Ecabet Sodium:

We are developing ecabet sodium as a prescription eye drop for the treatment of dry eye syndrome. Ecabet sodium represents a new class of molecules that increases the quantity and quality of mucin produced by conjunctival goblet cells and corneal epithelia. Mucin is a glycoprotein component of tear film that lubricates while retarding moisture loss from tear evaporation. Ecabet sodium is currently marketed in Japan as an oral agent for treatment of gastric ulcers and gastritis. In November 2004, we acquired U.S. marketing rights to ecabet sodium for the treatment of dry eye syndrome under a license agreement with Senju.

Dry Eye Syndrome:
According to the National Eye Institute, dry eye syndrome (keratoconjunctivities sicca or KCS) is defined as a disorder of the tear film due to the tear deficiency or excessive tear evaporation which causes damage to the interpalpebral (the exposed area between the upper and lower eye lids) ocular surface and is associated with symptoms of ocular discomfort. Dry eye syndrome has been linked with a number of factors, including age, hormonal changes, ocular disease, medications that disrupt tear secretion or blinking, and autoimmune diseases such as lupus and rheumatoid arthritis. In severe cases of dry eye syndrome, scarring develops that may lead to blindness.

Market opportunity:
Based on data compiled from various publicly available sources, annual sales in the U.S. prescription dry eye market were approximately $260 million in 2006.

Clinical/Regulatory status:
In May 2007, we announced positive results from the preliminary analysis of the Company's Phase IIb clinical study of ecabet sodium, which is being developed as a treatment for dry eye syndrome. Patients in the ecabet sodium group achieved a strong trend in the objective sign of blink rate. In addition, patients in the ecabet sodium group reported a strong trend in the Ocular Symptom Disease Index (OSDI) and a positive trend in the subjective assessment of patients' most bothersome symptom. Strong and positive trends are used to confirm observations from previous clinical ecabet sodium studies and to serve as indicators of potential efficacy endpoints in Phase III studies. While our Phase IIb study was not powered to show statistical significance, ecabet sodium did achieve statistical significance in the OSDI assessment. There were no reports of serious ocular adverse events compared with placebo. Pending further analyses of the Phase IIb study results we plan to initiate Phase III studies in 2008.

During the third quarter of 2006, Ista initiated a 100 patient Phase IIb confirmatory study designed to finalize the entry criteria and other clinical parameters for future registration studies. This study is nearing completion, with results expected during the first half of 2007. Based on these results, we will decide whether to proceed with Phase III studies of ecabet sodium as a prescription eye drop for the treatment of dry eye syndrome.