $427,802,
respectively, in services from the supplier.

In 1997, the Company provided an unsecured loan to an officer in the amount of
$126,000. The principal amount of the loan, plus accrued interest of 8% per
annum, is due and payable in full on May 30, 2002.

During the years ended December 31, 1997, 1998 and 1999 and the period from
February 13, 1992 (inception) through December 31, 1999, the Company made total
payments of approximately $28,500, $31,300, $36,200 and $140,435, respectively,
to a management company owned by a stockholder of the Company for reimbursement
of services performed on behalf of the Company and for reimbursement of
out-of-pocket expenses.

In November 1998, notes payable to certain stockholders totaling $1,000,000 were
converted into shares of Series C preferred stock at $5.63 per share.

In December 1999, certain stockholders of the Company provided an unsecured loan
to the Company in the amount of $500,000. In January 2000, the Company borrowed
an additional $1,250,000 from certain

F-12
<PAGE> 70
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. RELATED PARTY TRANSACTIONS (CONTINUED)
stockholders. The principal amount of the loans, plus accrued interest at 9.0%
per annum, was repaid in full in March 2000.

4. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

PREFERRED STOCK

At March 31, 2000, convertible preferred stock authorized and outstanding is as
follows:

<TABLE>
<CAPTION>
SHARES SHARES LIQUIDATION
AUTHORIZED OUTSTANDING VALUE
---------- ----------- -----------------
<S> <C> <C> <C>
Series A.................................... 1,951,753 1,951,753 $ 1,951,753
Series A1................................... 1,951,753 -- --
Series B.................................... 1,955,555 1,955,555 5,377,776
Series B1................................... 1,955,555 -- --
Series C.................................... 8,503,036 3,248,906 18,291,341
Series C1................................... 8,503,036 -- --
Series D.................................... 1,776,199 1,776,199 10,000,000
Series D1................................... 1,776,199 -- --
---------- --------- -----------
28,373,086 8,932,413 $35,620,870
========== ========= ===========
</TABLE>

In the event the Company completes a dilutive issuance of common stock, each
share of Series A, Series B and Series C preferred stock held by stockholders
that do not participate in the issuance shall be converted into one share of
Series A1, Series B1 and Series C1 preferred stock, respectively, plus such
number of fully paid, non-assessable shares of common stock based on a
conversion rate, subject to certain anti-dilution provisions.

A dilutive issuance means an issuance of common stock (including securities
exercisable or convertible into common stock) in a financing for a consideration
per share less than the conversion price of the Series A, B, C and D preferred
stock in effect on the date of and immediately prior to such issuance.

Each share of preferred stock is convertible into the number of fully paid and
nonassessable shares of common stock which results from dividing the conversion
price per share in effect for each series of preferred stock at the time of
conversion into the per share conversion value of such series. The initial
conversion price per share of Series A preferred stock, Series A-1 preferred
stock, Series B preferred stock, Series B-1 preferred stock, Series C preferred
stock and Series C-1 preferred stock is $1.00, $1.00, $2.75, $2.75, $5.63 and
$5.63, respectively. The per share conversion value of Series A preferred stock,
Series A-1 preferred stock, Series B preferred stock, Series B-1 preferred
stock, Series C preferred stock and Series C-1 preferred stock is $1.35, $1.35,
$3.71, $3.71, $7.60 and $7.60, respectively.

The holders of Series A, Series A1, Series B, Series B1, Series C and Series C1
preferred stock (collectively "Preferred Stock") are entitled to receive annual
dividends of $0.08, $0.08, $0.22, $0.22, $0.45 and $0.45 per share,
respectively, when and if declared by the board of directors, prior to and in
preference to holders of common stock. The right to such dividends, if declared
by the board of directors, shall be cumulative. As of December 31, 1999, no
dividends have been declared. In the event of a liquidation of the Company,
preferred stockholders are entitled to a liquidation preference of $1.00 per
share for Series A and Series A1, $2.75 per share for Series B and Series B1,
and $5.63 per share for Series C and Series C1, plus any declared and unpaid
dividends on such shares.

F-13
<PAGE> 71
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
The Preferred Stock is convertible into common stock at any time at the option
of the holder on a one to 0.74 basis, subject to anti-dilution adjustments, and
will automatically convert upon the closing of the initial public offering
contemplated by this prospectus, or by the written consent or affirmative vote
of a majority of the preferred stockholders. Each share of outstanding Preferred
Stock is entitled to one vote for each share of common stock into which it could
be converted.

PREFERRED AND COMMON STOCK SUBSCRIBED

Preferred and common stock subscribed reflects 221,551 and 24,638 shares of the
Company's Series C preferred and common stock, respectively, subscribed by
certain stockholders in December 1998 at a per share price of $5.63 and $0.76,
respectively. A corresponding subscription receivable was included in
stockholders' equity as of December 31, 1998. In January 1999, the Company
completed the subscribed transaction, and all preferred and common stock
subscription amounts were received and all preferred and common stock and stock
purchase warrants subject to the subscriptions were issued. The warrants were
not separately valued, therefore the entire proceeds from the transaction are
included in Preferred Stock in the accompanying balance sheet.

COMMON STOCK WARRANTS

In connection with the Series C preferred stock financing completed during 1998
and 1999, the Company also sold to the investors warrants to purchase 808,569
shares of common stock which were bundled with the preferred stock as a combined
unit. Each of the combined units consists of 10 shares of preferred stock and
five warrants to purchase a share of common stock at $.076 per share. The
warrants expire upon the earlier of five years from the date of issuance or the
closing of an initial public offering. The warrants also provide the holder with
the option to receive common shares equal to the intrinsic value of the warrant
at the time of warrant exercise (a "cashless exercise"). As the warrants were
sold with the stock in a combined unit, the warrants were not separately valued
and the proceeds from the financing were not allocated between Series C
Preferred Stock and common stock. Accordingly, the entire proceeds from the
financing are included in Preferred Stock in the accompanying Balance Sheet.

STOCK COMPENSATION PLAN

The Company has reserved 3,148,148 shares of common stock under the 1993 Stock
Option Plan (the "Plan") for issuance to eligible employees, officers, directors
and consultants. The Plan provides for the grant of incentive and nonstatutory
stock options. Terms of the stock option agreements, including vesting
requirements, are determined by the board of directors, subject to the
provisions of the Plan. Options granted by the Company vest ratably over four
years and are exercisable from the date of grant for a period of ten years. The
option price equals the estimated fair value of the common stock as determined
by the board of directors on the date of the grant.

F-14
<PAGE> 72
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1996............. 1,103,704 $.21 - $.38 $.26
Granted.................................... 689,444 $.76 $.76
Exercised.................................. (51,852) $.21 - $.38 $.23
Canceled................................... (55,556) $.38 $.38
---------
Outstanding at December 31, 1997............. 1,685,740 $.21 - $.76 $.46
Granted.................................... 302,594 $.76 $.76
Exercised.................................. (21,913) $.21 - $.38 $.26
Canceled................................... (19,569) $.38 - $.76 $.60
---------
Outstanding at December 31, 1998............. 1,946,852 $.21 - $.76 $.50
Granted.................................... 1,000,074 $.76 $.76
Exercised.................................. (206,835) $.21 - $.76 $.44
Canceled................................... (254,288) $.38 - $.76 $.71
---------
Outstanding at December 31, 1999............. 2,485,803 $.21 - $.76 $.59
Granted.................................... 493,333 $.76 $.76
Exercised.................................. (147,219) $.20 - $.76 $.33
Canceled................................... (14,043) $.76 $.76
---------
Outstanding at March 31, 2000 (unaudited).... 2,817,874 $.20 - $.76 $.63
=========
</TABLE>

The following table summarizes information about options outstanding at December
31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED-
REMAINING WEIGHTED NUMBER AVERAGE
NUMBER CONTRACTUAL AVERAGE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE AND VESTED PRICE
----------------------- ----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.21 - $.76..................... 2,485,803 7.10 $.59 1,465,246 $.43
</TABLE>

Pro forma net loss information has been determined as if the Company had
accounted for its employee stock options under the fair value method prescribed
in SFAS No. 123. The fair value of these options was estimated at the date of
grant using the minimum value pricing model with the following weighted average
assumptions for 1997, 1998 and 1999: risk-free interest rate of 4.83%, 6.18% and
5.5%, respectively, zero dividend yield; and a weighted-average life of the
option of five years. The estimated weighted average fair value of stock options
granted during 1997, 1998 and 1999 was $.19, $.16 and $.17, respectively.

The minimum value pricing model is similar to the Black-Scholes option valuation
model which was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable, except that it
excludes the factor for volatility. In addition, option valuation models require
the input of highly subjective assumptions. Because the Company's 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 management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

F-15
<PAGE> 73
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the related options. The
Company's pro forma information follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Pro forma net loss......................... $(6,800,745) $(9,686,181) $(14,359,850)
=========== =========== ============
Net loss, as reported...................... $(6,752,300) $(9,623,503) $(14,283,743)
=========== =========== ============
Pro forma net loss per share, basic and
diluted.................................. $ (5.32) $ (7.22) $ (9.56)
=========== =========== ============
Net loss per share, basic and diluted, as
reported................................. $ (5.28) $ (7.17) $ (9.50)
=========== =========== ============
</TABLE>

In March 2000 the Board of Directors of the Company approved the 2000 Stock
Option Plan and 2000 Employee Stock Purchase Plan subject to approval of the
stockholders. Upon approval of the plan by the stockholders and upon completion
of an initial public offering, the 1993 Stock Option Plan will terminate, no
further grants will be made under the 1993 Stock Option Plan, and any shares
reserved but not issued under the 1993 Stock Option Plan will be available for
grant under the 2000 Stock Plan.

SHARES RESERVED FOR FUTURE ISSUANCE

The following shares of common stock are reserved for future issuance at
December 31, 1999:

<TABLE>
<S> <C>
Conversion Series A, B and C preferred stock................ 13,084,795
Exercise of Visionex Call Option Agreement.................. 2,458,787
Stock options:
Granted and outstanding................................... 2,485,803
Reserved for future grants................................ 662,345
Exercise of warrants........................................ 808,569
----------
19,500,299
==========
</TABLE>

DEFERRED COMPENSATION

During the year ended December 31, 1999 and the three months ended March 31,
2000, in connection with the grant of various stock options to employees, the
Company recorded deferred stock compensation totaling $3,538,485 and $3,535,413,
respectively, representing the difference between the exercise price and the
estimated market value of the Company's common stock as determined by the
Company's management on the date such stock options were granted. Deferred
compensation is included as a reduction of stockholders' equity and is being
amortized to expense over the vesting period of the options in accordance with
FASB Interpretation No. 28, which permits an accelerated amortization
methodology. During the year ended December 31, 1999 and the three months ended
March 31, 2000, the Company recorded amortization of deferred compensation
expense of $1,323,484 and $729,126, respectively. As of March 31, 2000, total
charges to be recognized in future periods from amortization of deferred stock
compensation are anticipated to be approximately $2,443,000, $1,615,000,
$746,000, $213,000 and $4,000 for the remaining nine months of 2000, and for the
years ended December 31, 2001, 2002, 2003, and 2004, respectively.

F-16
<PAGE> 74
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES

CLINICAL TRIAL AGREEMENTS

During 1998, the Company entered into several agreements with contract research
organizations to perform Phase II and III clinical trials in various countries.
Upon early termination, the Company is subject to a termination fee of
approximately $200,000 as defined in the agreements. The Company presently has
no intention of terminating the agreements. As of December 31, 1999, the Company
had approximately $3.7 million of future obligations relating to these projects.

LEASE COMMITMENTS

The Company leases its corporate and laboratory facilities and certain equipment
under various operating leases. As of December 31, 1999, the Company has made
approximately $236,000 in cash deposits related to both capital and operating
leases. Provisions of the facilities lease provide for abatement of rent during
certain periods and escalating rent payments during the term. For financial
reporting purposes, rent expense is recognized on a straight-line basis over the
term of the lease. Accordingly, rent expense recognized in excess of rent paid
is reflected as deferred rent. Additionally, the Company is required to pay
taxes, insurance and maintenance expenses related to the building. Rent expense
on the facilities and equipment during 1997, 1998, 1999 and the period February
13, 1992 (inception) through December 31, 1999 was $232,446, $288,462, $237,159
and $993,253, respectively.

Future annual minimum payments under operating and capital leases as of December
31, 1999 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING DECEMBER 31: LEASES LEASES
------------------------- --------- ---------
<S> <C> <C>
2000........................................................ $190,982 $ 267,791
2001........................................................ 156,748 15,567
2002........................................................ 38,420 --
2003........................................................ 12,009 --
-------- ---------
$398,159 283,358
========
Less amounts representing interest.......................... (17,646)
---------
Present value of future minimum lease payments.............. 265,712
Less current portion........................................ (250,306)
---------
Long-term obligation under capital lease.................... $ 15,406
=========
</TABLE>

PURCHASE COMMITMENTS

The Company entered into a long term supply agreement with a producer of
hyaluronidase in the United Kingdom. The supply agreement provides for the
United Kingdom manufacturer to supply, and the

F-17
<PAGE> 75
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company to purchase, certain minimum levels of hyaluronidase. At December 31,
1999, the approximate future purchase commitments under the supply agreement are
as follows:

6. INCOME TAXES

At December 31, 1999, the Company had federal and California income tax net
operating loss carryforwards of approximately $17,308,000 and $14,778,000,
respectively.

The federal tax loss carryforwards will begin to expire in 2007, unless
previously utilized. The California net operating loss will continue to expire
in 2000, unless previously utilized. The Company also has federal and California
research tax credit carryforwards of $1,468,000 and $860,000, respectively,
which will begin to expire in 2010 unless previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the
Company's net operating loss and credit carryforwards may be limited because of
cumulative changes in ownership of more than 50.0% which have occurred. However,
the Company does not believe such limitation will have a material impact upon
the utilization of these carryforwards.

Significant components of the Company's deferred tax assets are shown below. A
valuation allowance of $15,745,000 has been recognized to offset the deferred
tax assets, as realization of such assets is uncertain.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards....................... $ 1,624,000 $ 6,907,000
Research and development credits....................... 1,063,000 2,027,000
Capitalized research and development................... 2,712,000 4,505,000
Deferred revenue....................................... 2,037,000 2,037,000
Other, net............................................. -- 269,000
----------- ------------
Total deferred tax asset................................. 7,436,000 15,745,000
Deferred tax liability:
Other, net............................................. (137,000) --
----------- ------------
Net deferred tax assets.................................. 7,299,000 15,745,000
Valuation allowance for deferred tax assets.............. (7,299,000) (15,745,000)
----------- ------------
$ -- $ --
=========== ============
</TABLE>

7. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Savings Plan (the "Plan") covering substantially all
employees that have been employed for at least three months and meet certain age
requirements. Employees may contribute up to

F-18
<PAGE> 76
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLAN (CONTINUED)
15% of their compensation per year (subject to a maximum limit by federal tax
law). The Company does not provide matching contributions to the Plan.

8. VISIONEX AGREEMENTS AND ACQUISITION

In June 1997, the Company entered into a seven-year agreement with Visionex Pte.
Ltd. ("Visionex"), a Singapore corporation. The Company granted Visionex the
exclusive right to register, import, market, sell and distribute the Company's
products in East Asia (excluding Japan and Korea) in exchange for a license fee
paid by Visionex to the Company of $5,000,000. Upon the formation of Visionex,
the Company had no ownership interest in Visionex, but investors owning 87.3% of
ISTA also owned 62.5% of Visionex. At March 8, 2000, investors who owned 66% of
ISTA shares controlled 100% of Visionex shares. In addition, three of the five
board members of Visionex at December 31, 1999 are also board members of the
Company.

The Company also entered into a Call Option Agreement (the "Agreement") with
Visionex and its shareholders (the "Shareholders"), whereby the Company may
require the Shareholders to exchange their outstanding shares of Visionex stock
(the "Preference Shares") for the Company's stock (the "Call Option"). The
Visionex Preference Shares would have been exchanged for a range dependent upon
the annual revenues of Visionex, as defined in the Agreement, of 1,668,662 up to
2,458,786 shares of the Company's common stock, or, if the Company has not yet
successfully completed an initial public offering, Series C preferred stock. The
Call Option could have been exercised by the Company anytime during the two-year
period beginning June 27, 2000, but could have been deferred for a period of up
to two years by a majority of the holders of the Preference Shares.

The Agreement also provided for a put option whereby each of the Visionex
Shareholders may require the Company to purchase the outstanding Preference
Shares held by such shareholder. The per share purchase price to be paid by the
Company under the put option is 0.1689 shares of the Company's common stock, or,
if the Company has not yet successfully completed an initial public offering,
Series C preferred stock (up to a maximum of 2,252,694 shares). The put option
was exercisable anytime in the three-year period beginning June 27, 1999.

The Company's financial statements through December 31, 1999 do not include the
assets, liabilities, or results of operations of Visionex due to the Company's
lack of ownership interest in Visionex and lack of control of the operations of
Visionex during such period. Due to the existence of the put option, the $5
million license fee received from Visionex was recorded as a liability.

On March 8, 2000, the Company issued 3,319,363 shares of Series C preferred
stock to acquire all of the outstanding capital stock of Visionex, which is
convertible into 2,458,787 shares of common stock. The assets of Visionex
consisted primarily of cash of approximately $4.4 million and the product rights
originally acquired from the Company by Visionex. The tangible assets were
valued at Visionex's carrying value, which approximates fair value. The Company
recorded no value for such intangible assets since (i) Visionex had not made any
substantial progress in commercializing the products since it had originally
acquired them, and (ii) the intangible assets had originally been acquired from
the Company, and (iii) the Company had no historical cost basis in the assets
prior to the transfer of them to Visionex. The liability related to the license
fee received from Visionex was extinguished and transferred to equity.
Accordingly, the Company recorded a deemed dividend of $19.2 million in the
first quarter of 2000 for the excess of the value of the shares issued over the
net tangible assets acquired.

F-19
<PAGE> 77
ISTA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. VISIONEX AGREEMENTS AND ACQUISITION (CONTINUED)
Had the acquisition of Visionex occurred on January 1, 1999, the Company's
unaudited pro forma combined net loss and net loss per share for 1999 would have
been $14,260,367 and $1.46, respectively, excluding the deemed dividend.

9. GEOGRAPHIC INFORMATION

During 1999, the Company purchased certain laboratory and production equipment
for use in Mexico and the United Kingdom. Laboratory and production equipment
located in these areas totaled $278,722 and $385,475 at December 31, 1998 and
1999, respectively.

The Company also has certain obligations denoted in foreign currency relating to
clinical trials in Mexico, the United Kingdom, Poland, Germany, and the
Netherlands. At December 31, 1998 and 1999 these obligations totaled $58,201 and
$74,544, respectively.

10. SUBSEQUENT EVENTS

In March 2000, the Company entered into a license agreement with Allergan, under
which Allergan will be responsible for the marketing, sale and distribution of
Vitrase in the United States and all international markets, except Mexico and
Japan. Under a related supply agreement, ISTA will supply all of Allergan's
requirements of Vitrase at a fixed price per unit subject to certain future
adjustments. The term of the license is ten full calendar years after the date
of the first commercial sale. Profits on the sale of Vitrase in the United
States will be split on a 50/50 basis between Allergan and the Company. The
Company is responsible for all costs of product development, preclinical studies
and clinical trials of Vitrase and may receive up to $35.0 million in payments
from Allergan upon the achievement of specified regulatory and development
objectives.

The Company issued 1,776,199 shares of Series D preferred stock to Allergan at
$5.63 per share for proceeds of approximately $10.0 million. These shares are
convertible into common stock upon an initial public offering based on a
conversion ratio determined by and approximating the initial public offering
price or at any time after September 30, 2000 based on a specified rate. The
preferred shares shall be entitled to a dividend of $0.45 per share when and if
declared by the board of directors.

In connection with the Company's license agreement with Allergan, the Company
expects to enter into a credit agreement with Allergan which will provide for up
to $10.0 million to be used for Vitrase specific development expenses. The
aggregate amount of this credit line may increase by $2.5 million upon the
filing of a New Drug Application for Vitrase by the Company. The credit
agreement will be terminated if the registration statement covering the
Company's initial public offering is declared effective by the Securities and
Exchange Commission prior to September 30, 2000.

F-20
<PAGE> 78

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Visionex Pte. Ltd.

We have audited the accompanying balance sheets of Visionex Pte. Ltd. (a
development stage company) as of December 31, 1998 and 1999 and the related
statements of operations, stockholders' equity and cash flows for the period May
24, 1997 (inception) through December 31, 1997, the years ended December 31,
1998 and 1999, and the period May 24, 1997 (inception) through December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Visionex Pte. Ltd. (a
development stage company) at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period May 24, 1997 (inception) through
December 31, 1997, the years ended December 31, 1998 and 1999, and the period
May 24, 1997 (inception) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

San Diego, California
March 8, 2000

F-21
<PAGE> 79

VISIONEX PTE. LTD.
(a development stage company)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,416,932 $ 4,369,960
Receivable from related party............................. -- 78,750
----------- -----------
Total current assets................................... 4,416,932 4,448,710
Property and equipment, net................................. 22,600 12,755
Licensed technology, net.................................. 3,928,571 3,214,286
Other assets.............................................. 13,703 16,747
----------- -----------
$ 8,381,806 $ 7,692,498
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 23,790 $ 33,731
----------- -----------
Total current liabilities.............................. 23,790 33,731
Commitments
Stockholders' equity:
Convertible preference shares, $.07 par value; 12,000,000
shares authorized in 1998 and 1999; 10,666,717 shares
issued and outstanding in 1998 and 1999................ 745,920 745,920
Ordinary shares, no par value, 8,000,000 shares authorized
and 20 shares issued and outstanding in 1998 and
1999................................................... 2 2
Additional paid-in capital................................ 9,920,746 9,920,746
Accumulated other comprehensive loss...................... (1,025,447) (1,033,787)
Deficit accumulated during the development stage.......... (1,283,205) (1,974,114)
----------- -----------
Total stockholders' equity............................. 8,358,016 7,658,767
----------- -----------
Total liabilities and stockholders' equity............. $ 8,381,806 $ 7,692,498
=========== ===========
</TABLE>

See accompanying notes.
F-22
<PAGE> 80

VISIONEX PTE. LTD.
(a development stage company)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM MAY 24, FROM MAY 24,
1997 (INCEPTION) YEARS ENDED 1997 (INCEPTION)
THROUGH DECEMBER 31, THROUGH
DECEMBER 31, ------------------------ DECEMBER 31,
1997 1998 1999 1999
---------------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
Costs and expenses:
Amortization of licensed
technology..................... $ 357,143 $ 714,286 $ 714,285 $ 1,785,714
Research and development.......... 4,475 57,308 32,404 94,187
General and administrative........ 102,785 256,406 153,681 512,872
--------- ----------- --------- -----------
Total costs and expenses....... 464,403 1,028,000 900,370 2,392,773
--------- ----------- --------- -----------
Loss from operations................ (464,403) (1,028,000) (900,370) (2,392,773)
Interest income..................... 179 209,019 209,461 418,659
--------- ----------- --------- -----------
Net loss............................ $(464,224) $ (818,981) $(690,909) $(1,974,114)
========= =========== ========= ===========
</TABLE>

See accompanying notes.
F-23
<PAGE> 81

VISIONEX PTE. LTD.
(a development stage company)

STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM MAY 24, 1997 (INCEPTION) THROUGH DECEMBER 31, 1999

<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED ACCUMULATED
PREFERENCE SHARES ORDINARY SHARES ADDITIONAL OTHER DURING THE TOTAL
--------------------- --------------- PAID-IN COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS STAGE EQUITY
---------- -------- ------ ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Convertible
Preference shares for
cash................... 10,666,717 $745,920 -- $-- $9,920,746 $ -- $ -- $10,666,666
Issuance of ordinary
shares for cash........ -- -- 20 2 -- -- -- 2
Net loss................. -- -- -- -- -- -- (464,224) (464,224)
Foreign currency
translation
adjustment............. -- -- -- -- -- (838,807) -- (838,807)
-----------
Comprehensive loss....... -- -- -- -- -- -- -- (1,303,031)
---------- -------- -- -- ---------- ----------- ----------- -----------
Balance at December 31,
1997..................... 10,666,717 745,920 20 2 9,920,746 (838,807) (464,224) 9,363,637
Net loss................. -- -- -- -- -- -- (818,981) (818,981)
Foreign currency
translation
adjustment............. -- -- -- -- -- (186,640) -- (186,640)
-----------
Comprehensive loss....... -- -- -- -- -- -- -- (1,005,621)
---------- -------- -- -- ---------- ----------- ----------- -----------
Balance at December 31,
1998..................... 10,666,717 745,920 20 2 9,920,746 (1,025,447) (1,283,205) 8,358,016
Net loss................. -- -- -- -- -- -- (690,909) (690,909)
Foreign currency
translation
adjustment............. -- -- -- -- -- (8,340) -- (8,340)
-----------
Comprehensive loss....... -- -- -- -- -- -- -- (699,249)
---------- -------- -- -- ---------- ----------- ----------- -----------
Balance at December 31,
1999..................... 10,666,717 $745,920 20 $2 $9,920,746 $(1,033,787) $(1,974,114) $ 7,658,767
========== ======== == == ========== =========== =========== ===========
</TABLE>

See accompanying notes.
F-24
<PAGE> 82

VISIONEX PTE. LTD.
(a development stage company)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM MAY 24, FROM MAY 24,
1997 1997
(INCEPTION) YEARS ENDED (INCEPTION)
THROUGH DECEMBER 31, THROUGH
DECEMBER 31, ----------------------- DECEMBER 31,
1997 1998 1999 1999
---------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................ $ (464,224) $ (818,981) $ (690,909) $(1,974,114)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of licensed technology... 357,143 714,286 714,285 1,785,714
Depreciation and amortization......... -- 4,892 9,845 14,737
Changes in operating assets and
liabilities:
Receivable from related party...... -- -- (78,750) (78,750)
Other assets....................... (17,534) 3,831 (3,044) (16,747)
Accounts payable................... 26,812 (3,022) 9,941 33,731
----------- ---------- ---------- -----------
Net cash used in operating
activities.................... (97,803) (98,994) (38,632) (235,429)
INVESTING ACTIVITIES
Purchases of property and equipment..... -- (27,492) -- (27,492)
License fee paid to ISTA
Pharmaceuticals....................... (5,000,000) -- -- (5,000,000)
----------- ---------- ---------- -----------
Net cash used in investing
activities.................... (5,000,000) (27,492) -- (5,027,492)
FINANCING ACTIVITIES
Proceeds from issuance of preference
shares................................ 10,666,666 -- -- 10,666,666
Proceeds from issuance of ordinary
shares................................ 2 -- -- 2
----------- ---------- ---------- -----------
Net cash provided by financing
activities.................... 10,666,668 -- -- 10,666,668
EFFECT OF EXCHANGE RATE CHANGES ON
CASH.................................. (838,807) (186,640) (8,340) (1,033,787)
Increase (decrease) in cash and cash
equivalents........................... 4,730,058 (313,126) (46,972) 4,369,960
Cash and cash equivalents at beginning
of period............................. -- 4,730,058 4,416,932 --
----------- ---------- ---------- -----------
Cash and cash equivalents at end of
period................................ $ 4,730,058 $4,416,932 $4,369,960 $ 4,369,960
=========== ========== ========== ===========
</TABLE>

See accompanying notes.
F-25
<PAGE> 83

VISIONEX PTE. LTD.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Visionex Pte. Ltd. ("Visionex"), was incorporated in Singapore on May 24, 1997
to develop and commercialize therapeutic ophthalmic drugs and non-surgical
vision correction systems and to manufacture and distribute such systems and
products.

All of the outstanding shares of Visionex are owned by investors who are also
investors in ISTA Pharmaceuticals, Inc., however Visionex management does not
believe that Visionex and ISTA were under common control during the periods
presented.

On March 8, 2000, all of the outstanding preference and ordinary shares of
Visionex were acquired by ISTA Pharmaceuticals, Inc. through the exchange of
3,319,363 shares of its Series C preferred stock.

CASH AND CASH EQUIVALENTS

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Equipment and furniture are
depreciated using the straight-line method over their estimated useful lives
(generally 3 to 5 years) and leasehold improvements are amortized using the
straight-line method over the useful life of the asset or the lease term,
whichever is shorter.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, if indicators of impairment
exist, Visionex assesses the recoverability of the affected long-lived assets by
determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, Visionex
measures the amount of such impairment by comparing the cash flows associated
with the use of the asset. While Visionex's current and historical operating and
cash flow losses are indicators of impairment, Visionex believes the future cash
flows to be received from the long-lived assets will exceed the assets' carrying
value, and accordingly Visionex has not recognized any impairment losses through
December 31, 1999.

F-26
<PAGE> 84
VISIONEX PTE. LTD.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT

Expenditures relating to research and development are expensed in the period
incurred.

USE OF ESTIMATES

FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires unrealized gains or losses on the Company's cash,
and cash equivalents and available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income (loss).

The financial statements of the Company are measured using the Singapore Dollar
(SGD) as the functional currency. Assets and liabilities of the Company have
been translated into U.S. dollars at the rates of exchange at the balance sheet
date. Income and expense items have been translated into U.S. dollars at the
average daily rate of exchange during the reporting period. The resulting
translation adjustments are included as a separate component of other
comprehensive income (loss).

Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses that are
reflected in income as unrealized (based on period-end transactions) or realized
upon settlement of the transactions. The Company incurred a transaction
gain/(loss) of $21,986, $(2,757) and $549 during 1997, 1998 and 1999,
respectively.

INCOME TAXES

Total tax expense to the Singapore government amounted to $10,000 for the year
ended December 31, 1999 and for the period from May 24, 1997 (inception) through
December 31, 1999. The Company is not subject to and is not required to pay U.S.
federal income taxes.

F-27
<PAGE> 85
VISIONEX PTE. LTD.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

2. BALANCE SHEET DETAILS

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements and related accumulated depreciation and
amortization are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Property and equipment:
Computer equipment........................................ $ 7,308 $ 7,308
Leasehold improvements.................................... 20,184 20,184
------- --------
27,492 27,492
Less accumulated depreciation and amortization.............. (4,892) (14,737)
------- --------
$22,600 $ 12,755
======= ========
</TABLE>

Total depreciation and amortization expense amounted to $9,845, $4,892 and
$14,737 for the years ended December 31, 1998 and 1999 and for the period from
May 24, 1997 (inception) through December 31, 1999, respectively. There was no
depreciation or amortization expense for the period from May 24, 1997
(inception) through December 31, 1997. All property and equipment is located at
the Company's Singapore operating location.

3. STOCKHOLDERS' EQUITY

PREFERENCE SHARES

Each preference share shall be entitled to one vote. The preference shares are
not redeemable by Visionex. In the event of the liquidation of Visionex, the
holders of preference shares shall have priority in the repayment of capital
(based on the issue price) over holders of ordinary shares with respect to any
net proceeds from liquidation of Visionex after payments to all the creditors of
Visionex, whether secured or unsecured.

The preference shares are convertible into one ordinary share at the option of
the holders. The preference shares shall be automatically converted into
ordinary shares at the conversion ratio in the event not less than 75% of the
holders of the issued and outstanding preference shares consent in writing to
such conversion or resolve by way of a special resolution at a duly convened
meeting of the preference shareholders, approving such a conversion.

4. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company leases primarily consist of a facility lease. Rent expense on the
facility lease during 1998, 1999 and the period from inception (May 24, 1997)
through December 31, 1999 was $33,268, $43,750 and $77,018, respectively. There
was no rent expense for the period May 24, 1997 (inception) through December 31,
1997.

F-28
<PAGE> 86
VISIONEX PTE. LTD.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future annual minimum payments under the operating leases as of December 31,
1999 are as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: OPERATING LEASES
------------------------- ----------------
<S> <C>
2000........................................................ $51,636
2001........................................................ 6,071
2002........................................................ 1,804
2003........................................................ 1,022
-------
$60,533
=======
</TABLE>

RESEARCH AND CAPITAL EXPENDITURE COMMITMENTS

In 1998, Visionex entered into an agreement with the Economic Development Board
of Singapore. Under the agreement, the company committed to implement a research
project requiring aggregate expenditures of $3.0 million in capital equipment
and $2.3 million in operating costs, preliminarily budgeted to be incurred as
follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1999........................................................ $1,040,000
2000........................................................ $2,460,000
2001........................................................ $ 680,000
2002........................................................ $1,100,000
</TABLE>

This commitment was made as consideration for the abatement of a transfer tax of
up to $1.0 million which would otherwise have been payable to the Singapore
government on the license of technology from ISTA in 1997. Through December 31,
1999, Visionex has not met the operating expenditure plans as set forth in the
agreement, and ISTA management is not currently planning to meet the expenditure
plans for 2000 through 2002. The Economic Development Board has accepted a
suspension of the original project, but has not formally approved a termination
of the Company's remaining research and capital expenditure commitment.

F-29
<PAGE> 87

ISTA PHARMACEUTICALS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

INTRODUCTION

ISTA Pharmaceuticals ("ISTA") entered into a stock purchase agreement with
Visionex Pte. Ltd. ("Visionex"), which was consummated on March 8, 2000.

The unaudited pro forma combined statements of operations which follow have been
prepared by ISTA based upon the historical financial statements of ISTA and
Visionex, and may not be indicative of the results that may have actually
occurred if the combination had been in effect on the date indicated or for the
periods presented or that may be obtained in the future. The pro forma combined
condensed financial statements should be read in conjunction with the audited
financial statements and notes of ISTA and Visionex included elsewhere in the
Prospectus.

The unaudited pro forma combined condensed statements of operations for the year
ended December 31, 1999 and three months ended March 31, 2000 assume the
purchase of Visionex had been consummated on January 1, 1999. The pro forma
information is based on the historical financial statements of ISTA and Visionex
giving effect to the transaction under the purchase method of accounting and the
assumption and adjustments in the accompanying footnotes.

F-30
<PAGE> 88

ISTA PHARMACEUTICALS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
TOTAL
PRO FORMA COMBINED
ISTA VISIONEX ADJUSTMENTS RESULTS
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Costs and expenses:
Research and development........... $ 11,061,278 $ 746,689 $(714,285)(a) $ 11,093,682
General and administrative......... 3,240,286 153,681 -- 3,393,967
------------ --------- --------- ------------
Total costs and expenses........ 14,301,564 900,370 (714,285) 14,487,649
------------ --------- --------- ------------
Loss from operations................. (14,301,564) (900,370) 714,285 (14,487,649)
Interest income...................... 69,399 209,461 -- 278,860
Interest expense..................... (51,578) -- -- (51,578)
------------ --------- --------- ------------
Net loss............................. $(14,283,743) $(690,909) $ 714,285 $(14,260,367)
============ ========= ========= ============
Pro forma net loss per common share
(basic and diluted)................ $ (1.46)
============
Shares used in the computation of pro
forma net loss per common share
(basic and diluted)................ 9,791,487(b)
============
</TABLE>

(a) Eliminates the 1999 amortization of the $5,000,000 license fee originally
acquired by Visionex from ISTA in 1997.

(b) Includes (i) the weighted average common shares of ISTA during 1999, (ii)
ISTA's convertible preferred stock outstanding as of December 31, 1999,
using the as-if converted method from the original date of issuance, and
(iii) the 3,319,363 shares of Series C preferred stock issued by ISTA in
March 2000 to acquire Visionex, as if such shares had been issued on January
1, 1999 and converted into 2,458,787 shares of common stock at that date.

See accompanying notes to unaudited pro forma combined condensed financial
statements.

F-31
<PAGE> 89

ISTA PHARMACEUTICALS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
TOTAL
PRO FORMA COMBINED
ISTA VISIONEX ADJUSTMENTS RESULTS
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Costs and expenses:
Research and development........... $ 3,000,870 $ 200,561 $(178,571)(c) $ 3,022,860
General and administrative......... 1,456,034 43,979 -- 1,500,013
------------ --------- --------- ------------
Total costs and expenses........ 4,456,904 244,540 (178,571) 4,522,873
------------ --------- --------- ------------
Loss from operations................. (4,456,904) (244,540) 178,571 (4,522,873)
Interest income...................... 7,613 45,962 -- 53,575
Interest expense..................... (86,532) -- -- (86,532)
------------ --------- --------- ------------
Net loss............................. (4,535,823) (198,578) 178,571 $ (4,555,830)
Deemed dividend for preferred
shareholders....................... 19,244,567 -- -- 19,244,567
Net loss attributable to common
shareholders....................... $(23,780,390) $(198,578) $ 178,571 (23,800,397)
============ ========= ========= ============
Pro forma net loss per common share
(basic and diluted)................ $ (2.28)
============
Shares used in the computation of pro
forma net loss per common share
(basic and diluted)................ 10,445,913(d)
============
</TABLE>

(c) Eliminates the first quarter 2000 amortization of the $5,000,000 license fee
originally acquired by Visionex from ISTA in 1997.

(d) Includes (i) the weighted average common shares of ISTA during the three
months ended March 31, 2000, (ii) ISTA's convertible preferred stock
outstanding as of March 31, 2000, using the as-if converted method from the
original date of issuance, and (iii) the 3,319,363 shares of Series C
preferred stock issued by ISTA in March 2000 to acquire Visionex, as if such
shares had been issued on January 1, 2000 and converted into 2,458,787
shares of common stock at that date.

See accompanying notes to unaudited pro forma combined condensed financial
statements.

F-32
<PAGE> 90

[INSIDE BACK COVER]
<PAGE> 91

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

[ISTA PHARMACEUTICALS LOGO]

ISTA PHARMACEUTICALS, INC.

4,500,000 SHARES

COMMON STOCK

---------------------------
PROSPECTUS
---------------------------

, 2000

CIBC WORLD MARKETS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
THOMAS WEISEL PARTNERS LLC

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.

UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 92

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all fees and expenses payable by ISTA in
connection with the registration of the common stock hereunder. All of the
amounts shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.

<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC Registration Fee........................................ $ 22,770
NASD Filing Fee............................................. 9,125
Nasdaq National Market Listing Fee.......................... 90,000
Printing and Engraving Expenses............................. 200,000
Legal Fees and Expenses..................................... 350,000
Accounting Fees and Expenses................................ 250,000
Transfer Agent and Registrar Fees and Expenses.............. 25,000
Blue Sky fees and expenses.................................. 10,000
Miscellaneous Expenses...................................... 233,105
----------
Total.................................................. $1,190,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. We will also enter into agreements with our directors and executive
officers that require ISTA, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors and executive officers to the fullest extent permitted by Delaware
law. We have also purchased directors and officers liability insurance, which
provides coverage against certain liabilities, including liabilities under the
Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) Within the last three years, and through December 31, 1999, we have issued
and sold the following unregistered securities:

(1) Since inception, the registrant has granted options to purchase
4,406,600 shares of common stock to employees, directors and consultants
under its 1993 stock plan at exercise prices ranging from $0.15 to $0.56
per share. Of the 4,406,600 options granted, 3,400,834 remain outstanding,
558,811 shares of common stock have been purchased pursuant to exercises of
options and 446,955 options have been canceled and returned to the 1993
stock plan.

(2) From June 1997 to March 2000, the registrant sold 6,528,269 shares
of Series C preferred stock and 1,153,877 warrants to purchase common stock
to 42 investors at a purchase price of $5.63 for each share of Series C
preferred stock and $0.001 for each warrant.

(3) In March 2000, the registrant sold 1,776,199 shares of Series D
preferred stock to one investor at a purchase price of $5.63 per share.

The sales and issuances of securities in the transactions described above were
deemed to be exempt from registration under the Securities Act in reliance upon
Rule 506 of Regulation D of the Securities Act or Rule 701 promulgated under
Section 3(b) of the Securities Act, as transactions by an issuer not involving

II-1
<PAGE> 93

any public offering or transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients of
securities in each transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
securities issued in such transactions. All recipients had adequate access,
through their relationship with ISTA, to information about us.

(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation, currently in
effect
3.2* Form of Amended and Restated Certificate of Incorporation
(to be filed with the Delaware Secretary of state prior to
the closing of the offering covered by this Registration
Statement)
3.3* Certificate of Incorporation to be effective prior to
completion of the offering
3.4* Bylaws of the registrant, as in effect upon filing of the
registration statement
3.5* Bylaws of the registrant, to be effective prior to
completion of the offering
4.1* Specimen common stock certificate
5.1* Form of opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation
10.1* Amended and Restated Investors Rights Agreement dated as of
March 29, 2000
10.2* 1993 Stock Plan and forms of agreements thereunder
10.3* 2000 Stock Plan and forms of agreements thereunder
10.4* 2000 Employee Stock Purchase Plan
10.5* Form of Indemnification Agreement with executive officers
and directors
10.6* Clinical Development Agreement between Covance, Inc. and the
registrant dated as of October 20, 1998, as amended
10.7* Agreement between CroMedica Global Inc. and the registrant
as of September 8, 1998
10.8* Agreement between CroMedica Global Inc. and the registrant
as of May 19, 1999
10.9* Lease between the registrant and Aetna Life Insurance
Company dated September 13, 1996 for leased premises located
at Suite 100, 15279 Alton Parkway, Irvine, California
10.10* Lease between the registrant and Aseguradora Mexicana, S.A.
dated December 30, 1993 for leased premises located at Paseo
de los Heroes No. 10, 105 in the development known as
"Desarrollo Urbano del Rio Tijuana" in Tijuana, B.C., Mexico
10.11* Equipment Financing Agreement between Lease Management
Services, Inc. and the registrant as of October 7, 1996, as
amended
10.12* Agreement between Visionex Pte. Ltd. and the registrant as
of June 1997
10.13* Distributor agreement between Laboratories Sophia S.A. de
C.V. and the registrant as of April 23, 1998
10.14* Manufacture and Supply Agreement between Prima Pharm, Inc.
and the registrant as of December 19, 1996
10.15* Supply Agreement between Biozyme Laboratories, Ltd. and the
registrant as of September 23, 1999
10.16*++ License Agreement between Allergan Sales, Inc., Allergan
Sales, Ltd. and the registrant as of March 29, 2000
10.17*++ Supply Agreement between Allergan Sales, Inc., Allergan
Sales, Ltd. and the registrant as of March 29, 2000
10.18* Series D Preferred Stock Purchase Agreement between Allergan
Pharmaceuticals (Ireland) Ltd., Inc. and registrant, dated
as of March 29, 2000
10.19* Call Option Agreement between Visionex Pte. Ltd. and the
registrant as of June 27, 1997
</TABLE>

II-2
<PAGE> 94

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
21.1* Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1* Power of Attorney (included on signature page)
24.2* Power of Attorney
27.1* Financial Data Schedule
</TABLE>

-------------------------
* Previously filed.

++ Confidential treatment requested.

(b) FINANCIAL STATEMENT SCHEDULES

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, or are inapplicable, and therefore have been omitted.

ITEM 17. UNDERTAKINGS

Insofar as indemnification by ISTA for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of ISTA, we
have been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by ISTA of
expenses incurred or paid by a director, officer or controlling person of ISTA
in the successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by ISTA is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

We hereby undertake that:

(a) We will provide to the underwriters at the closing as specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

(b) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by ISTA pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.

(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 95

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, ISTA
Pharmaceuticals, Inc. has duly caused this Amendment No. 5 to the Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irvine, State of California, on the 9th day of
August, 2000.

ISTA PHARMACEUTICALS, INC.

By: /s/ J. C. MACRAE
------------------------------------
J. C. MacRae
Executive Vice President,
Chief Operating Officer, Chief
Financial Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 5 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities indicated on the 9th day of August, 2000.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ EDWARD H. DANSE* Chief Executive Officer,
----------------------------------------------------- Director (Principal Executive
Edward H. Danse Officer)

/s/ J. C. MACRAE Executive Vice President,
----------------------------------------------------- Chief Operating Officer,
J. C. MacRae Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ ROBERT G. MCNEIL* Chairman of the Board
-----------------------------------------------------
Robert G. McNeil

/s/ DAVID E. COLLINS*
-----------------------------------------------------
David E. Collins

/s/ BRIAN H. DOVEY* Director
-----------------------------------------------------
Brian H. Dovey

/s/ GEORGE M. LASEZKAY* Director
-----------------------------------------------------
George M. Lasezkay

/s/ CHARLES H. MAY* Director
-----------------------------------------------------
Charles H. May

/s/ BENJAMIN F. MCGRAW III* Director
-----------------------------------------------------
Benjamin F. McGraw III

/s/ JOHN H. PARRISH* Director
-----------------------------------------------------
John H. Parrish

/s/ WAYNE I. ROE* Director
-----------------------------------------------------
Wayne I. Roe

*By: /s/ J. C. MACRAE
-------------------------------------------------
J. C. MacRae
Attorney-in-fact
</TABLE>

II-4
<PAGE> 96

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation, currently in
effect
3.2* Form of Amended and Restated Certificate of Incorporation
(to be filed with the Delaware Secretary of State prior to
the closing of the offering covered by this Registration
Statement)
3.3* Certificate of Incorporation to be effective prior to
completion of the offering
3.4* Bylaws of the registrant, as in effect upon filing of the
registration statement
3.5* Bylaws of the registrant, to be effective prior to
completion of the offering
4.1* Specimen common stock certificate
5.1* Form of opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation
10.1* Amended and Restated Investors Rights Agreement dated as of
March 29, 2000
10.2* 1993 Stock Plan and forms of agreements thereunder
10.3* 2000 Stock Plan and forms of agreements thereunder
10.4* 2000 Employee Stock Purchase Plan
10.5* Form of Indemnification Agreement with executive officers
and directors
10.6* Clinical Development Agreement between Covance, Inc. and the
registrant dated as of October 20, 1998, as amended
10.7* Agreement between CroMedica Global Inc. and the registrant
as of September 8, 1998
10.8* Agreement between CroMedica Global Inc. and the registrant
as of May 19, 1999
10.9* Lease between the registrant and Aetna Life Insurance
Company dated September 13, 1996 for leased premises located
at Suite 100, 15279 Alton Parkway, Irvine, California
10.10* Lease between the registrant and Aseguradora Mexicana, S.A.
dated December 30, 1993 for leased premises located at Paseo
de los Heroes No. 10, 105 in the development known as
"Desarrollo Urbano del Rio Tijuana" in Tijuana, B.C., Mexico
10.11* Equipment Financing Agreement between Lease Management
Services, Inc. and the registrant as of October 7, 1996, as
amended
10.12* Agreement between Visionex Pte. Ltd. and the registrant as
of June 1997
10.13* Distributor agreement between Laboratories Sophia S.A. de
C.V. and the registrant as of April 23, 1998
10.14* Manufacture and Supply Agreement between Prima Pharm, Inc.
and the registrant as of December 19, 1996
10.15* Supply Agreement between Biozyme Laboratories, Ltd. and the
registrant as of September 23, 1999
10.16*++ License Agreement between Allergan Sales, Inc., Allergan
Sales, Ltd. and the registrant as of March 29, 2000
10.17*++ Supply Agreement between Allergan Sales, Inc., Allergan
Sales, Ltd. and the registrant as of March 29, 2000
10.18* Series D Preferred Stock Purchase Agreement between Allergan
Pharmaceuticals (Ireland) Ltd., Inc. and registrant, dated
as of March 29, 2000
10.19* Call Option Agreement between Visionex Pte. Ltd. and the
registrant as of June 27, 1997
21.1* Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1* Power of Attorney (included on signature page)
24.2* Power of Attorney
27.1* Financial Data Schedule
</TABLE>

-------------------------
* Previously filed.

++ Confidential treatment requested.

II-5