UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Mark One

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

MARCH 31, 2012 FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2011~~2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: ~~000~~001-~~31255~~35396

ISTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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

50 Technology Drive, Irvine, California 92618

(Address of principal executive offices)

(949) 788-6000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ¨ Accelerated filer ¨x Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of ~~September~~March 3031, ~~2011~~2012 was 41,~~501~~906,~~397~~005.

TABLE OF CONTENTS

		Page No
PART I FINANCIAL INFORMATION (unaudited)
PART I. FINANCIAL INFORMATION (unaudited)			3
Item 1	Financial Statements	3
Item 1.	Financial Statements		3
	Condensed Balance Sheets—September 30, 2011 and December 31, 2010	3
	Condensed Balance Sheets—March 31, 2012 and December 31, 2011		3
	Condensed Statements of Operations—Three and Nine months ended September 30, 2011 and 2010	4
	Condensed Statements of Operations and Comprehensive Income—Three Months Ended March 31, 2012 and 2011		4
	Condensed Statement of Stockholders’ Deficit—Nine months ended September 30, 2011	5
	Condensed Statements of Cash Flows—Three Months Ended March 31, 2012 and 2011		5
	Condensed Statements of Cash Flows—Nine months ended September 30, 2011 and 2010	6
	Notes to Condensed Financial Statements		6
	Notes to Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		26
Item 3	Quantitative and Qualitative Disclosure About Market Risk	28
Item 4.	Controls and Procedures		26
Item 4	Controls and Procedures	28
PART II. OTHER INFORMATION			27
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 1	Legal Proceedings	29
Item 6.	Exhibits		29
Item 1A	Risk Factors	29
	Signatures		30
Item 6	Exhibits	30
	Index to Exhibits		31
	Signatures	31
	Index to Exhibits	32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ISTA PHARMACEUTICALS, INC.

Condensed Balance Sheets

(in thousands, except per share data)

(unaudited)

	September 30,2011			December 31,2010
	March 31,2012			December 31,2011
ASSETS
Current assets:
Cash and cash equivalents	$	5153,~~861~~692		$	7871,~~777~~593
Accounts receivable, net of allowances of $0 and $1 for September 30, 2011 and December 31, 2010, respectively		61,442			33,497
Accounts receivable, net of allowances of $1 for March 31, 2012 and December 31, 2011, respectively		45,329			56,364
Inventory, net of allowances of $966 and $1,275 for September 30, 2011 and December 31, 2010, respectively		6,267			6,130
Inventory, net of allowance of $1,280 and $1,076 for March 31, 2012 and December 31, 2011, respectively		7,268			6,718
Other current assets		5,~~803~~829			35,~~454~~444
Total current assets		~~125~~112,~~373~~118			~~121~~140,~~858~~119
Property and equipment, net		10,~~403~~029			10,~~352~~137
Deferred financing costs, net		~~1,135~~759			~~1,885~~947
Deposits and other assets		~~586~~1,830			~~145~~1,888
Total assets	$	~~137~~124,~~497~~736		$	~~134~~153,~~240~~091
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	7,~~701~~391		$	4,~~158~~564
Accrued compensation and related expenses		64,~~357~~317			65,~~428~~071
Revolving Credit Facility		2415,000			1324,000
Current portion of Facility Agreement		21,450			21,450
Current portion of obligations under capital leases		~~122~~103			~~143~~114
Allowance for rebates and chargebacks		1321,~~579~~849			918,~~273~~690
Allowance for product returns		79,~~922~~826			89,~~623~~128
Royalties payable		3912,~~449~~147			2541,~~567~~074
Other accrued expenses		1217,~~332~~881			1713,~~394~~763
Total current liabilities		~~132~~109,~~912~~964			~~106~~137,~~036~~854
Deferred rent and other long term liabilities		2,~~086~~123			2,~~287~~055
Obligations under capital leases		~~176~~125			~~123~~150
Facility Agreement, net of current portion and unamortized discounts and derivatives		19,182			38,706
Facility Agreement, net of current portion and unamortized discounts and derivative		24,220			21,975
Warrant liability		1753,~~901~~139			6640,~~185~~130
Total liabilities		~~172~~189,~~257~~571			~~213~~202,~~337~~164
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000 shares authorized of which 1,000 shares have been designated as Series A Participating Preferred Stock at September 30, 2011 and December 31, 2010; no shares issued and outstanding		—			—
Preferred stock, $0.001 par value; 5,000 shares authorized of which 1,000 shares have been designated as Series A Participating Preferred Stock at March 31, 2012 and December 31, 2011; no shares issued and outstanding		—			—
Common stock, $0.001 par value; 100,000 shares authorized at September 30, 2011 and December 31, 2010; 41,501 and 33,589 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		41			33
Common stock, $0.001 par value; 100,000 shares authorized at March 31, 2012 and December 31, 2011; 41,906 and 41,607 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		42			42
Additional paid-in capital		~~408~~412,~~457~~106			~~323~~410,~~442~~063
Accumulated deficit		(~~443~~476,~~258~~983	)		(~~402~~459,~~572~~178	)
Total stockholders’ deficit		(3464,~~760~~835	)		(7949,~~097~~073	)
Total liabilities and stockholders’ deficit	$	~~137~~124,~~497~~736		$	~~134~~153,~~240~~091

See accompanying notes

ISTA PHARMACEUTICALS, INC.

Condensed Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2011			2010			2011			2010
	2012			2011
Revenues:
Product sales, net	$	4134,~~386~~012		$	4236,~~020~~720		$	~~115,244~~		$	~~105,393~~
Total revenues		4134,~~386~~012			4236,~~020~~720			~~115,244~~			~~105,393~~
Cost of products sold		10,140			9,678			28,440			25,171
Cost of products sold (including one-time adjustment of $9,312 for royalty settlement for three months ended March 31, 2012)		(2,264	)		9,216
Gross profit		3136,~~246~~276			3227,~~342~~504			~~86,804~~			~~80,222~~
Costs and expenses:
Research and development		79,~~720~~491			710,~~945~~344			~~26,914~~			~~17,779~~
Selling, general and administrative		1928,~~644~~396			1926,~~614~~931			~~69,929~~			~~60,383~~
Total costs and expenses		2737,~~364~~887			2737,~~559~~275			~~96,843~~			~~78,162~~
Income (loss) from operations		3,882			4,783			(10,039	)		2,060
Loss from operations		(1,611	)		(9,771	)
Other income (expense):
Other expense:
Interest expense		(1,~~671~~440	)		(2,~~078~~068	)		~~(5,806~~	)		~~(6,222~~	)
Gain on derivative valuation		75			117			69			130
Loss on derivative valuation		(1,745	)		—
Gain (loss) on warrant valuation		28,328			(26,338	)		(24,910	)		7,159
Loss on warrant valuation		(13,009	)		(72,234	)
Total other income (expense)		26,732			(28,299	)		(30,647	)		1,067
Total other expense		(16,194	)		(74,302	)
Net income (loss)	$	30,614		$	(23,516	)	$	(40,686	)	$	3,127
Net loss	$	(17,805	)	$	(84,073	)
Net income (loss) per common share, basic	$	0.74		$	(0.70	)	$	(1.08	)	$	0.09
Other comprehensive income		—			—
Shares used in computing net income (loss) per common share, basic		41,492			33,483			37,632			33,418
Total comprehensive loss	$	(17,805	)	$	(84,073	)
Net income (loss) per common share, diluted	$	0.64		$	(0.70	)	$	(1.08	)	$	0.07
Net loss per common share, basic and diluted	$	(0.43	)	$	(2.49	)
Shares used in computing net income (loss) per common share, diluted		47,898			33,483			37,632			42,939
Shares used in computing net loss per common share, basic and diluted		41,786			33,715

See accompanying notes

ISTA PHARMACEUTICALS, INC.

Condensed Statement of Stockholders’ Deficit

(in thousands, except share data)

(unaudited)

											TotalStockholders’ Equity(Deficit)
						AdditionalPaid-in Capital
	Common Stock							AccumulatedDeficit
	Shares			Amount
Balance at December 31, 2010		33,589,335		$	33	$	323,442	$	(402,572	)	$	(79,097	)
Reduction of common stock due to unvested restricted stock awards		(377,039	)		—		—		—			—
Issuance of common stock from exercises of stock options		534,019			2		2,414		—			2,416
Restricted stock issuances		90,187			—		—		—			—
Issuance of common stock from warrant exercises		7,594,502			6		6,230		—			6,236
Transfer of warrant liability to additional paid-in capital upon exercises of warrants		—			—		73,194		—			73,194
Common stock issued under ESPP		70,393			—		311		—			311
Stock-based compensation costs		—			—		2,866		—			2,866
Net loss		—			—		—		(40,686	)		(40,686	)
Comprehensive loss		—			—		—		(40,686	)		(40,686	)
Balance at September 30, 2011		41,501,397		$	41	$	408,457	$	(443,258	)	$	(34,760	)

See accompanying notes

ISTA PHARMACEUTICALS INC.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2011			2010
	2012			2011
OPERATING ACTIVITIES
Net (loss) income	$	(40,686	)	$	3,127
Net loss	$	(17,805	)	$	(84,073	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation costs		21,~~866~~534			21,~~899~~017
Amortization of deferred financing costs		~~750~~188			~~804~~267
Amortization of discounts on Facility Agreement		~~1,995~~500			~~2,136~~712
Change in value of warrants related to Facility Agreement		24,910			(7,159	)
Amortization of intangible assets		58			—
Change in value of derivative related to Facility Agreement		(69	)		(130	)
Gain on royalty settlement		(9,312	)		—
Depreciation and amortization		1,696			906
Change in value of warrants related to Facility Agreement		13,009			72,234
Change in value of derivative related to Facility Agreement		1,745			—
Depreciation and amortization		604			567
Changes in operating assets and liabilities:
Accounts receivable, net		~~(27~~11,~~945~~035	)		(~~9,117~~723	)
Inventory, net		(~~137~~550	)		(92869	)
Other current assets		(~~2,349~~385	)		~~(571~~594	)
Accounts payable		32,~~543~~827			15,~~648~~058
Accrued compensation and related expenses		(71754	)		(2,~~055~~253	)
Allowance for rebates and chargebacks		43,~~306~~159			~~3,138~~781
Allowance for product returns		~~(701~~698	)		~~1,703~~(252	)
Royalties payable		13(19,~~882~~615	)		136,~~317~~094
Other accrued expenses		(54,~~062~~118	)		4(2,~~366~~224	)
Deferred rent and other long term liabilities		(~~201~~66	)		—(66	)
Net cash (used in) provided by operating activities		(23,273	)		14,920
Net cash used in operating activities		(9,012	)		(3,136	)
INVESTING ACTIVITIES
Purchases of equipment		(~~1,564~~496	)		(~~1,456~~330	)
Deposits and other assets		~~(441~~—	)		6(5	)
Net cash used in investing activities		(~~2,005~~496	)		(~~1,450~~335	)
FINANCING ACTIVITIES
Proceeds from exercise of warrants		6,236			—
Net proceeds from exercises of stock options		643			503
Proceeds from exercise of stock options		2,416			11
Payments under capital leases		(36	)		(46	)
Proceeds from issuance of common stock for ESPP		311			153
Proceeds from Revolving Credit Facility		38,000			13,000
Payments under capital leases		(151	)		(123	)
Repayments on Revolving Credit Facility		(47,000	)		(13,000	)
Repayments on Facility Agreement		(21,450	)		—
Net cash (used in) provided by financing activities		(8,393	)		457
Proceeds from Revolving Credit Facility		50,000			39,000
Decrease in cash and cash equivalents		(17,901	)		(3,014	)
Repayments on Revolving Credit Facility		(39,000	)		(39,000	)
Cash and cash equivalents at beginning of period		71,593			78,777
Net cash (used in) provided by financing activities		(1,638	)		41
Cash and cash equivalents at end of period	$	53,692		$	75,763
(Decrease) increase in cash and cash equivalents		(26,916	)		13,511
Cash and cash equivalents at beginning of period		78,777			53,702
Cash and cash equivalents at end of period	$	51,861		$	67,213
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	~~3,214~~724		$	31,~~293~~080
Transfer of warrant liability to additional paid-in capital upon exercise of warrants	$	73,194		$	—

See accompanying notes

ISTA PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(unaudited)

1. The Company

ISTA Pharmaceuticals, Inc., (“which we refer to as ISTA,” the “Company,” or “we”), was incorporated as Advanced Corneal Systems, Inc. in California in February 1992 to discover, develop and market new remedies for diseases and conditions of the eye. In March 2000, we changed our name to ISTA Pharmaceuticals, Inc., and we reincorporated in Delaware in August 2000. BROMDAY™, BEPREVE®, ISTALOL®, VITRASE®, XIBROM (bromfenac ~~ophthalmic~~ ophthalmic solution)®, XIBROM™, ~~REMURA™,~~ T-PRED™, PROLENSA™, BEPOSONE™, BEPOMAX™, ISTA®, ISTA Pharmaceuticals, Inc.® and the ISTA logo are our trademarks, either owned or under license.

We are a rapidly growing commercial-stage, multi-specialty pharmaceutical company developing, marketing and selling our own products in the United States, or the U.S., and Puerto Rico. We are the third largest branded prescription eye care business in the U.S. and have a growing allergy drug franchise. We have obtained product approvals for five prescription drugs in six years. We manufacture our finished good products through third-party contracts, and we in-license or acquire new products and technologies to add to our internal development efforts from time to time. Our products and product candidates seek to treat allergy and serious diseases of the eye and include therapies for ocular inflammation and pain, glaucoma, dry eye and ocular and nasal allergies. The U.S. prescription markets for 2011, which our therapies seek to address, include key segments of the $67.5 billion ophthalmic pharmaceutical market and the $2.5 billion nasal allergy market.

We currently have four products available for sale in the U.S. and Puerto Rico: once-daily BROMDAY (bromfenac ophthalmic solution) 0.09%, for the treatment of postoperative inflammation and reduction of ocular pain in patients who have undergone cataract extractions, BEPREVE (bepotastine besilate ophthalmic solution) 1.5%, for the treatment of ocular itching associated with allergic conjunctivitis, ISTALOL (timolol maleate ophthalmic solution) 0.05%, for the treatment of glaucoma, and VITRASE (hyaluronidase injection) ovine, 200 USP units/ml, for use as a spreading agent. At the beginning of 2011, we had one additional product available for sale, twice-daily XIBROM (bromfenac ophthalmic solution) 0.09%, a topical non-steroidal anti-inflammatory formulation of bromfenac for the treatment of ocular inflammation and pain following cataract surgery, or XIBROM. We stopped shipping XIBROM in February 2011. In addition, we have several eye and allergy product candidates in various stages of development, including treatments for dry eye, ocular inflammation and pain and nasal allergies.

~~Due~~We tohave ~~the~~incurred ~~rapid~~losses ~~adoption~~since ofinception ~~BROMDAY™ (bromfenac ophthalmic solution) 0.09%, the first~~ and ~~only~~have ~~once-daily~~a ~~non-steroidal~~stockholders’ ~~anti-inflammatory~~deficit ~~prescription~~of ~~eye~~approximately ~~drop~~$477 ~~for the treatment of postoperative~~million ~~inflammation~~at ~~and reduction of ocular pain in patients who have undergone cataract extractions~~March 31, we2012. ~~stopped~~We ~~shipping~~believe ~~twice-daily~~that ~~XIBROM~~our ~~(bromfenac~~existing ~~ophthalmic~~capital ~~solution)®~~resources ~~0.09%~~as inwell ~~February~~as ~~2011.~~our ~~At that time, we~~ anticipated ~~wholesalers~~future ~~would~~operations ~~continue~~will toenable ~~sell~~us ~~XIBROM~~ to ~~pharmacies~~fund ~~until~~operations ~~their~~for ~~inventories~~at ~~were~~least ~~depleted. As of September 30, 2011, most of~~ the ~~wholesalers’~~next ~~inventories~~twelve ~~were depleted~~months. ~~Thus, we believe that the conversion of XIBROM to BROMDAY has been well accepted by the markets.~~

2. ~~Summary~~Merger ofAgreement ~~Significant~~with ~~Accounting~~Bausch & ~~Policies~~Lomb

On March 26, 2012, we entered into a definitive Agreement and Plan of Merger, or the Merger Agreement, with Bausch & Lomb Incorporated, a New York corporation, or Parent, and Inga Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent, or Merger Sub, and which together with Parent we refer to as Bausch & Lomb.

Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Sub will merge with and into us, and we will become a wholly-owned subsidiary of Parent, which transaction we refer to as the Merger. At the effective time of the Merger, each share of our common stock issued and outstanding immediately prior thereto (other than shares owned by (i) any of our stockholders who are entitled to and who properly exercise, and do not withdraw or lose, appraisal rights under Section 262 of the General Corporation Law of the State of Delaware, (ii) us as treasury stock or (iii) Parent or any of its wholly-owned subsidiaries) will be converted automatically into the right to receive $9.10 in cash, without interest and less any applicable withholding taxes. Our Board of Directors unanimously approved the Merger Agreement and recommends that our stockholders vote to adopt the Merger Agreement.

The closing of the Merger is subject to customary closing conditions including, among others, adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon, the absence of any governmental order or law that makes the Merger illegal or otherwise enjoins, restrains, prevents or prohibits consummation of the Merger, and, as a condition to Bausch & Lomb’s obligation to complete the Merger, the absence of a Company “material adverse effect” since the date of the Merger Agreement. On April 23, 2012, we filed a preliminary proxy statement with the Securities and Exchange Commission, or the SEC, relating to the special meeting for our shareholders to consider and vote on the proposal to adopt the Merger Agreement.

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement which was attached as an exhibit to a Current Report on Form 8-K filed with the SEC on March 28, 2012.

3. Senju Arbitration

On March 26, 2012, in connection with the settlement of an arbitration proceeding, we and Senju Pharmaceuticals Co. Ltd., or Senju, executed a Fourth Amendment to Bromfenac License Agreement, or the Fourth Amendment, which amended the License Agreement, dated as of March 7, 2002, by and between Senju and us, as successor in interest to AcSentient, Inc., or AcSentient, as amended by the Amendment to Bromfenac License Agreement dated August 13, 2002, the Second Amendment to Bromfenac License Agreement dated May 31, 2006, and the Third Amendment to Bromfenac License Agreement dated February 16, 2010, or as amended, the License Agreement. The Fourth Amendment amended the License Agreement with respect to the royalties payable to Senju and specifically it established new lower royalty rates for BROMDAY until we launch our proprietary new product, PROLENSA, and confirmed the existing rate for PROLENSA. In connection with the Fourth Amendment, we made a one-time payment of $24 million to Senju. As a result, for the first quarter of 2012, we reduced our royalties payable balance by $33.3 million, resulting in a one-time benefit to cost of products sold of $9.3 million. Effective January 1, 2012, royalties to be paid on future revenues of BROMDAY were reduced by approximately one-half.

4. Summary of Significant Accounting Policies

Basis of Presentation

Our unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying unaudited condensed financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles in the ~~United States~~U.S., or GAAP, and, therefore should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011 ~~filed~~as ~~with the Securities and Exchange Commission, or the SEC, on February 25, 2011~~amended.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the unaudited condensed balance sheets as of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, ~~the~~and ~~condensed~~ statements of operations ~~for the three~~ and ~~nine months ended September 30, 2011 and 2010, the condensed statement of stockholders’~~ ~~deficit~~comprehensive ~~for~~income ~~the nine months ended September 30, 2011~~ and ~~the condensed statements of~~ cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010,~~2011 have been made. The interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the ~~condensed~~ financial statements and accompanying notes. Actual results could differ significantly from those estimates. Our significant estimates include, among others, our estimates for product returns, rebates and chargebacks, the fair value of our financial instruments, stock-based compensation, royalty obligations and litigation related matters.

7Reclassifications

~~Table~~Certain ofcomparative ~~Contents~~prior period amounts in the financial statements and accompanying notes may have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported operating expenses or net loss.

Revenue Recognition

Product Revenues. We recognize revenues from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. We recognize product revenues net of estimated allowances for rebates, chargebacks, product returns and other discounts, such as wholesaler fees. If actual future payments for allowances for discounts, product returns, wholesaler fees, rebates and chargebacks materially exceed the estimates we made at the time of sale, our financial position, results of operations and cash flows may be negatively impacted.

We establish allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:

•

the number of agreements with customers and specific contractual terms;

• ~~the~~ estimated level of units in the distribution channel;

•

historical rebates, chargebacks and returns of products;

•

direct communication with customers;

•

anticipated introduction of competitive products or generics;

•

anticipated pricing strategy changes by us and/or our competitors;

•

analysis of prescription data gathered by a third-party prescription data provider;

•

the impact of wholesaler distribution agreements;

•

the impact of changes in state and federal regulations; and

• the estimated remaining shelf- life of products.

In our analyses, we utilize on-hand unit data purchased from the major wholesalers, as well as prescription data purchased from a third-party data provider, to develop estimates of sales by wholesalers to pharmacies and others. We utilize an internal analysis to compare, on a historical basis, net product shipments versus both estimated prescriptions written and product returns. Based on such analysis, we develop an estimate of the quantity of product which may be subject to various discounts, product returns, rebates, chargebacks and wholesaler fees.

We record estimated allowances for rebates, chargebacks, product returns and other discounts, such as wholesaler fees, in the same period when revenue is recognized. The objective of recording the allowances for such deductions at the time of sale is to provide a reasonable estimate of the aggregate amount of credit to our direct customers or payments to our indirect customers. Customers typically process their claims for allowances such as early pay discounts promptly, usually within the established payment terms. We monitor actual credit memos issued to our customers and compare such actual amounts to the estimated provisions, in the aggregate, for each allowance category to assess the reasonableness of the various reserves at each balance sheet date. Differences between our estimated allowances and actual credits issued have not been significant, and are accounted for in the current period as a change in estimate.

In general, we are obligated to accept from our customers the return of products that have reached their expiration date. We authorize returns for damaged products, expiring and expired products in accordance with our return goods policy and procedures, and have established reserves for such amounts at the time of sale. We typically refund the agreed proportion of the sales price by the issuance of a credit, rather than a cash refund or exchange for inventory, and the returned product is destroyed. With the launch of each of our products, we record a sales return allowance, which is larger for stocking orders than subsequent re-orders. To date, actual product returns have not exceeded our estimated allowances for returns. Although we believe that our estimates and assumptions are reasonable as of the date made, actual results may differ significantly from these estimates. Our financial position, results of operations and cash flows may be materially and negatively impacted if actual returns materially exceed our estimated allowances for returns.

We identify product returns by their manufacturing lot number. Because we manufacture in bulk, lot sizes can be large and, as a result, sales of any individual lot may occur over several periods. As a result, we are unable to specify if actual returns or credits relate to a sale that occurred in the current period or a prior period, and therefore, we cannot specify how much of the allowance recorded relates to sales made in prior periods. Since there have been no material differences between estimates recorded and actual credits issued, we believe our systems and procedures are adequate for managing our business.

Allowances for product returns were $9.8 million and $9.1 million as of March 31, 2012 and December 31, 2011, respectively. These allowances reflect an estimate of our liability for products that may be returned by the original purchaser in accordance with our stated return policy, which allows customers to return products within six months of their respective expiration dates and for a period up to twelve months after such products have reached their respective expiration dates. We estimate our liability for product returns at each reporting period based on the estimated units in the channel and the other factors discussed above. As a percentage of gross product revenues, the reserve for product returns was 6.3% and 1.1% for the periods ended March 31, 2012 and 2011, respectively. The increase in the rate of return is primarily due to higher product returns for XIBROM and BEPREVE, partially offset by historical trending of actual return data, the lengthening of product shelf life, and continued acceptance and pull through of our other products.

Allowances for product returns were $7.9 million and $8.6 million as of September 30, 2011 and December 31, 2010, respectively. These allowances reflect an estimate of our liability for products that may be returned by the original purchaser in accordance with our stated return policy, which allows customers to return products within six months of their respective expiration dates and for a period up to twelve months after such products have reached their respective expiration dates. We estimate our liability for product returns at each reporting period based on the estimated units in the channel and the other factors discussed above. As a percentage of gross product revenues, the reserve for product returns was 1.2% and 2.7% for the three months ended September 30, 2011 and 2010, respectively; and was 1.4% and 2.5% for the nine months ended September 30, 2011 and 2010, respectively. The decrease is due to lower product returns, improved product shelf life, continued acceptance and sale of our products and the discontinuation of XIBROM in early 2011.

We also periodically offer promotional discounts to our existing customer base. These discounts are usually calculated as a percentage of the current published list price. Accordingly, the discounts are recorded as a reduction of revenue in the period that the program is offered. In addition to promotional discounts, at the time we implement a price increase, we generally offer our existing customers an opportunity to purchase a limited quantity of products at the previous list price. Shipments resulting from these programs generally are not in excess of ordinary levels and therefore, we recognize the related revenue upon receipt by the customer and include the sale in estimating our various product-related allowances. In the event we determine that these sales represent purchases of inventory in excess of ordinary levels for a given wholesaler, the potential impact on product returns exposure would be specifically evaluated and reflected as a reduction to revenue at the time of such sale.

Allowances for estimated rebates and chargebacks were $1321.69 million and $918.37 million as of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~ 2011, respectively. Other discounts, such as wholesaler fees and prompt pay discounts, were $6.97 million and $5.07 million as of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, respectively. These allowances reflect an estimate of our liability for items such as rebates due to various governmental organizations under the Medicare/Medicaid regulations, rebates due to managed care organizations under specific contracts, chargebacks due to various organizations purchasing certain of our products through federal contracts and/or group purchasing agreements and fees charged by certain wholesalers under distribution agreements. We estimate our liability for rebates, chargebacks and other discounts, such as wholesaler fees, at each reporting period based on the assumptions described above.

As a percentage of gross product revenues, the allowance for rebates, chargebacks and other discounts such as wholesaler fees was 2227.62% and 1721.48% for the three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010, respectively; and was 22.1% and 17.5% for the nine months ended September 30,~~ 2011 ~~and 2010~~, respectively. The increase is primarily due to growth in the number and utilization of managed care contracts, federal contracts, and wholesaler distribution agreements ~~and the impact of higher Medicaid and Medicare rebates required under the recent healthcare legislation~~. ~~For the nine months ended September 30, 2011, we recorded estimated new Medicare rebates required under the legislation, commonly known as “donut-hole” rebates, of $0.9 million.~~

License Revenue. Amounts received for product and technology license fees under multiple-element arrangements are deferred and recognized over the period of such services or performance if such arrangements require on-going services or performance. Amounts received for milestones are recognized upon achievement of the milestone, unless we have ongoing performance obligations. Any amounts received prior to satisfying our revenue recognition criteria will be recorded as deferred income in the accompanying condensed balance sheets.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and short-term U.S. Treasury investments with maturities of three months or less when purchased. Cash and cash equivalents are carried at cost, which we believe approximates fair value because of the short-term maturity of these instruments. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, due to a temporary federal program in effect through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning in 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may exceed federally insured limits. We had total cash and cash equivalents of approximately $5153.97 million and $7871.86 million as of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, respectively, of which, $15 million ~~and~~was ~~$60 million at September 30, 2011 and December 31, 2010, respectively, were~~ invested in low interest bearing U.S. Treasury Funds.

Concentration of Credit Risk and Customer Risk

Financial instruments that potentially subject us to a significant concentration of credit risk principally consist of trade receivables. Wholesale distributors account for a substantial portion of trade receivables. Accounts receivables from Cardinal Health, Inc., McKesson HBOC and AmeriSource Bergen Corp. accounted for 41%, 39% and 19%, respectively, of our total accounts receivables as of March 31, 2012. Accounts ~~receivable~~receivables from McKesson HBOC, Cardinal Health, Inc., and AmeriSource Bergen Corp. accounted for 40%, 41% and 15%, respectively, of our total accounts receivables as of December 31, 2011. We maintain reserves for bad debt and such losses, in the aggregate, have not exceeded our estimates.

Sales to McKesson HBOC, Cardinal Health, Inc., and AmeriSource Bergen Corp. accounted for 37%, 41% and 19% of our net revenues for the three months ended March 31, 2012. Sales to McKesson HBOC, Cardinal Health, Inc., and AmeriSource Bergen Corp. accounted for 34%, 34% and 23% of our net revenues for the three months ended March 31, 2011.

McKesson HBOC, Cardinal Health, Inc., and AmeriSource Bergen Corp. accounted for 42%, 43% and 11%, respectively, of our total accounts receivable as of September 30, 2011. Accounts receivable from McKesson HBOC, Cardinal Health, Inc., and AmeriSource Bergen Corp. accounted for 37%, 43% and 14%, respectively, of our total accounts receivable as of December 31, 2010. We maintain reserves for bad debt and such losses, in the aggregate, have not exceeded our estimates.

Sales to Cardinal Health, Inc., McKesson HBOC, and AmeriSource Bergen Corp. accounted for 39%, 35% and 19%, respectively, of our net revenues for the nine months ended September 30, 2011. Sales to Cardinal Health, Inc., McKesson HBOC, and AmeriSource Bergen Corp. accounted for 41%, 33% and 16%, respectively, of our net revenues for the nine months ended September 30, 2010.

Inventory

Inventory at ~~September~~March 3031, ~~2011~~2012 was $67.3 million, which was comprised of $34.27 million of raw materials, $0.86 million of work-in-progress and $3.3 million of finished goods and ~~included~~excluded $1.03 million in inventory reserves. Inventory at December 31, ~~2010~~2011 was $6.17 million, which was comprised of $34.5 million of raw materials, $0.1 million of work-in-progress and $3.81 million of finished goods and ~~included~~excluded $1.30 million in inventory reserves. Inventory, net of allowances, is stated at the lower of cost or market. Cost is determined by the first-in, first-to-expire method.

Inventory is reviewed periodically for slow-moving or obsolete status. We adjust our inventory to reflect situations in which the cost of inventory is not expected to be recovered. We would record a reserve to adjust inventory to its net realizable value if: (i) a launch of a new product is delayed, inventory may not be fully utilized and could be subject to impairment, (ii) when a product is close to expiration and not expected to be sold, (iii) when a product has reached its expiration date or (iv) when a product is not expected to be saleable. In determining the reserves for these products, we consider factors such as the amount of inventory on hand and its remaining shelf life, and current and expected market conditions, including management forecasts and levels of competition. We have evaluated the current level of inventory considering historical trends and other factors, and based on our evaluation, have recorded adjustments to reflect inventory at its net realizable value. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand, competition or other relevant factors differ from expectations. These estimates require us to make assessments about the future demand for our products in order to categorize the status of such inventory items as slow-moving, obsolete or in excess-of-need. These future estimates are subject to the ongoing accuracy of our forecasts of market conditions, industry trends, competition and other factors. Differences between our estimated reserves and actual inventory adjustments have not been significant, and are accounted for in the current period as a change in estimate.

Costs incurred for the manufacture of validation batches for pre-approval products are recorded as research and development expenses in the period in which those costs are incurred.

Supply Concentration Risks

Some materials used in our products are currently obtained from a single source. We have a supply agreement with Senju ~~Pharmaceuticals, Co. Ltd., or Senju,~~ for bepotastine besilate, which is the active pharmaceutical ingredient in BEPREVE. Currently, Senju is our sole source for bepotastine besilate for BEPREVE. We have a supply agreement with Regis Technologies, Inc., or Regis, for bromfenac, which is the active pharmaceutical ingredient in BROMDAY and was also used for XIBROM. Currently, Regis is our sole source for bromfenac. We also have supply agreements with Bausch & Lomb, ~~Incorporated~~ to manufacture finished product of BROMDAY, BEPREVE and ISTALOL. Currently, Bausch & Lomb ~~Incorporated~~ is our sole source for finished product of BROMDAY, BEPREVE and ISTALOL.

Ovine hyaluronidase, the active pharmaceutical ingredient used in VITRASE, is processed in several stages to produce a highly purified raw material for formulation. InWe ~~June 2010, we received approval from the U.S. Food and Drug Administration, or the FDA, to~~ manufacture hyaluronidase at our Irvine, California manufacturing facility ~~and began production in July 2010~~. We have a supply agreement with Alliance Medical Products to manufacture ~~finished~~commercial ~~product~~quantities of VITRASE. Currently, Alliance Medical Products is our sole source for ~~finished product of~~ VITRASE.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, current and long-term debt, certain derivatives related to our debt obligations and common stock warrants issued to lenders. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. The carrying amount of our revolving credit facility with Silicon Valley Bank, or ~~the~~ Revolving Credit Facility, approximates fair value since the interest rate approximates the market rate for debt securities with similar terms and risk characteristics. ~~Although~~We ~~our~~have a facility agreement, or ~~the~~ Facility Agreement, with certain accredited institutional investors, collectively known as ~~the~~ Lenders,. Although our Facility Agreement is considered a financial instrument, we are unable to reasonably determine fair value.

Fair Value Measurements

We account for fair value measurements under the Financial Standards Accounting Board, or the FASB, Accounting Standard Codification 820 “Fair Value Measurements and Disclosures”, or ASC 820, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We have segregated all assets and liabilities measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. As of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, all of our assets and liabilities are valued using Level 1 inputs except for the derivatives ~~derivative~~ and warrants related to our Facility Agreement. We have valued the warrants using a Black-Scholes model, which we believe is the appropriate valuation model based on the terms of the warrants and based on assumptions and data available as of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, including but not limited to our stock price, risk-free interest rates and stock price volatility.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands) (unaudited):

Fair Value Measurements using

Total CarryingValue at

Level 1

Level 2

Level 3

September 30, 2011

March 31, 2012

Cash and cash equivalents, including U.S. Treasury Funds

5153,~~861~~692

—

5153,~~861~~692

Derivative (Facility Agreement)

—

(~~100~~4,137

)

(~~100~~4,137

)

Warrants

—

(1753,~~901~~139

)

(1753,~~901~~139

)

December 31, 2010

December 31, 2011

Cash and cash equivalents, including U.S. Treasury Funds

7871,~~777~~593

—

7871,~~777~~593

Derivative (Facility Agreement)

—

(~~169~~2,392

)

(~~169~~2,392

)

Warrants

—

(6640,~~185~~130

)

(6640,~~185~~130

)

	Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3) Derivatives			Fair Value MeasurementsUsing Observable InputsOther Than Level 1(Level 3) Warrants
	Fair Value MeasurementsUsing Unobservable Inputs (Level 3)
Balance at December 31, 2010	$	(169	)	$	(66,185	)
	Derivative			Warrants
Total gains or losses (realized or unrealized)		69			(24,910	)
Ending balance at December 31, 2011	$	(2,392	)	$	(40,130	)
Transfer of warrant liability to additional paid-in capital upon exercises of warrants		—			73,194
Total losses (realized or unrealized)		(1,745	)		(13,009	)
Balance at September 30, 2011	$	(100	)	$	(17,901	)
Ending balance at March 31, 2012	$	(4,137	)	$	(53,139	)

Comprehensive (Loss) Income

Accounting Standards Codification 220 “Comprehensive Income,” or ASC 220, requires reporting and displaying comprehensive income (loss) and its components. Upon adoption on January 1, ~~which~~2012, ~~includes~~we ~~net~~had the option to report total comprehensive income, ~~(loss)~~including ~~and unrealized~~components ~~gains~~of net income and ~~losses~~components onof ~~investments~~other ~~and~~comprehensive ~~foreign~~income, ~~currency~~as ~~translation~~a ~~gains~~single ~~and~~continuous ~~losses~~statement or in two separate but consecutive statements. ~~Total~~We elected to present comprehensive ~~(loss)~~income in a single continuous statement as part of the condensed statements of operations. We did not have any components of comprehensive income to report upon and, therefore, our total comprehensive loss for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011 was $~~(40~~17.7)8 million and $384.1 million, respectively.

Stock-Based Compensation

We recognize compensation costs for all stock-based awards made to employees and directors. The fair value of stock-based awards is estimated at grant date using an option pricing model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. Since stock-based compensation is recognized only for those awards that are ultimately expected to vest, we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised, if necessary, in future periods if actual forfeitures differ from estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

Since stock-based compensation is recognized only for those awards that are ultimately expected to vest, we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised, if necessary, in future periods if actual forfeitures differ from estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

We use the Black-Scholes option-pricing model to estimate the fair value of stock-based awards. The determination of fair value using the Black-Scholes option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We estimate the expected term based on the contractual term of the awards and employees’ exercise and expected post-vesting termination behavior.

~~Stock~~We ~~Options~~recorded stock-based compensation expense related to stock options of $1.2 million and $0.9 million for the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012, there was $10.9 million of total unrecognized compensation cost related to non-vested stock options, which is scheduled to be recognized over a remaining weighted average vesting period of approximately 3.1 years.

The amount of compensation expense recorded is based on the market value of the shares on the date of grant. Expenses related to the vesting of stock options were $0.9 million for both the three months ended September 30, 2011 and 2010, respectively, and $2.5 million and $2.6 million for the nine months ended September 30, 2011 and 2010, respectively. At September 30, 2011, there was $6.2 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a remaining weighted average vesting period of approximately 2.4 years.

Restricted Stock Awards

The amount of unearned compensation ~~expense~~ recorded is based on the market value of the shares on the date of issuance. Expenses related to the vesting of restricted stock were $0.2 million and $0.1 million for the three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010, respectively, and $0.4 million and $0.3 million for the nine months ended September 30,~~ 2011 ~~and 2010~~, respectively. As of ~~September~~March 3031, ~~2011~~2012, there was approximately $12.31 million of unamortized compensation cost related to restricted stock awards, which is ~~expected~~ scheduled to be recognized ratably over the vesting period of four years.

WeStock ~~have~~Appreciation ~~excluded~~Rights ~~377,039~~and ~~unvested~~Phantom ~~restricted stock~~Stock awards from our calculation of common stock outstanding, which has been included erroneously in prior periods. The exclusion did not have a material impact on our basic or diluted earnings per share for any prior reported periods.

~~Net~~For ~~Income~~the ~~(Loss)~~three ~~Per~~months ~~Share~~ended March 31, 2012, we recorded compensation expense of $0.1 million and a corresponding liability related to the prorated vesting of the stock appreciation rights and phantom stock granted to our Chief Executive Officer. These stock appreciation rights and phantom stock are accounted for as liability awards and are remeasured at fair value each reporting period until they become vested, assuming a prorated vesting over the period of the award, with compensation expense being recognized over the requisite service period in accordance with ASC 718-30 “Compensation—Stock Compensation, Awards Classified as Liabilities”, and the cumulative compensation cost recognized to date must be trued up each reporting period for changes in fair value prorated for the portion of the requisite service period rendered. We use the Black-Scholes option-pricing model to estimate the fair value of the stock appreciation rights and the market price of our common stock at the end of each reporting period to estimate the fair value of the phantom stock.

~~Basic~~Net ~~net~~Loss ~~income~~Per ~~(loss)~~Share 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 per share is computed by dividing the net income for the period by the weighted-average number of common and common equivalent shares, such as stock options, unvested restricted shares and warrants, outstanding during the period. Diluted earnings per common share consider the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted earnings per share excludes the impact of potential common shares related to our stock options, unvested restricted shares and warrants, in periods in which the exercise or conversion price is greater than the average market price of our common stock during the period.

Basic ~~and~~net ~~diluted~~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 ~~was~~is ~~calculated~~computed asby ~~follows~~dividing the net income (loss) for the period by the weighted-average number of common and common equivalent shares, such as stock options, unvested restricted shares and warrants, outstanding during the period. Diluted earnings for common stockholders per common share consider the impact of potentially dilutive securities except in ~~thousands~~periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options, ~~unaudited):~~unvested restricted shares and warrants, in periods in which the exercise or conversion price is greater than the average market price of our common stock during the period.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Numerator for basic and diluted income (loss) per share:
Net income (loss)	$	30,614	$	(23,516	)	$	(40,686	)	$	3,127
Denominator:
Denominator for basic income per share — weighted-average shares		41,492		33,483			37,632			33,418
Effect of dilutive securities		6,406		—			—			9,521
Denominator for diluted income per share — adjusted weighted-average shares		47,898		33,483			37,632			42,939

Diluted net income per share of common stock includes the dilutive effect of stock options, unvested restricted stock and warrants. As we incurred net losses for the three months ended March 31, 2012 and 2011, we have not computed the diluted earnings per share, as the potentially dilutive securities would have an anti-dilutive effect on earnings. For the three months ended March 31, 2012 and 2011, respectively, approximately 7.3 million and 9.4 million stock options and shares of unvested restricted stock were excluded from the calculation of diluted income per share because their exercise prices rendered them anti-dilutive.

Diluted net income per share of common stock includes the dilutive effect of stock options, unvested restricted stock and warrants. For the three months ended September 30, 2011, we excluded approximately 6.8 million stock options, 1.8 million warrants and 0.2 restricted stock awards from the calculation of diluted income per share, because their exercise

~~prices~~Common ~~rendered~~shares ~~them~~issued ~~anti-dilutive.~~for ~~For~~nominal consideration, if any, would be included in the ~~nine~~per ~~months~~share calculations ~~ended~~as ~~September 30,~~if ~~2010,~~they ~~approximately~~were ~~6.7 million~~outstanding ~~stock~~for ~~options~~all ~~and~~periods 6presented.~~2 million~~ ~~warrants~~We ~~were~~have ~~excluded~~further ~~from~~determined that the ~~calculation~~ ofwarrants ~~diluted~~issued ~~income~~in ~~per~~conjunction ~~share~~with ~~because~~our ~~their~~Facility ~~exercise~~Agreement ~~prices~~represent ~~rendered~~participating ~~them~~securities, ~~anti-dilutive.~~requiring Asthe weuse ~~incurred~~of ~~net~~the ~~losses~~two-class method for the calculation ~~nine~~of ~~months~~basic ~~ended~~and ~~September 30,~~diluted ~~2011~~earnings ~~and~~per ~~three~~share. ~~months~~Because ~~ended~~net ~~September 30,~~losses ~~2010,~~are ~~respectively~~not allocated to the warrant holders, wethe ~~have~~two-class method does not ~~computed~~ ~~the~~effect ~~diluted~~our calculation of earnings per share, asfor the ~~potentially~~three ~~dilutive~~months ~~securities~~ended ~~would~~March 31, ~~have~~2012 anand ~~anti-dilutive effect on earnings~~2011.

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. We have further determined that warrants issued in conjunction with our Facility Agreement represent participating securities, requiring the use of the two-class method for the calculation of basic and diluted earnings per share. Because net losses are not allocated to the warrant holders, the two-class method does not affect our calculation of earnings per share for the nine months ended September 30, 2011 and three months ended September 30, 2010, respectively. The two-class method for the three months ended September 30, 2011 and the nine months ended September 30, 2010 reflects the amount of unallocated undistributed earnings calculated using the participation percentage.

The following table sets forth the calculation of unallocated undistributed earnings using the two-class method for amounts attributable to our common stock and our warrants (in thousands) (unaudited):

	Three Months EndedSeptember 30, 2011		Nine Months EndedSeptember 30, 2010
Net income attributable to shareholders	$	30,614	$	3,127
Common stock unallocated earnings		26,243		2,158
Warrant unallocated earnings		4,371		969
Total unallocated earnings	$	30,614	$	3,127

Executive Employment Agreements

We have employment agreements with each of our executive officers. ~~which~~Such ~~provides~~employment ~~that~~agreements ~~any~~provide ~~unvested~~benefits ~~stock~~upon ~~options~~a ~~and~~change ~~restricted~~in ~~shares~~control, ~~then~~including ~~held~~severance bybenefits ~~such~~ if the executive officer ~~will~~is ~~become~~terminated under ~~fully~~certain ~~vested~~circumstances and, ~~with~~within ~~respect~~a tospecified ~~stock~~period ~~options,~~following ~~immediately~~such ~~exercisable,~~event. The employment agreements provide that in the event of a change in control ~~of the Company~~ and, ~~for certain officers,~~ if within ~~twenty-four~~24 months following such change in control ~~such~~ the executive officer’s employment is terminated ~~by the Company~~ without cause, or such executive officer resigns for good reason within sixty days of the event forming the basis for such good reason termination, then we will provide the executive officer with severance compensation and benefits consisting of (i) a lump sum severance payment of certain months of base salary, (ii) a multiple of the greater of the target bonus to be earned for the year in which termination occurs or the bonus amount paid to the executive in the prior year, (iii) health insurance premiums for continued health insurance coverage for such executive officer and all then insured dependents for a period of certain months of benefits, (iv) outplacement services for one year, at our expense not to exceed $25,000, with a nationally recognized service selected by us; and (v) any unvested options, restricted shares, stock appreciation rights, phantom stock or other equity based awards then held by the executive officers will become fully vested and, with respect to options, immediately exercisable, as of the date of termination.

Revolving Credit Facility

Under our Revolving Credit Facility, we may borrow up to the lesser of $25.0 million or 80% of eligible accounts receivable, plus the lesser of 25% of net cash and cash equivalents or $10.0 million. As of ~~September~~ March 3031, ~~2011~~2012, we had $2425.40 million available under the Revolving Credit Facility, of which we borrowed $2415.0 million. All outstanding amounts under the Revolving Credit Facility bear interest at a variable rate equal to the lender’s prime rate ~~plus a margin of 0~~.~~50%.~~ In no event shall the interest rate on outstanding borrowings be less than 4.5000%, which is payable on a monthly basis. The Revolving Credit Facility also contains customary covenants regarding the operation of our business and financial covenants relating to ratios of current assets to current liabilities and tangible net worth and is collateralized by all of our assets. An event of default under the Revolving Credit Facility will occur if, among other things, (i) we are delinquent in making payments of principal or interest on the Revolving Credit Facility; (ii) we fail to cure a breach of a covenant or term of the Revolving Credit Facility; (iii) we make a representation or warranty under the Revolving Credit Facility that is materially inaccurate; (iv) we are unable to pay our debts as they become due, certain bankruptcy proceedings are commenced or certain orders are granted against us, or we otherwise become insolvent; or (v) an acceleration event occurs under certain types of other indebtedness outstanding from time to time. If an event of default occurs, the indebtedness to Silicon Valley Bank could be accelerated, such that it becomes immediately due and payable. ~~We also had letters of credit of $0.6 million outstanding.~~ As of ~~September~~March 3031, ~~2011~~2012, we were in compliance with all of the covenants under the Revolving Credit Facility. During certain months in the fourth quarter, we may not be able to fulfill our adjusted quick ratio covenant. We are in discussions with Silicon Valley Bank, and, if successful, will either modify the covenant under the Revolving Credit Facility or seek a waiver for the covenant. However, no assurance can be given as to the outcome of our negotiations. Our failure to amend the covenant or obtain a waiver could cause us an inability to borrow under our Revolving Credit Facility. All amounts borrowed in September 2011 under the Revolving Credit Facility were repaid in October 2011. As of November 4, 2011, there were no borrowings under the Revolving Credit Facility. The Revolving Credit Facility expires on March 31, 2012.

All amounts borrowed under the Revolving Credit Facility were repaid in April 2012. The Revolving Credit Agreement can be terminated by us as long as all outstanding principal and accrued and unpaid interest is paid, and we intend to terminate the Revolving Credit Facility if the Merger is consummated. If we terminate the agreement, a make-whole premium of approximately $0.1 million will also be due and payable. The Revolving Credit Facility otherwise expires on March 31, 2013.

Facility Agreement

Pursuant to a facility agreement, or the Facility Agreement, certain investors and lenders, collectively called the Lenders, loaned us $65 million. In August 2011, we repaid the first installment of $21.5 million to the Lenders. On ~~September~~March 3031, ~~2011~~2012, we had total ~~remaining~~ indebtedness under the Facility Agreement of $43.6 million, which excludes unamortized discounts of $32.10 million and the value of the derivative of $04.1 million. Outstanding amounts under the Facility Agreement accrue interest at a rate of 6.5% per annum, payable quarterly in arrears. We are required to repay the Lenders 33% of the original principal amount (or $21.5 million) on September 26, 2012, and 34% of the original principal amount (or $22.0 million) on September 26, 2013.

Any amounts drawn under the Facility Agreement may become immediately due and payable upon (i) an “event of default,” as defined in the Facility Agreement, in which case the Lenders would have the right to require us to repay 100% of the principal amount of the loan, plus any accrued and unpaid interest thereon, or (ii) the consummation of certain change of control transactions, in which case the Lenders would have the right to require us to repay 110% of the outstanding principal amount of the loan, plus any accrued and unpaid interest thereon, or a Put Election. An event of default under the Facility Agreement will occur if, among other things, (i) we fail to make payment when due; (ii) we fail to comply in any material respect with any covenant of the Facility Agreement, and such failure is not cured; (iii) any representation or warranty made by us in any transaction document was incorrect, false, or misleading in any material respect as of the date it was made; (iv) we are generally unable to pay our debts as they become due or a bankruptcy or similar proceeding is commenced by or against us; or (v) cash and cash equivalents on the last day of each calendar quarter are less than $10 million. The Facility Agreement also contains customary covenants regarding operations of our business. As of ~~September~~March 3031, ~~2011~~2012, we were in compliance with all the covenants under the Facility Agreement.

In connection with the Facility Agreement, we entered into a security agreement with the Lenders, pursuant to which, as security for our repayment obligations under the Facility Agreement, we granted to the Lenders a security interest in certain of our intellectual property, including intellectual property relating to BROMDAY, BEPREVE, ISTALOL, VITRASE, ~~REMURA,~~ PROLENSA and XIBROM, and each other product marketed by or under license from us, and certain personal property relating thereto.

~~Because~~In connection with the ~~consummation~~Facility Agreement, we issued to the Lenders warrants to purchase an aggregate of 15 million shares of our common stock at an exercise price of $1.41 per share, of which we have approximately 6.9 million warrants outstanding at March 31, 2012. If we issue or sell shares of our common stock (other than certain ~~change~~“excluded shares,” as such term is defined in ~~control~~the ~~transactions~~Facility ~~results~~Agreement), we will issue concurrently therewith additional warrants to purchase such number of shares of common stock as will entitle the Lenders to maintain the same beneficial ownership in the Company after the issuance as they had prior to such issuance, as adjusted on a ~~premium~~pro rata basis for repayments of the outstanding principal, amount under the ~~premium~~ ~~put~~loan, ~~feature~~with issuch awarrants ~~derivative~~being ~~that~~issued isat ~~required~~an exercise price equal to bethe ~~bifurcated~~greater ~~from~~of $1.41 per share and the ~~host~~closing ~~debt~~price ~~instrument~~of ~~and~~the ~~recorded~~common atstock ~~fair~~on ~~value~~the atdate ~~each~~immediately ~~quarter~~prior ~~end~~to the issuance. The ~~value~~anti-dilutive element in the warrant agreement requires us to follow the Derivatives and Hedging Topic of the ~~derivative~~FASB Accounting atStandards ~~September 30~~Codification. The Codification requires us to classify our warrants as a liability, ~~2011~~which ~~was~~are marked to market and adjusted quarterly. We recorded a non-cash valuation loss of $013.10 million, or $0.31 per basic and isdiluted ~~marked-~~share for the three month period ended March 31, 2012 as compared to~~-market~~ a loss of $72.2 million, or $2.14 per basic and diluted share for the three month period ended March 31, 2011. The change in the valuation of the warrants as of March 31, ~~adjusted~~2012 ~~quarterly~~was ~~through~~primarily ~~other~~driven ~~expense~~by changes in our stock price and partially offset by a smaller number of warrants outstanding and related volatility.

InBecause ~~connection with~~ the ~~Facility~~consummation ~~Agreement, we issued to the Lenders warrants to purchase an aggregate~~ of ~~15 million~~certain ~~shares~~change ofin ~~our~~control ~~common~~transactions ~~stock~~results atin ana ~~exercise~~premium ~~price~~ of ~~$1.41~~the ~~per share, of which 6.9 million warrants expiring in 2014 remain~~ outstanding. ~~If we issue or sell shares of our common stock (other than certain “excluded shares~~principal,” ~~as such term is defined in~~ the ~~Facility~~premium ~~Agreement),~~put wefeature ~~will~~is ~~issue~~a ~~concurrently~~derivative ~~therewith~~that ~~additional~~is ~~warrants~~required to ~~purchase~~be ~~such~~bifurcated ~~number~~from ofthe host ~~shares~~debt ofinstrument ~~common~~and ~~stock~~recorded ~~that~~at ~~will~~fair ~~entitle~~value ~~the~~at ~~Lenders~~each toquarter ~~maintain~~end. ~~the~~During ~~same beneficial ownership in~~ the ~~Company~~three ~~after~~months ~~the~~ended ~~issuance~~March 31, ~~as they had prior to such issuance~~2012, aswe ~~adjusted~~announced onthat aBausch & ~~prorata~~Lomb ~~basis~~and ~~for~~we ~~repayments~~had ofentered ~~the~~into ~~outstanding principal amount under~~ the ~~loan,~~Merger ~~with~~Agreement ~~such~~(as ~~warrants~~described ~~being~~in ~~issued~~note at2 anabove), ~~exercise~~and ~~price equal to~~ the ~~greater~~Lenders ofhave ~~$1.41~~provided ~~per~~us ~~share~~notice ~~and the closing price~~ of ~~the~~their ~~common~~Put ~~stock on the date immediately prior to the issuance~~Elections. ~~The~~Since ~~anti-dilutive element in~~ the ~~warrant~~Merger ~~agreement~~would ~~requires~~have ~~us to follow~~ the ~~Derivatives~~effect ~~and Hedging Topic~~ of ~~the FASB Accounting Standards Codification, or the Codification. The Codification requires us to classify our warrants as~~ a ~~liability,~~change ~~which~~in ~~are~~control ~~marked to market~~ and ~~adjusted~~would ~~quarterly.~~trigger Wethe ~~recorded~~premium ~~a non-cash valuation loss~~ of ~~$24.9 million, or $0.66 per diluted share for~~ the ~~nine~~outstanding ~~months~~principal ~~ended~~amount ~~September 30,~~due ~~2011~~under ~~and a non-cash valuation gain of $7.2 million, or $0.17 per diluted share for~~ the ~~nine~~Facility ~~months ended September 30~~Agreement, ~~2010.~~we Wehave ~~also~~ recorded athe ~~non-cash~~value ~~valuation gain~~ of ~~$28.3 million, or $0.59 per~~ ~~diluted share for~~ the ~~three~~derivative ~~months~~at ~~ended September 30, 2011 and~~ a ~~non-cash~~significantly ~~valuation~~high ~~loss~~probability of ~~$26.3 million, or $0.79 per diluted share for~~ the ~~three~~change ~~months~~in ~~ended~~control ~~September 30, 2010~~transaction. The ~~change~~value ~~in the valuation~~ of the ~~warrants~~derivative ~~was~~at ~~primarily driven by changes in our stock price, related volatility and the weighted average number of warrants outstanding. During the nine months ended September~~March 3031, ~~2011,~~2012 ~~some~~was ~~of the Lenders and their assignees exercised a total of 8~~$4.1 million ~~warrants,~~ ~~of which a portion were exercised for cash~~ and aadjusted ~~portion~~through ~~were~~other ~~exercised on a cashless basis~~expense.

ACommitments ~~reconciliation~~and ~~of warrant~~Contingencies ~~activity for the nine months ended September 30, 2011 is as follows (in thousands) (unaudited):~~

	Warrants					Common Stock
Balance at December 31, 2010				15,000
Less: warrants exercised / common stock issued
For cash		(4,423	)				4,423
On a cashless basis		(3,666	)				3,172
Total warrants exercised / common stock issued				(8,089	)		7,595
Balance at September 30, 2011				6,911

In connection with the our strategic option process, pursuant to the terms of our financial advisor’s engagement letters with us, our financial advisor has previously received a fee of $0.8 million for services rendered in connection with the Merger and strategic defense of the Company, invoiced a fee of $2.5 million (which has not yet been paid) upon announcement of the Merger and is entitled to receive a contingent fee our financial advisor has estimated to be approximately $7.5 million if the Merger is consummated. In addition, under its engagement letters with us, our financial advisor invoiced a separate defense advisory fee of $4.4 million, $2.6 million of which our financial advisor has offered to credit against the contingent fee to be paid to it by us if the Merger is consummated, and the contingent fee, the defense advisory fee and any unpaid transaction expenses are paid to our financial advisor within one business day thereafter.

Legal

Bromfenac Royalty Litigation: In April 2010, we stopped making royalty payments and initiated legal action against Senju seeking a declaratory judgment with regard to our royalty obligations in connection with bromfenac products and a recovery of overpaid XIBROM royalties and other damages. The only U.S. patent applicable to XIBROM and, now to BROMDAY, expired in January 2009 and, according to U.S. case law and the terms of our license agreement with Senju, we asserted that no bromfenac product royalties are due after patent expiration. In August 2010, the U.S. District Court for the Central District of California stayed our action against Senju, and, in September 2010, Senju initiated an arbitration proceeding regarding the same dispute with the International Chamber of Commerce, or the ICC. In March 2012, we settled all outstanding claims with Senju and entered into the Fourth Amendment of our bromfenac license agreement with Senju (see note 3 above).

~~Commitments~~In June 2010, we stopped making royalty payments and ~~Contingencies~~initiated a legal action by filing a Complaint against AcSentient, seeking a declaratory judgment with regard to our bromfenac royalty obligations under the Asset Purchase Agreement dated May 3, 2002 between AcSentient and us. The only U.S. patent applicable to XIBROM and, now, to BROMDAY expired in January 2009 and, according to U.S. case law and the terms of our agreement with AcSentient, we believe no XIBROM and BROMDAY royalties are due after patent expiration. A declaratory judgment that we are seeking from the court in regard to royalty obligations to AcSentient may apply not only to XIBROM, but also to BROMDAY, which was approved by the Food and Drug Administration, or the FDA, in October 2010. In November 2010, the Superior Court of the State of California, County of Orange stayed our case against AcSentient and ruled that the dispute had to be arbitrated. We will have an opportunity to appeal that court’s ruling after the final judgment is entered by the court. In January 2011, AcSentient filed a request for arbitration with the ICC. This arbitration is in its early stages.

WeThere ~~are~~can ~~subject~~be tono ~~routine~~assurance ~~claims~~about when or how the AcSentient dispute will be resolved, and ~~litigation~~we ~~incidental~~cannot topredict ~~our~~the ~~business~~final outcome or financial impact. InThe ~~the~~parties ~~opinion~~could ofelect ~~management~~to settle the dispute, allow the ~~resolution~~dispute ofto ~~such~~be ~~claims~~resolved in arbitration or the U.S. courts. Until this dispute is ~~not~~resolved, ~~expected~~for accounting purposes, we have been and intend to continue to reserve for BROMDAY and XIBROM royalties, which would have abeen ~~material~~payable ~~adverse~~to ~~effect~~AcSentient onif ~~our~~the ~~operating~~relevant ~~results~~contractual orroyalty ~~financial~~obligations ~~position~~were existing and enforceable. As of March 31, 2012, we had approximately $5.3 million reserved for such contingent XIBROM and BROMDAY royalties.

~~Legal~~Subpoenas From ~~Proceedings~~the U.S. Attorney, Western District of New York. In April 2008, we received subpoenas from the office of the U.S. Attorney for the Western District of New York requesting information regarding the marketing activities related to XIBROM. We are cooperating with the government’s investigation. From April 2008 through March 31, 2012, we have incurred approximately $6.0 million in legal fees associated with this criminal investigation and expect to incur significant expenses in the future. In October 2011, we, and certain of our officers and current and former employees received correspondence from the government identifying them as targets. Tolling agreements have been executed to allow cooperation and discussions regarding resolution. The Company has executed indemnification agreements with each of the individual targets, and each target has executed a corresponding undertaking agreement. If the government chooses to engage in civil litigation or initiate a criminal prosecution against us, our officers or our current or former employees, as a result of its review of the requested documents and other evidence, we may have to incur significant amounts to defend such actions or pay or incur substantial fines or penalties, on behalf of ourselves, our officers or our current or former employees, any of which could significantly deplete our cash resources. The case is ongoing and the likelihood of an unfavorable outcome and/or the amount/range of loss or additional expenses, cannot be reasonably estimated.

~~Bromfenac~~TRICARE ~~Royalty~~Retail ~~Litigation~~Pharmacy Program. WeSection 703 ~~initiated~~of ~~legal~~the ~~action~~National Defense inAuthorization ~~April~~Act ~~2010~~of ~~against~~2008, ~~Senju~~enacted ~~seeking~~on aJanuary 28, ~~declaratory~~2009, ~~judgment with~~requires ~~regard~~that topharmaceutical ~~our~~products ~~royalty~~purchased ~~obligations~~through the Department of Defense, or DoD, TRICARE Retail Pharmacy program be subject to ~~Senju~~the inFederal ~~connection~~Ceiling ~~with~~Price ~~bromfenac~~discount ~~products~~under the ~~and~~Veterans aHealth ~~recovery~~Care Act of ~~overpaid~~1992. ~~XIBROM~~DoD ~~royalties~~issued ~~and~~a ~~other~~rule ~~damages.~~pursuant ~~The~~to ~~only~~Section 703 ~~U.S.~~that ~~patent~~requires ~~applicable~~manufacturers to ~~XIBROM~~provide ~~and~~DoD with a quarterly refund on pharmaceutical products utilized through the TRICARE Retail Pharmacy program, ~~now~~and to ~~BROMDAY~~pay rebates to DoD on TRICARE Retail Pharmacy purchases retroactive to January 28, ~~expired~~2008. inWe have requested a waiver of the retroactive rebate for TRICARE Retail Pharmacy utilization for the period from January 28, ~~2009~~2008 ~~and~~to May 26, 2009 ~~according~~(the toeffective Udate of the DoD rule).S. ~~case~~In ~~law~~addition, ~~and~~the regulation was the ~~terms~~subject of litigation by others, and it was our ~~agreement~~position ~~with~~that ~~Senju,~~the weretroactive ~~believe~~application noof ~~bromfenac~~the ~~product~~regulation ~~royalties~~was ~~are~~contrary ~~due~~to ~~after~~established ~~patent~~case ~~expiration~~law. In ~~August~~October ~~2010~~2011, the United ~~U.S.~~States District Court for the ~~Central~~ District of ~~California~~Columbia ~~stayed~~issued ~~our~~its ~~action~~decision ~~against Senju,~~in ~~and,~~Coalition for Common Sense in ~~September 2010~~Government Procurement v. United States, ~~Senju~~No. 08-996 ~~initiated~~(D.D.C. anOct. ~~arbitration~~25, ~~proceeding~~2011) ~~regarding~~upholding the ~~same~~DoD’s ~~dispute~~regulation. ~~with~~That case has been appealed to the ~~International~~United ~~Chamber~~States ofCircuit ~~Commerce,~~Court orfor the ~~ICC.~~District ~~The~~of ~~order~~Columbia. ~~staying~~It ~~our~~is ~~action~~uncertain ~~against~~whether ~~Senju~~such appeal will ~~not~~be ~~become~~successful. ~~appealable~~In ~~until~~addition, ~~after~~ the ~~arbitration~~ isforegoing ~~concluded~~court ~~and~~decision adoes ~~judgment~~not isimpact ~~entered~~our incurrently ~~the~~pending ~~court~~request ~~case.~~for ~~The~~a ~~arbitration~~waiver ~~proceeding,~~of the retroactive ~~outcome~~rebate. As of ~~which~~March ~~may~~31, ~~also~~2012, ~~affect~~we determined that our ~~BROMDAY~~payment ~~royalty~~of ~~obligations~~the retroactive rebate (from January 28, 2008 to May 26, 2009) created by the regulation is inneither ~~its~~reasonably ~~early~~estimable ~~stages~~nor probable.

FDA Complaint. In ~~June 2010~~March 2011, we ~~initiated~~filed a ~~legal~~Citizens ~~action~~Petition, byor ~~filing~~ a ~~Complaint~~CP, ~~against~~with ~~AcSentient,~~the ~~Inc~~FDA. ~~and~~The ~~AcSentient~~CP ~~II,~~requested ~~LLC,~~the ~~which~~FDA ~~we collectively refer~~ to asrefrain ~~AcSentient,~~from granting ~~seeking~~tentative aor ~~declaratory~~final ~~judgment~~approval ~~with~~of ~~regard~~any toabbreviated ~~our~~New ~~bromfenac~~Drug ~~royalty~~Application, ~~obligations~~or ~~under~~ANDA, ~~the~~for ~~Asset~~bromfenac ~~Purchase~~sodium ~~Agreement~~ophthalmic ~~dated~~solution ~~May 3,~~0.09% ~~2002~~that ~~between~~utilizes the ~~Company~~labeling ~~and~~for ~~AcSentient~~XIBROM, ~~Inc.~~or ~~The~~omits ~~only~~any ~~U.S.~~portion ~~patent~~of ~~applicable to~~the ~~XIBROM~~BROMDAY ~~and,~~label ~~now,~~relating to ~~BROMDAY~~the ~~expired~~once-per-day dosing. inIn ~~January~~May ~~2009 and~~2011, ~~according~~the toFDA ~~U.S.~~partially ~~case~~denied ~~law~~our CP and ~~the~~approved ~~terms~~a generic version of ~~our~~XIBROM. ~~agreement~~In ~~with~~May ~~AcSentient~~2011, ~~Inc.,~~ we ~~believe~~filed noa ~~XIBROM~~Complaint ~~and~~in ~~BROMDAY~~the ~~royalties~~United ~~are~~States ~~due~~District ~~after~~Court ~~patent~~for ~~expiration.~~the ADistrict ~~declaratory~~of ~~judgment~~Columbia alleging that ~~we are seeking from~~ the ~~Court~~FDA’s inapproval ~~regard~~of toa ~~royalty~~generic version ~~obligations~~of toXIBROM ~~AcSentient~~was ~~may~~arbitrary, ~~apply~~capricious, ~~not~~and ~~only~~contrary to ~~XIBROM,~~law. We ~~but~~ also tofiled ~~BROMDAY,~~papers ~~which~~seeking ~~was~~injunctive ~~approved~~relief bywith respect to the FDA’s inapproval ~~October~~of ~~2010.~~a Ingeneric ~~November~~version ~~2010,~~of ~~the~~twice-daily ~~Superior~~XIBROM ~~Court~~and ofrelief ~~the~~from ~~State~~denial of ~~California,~~our ~~County~~2011 ofCP requesting ~~Orange~~that ~~stayed~~the ~~our~~FDA ~~case~~refrain ~~against~~from ~~AcSentient~~granting ~~and~~tentative ~~ruled~~or final approval of any ANDA that utilizes the ~~dispute~~labeling ~~had~~for toXIBROM beor ~~arbitrated. We~~omits ~~will~~any ~~have~~portion anof ~~opportunity~~the BROMDAY label relating to ~~appeal~~the ~~that~~once-per-day ~~Court’s~~dosing. Although ~~ruling~~our ~~after~~request ~~the~~for ~~final~~a ~~judgment~~temporary isinjunction ~~entered~~was denied by the ~~Court.~~court Inin ~~January~~May 2011, ~~AcSentient~~our ~~filed~~subsequent ~~a request~~motion for ~~arbitration~~summary ~~with~~judgment seeking revocation of the ~~ICC.~~approval ~~That~~of ~~arbitration~~the isgeneric inbromfenac ~~its~~product, ~~early~~as ~~stages.~~well as the FDA’s counter-motion for summary judgment, have been fully briefed before the court.

There can be no assurance about when these two disputes will be resolved, and we cannot predict the final outcome or financial impact of either. Until these two disputes are resolved, for accounting purposes, we have been and intend to continue to reserve for BROMDAY and XIBROM royalties, which would have been payable to Senju and AcSentient if the relevant contractual royalty obligations were existing and enforceable. As of September 30, 2011, we had approximately $33.5 million reserved for such contingent XIBROM and BROMDAY royalties.

Subpoenas From the U.S. Attorney, Western District of New York. In April 2008, we received subpoenas from the office of the U.S. Attorney for the Western District of New York requesting information regarding the marketing activities related to XIBROM. We are cooperating with the government’s investigation. From April 2008 through September 30, 2011, we have incurred approximately $4.0 million in legal fees associated with this criminal investigation and expect to incur significant expenses in the future. In October 2011, we, and certain of our officers and current and former employees received correspondence from the government identifying them as targets. Tolling agreements have been executed to allow cooperation and discussions regarding resolution. If the government chooses to engage in civil litigation or initiate a criminal prosecution against us, our officers or our current or former employees, as a result of its review of the requested documents and other evidence, we may have to incur significant amounts to defend such actions or pay or incur substantial fines or penalties, on behalf of ourselves, our officers or our current or former employees, any of which could significantly deplete our cash resources. The case is ongoing and the likelihood of an unfavorable outcome and/or the amount/range of loss or additional expenses, cannot be reasonably estimated.

~~January 28,~~ In ~~2008.~~October We2010, ~~have~~we ~~requested~~submitted a ~~waiver~~supplemental ofNew ~~the~~Drug Application, ~~retroactive~~or ~~rebate~~sNDA, ~~for~~to ~~TRICARE~~add ~~Retail~~a ~~Pharmacy~~2.4 ~~utilization~~mL ~~for~~size to the ~~period~~already ~~from~~existing ~~January 28,~~New ~~2008~~Drug toApplication, ~~May 26~~or NDA, ~~2009~~approval ~~(the~~for ~~effective date~~1.7 ofmL ~~the~~size ~~DoD~~of ~~rule)~~BROMDAY. In ~~addition~~February 2011, the ~~regulation~~FDA’s ~~was~~Center ~~the~~for ~~subject~~Drug ofEvaluation ~~litigation~~and byResearch, ~~others~~or CDER, ~~and~~issued ita ~~was~~Complete ~~our~~Response letter, ~~position~~stating that the ~~retroactive~~sNDA ~~application~~could ofnot ~~the~~be ~~regulation~~approved ~~was~~because ~~contrary~~a single bottle should not be used to ~~established~~treat ~~case~~more ~~law.~~than Asone ofeye ~~September~~in a post-operative setting. ~~30,~~In May 2011, we ~~determined that~~requested ~~our~~a ~~payment~~hearing ofon the ~~retroactive~~proposal ~~rebate~~to ~~(from~~deny ~~January~~approval of the sNDA. 28In August 2011, ~~2008~~CDER toissue ~~May 26~~a Notice of Opportunity for a Hearing, ~~2009)~~proposing ~~created~~to bydeny approval of the ~~regulation~~2.4 ismL ~~neither~~size. ~~reasonably~~The ~~estimable~~FDA ~~nor~~was ~~probable~~required asto ofhold ~~September~~the hearing or grant itself summary judgment by December 303, 2011. In ~~late~~November ~~October~~ 2011, ~~the~~we ~~United States District~~contacted ~~Court~~CDER, ~~for~~saying ~~the~~it ~~District~~had ofviolated ~~Columbia issued~~ its ~~decision~~own inrules ~~Coalition~~by ~~for~~not ~~Common~~commencing ~~Sense~~the hearing in ~~Government~~time ~~Procurement~~to v.meet ~~United~~the ~~States,~~December 3 Nodeadline. ~~08-996~~The ~~(D.C.~~FDA ~~Dist.~~responded ~~Ct.~~by ~~Oct.~~saying ~~25,~~that ~~2011)~~any ~~upholding~~ruling on the ~~DoD's~~matter ~~regulation.~~should Itbe isdeferred ~~uncertain~~until ~~whether~~a meeting of the ~~decision~~FDAs ~~will~~Dermatologic and beOphthalmic ~~appealed,~~Drugs ~~and~~Advisory ifCommittee, soor DODAC, could be held on the issue of whether ~~such~~a ~~appeal~~single ~~would~~bottle should be ~~successful~~used to treat more than one eye in a post-operative session. We Inthen ~~addition,~~requested the ~~foregoing~~FDA ~~court~~to ~~decision~~grant ~~does~~summary ~~not~~judgment ~~impact~~because of CDER’s ~~our~~persistent ~~currently~~refusal ~~pending~~to ~~request~~act ~~for~~on athis ~~waiver~~matter ofor ~~the~~that ~~retroactive~~CDER ~~rebate~~be ordered to commence a hearing forthwith.

~~FDA~~On February ~~Complaint. We filed a Citizen Petition~~27, ~~or CP~~2012, ~~with~~DODAC ~~the~~met ~~FDA~~to indiscuss ~~March 2011. The CP requested~~ the ~~FDA~~appropriateness ~~to refrain~~of ~~from~~using ~~granting~~a ~~tentative~~single orbottle ~~final approval~~ of ~~any~~anti-inflammatory ~~abbreviated~~drops ~~new~~to ~~drug~~treat ~~application,~~both oreyes ~~ANDA,~~post-operatively ~~for~~and ~~bromfenac sodium ophthalmic solution 0.09% that utilizes~~ the ~~labeling~~appropriate ~~for~~fill ~~discontinued~~volume ~~XIBROM~~of ~~(bromfenac~~these ~~ophthalmic solution)® 0~~drugs.~~09%~~ orDODAC ~~omits~~agreed ~~any~~that ~~portion~~it ofmay ~~the~~be ~~BROMDAY~~appropriate ~~label relating~~ to ~~the~~use ~~once-per-day dosing. In May 2011, the FDA partially~~a ~~denied~~single ~~our~~bottle CPfor ~~and~~both ~~approved~~eyes with a ~~generic~~vote ~~version~~ of ~~twice-daily~~five ~~bromfenac~~(5) ~~ophthalmic~~“yes” ~~solution 0.09%~~votes, ~~which~~four is(4) ~~substitutable~~“no” ~~for~~votes, ~~one~~and ~~bottle~~two ~~size of our twice-daily XIBROM~~ (~~bromfenac ophthalmic solution~~2)® 0abstentions.~~09%. In~~ ~~May 2011~~However, weDODAC ~~filed~~agreed ~~a Complaint in the United States District Court for the District of Columbia alleging~~ that ~~the~~it ~~FDA’s~~is ~~approval~~not ofappropriate ~~a generic version of XIBROM was arbitrary, capricious, and contrary~~ to ~~law. We~~label ~~also~~a ~~filed~~product ~~papers~~for ~~seeking~~such ~~injunctive~~use ~~relief~~ with ~~respect to the FDA’s approval of~~ a ~~generic~~vote ~~version~~ of ~~twice-daily~~one ~~bromfenac~~(1) “yes” ~~ophthalmic~~vote ~~solution 0.09%~~ and ~~relief~~ten ~~from denial~~(10) of“no” ~~our~~votes, ~~2011~~mainly CPbecause ~~requesting~~there ~~that~~is ~~the~~no ~~FDA~~formal ~~refrain~~clinical ~~from~~study ~~granting~~on ~~tentative~~this oruse. ~~final~~DODAC ~~approval~~stated ~~of any abbreviated new drug application for bromfenac sodium ophthalmic solution 0.09%~~ that ~~utilizes~~ the ~~labeling~~decision ~~for discontinued XIBROM or omits any portion of the BROMDAY label relating~~ to ~~the~~use ~~once-per-day~~one ~~dosing. Although~~bottle ~~our request~~ for atwo ~~temporary~~eyes ~~injunction~~should ~~was~~be ~~denied~~entirely ~~by the Court~~ in ~~May 2011, our subsequent motion for summary judgment seeking revocation of~~ the ~~approval of the generic bromfenac product, as well as the FDA~~physician’s ~~counter-motion for summary judgment, have been fully briefed before the Court~~discretion.

Shareholder Class Action Complaints. We, ~~are~~our ~~involved~~directors, Parent and Merger Sub were named as defendants in ~~other~~four ~~claims~~putative ~~and~~class action ~~legal~~complaints. ~~proceedings~~The ~~incidental~~first tocase, ~~our~~captioned ~~business~~Hutt ~~from~~v. ~~time~~ISTA toPharmaceuticals, ~~time~~Inc., ~~Except~~et asal., ~~described~~C.A. ~~immediately~~7367, was filed on March 29, 2012 in the Court of Chancery of the State of Delaware. An amended complaint was filed in the Hutt action ~~above~~on April 27, we2012. The doplaintiff and Mr. Peter Barton Hutt, one of our directors, are not ~~believe~~related. ~~that~~The ~~pending~~second, ~~actions~~third, orand ~~proceedings~~fourth complaints, ~~either~~captioned ~~individually~~Salina v. ISTA Pharmaceuticals, Inc., et al., Hijab v. ISTA Pharmaceuticals, Inc., et al., and Kretz v. ISTA Pharmaceuticals, Inc., et al., were filed on or about April 5, 2012, April 10, 2012, and April 25, 2012 respectively, in the ~~aggregate~~Superior Court for the State of California. On April 30, ~~will~~2012, ~~have~~an aamended ~~material~~complaint ~~adverse~~was filed ~~effect~~in the Hijab action. The actions, purportedly brought on behalf of a class of stockholders, allege that our ~~financial~~directors ~~condition~~breached their fiduciary duties in connection with the proposed acquisition by, ~~results~~among other things, failing to disclose all material information concerning the Merger, and failing to maximize stockholder value and obtain the best financial and other terms and act in the best interests of ~~operations~~public orstockholders. The ~~cash~~complaints ~~flows~~further allege that Bausch & Lomb aided and abetted the directors’ purported breaches. The plaintiffs seek injunctive and other equitable relief, including enjoining us from consummating the Merger, and ~~adequate~~damages, ~~provision~~in ~~has~~addition ~~been~~to ~~made~~fees ~~for~~and costs. On May 1, 2012, the ~~resolution~~plaintiff in the Salina action filed a request for voluntary dismissal of ~~such~~that ~~actions~~case. We believe that the claims asserted in these suits are without merit and ~~proceedings~~intend to vigorously defend these matters.

We are involved in other claims and legal proceedings incidental to our business from time to time. We do not believe that pending actions or proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows, and adequate provision has been made for the resolution of such actions and proceedings.

Segment Reporting

We currently operate in only one segment.

Income Taxes

We account for income taxes under the Income Tax Topic of the FASB ~~Accounting Standards Codification~~ASC. As of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, there are no unrecognized tax benefits included in the balance ~~sheet~~sheets that would, if recognized, affect the effective tax rate.

Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our ~~condensed~~ balance sheets at ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011, respectively, and have not recognized interest and/or penalties in the ~~condensed~~ statement of operations for the ~~three~~period ~~and nine months~~ ended ~~September~~ March 3031, ~~2011~~2012.

We are subject to taxation in the ~~United~~U.S. ~~States~~ and various state jurisdictions. Our tax years for ~~2007~~ 2008 and forward are subject to examination by federal tax authorities, as are the years ~~2006~~2007 and forward by state tax authorities. Net operating loss carryforwards from the years ~~1995~~1996 forward are also subject to adjustment.

At December 31, 2010, we had net deferred tax assets of $42.9 million. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of our net operating loss and research and development credit carryforwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future due to the exercise of warrants or other transactions. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.

At December 31, 2010, we had federal and state net operating loss carryforwards of approximately $117.5 million and $72.3 million, respectively, after utilizing $17.8 million to offset taxable income in 2010 and limiting our net operating loss carryforwards due to previous ownership changes under Internal Revenue Code Section 382. Federal tax loss carryforwards continue to expire in 2011 unless previously utilized. California tax loss carryforwards begin to expire in 2012, unless previously utilized. In addition, we have federal and California research and development tax credit carryforwards of $9.6 million and $6.2 million, respectively. The federal research and development credit carryforwards will begin to expire in 2011 unless previously utilized. The California research and development credit carryforwards carry forward indefinitely.

~~New~~At ~~Accounting~~December 31, ~~Pronouncements~~2011, we had net deferred tax assets of $83.2 million. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of our net operating loss and research and development credit carryforwards to offset future taxable income are subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have occurred previously or that could occur in the future. We have completed a Section 382 analysis to determine the limitation of the net operating loss but have not completed an analysis of research and development credit carry forwards. Until this analysis has been performed, we have removed the deferred tax assets for federal research and development credits of $6.6 million and $6.4 million for state research and development credits generated through 2011 from the deferred tax asset schedule, and have recorded a corresponding decrease to the valuation allowance. When this analysis is finalized, we plan to update our unrecognized tax benefits. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.

InAt ~~June~~December 31, 2011, ~~the~~we ~~FASB~~had ~~updated~~federal ~~the~~and ~~accounting~~California ~~guidance~~net onoperating ~~Topic~~loss ~~220,~~carryforwards ~~entitled~~of approximately ~~“Comprehensive~~$123.0 ~~Income”,~~million ~~relating~~and to$74.0 ~~presentation of~~million, ~~comprehensive income~~respectively. ~~This~~Our ~~guidance~~net ~~requires~~operating ~~companies~~loss tocarryforwards ~~present~~are ~~total~~limited ~~comprehensive~~due ~~income,~~to ~~the~~previous ~~components~~ownership ofchanges ~~net~~under ~~income~~Internal ~~and~~Revenue ~~the~~Code ~~components~~Section 382. ofWe ~~other~~have ~~comprehensive~~established ~~income,~~a orvaluation ~~OCI,~~allowance ~~either~~against inour federal aand ~~single~~California ~~continuous~~net ~~statement~~operating ofloss ~~comprehensive~~carryforwards ~~income or~~due into ~~two~~the ~~but~~uncertainty ~~consecutive~~of ~~statements~~realization. ~~Additionally,~~Our ~~companies~~federal ~~are~~tax ~~required~~loss carryforwards began to ~~present~~expire onin ~~the~~2011, ~~face~~and ofwill ~~the~~continue ~~financial~~to ~~statements~~expire ~~the~~unless ~~reclassification~~utilized. ~~adjustments~~Our ~~that~~California ~~are~~tax ~~reclassified~~loss ~~from~~carryforwards ~~OCI~~began to expire ~~net~~in ~~income~~2012, ~~where~~and ~~the~~will ~~components~~continue ofto ~~net~~expire ~~income~~unless ~~and~~utilized. ~~the components~~We ofalso ~~OCI~~have ~~are~~federal ~~presented.~~and ~~This~~California ~~guidance~~research istax ~~effective~~credit ~~beginning~~carryforwards inof ~~our~~approximately ~~fiscal~~$6.6 ~~2012~~million ~~year~~and $6.4 million, respectively. The ~~adoption~~federal ofresearch ~~this~~tax ~~guidance~~credits isbegan ~~not~~to ~~expected~~expire in 2011, and will continue to ~~have~~expire aunless ~~material~~utilized. ~~impact~~Our onCalifornia ~~our~~research ~~financial~~tax ~~position~~credit orcarryforwards ~~results~~do ofnot ~~operations~~expire and will carryforward indefinitely until utilized.

In June 2011, the FASB updated the accounting guidance on alignment of disclosures for GAAP and the International Financial Reporting Standards, or IFRS, by updating Topic 820 entitled “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”, relating to presentation of fair value measurements reported in financial statements. The updated guidance requires companies to align fair value measurement and disclosure requirements between GAAP and IFRS. The updated guidance is effective beginning in our fiscal 2012 year and earlier adoption is not permitted. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In December 2010, the FASB updated the accounting guidance relating to the disclosure of supplementary pro forma information for business combinations. The updated guidance requires companies to provide additional comparative pro forma financial information along with the nature and amount of any material nonrecurring pro forma adjustments related to the business combination. The updated guidance is effective for business combinations which have an acquisition date in fiscal years beginning on or after December 15, 2010, or our 2011 fiscal year. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In December 2010, the FASB issued an Accounting Standards Update, Entitled “Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers (A consensus of the FASB Emerging Issues Task Force)”. ASU 2010-27 addresses how pharmaceutical companies should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, of 2010 and the Health Care and Education Affordability Reconciliation Act of 2010 and subsequent legislation passed during the third quarter of 2010, which we collectively refer to as the Healthcare Reform Act. The Healthcare Reform Act imposes an annual fee on the pharmaceutical manufacturing industry for each year beginning on or after January 1, 2011. For reporting entities that are subject to the pharmaceutical fee mandated by the Healthcare Reform Act, the amendments in ASU 2010-27 specify the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight–line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2010-27 is effective for calendar years beginning after December 31, 2010, or our 2011 fiscal year, when the fee initially becomes payable. We adopted the provisions of ASU 2010-27 on January 1, 2011 and the adoption did not have a material effect to our financial position or results of operations.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition — Milestone Method (Topic 605): Milestone Method of Revenue Recognition, or ASU 2010-17. ASU 2010-17 provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. Under ASU 2010-17, entities can make an accounting policy to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met for the milestones to be considered substantive. ASU 2010-17 is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010, which for us means our fiscal year 2011. We adopted the provisions of ASU 2010-17 on January 1, 2011 and the adoption did not have a material effect to our financial position or results of operations.

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

This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other sections of this Quarterly Report on Form 10-Q. Words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this Quarterly Report on Form 10-Q, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Quarterly Report on Form 10-Q. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and the audited financial statements and the notes thereto and disclosures made under the captions “Management Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “ Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011, ~~filed~~as ~~with the Securities and Exchange Commission, or the SEC, on February 25, 2011~~amended. We obtained the market data and industry information contained in this Quarterly Report on Form 10-Q from internal surveys, estimates, reports and studies, as appropriate, as well as from market research, publicly available information and industry publications. Although we believe our internal surveys, estimates, reports, studies and market research, as well as industry publications, are reliable, we have not independently verified such information, and, as such, we do not make any representation as to its accuracy.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited condensed financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011, ~~filed~~as ~~with the SEC~~amended, ~~on February 25, 2011~~ and the unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q. References in this Quarterly Report on Form 10-Q to “ISTA,” “we,” “our,” “us,” or the “Company” refer to ISTA Pharmaceuticals, Inc.

Overview

We currently have four products available for sale in the U.S. and Puerto Rico: once-daily BROMDAY (bromfenac ophthalmic solution) 0.09%, for the treatment of postoperative inflammation and reduction of ocular pain in patients who have undergone cataract extractions, BEPREVE (bepotastine besilate ophthalmic solution) 1.5%, for the treatment of ocular itching associated with allergic conjunctivitis, ISTALOL (timolol maleate ophthalmic solution) 0.05%, for the treatment of glaucoma, and VITRASE (hyaluronidase injection) ovine, 200 USP units/ml, for use as a spreading agent. ~~Until~~At ~~February 28,~~the beginning of 2011, we ~~sold~~had one additional product available for sale, twice-daily XIBROM (bromfenac ophthalmic solution) 0.09%, ~~which~~a ~~was~~topical ~~prescribed~~non-steroidal anti-inflammatory formulation of bromfenac for the treatment of ocular inflammation and pain following cataract surgery., ~~Effective~~or ~~February~~XIBROM. ~~2011,~~We we stopped shipping XIBROM ~~and~~in ~~focused~~February ~~on the conversion of XIBROM sales to BROMDAY sales. For the week ended September 30,~~ 2011~~, 97~~.6% ~~of the new prescriptions for our bromfenac franchise were converted to BROMDAY.~~ In addition, we have several eye and allergy product candidates in various stages of development, including treatments for dry eye, ocular inflammation and pain and nasal allergies.

We have incurred losses since inception and have a stockholders’ deficit of approximately $~~34.8~~477 million ~~through~~at ~~September~~March 3031, ~~2011~~2012.

~~During~~Merger ~~the~~Agreement ~~three~~with ~~months~~Bausch ~~ended~~& ~~September 30,~~Lomb ~~2011 and through the date of this filing, the following events occurred:~~

•On InMarch 26, ~~early September 2011~~2012, we ~~launched~~entered into a ~~twin-pack~~definitive ~~size~~Agreement and Plan of ~~BROMDAY.~~Merger, ~~This~~or ~~size~~the Merger Agreement, with Bausch & Lomb Incorporated, a New York corporation, or Parent, and Inga Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of ~~BROMDAY~~Parent, ~~will~~or ~~also~~Merger ~~allow~~Sub, usand towhich ~~offer~~together ~~BROMDAY~~with toParent ~~our~~we ~~customers~~refer into anas ~~alternative~~Bausch ~~pack~~& ~~size~~Lomb.

•Pursuant Onto ~~October~~the ~~13,~~terms ~~2011, we announced statistically significant results from our Phase 3 clinical program for PROLENSA™ (bromfenac ophthalmic solution). PROLENSA is a low concentration~~ of ~~bromfenac~~the inMerger aAgreement, ~~modified~~and ~~ophthalmic~~subject ~~solution~~to ~~developed~~the toconditions ~~treat~~thereof, ~~pain~~Merger ~~and~~Sub ~~inflammation~~will ~~associated~~merge with ~~cataract~~and ~~surgery.~~into ~~The new~~us, ~~optimized~~and ~~formulation~~we ~~used~~will become ~~for~~a ~~PROLENSA~~wholly-owned ~~enhances~~subsidiary ~~the penetration~~ of ~~the~~Parent, ~~drug~~which ~~into~~transaction ~~ocular~~we ~~tissues,~~refer ~~allowing us~~ to ~~lower~~as the ~~concentration~~Merger. ofAt the ~~active~~effective ~~ingredient,~~time ~~bromfenac,~~of ~~while maintaining~~ the ~~convenience~~Merger, ofeach ~~once-daily~~share ~~use~~ of ~~BROMDAY.~~our Incommon ~~both~~stock ~~Phase~~issued 3and ~~studies,~~outstanding ~~PROLENSA~~immediately ~~was~~prior ~~statistically~~thereto ~~significantly~~(other ~~better~~ than ~~placebo~~shares ~~and~~owned ~~met~~by ~~the~~(i) any ~~primary efficacy endpoint~~ of our ~~absence~~stockholders ofwho ~~ocular~~are ~~inflammation~~entitled 14to ~~days following surgery~~ and ~~the~~who ~~secondary~~properly ~~efficacy~~exercise, ~~endpoint~~and ofdo ~~elimination~~not ofwithdraw ~~ocular pain one day post-surgery. There were no serious drug-related ocular~~ or ~~systemic adverse events~~lose, ~~and~~appraisal ~~PROLENSA's~~rights ~~safety~~under ~~profile~~Section 262 ~~was~~of ~~found~~the toGeneral beCorporation ~~consistent~~Law ~~with~~of ~~our~~the ~~currently~~State ~~marketed~~of ~~topical nonsteroidal anti-inflammatory drug~~Delaware, ~~or NSAID, compound, BROMDAY™~~ (~~bromfenac ophthalmic solution~~ii) us ~~0.09%.~~as ~~The~~treasury ~~two~~stock ~~clinical~~or ~~studies had the lowest number of adverse events~~ (~~greater than 2%~~iii) Parent ~~than~~or any of ~~our~~its ~~bromfenac~~wholly-owned ~~clinical~~subsidiaries) ~~trials~~will ~~for~~be ~~cataract~~converted ~~surgery~~automatically tointo ~~date,~~the ~~and,~~right to ~~the~~receive ~~best~~$9.10 ofin ~~our knowledge~~cash, ~~PROLENSA~~without ~~contains~~interest ~~the~~and ~~lowest~~less ~~concentration of bromfenac currently under investigation in~~ any ~~clinical~~applicable ~~trials~~withholding ~~for inflammation and pain associated with cataract surgery~~taxes. WeOur ~~plan~~Board toof ~~file~~Directors aunanimously ~~New~~approved ~~Drug Application with~~ the ~~FDA~~Merger ~~for~~Agreement ~~PROLENSA~~and inrecommends that ~~the~~our ~~first~~stockholders ~~quarter~~vote ofto ~~2012,~~adopt ~~with~~the aMerger ~~commercial launch planned for late 2012 or early 2013~~Agreement.

•The Onclosing ~~July~~of ~~28,~~the ~~2011,~~Merger weis ~~announced~~subject ~~top-line~~to ~~results~~customary ~~from~~closing conditions ~~the~~including, ~~first~~among ofothers, ~~our~~adoption ~~two~~of ~~Phase~~the 3Merger ~~studies~~Agreement toby ~~evaluate~~ the ~~short-term~~affirmative ~~safety~~vote ~~and efficacy~~ of ~~two~~the ~~concentrations~~holders of ~~REMURA~~a ~~(bromfenac~~majority ~~ophthalmic~~of ~~solution for dry eye) in alleviating~~ the ~~signs~~outstanding ~~and~~shares ~~symptoms~~ of ~~dry~~our ~~eye~~common ~~disease.~~stock ~~Our~~entitled ~~Phase~~to 3vote ~~safety and efficacy program~~thereon, ~~which~~the ~~consisted~~absence of ~~two~~any ~~studies~~governmental ~~known~~order asor ~~EAST~~law ~~and~~that ~~WEST,~~makes the ~~was~~merger ~~conducted~~illegal ~~under~~or aotherwise ~~Special Protocol Assessment~~enjoins, ~~or SPA~~restrains, ~~agreed~~prevents ~~upon~~or ~~with~~prohibits ~~the~~consummation ~~FDA. According to preliminary analysis~~ of the ~~top-line results from the WEST study~~Merger, ~~while REMURA was highly effective in treating a sign~~ and ~~symptom of dry eye~~, itas ~~was not statistically significantly better than placebo,~~ a ~~common~~condition ~~outcome~~to ~~reported~~Bausch in& ~~studies~~Lomb’s ~~testing~~obligation ~~other~~to ~~dry~~complete ~~eye~~the ~~therapies. From baseline~~Merger, ~~both~~the ~~concentrations~~absence of ~~REMURA~~a ~~and~~Company ~~the~~“material ~~placebo~~adverse ~~showed~~effect” since ~~highly~~the ~~statistically~~date ~~significant~~of ~~improvement~~the (pMerger ~~< 0~~Agreement.~~0001)~~ inOn ~~one~~April 23, ~~sign~~2012, ~~and~~we ~~one~~filed ~~symptom.~~a ~~The~~preliminary ~~co-primary~~proxy ~~end-points~~statement ~~identified~~with in the ~~SPA~~Securities ~~require~~and ~~REMURA~~Exchange toCommission, ~~achieve~~or athe ~~statistically significant difference from placebo~~SEC, ~~not~~relating ~~baseline,~~to ~~which was not achieved in~~ the ~~WEST~~special ~~Study.~~meeting ~~All~~for ~~three~~our ~~formulations~~shareholders ~~were~~to ~~rated~~consider byand ~~patients~~vote ason ~~very comfortable. Since REMURA did not meet its co-primary end points in~~ the ~~WEST study, armed with this data, we amended the statistical plan~~ proposal to ~~appropriately~~adopt ~~focus~~ the ~~EAST~~Merger ~~study~~Agreement.

•Results ~~On October 13, 2011, we announced top-line results from the second~~ of ~~our~~Operations two Phase 3 studies to evaluate the short-term safety and efficacy of two concentrations of REMURATM (bromfenac ophthalmic solution for dry eye) in alleviating the signs and symptoms of dry eye disease. In the EAST study, REMURA was highly effective in treating a sign and symptom of dry eye but was not statistically significantly better than placebo in the entire patient cohort, a common outcome reported in studies testing other dry eye therapies. In both Phase 3 studies, safety data demonstrated REMURA was well-tolerated, with an adverse event profile similar to placebo and consistent with those observed previously with REMURA in a Phase 2 study and with other prescription dry eye drops. All three formulations were rated by patients as very comfortable. For the EAST study, we amended the statistical plan to focus on the subpopulation identified in the WEST study as responders. The EAST study did not show a significant difference from placebo in this subpopulation, which we believe is partly due to the fact that the EAST study enrolled far fewer patients with mild to moderate dry eye disease. We will complete a full analysis of the data, but focus our efforts on the potential use of the vehicle as an over-the-counter artificial tear product.

•Three ~~According~~Months toEnded ~~a paper published in September 2011 in the issue of RETINA~~March 31, ~~The~~2012 ~~Journal of Retinal~~ and ~~Vitreous~~2011 Diseases, a pilot study suggested that the topical NSAID, eye drop of XIBROM (bromfenac ophthalmic solution) 0.09%, administered twice daily may have an additive effect when used with intravitreal LUCENTIS® (ranibizumab injection) in reducing retinal thickness in neovascular age-related macular degeneration, or NV AMD. AMD robs the patient of all but the outermost, peripheral vision, leaving only dim images or black holes at the center of vision, and is the leading cause of vision loss and blindness among Americans who are aged 65 and older. Retinal specialists believe reducing the macular thickness (the width of the central retina) may help preserve or improve patients' vision over the long term. Thirty eyes were tested consecutively and were randomized in a 2:1 ratio of combination therapy (intravitreal LUCENTIS and topical XIBROM) and LUCENTIS alone. All patients received LUCENTIS therapy monthly for 4 months, then as needed on a monthly basis in accordance with standard of care. Patients receiving XIBROM self-administered 1 drop twice a day for

Revenues. Net revenues were approximately $34.0 million and $36.7 million for the three months ended March 31, 2012 and March 31, 2011, respectively.

The decrease in revenues for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 is primarily due to lower sales of bromfenac products, higher rebates recorded due to higher utilization under our managed care contracts and higher product return reserves, offset by higher sales of BEPREVE. The decrease in bromfenac product sales results from higher units shipped in 2011 as we had just launched BROMDAY and continued to ship XIBROM prior to stop shipping the product in February 2011.

The following table sets forth our net revenues for each of our products for the three months ended March 31, 2012 and 2011, respectively (dollars in millions), and the corresponding percentage change.


	Three Months Ended March 31,				% Change
	2012		2011		% Change
BROMDAY / XIBROM	$	19.1	$	23.0		-17	%
BEPREVE		6.1		4.2		45	%
ISTALOL		5.8		6.2		-6	%
VITRASE		3.0		3.3		-9	%

Total revenues	$	34.0	$	36.7		-7	%

12Gross margin and cost of products sold. Gross margin for the three months ended March 31, 2012 was 107% of net revenues, or $36.3 ~~Three-quarters~~million, as compared to 75% of ~~subjects~~net ~~enrolled~~revenues, ~~had~~or ~~pre~~$27.5 million, for the three months ended March 31, 2011. Included in the gross margin for the three months ended March 31, 2012 is a $9.3 million one-~~existing~~time ~~minimally~~benefit ~~classic~~to orcost ~~occult~~of NVproducts ~~AMD~~sold ~~and~~as a ~~history~~result of ~~LUCENTIS~~the ~~use~~settlement of our dispute with Senju. ~~Endpoints~~Excluding ~~included~~this ~~adverse~~one-time ~~events~~benefit, ~~mean~~the ~~change~~gross inmargin ~~visual~~for ~~acuity~~the three months ended March 31, ~~change~~2012 was 79%. Excluding the settlement, the increase in ~~macular~~the ~~thickness~~gross margin percentage for the three months ended March 31, ~~number~~2012, ofas ~~subjects~~compared ~~with~~to athe ~~50um~~three ~~(micrometer)~~months orended ~~more~~March 31, 2011 is primarily the reduction in ~~macular~~the ~~thickness~~rate of royalties for BROMDAY and ~~mean~~the ~~number~~growth in revenues and market share for BEPREVE. Cost of ~~LUCENTIS~~products ~~injections~~sold ~~over~~(excluding the 12$9.3 million one-~~month~~time ~~period~~benefit for the Senju royalty settlement) was $7.0 ~~This~~million isfor the ~~second~~three ~~independent~~months ~~study~~ended ~~suggesting~~March 31, ~~that~~2012, ~~use~~as compared to $9.2 million for the three months ended March 31, 2011. Cost of ~~XIBROM~~products ~~may~~sold befor ~~safe~~the three months ended March 31, 2012 and ~~effective~~2011 asconsisted anprimarily ~~adjunct~~of ~~therapy~~standard costs for ~~AMD~~each of our commercial products, distribution costs, royalties, inventory reserves and itother costs of products sold. Excluding the settlement, the decrease in cost of products sold is primarily the ~~longest~~result ~~performed~~of tolower ~~date~~net ~~with~~product ~~twice-daily~~sales ~~XIBROM~~and ~~0.09%~~reduction ~~dosing~~in ~~(12~~the ~~months)~~royalty rate for BROMDAY.

~~Results~~Research and development expenses. Research and development expenses were $9.5 million for the three months ended March 31, 2012, as compared to $10.3 million for the three months ended March 31, 2011. The decrease in research and development expenses of ~~Operations~~$0.8 million is due to timing associated with the initiation and completion of clinical trials and medical affairs costs and partially offset by a $0.6 million milestone expense related to a $2 million milestone payment due to a third party for achievement of $50 million of cumulative net revenues of BEPREVE and higher costs associated with manufacturing development costs, as described below.

~~Three~~Generally, ~~Months~~our ~~Ended~~research ~~September~~and development resources are not dedicated to a single project but are applied to multiple product candidates in our portfolio. As a result, we manage and evaluate our research and development expenditures generally by the type of costs incurred. We generally classify and separate research and development expenditures into amounts related to clinical development costs, regulatory costs, pharmaceutical development costs, manufacturing development costs, and medical affairs costs. In addition, we also record as research and development expenses any upfront and milestone payments to third parties prior to regulatory approval of a product candidate under our licensing agreements unless there is an alternative future use. For the three months ended March 3031, 2012, approximately ~~2011~~47% of our research and ~~2010~~development expenditures were for clinical development costs, 12% were for regulatory costs, 3% were for pharmaceutical development costs, 12% were for manufacturing development costs, 15% were for medical affairs costs, 7% were for a milestone accrual and 4% were for stock-based compensation costs ($0.3 million).

Revenues. Net revenues were $41.4 million for the three months ended September 30, 2011, as compared to $42.0 million for the three months ended September 30, 2010. The 1% decrease is the result of lower revenues in the BROMDAY/XIBROM franchise and higher managed care and government rebates, partially offset by growth in our remaining products. The decrease in XIBROM/BROMDAY is primarily due to a lower average price per BROMDAY prescription as compared to the product it replaced, XIBROM. We recently launched BROMDAY in a twin-pack configuration containing two bottles of BROMDAY priced at approximately double the single bottle price. We anticipate the launch of the BROMDAY twin pack will increase the average price per BROMDAY prescription over time. We recorded $3.7 million in revenues for BROMDAY twin-pack size during the three months ended September 30, 2011.

The following table sets forth our net revenues for each of our products for the three months ended September 30, 2011 and 2010, respectively (dollars in millions), and the corresponding percentage change.

	Three Months Ended September 30,
	2011		2010		% Change
BROMDAY and XIBROM	$	24.9	$	29.6		(16	%)
BEPREVE		5.4		3.9		38	%
ISTALOL		7.0		5.3		32	%
VITRASE		4.1		3.2		28	%
Total revenues	$	41.4	$	42.0		(1	%)

Gross margin and cost of products sold. Gross margin for the three months ended September 30, 2011 was 76% of net revenues, or $31.2 million, as compared to 77% of net revenues, or $32.3 million, for the three months ended September 30, 2010. The decrease in the gross margin percentage is primarily the result of lower revenues from BROMDAY and the impact of higher rebates as discussed above. Cost of products sold was $10.1 million for the three months ended September 30, 2011, as compared to $9.7 million for the three months ended September 30, 2010. Cost of products sold consisted primarily of standard costs for each of our commercial products, distribution costs, royalties, inventory reserves and other costs of products sold. The increase in cost of products sold is primarily the result of the growth of units sold.

Research and development expenses. Research and development expenses were $7.7 million for the three months ended September 30, 2011, as compared to $7.9 million for the three months ended September 30, 2010. The decrease in research and development expenses of $0.2 million is due primarily to decreased medical affairs and manufacturing costs, and partially offset by timing associated with the initiation and completion of clinical trials, as described below.

Generally, our research and development resources are not dedicated to a single project but are applied to multiple product candidates in our portfolio. As a result, we manage and evaluate our research and development expenditures generally by the type of costs incurred. We generally classify and separate research and development expenditures into amounts related to clinical development costs, regulatory costs, pharmaceutical development costs, manufacturing development costs, and medical affairs costs. In addition, we also record as research and development expenses any upfront and milestone payments to third parties prior to regulatory approval of a product candidate under our licensing agreements unless there is an alternative future use. For the three months ended September 30, 2011, approximately 50% of our research and development expenditures were for clinical development costs, 14% were for regulatory costs, 4% were for pharmaceutical development costs, 8% were for manufacturing development costs, 21% were for medical affairs costs, and 3% were for stock-based compensation costs ($0.3 million).

Changes in our research and development expenses are primarily due to the following:

• Clinical Development Costs — ~~Clinical~~Overall clinical development costs, which include clinical investigator fees, clinical trial monitoring costs, data management and statistical analysis, were $4.5 million for the three months ended ~~September~~March 3031, ~~2011~~2012 ~~were $3.9 million~~ as compared to $35.89 million for the three months ended ~~September~~March 3031, ~~2010~~2011. The decrease in costs resulted from the timing of our current ongoing BEPOSONE clinical trial as compared to higher clinical study activity in 2011 related to the Phase 2 BEPOMAX clinical trials, start-up costs related to a clinical trial for PROLENSA and our dry eye clinical trials in 2011.

•

Regulatory Costs — Regulatory costs, which include compliance expenses for existing products and other activity for pipeline projects, were $1.1 million for the three months ended March 31, 2012 and 2011, respectively.

•

Pharmaceutical Development Costs — Pharmaceutical development costs, which include costs related to the testing and development of our pipeline products, were $0.3 million for the three months ended March 31, 2012 and 2011, respectively.

•

Manufacturing Development Costs — Manufacturing development costs, which include costs related to production scale-up and validation, raw material qualification, and stability studies, were $1.2 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively. The increase in the costs relate to a higher number of animal studies and manufacturing development costs associated with our dry eye products.

•

Medical Affairs Costs — Medical affairs costs, which include activities that relate to medical information and communication in support of our products, were $1.4 million for the three months ended March 31, 2012 compared to $2.0 million for the three months ended March 31, 2011, or a decrease of $0.6 million. The decrease is primarily attributable to lower personnel costs and continuing medical education costs, which were higher in 2011 due to the launch of BROMDAY.

• Regulatory Costs — Regulatory costs, which include compliance expenses for existing products and other activity for pipeline projects, were $1.0 million and $0.9 million for the three months ended September 30, 2011 and 2010, respectively.

• Pharmaceutical Development Costs — Pharmaceutical development costs, which include costs related to the testing and development of our pipeline products, were $0.3 million for both the three months ended September 30, 2011 and 2010, respectively.

• Manufacturing Development Costs — Manufacturing development costs, which include costs related to production scale-up and validation, raw material qualification, and stability studies, were $0.6 million and $0.7 million for the three months ended September 30, 2011 and 2010, respectively.

• Medical Affairs Costs — Medical affairs costs, which include activities that relate to medical information and communication in support of our products, were $1.6 million for the three months ended September 30, 2011 as compared to $1.9 million for the three months ended September 30, 2010. The decrease is primarily attributable to lower continuing medical education costs.

Our research and development activities reflect our efforts to advance our product candidates through the various stages of product development. The expenditures that will be necessary to execute our development plans are subject to numerous uncertainties, which may affect our research and development expenditures and capital resources. For instance, the duration and the cost of clinical trials may vary significantly depending on a variety of factors including a trial’s protocol, the number of patients in the trial, the duration of patient follow-up, the number of clinical sites in the trial, and the length of time required to enroll suitable patient subjects. Even if earlier results are positive, we may obtain different results in later stages of development, including failure to show the desired safety or efficacy, which could impact our development expenditures for a particular product candidate. Although we spend a considerable amount of time planning our development activities, we may be required to deviate from our plan based on new circumstances or events or our assessment from time to time of a product candidate’s market potential, other product opportunities and our corporate priorities. Any deviation from our plan may require us to incur additional expenditures or accelerate or delay the timing of our development spending. Furthermore, as we obtain results from trials and review the path toward regulatory approval, we may elect to discontinue development of certain product candidates in certain indications, in order to focus our resources on more promising candidates or indications. As a result, the amount or ranges of costs and timing to complete our product development programs and each future product development program is not estimable.

Selling, general and administrative expenses. Selling, general and administrative expenses were $1928.64 million for ~~both~~ the three months ended March 31, 2012, as compared to $26.9 million for the three months ended ~~September~~March 3031, 2011. ~~and~~The ~~September 30~~$1.5 million increase primarily reflects higher expenses related to sales, ~~2010~~promotion and marketing of our products of $0.6 million, ~~respectively~~higher general and administration expenses of $0.4 ~~Included~~million and higher stock based compensation of $0.5 million. The increase in general and administration expenses is due primarily to costs incurred as part of our strategic option process ($3.9 million) and costs for ongoing litigation ($0.7 million), offset by costs incurred in 2011 related to a failed acquisition ($4.5 million). In connection with the ~~three~~our ~~months~~strategic ~~ended~~option ~~September 30~~process, ~~2011~~pursuant ~~are~~to the terms of our financial advisor’s engagement letters with us, our financial advisor has previously received a fee of $0.98 million for ~~costs~~services ~~incurred~~rendered in connection with the ~~bromfenac~~Merger ~~royalty~~and ~~litigation~~strategic defense of the Company, invoiced a fee of $2.5 Nomillion (which has not yet been paid) upon ~~similar~~announcement ~~expenses~~of ~~were~~the ~~recorded~~Merger inand is entitled to receive a contingent fee our financial advisor has estimated to be approximately $7.5 million if the ~~comparable~~Merger ~~period~~is inconsummated. ~~2010~~In addition, under its engagement letters with us, our financial advisor invoiced a separate defense advisory fee of $4.4 million, $2.6 million of which our financial advisor has offered to credit against the contingent fee to be paid to it by us if the Merger is consummated, and the contingent fee, the defense advisory fee and any unpaid transaction expenses are paid to our financial advisor within one business day thereafter.

Stock-based compensation costs. Total stock-based compensation costs for the three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011 were $1.15 million and $1.0 million, respectively. ~~For~~The increase in the cost of $0.5 million was primarily due to higher compensation recorded during the three months ended ~~September~~March 31, 2012, stock options, restricted stock awards, stock appreciation rights and phantom stock granted during the three months ended December 3031, 2011, which were not present in 2011. For the three months ended March 31, 2012 and ~~2010~~2011, we granted stock options to employees to purchase 8144,~~400~~ 250 shares of common stock (at a weighted average exercise price of $68.5103 per share) and 60635,~~000~~940 shares of common stock (at a weighted average exercise price of $36.1160 per share), respectively, equal to the fair market value of our common stock at the time of grant. We ~~also~~did ~~issued~~not ~~4,000~~issue ~~and~~any ~~3,333~~ restricted stock awards ~~for~~during the three months ended ~~September~~March 3031, ~~2011~~2012 ~~and~~as ~~2010~~compared to issuing 139,543 restricted ~~respectively~~stock awards for the three months ended March 31, 2011. Included in stock-based compensation costs were $0.2 million and $0.1 million for each of the three months ended ~~September~~ March 3031, ~~2011~~2012 and ~~2010~~2011, ~~respectively,~~ related to restricted stock awards and $0.1 million related to stock appreciation rights and phantom stock issued during the three months ended December 31, 2011. No similar costs were recorded in 2011 related to the stock appreciation rights or phantom stock.

Interest expense. Interest expense was $1.74 million ~~and~~for the three months ended March 31, 2012 as compared to $2.1 ~~for~~million for the three months ended ~~September~~March 3031, 2011. ~~and~~Interest ~~2010,~~cost ~~respectively.~~were ~~The~~lower ~~decrease~~during inthe ~~interest~~three ~~expense~~months ~~was~~ended ~~due~~March 31, to2012 ~~the~~as ~~repayment~~we ofrepaid $21.5 million on our Facility Agreement (as described below) in 2011. The components of interest expense are as follows (in millions):

The components of interest expense are as follows (in millions):


	Three Months Ended March 31,
	2012		2011
Interest related to the Facility Agreement	$	0.7	$	1.1
Amortization of the discount on the Facility Agreement		0.5		0.6
Amortization of deferred financing costs		0.2		0.2
Amortization of derivative on the Facility Agreement		—		0.1
Interest related to the Revolving Credit Facility		—		0.1

Interest expense	$	1.4	$	2.1

	Three MonthsEnded September 30,
	2011		2010
Interest related to the Facility Agreement	$	0.8	$	1.1
Amortization of the discount on the Facility Agreement		0.5		0.6
Amortization of deferred financing costs		0.2		0.2
Amortization of derivative on the Facility Agreement		0.1		0.1
Interest related to the Revolving Credit Facility		0.1		0.1
Interest expense	$	1.7	$	2.1

~~Gain~~Loss ~~(loss)~~ on ~~warrant~~derivative valuation. ~~For~~During the three months ended ~~September~~March 3031, ~~2011~~2012, we incurred ~~recorded~~ a ~~non-cash~~loss ~~valuation gain~~ of $281.37 million, oron ~~$0.59~~the ~~per~~derivative ~~diluted~~valuation ~~share,~~ as compared to ano ~~non-cash~~change ~~valuation~~in ~~loss~~the ofderivative ~~$26.3~~value ~~million, or $0.79 per diluted share,~~ for the three months ended ~~September~~March 3031, ~~2010~~2011. ~~The~~During ~~change in~~ the ~~valuation~~ ofthree ~~the~~months ~~warrants~~ended ~~for~~March 31, 2012, the ~~three~~value ~~months~~of ~~ended~~the ~~September 30~~derivative, ~~2011~~which ~~and~~is related ~~2010~~to ~~was~~certain ~~primarily~~change ~~driven~~in bycontrol ~~changes~~transactions inunder our ~~stock~~Facility ~~price~~Agreement, ~~and~~increased ~~the~~as ~~number~~a result of ~~weighted~~our ~~average~~decision ~~warrants~~to ~~outstanding,~~enter ~~offset~~into bythe ~~increases~~Merger inAgreement ~~related~~with ~~volatility~~Bausch & Lomb.

~~Nine~~Loss on warrant valuation. For the three months ended ~~September~~March 3031, 2012, we recorded a non-cash valuation loss of $13.0 million or $0.31 per basic and diluted share as compared to a non-cash valuation loss of $72.2 million, or $2.14 per basic and diluted share for the three months ended March 31, 2011. The change in the valuation of the warrants for the three months ended March 31, 2012 was primarily driven by a decrease in our stock price and ~~2010~~a reduction in the number of outstanding warrants at March 31, 2012 as compared to those at March 31, 2011.

~~Revenues.~~Liquidity Net revenues were $115.2 million for the nine months ended September 30, 2011, as compared to $105.4 million for the nine months ended September 30, 2010. The 9% increase is the result of growth in all of our products, partially offset by a lower average price for BROMDAY than the product it replaced, XIBROM, and ~~higher~~Capital ~~managed~~Resources care and government rebates. We recently launched BROMDAY in a twin-pack configuration containing two bottles of BROMDAY priced at approximately double the single bottle price. We anticipate the launch of the BROMDAY twin pack will increase the average price per BROMDAY prescription over time. We recorded $3.7 million in revenues for BROMDAY twin-pack size during the nine months ended September 30, 2011.

~~The~~As ~~following~~of ~~table~~March 31, ~~sets~~2012, ~~forth~~we ~~our~~had ~~net~~$53.7 ~~revenues~~million ~~for~~in ~~each~~ cash and working capital of $2.2 million. One-third of our ~~products~~$65 ~~for~~million ~~the~~Facility ~~nine~~Agreement ~~months~~(or ~~ended~~$21.5 million) is due in September ~~30,~~ ~~2011~~2012 and ~~2010~~we anticipate making the repayment out of cash on hand. Historically, ~~respectively~~we ~~(dollars~~have infinanced ~~millions)~~our operations primarily through sales of our debt and equity securities and cash receipts from product sales. Since March 2000, we have received gross proceeds of approximately $347.2 million from sales of our common stock and the ~~corresponding~~issuance ~~percentage~~of ~~change~~promissory notes and convertible debt.

	Nine Months Ended September 30,
	2011		2010		% Change
BROMDAY and XIBROM	$	61.4	$	71.0		(14	%)
BEPREVE		21.8		10.6		106	%
ISTALOL		21.2		15.0		41	%
VITRASE		10.8		8.8		23	%
Total revenues	$	115.2	$	105.4		9	%

For the three months ended March 31, 2012, we used $9.0 million of cash from operations. This was primarily the result of a net loss ($17.8 million), the gain on the royalty settlement with Senju ($9.3 million) and a net increase in working capital ($0.5 million); and partially offset by a non-cash loss on warrant valuation ($13.0 million) and by certain other non-cash charges ($4.6 million). Non-cash charges consisted primarily of change in value of the derivative under the Facility Agreement ($1.7 million), stock-based compensation costs ($1.5 million), amortization of discounts on the Facility Agreement ($0.5 million), depreciation and amortization ($0.6 million), amortization of deferred financing costs ($0.2 million) and amortization of intangible assets ($0.1 million). The reduction in working capital was primarily due to the payment to Senju of $24 million for past due royalties offset by decreases in accounts receivable, net, and increases in accounts payable and other liabilities. For the three months ended March 31, 2011, we used $3.1 million of cash from operations, primarily the result of the decrease of accrued compensation costs and other accrued expenses. We incurred a net loss of $84.1 million, which included a non-cash loss on warrant valuation ($72.2 million) and other non-cash charges of $2.6 million. Non-cash charges consisted primarily of stock-based compensation costs ($1.0 million), amortization of discounts on the Facility Agreement ($0.7 million), depreciation and amortization ($0.6 million) and amortization of deferred financing costs ($0.3 million).

~~Gross margin and cost of products sold. Gross margin for~~ For the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~ ~~was~~2012 ~~75%~~and ~~of net revenues~~2011, orwe ~~$86.8~~used ~~million, as compared to 76% of net revenues, or~~ $800.65 million, ~~for the nine months ended September 30, 2010. The decrease in the gross margin percentage is primarily the result of lower revenues from BROMDAY~~ and ~~the impact of higher rebates as discussed above. Cost of products sold was~~ $280.43 million ~~for the nine months ended September 30, 2011, as compared to $25.2 million for the nine months ended September 30, 2010. Cost~~ of ~~products sold~~cash ~~consisted~~from ~~primarily~~investing ~~of standard costs for each of our commercial products~~activities, ~~distribution costs~~respectively, ~~royalties, inventory reserves and other costs of products sold. The increase in cost of products sold is~~ primarily ~~the~~due ~~result~~to of the ~~growth~~purchases of ~~units sold~~equipment.

~~Research~~For ~~and~~the ~~development~~three ~~expenses.~~months ~~Research~~ended ~~and~~March ~~development~~31, ~~expenses~~2012, ~~were~~we used cash of $268.94 million, primarily for ~~the~~net ~~nine~~repayments ~~months~~under our Revolving Credit Facility ~~ended~~($9.0 ~~September 30~~million), ~~2011,~~partially asoffset ~~compared~~by exercises of stock options granted to our employees ($170.86 million). ~~for~~For the ~~nine~~three months ended ~~September~~March 3031, ~~2010.~~2011, ~~The~~we ~~increase~~generated incash ~~research~~from ~~and~~financing ~~development~~activities ~~expenses~~ of $90.15 million, ~~is due~~ primarily tofrom ~~timing~~exercises ~~associated~~of ~~with the initiation and completion~~stock ofoptions ~~clinical~~granted ~~trials~~to ~~and~~our ~~increased medical affairs costs, as described below~~employees.

Generally, our research and development resources are not dedicated to a single project but are applied to multiple product candidates in our portfolio. As a result, we manage and evaluate our research and development expenditures generally by the type of costs incurred. We ~~generally~~believe ~~classify~~that ~~and separate~~current ~~research~~cash and ~~development~~cash ~~expenditures into amounts related to clinical development costs~~equivalents, ~~regulatory~~together ~~costs,~~with ~~pharmaceutical~~amounts ~~development~~available ~~costs, manufacturing development costs, and medical affairs costs. In addition, we also record as~~for ~~research~~borrowing ~~and development expenses any upfront and milestone payments to third parties prior to regulatory approval of a product candidate~~ under our ~~licensing~~Revolving ~~agreements~~Credit ~~unless~~Facility ~~there is an alternative future use. For the nine months ended September 30, 2011, approximately 54% of our research~~ and ~~development~~cash ~~expenditures~~generated ~~were~~from ~~for clinical development costs~~operations, ~~12%~~will ~~were~~be ~~for~~sufficient ~~regulatory~~to ~~costs,~~meet 4%anticipated ~~were~~cash ~~for~~needs ~~pharmaceutical development costs, 9% were~~ for ~~manufacturing~~operating ~~development costs, 18% were for medical affairs costs,~~ and 3%capital ~~were~~expenditures for ~~stock-based~~the ~~compensation~~next ~~costs~~12 ~~($0~~months.8 ~~million).~~

~~Changes~~We inhave ~~our~~a ~~research and~~stockholders’ ~~development~~deficit ~~expenses~~of ~~are~~approximately ~~primarily~~$64.8 ~~due~~million to(including ~~the~~non-cash ~~following:~~valuation warrant adjustments of $119.7 million) through March 31, 2012.

• Clinical Development Costs — Clinical development costs for the nine months ended September 30, 2011 were $14.6 million as compared to $6.1 million for the nine months ended September 30, 2010. The increase in costs resulted from the ongoing Phase 3 efficacy and safety dry eye trials for REMURA, the completed Phase 2 bepotastine besilate nasal spray clinical trials and the recently completed Phase 3 trials related to PROLENSA.

• Regulatory Costs — Regulatory costs were $3.2 million and $2.9 million for the nine months ended September 30, 2011 and 2010, respectively. These costs were primarily higher due to increased personnel costs.

• Under ~~Pharmaceutical~~our ~~Development~~Revolving ~~Costs~~Credit —Facility, ~~Pharmaceutical~~we ~~development~~may ~~costs~~borrow ~~were~~up to the lesser of $125.0 million ~~for~~or ~~both~~80% of eligible accounts receivable, plus the ~~nine~~lesser ~~months~~of ~~ended~~25% ~~September~~of 30net cash and cash equivalents or $10.0 million. As of March 31, ~~2011~~2012, we had $25.0 million available under the Revolving Credit Facility, of which we borrowed $15.0 million. All outstanding amounts under the Revolving Credit Facility bear interest at a variable rate equal to the lender’s prime rate. In no event shall the interest rate on outstanding borrowings be less than 4.00%, which is payable on a monthly basis. The Revolving Credit Facility also contains customary covenants regarding the operation of our business and ~~2010~~financial covenants relating to ratios of current assets to current liabilities and tangible net worth and is collateralized by all of our assets. An event of default under the Revolving Credit Facility will occur if, ~~respectively~~among other things, (i) we are delinquent in making payments of principal or interest on the Revolving Credit Facility; (ii) we fail to cure a breach of a covenant or term of the Revolving Credit Facility; (iii) we make a representation or warranty under the Revolving Credit Facility that is materially inaccurate; (iv) we are unable to pay our debts as they become due, certain bankruptcy proceedings are commenced or certain orders are granted against us, or we otherwise become insolvent; or (v) an acceleration event occurs under certain types of other indebtedness outstanding from time to time. If an event of default occurs, the indebtedness to Silicon Valley Bank could be accelerated, such that it becomes immediately due and payable. As of March 31, 2012, we were in compliance with all of the covenants under the Revolving Credit Facility.

•All ~~Manufacturing~~amounts ~~Development~~borrowed ~~Costs~~under —the ~~Manufacturing~~Revolving ~~development~~Credit ~~costs~~Facility were $2repaid in April 2012.3 ~~million~~The Revolving Credit Agreement can be terminated by us as long as all outstanding principal and ~~$2.6~~accrued ~~million~~and ~~for~~unpaid interest is paid and we intend to terminate the ~~nine~~Revolving ~~months~~Credit ~~ended~~Facility ~~September~~if ~~30,~~the ~~2011~~Merger ~~and~~is ~~2010~~consummated. If we terminate the agreement, ~~respectively~~a make-whole premium of approximately $0.1 ~~The~~million ~~decrease~~will isalso ~~primarily~~be due toand ~~lower~~payable. ~~costs~~The ~~for~~Revolving ~~supplies~~Credit ~~for~~Facility ~~clinical~~otherwise ~~trials~~expires on March 31, 2013.

•We ~~Medical~~have ~~Affairs~~a facility ~~Costs~~agreement, —or ~~Medical~~the ~~affairs~~Facility ~~costs~~Agreement, ~~for~~with certain accredited institutional investors, collectively known as Lenders. On March 31, 2012, we had total indebtedness under the ~~nine~~Facility ~~months~~Agreement ~~ended~~of ~~September~~$43.6 30million, ~~2011~~which ~~were~~excludes unamortized discounts of $52.0 million asand ~~compared~~the tovalue of the derivative of $4.41 million. ~~for~~Outstanding amounts under the ~~nine~~Facility ~~months~~Agreement ~~ended~~accrue ~~September~~interest ~~30,~~at ~~2010~~a rate of 6.5% per annum, orpayable anquarterly ~~increase~~in arrears. We are required to repay the Lenders 33% of the original principal amount (or $021.65 million.) ~~The~~on ~~increase~~September 26, is2012, ~~primarily~~and ~~attributable~~34% toof ~~increased~~the ~~personnel~~original ~~costs,~~principal ~~continuing~~amount ~~medical~~(or ~~education~~$22.0 ~~costs~~million) ~~and~~on ~~post-marketing~~September 26, ~~clinical studies~~2013.

~~Selling,~~Any ~~general~~amounts drawn under the Facility Agreement may become immediately due and ~~administrative~~payable ~~expenses.~~upon ~~Selling~~(i) an “event of default,” ~~general~~as defined ~~and~~in ~~administrative~~the ~~expenses~~Facility ~~were~~Agreement, ~~$69.9~~in ~~million~~which ~~for~~case the ~~nine~~Lenders ~~months ended~~would ~~September 30,~~have ~~2011,~~the asright ~~compared~~to require us to ~~$60.4~~repay ~~million~~100% ~~for~~of the ~~nine~~principal ~~months~~amount ~~ended~~of ~~September 30~~the loan, ~~2010.~~plus ~~The~~any ~~$9.5~~accrued ~~million~~and ~~increase~~unpaid ~~primarily~~interest ~~reflect~~thereon, ~~expenses~~or (ii) the consummation of ~~$3.4~~certain ~~million~~change of control ~~higher~~transactions, ~~legal~~in ~~costs~~which ~~associated~~case ~~with~~the Lenders would have the ~~bromfenac~~right ~~royalty litigation~~to ~~and~~require ~~our~~us ~~complaint~~to ~~against~~repay 110% of the ~~FDA~~outstanding ~~regarding~~principal amount of the ~~approval~~loan, ofplus aany ~~generic~~accrued ~~version~~and ofunpaid ~~XIBROM~~interest thereon, $4or a Put Election.6 ~~million~~An inevent ~~legal,~~of ~~professional~~default ~~and~~under the Facility Agreement will occur if, among other ~~fees~~things, ~~incurred~~(i) we fail to make payment when due; (ii) we fail to comply in ~~connection~~any material respect with ~~financing~~any covenant of the Facility Agreement, and ~~due~~such ~~diligence~~failure ~~activities~~is tonot ~~pursue~~cured; a(iii) any ~~potential~~representation or ~~acquisition~~warranty ofmade aby ~~company~~us ~~with~~in ~~marketed~~any ~~products~~transaction document was incorrect, ~~for~~false, ~~which~~or misleading in any material respect as of the date it was made; (iv) we ~~were~~are ~~successful~~generally inunable ~~securing~~to pay our debts as they become due or a ~~financing~~bankruptcy ~~commitment~~or ~~but~~similar ~~were~~proceeding ~~unsuccessful~~is commenced inby ~~concluding~~or ~~the~~against ~~acquisition,~~us; or (v) cash and ~~higher~~cash ~~sales~~equivalents ~~and~~on ~~marketing~~the ~~costs~~last day of each calendar quarter are less than $~~1.3~~10 million,. ~~which~~The ~~includes~~Facility ~~launch~~Agreement ~~and promotional~~also ~~costs~~contains ~~associated~~customary ~~with~~covenants regarding operations of our ~~products~~business. As of March 31, 2012, ~~primarily~~we ~~BROMDAY~~were in compliance with all the covenants under the Facility Agreement.

~~Stock-based~~In ~~compensation~~connection ~~costs.~~with ~~Total stock-based compensation costs for both of~~ the ~~nine~~Facility ~~months ended September 30~~Agreement, we ~~2011~~entered ~~and~~into ~~2010~~a ~~were~~security ~~$2.9~~agreement ~~million,~~with ~~respectively. For~~ the ~~nine months ended September 30~~Lenders, ~~2011~~pursuant ~~and 2010, we granted stock options~~ to ~~employees to purchase 835~~which,~~140~~ ~~shares~~as ~~of common~~security ~~stock~~for ~~(at~~our arepayment ~~weighted~~obligations ~~average~~under ~~exercise~~the ~~price~~Facility ~~of $7.00 per share) and 929~~Agreement,~~302~~ ~~shares~~we ofgranted ~~common~~to ~~stock~~the ~~(at~~Lenders a ~~weighted~~security ~~average~~interest ~~exercise~~in ~~price~~certain of ~~$3.57~~our ~~per~~intellectual ~~share)~~property, ~~respectively, equal to the fair market value of our common stock at the time of~~including ~~grant.~~intellectual Weproperty ~~also~~relating ~~issued~~to ~~147~~BROMDAY,~~543~~ ~~and~~BEPREVE, ~~155~~ISTALOL,~~152~~ ~~restricted stock awards for the nine months ended September 30~~VITRASE, ~~2011~~PROLENSA and ~~2010~~XIBROM, ~~respectively.~~and ~~Included~~each inother ~~stock-based~~product ~~compensation~~marketed ~~costs~~by ~~for~~or ~~the~~under ~~nine~~license ~~months~~from ~~ended September 30~~us, ~~2011~~ and ~~2010~~certain ~~were $0.4~~personal ~~million~~property ~~and~~relating $0thereto.3 ~~million, respectively, related to restricted stock awards.~~

~~Interest~~Because ~~expense.~~the ~~Interest~~consummation ~~expense~~of certain change in control transactions results in a premium of the outstanding principal, the premium put ~~was~~feature ~~$5.8~~is ~~million~~a derivative that is required to be bifurcated from the host debt instrument and ~~$6.2~~recorded ~~million~~at ~~for~~fair value at each quarter end. During the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012, we announced that Bausch & Lomb and ~~2010,~~we ~~respectively~~had entered into the Merger Agreement (see Merger Agreement with Bausch & Lomb above) and we have received from each Lender a Put Election. ~~The~~Since ~~decrease~~this transaction would have the effect of a change in ~~interest~~control ~~expense~~and ~~was~~would trigger the premium of the outstanding principal amount due tounder the ~~repayment~~Facility Agreement, we have recorded the value of ~~$21~~the derivative at a significantly high probability of the change in control transaction .5 The value of the derivative at March 31, 2012 was $4.1 million onand ~~our~~adjusted ~~Facility~~through ~~Agreement~~other expense.

The components of interest expense are as follows (in millions):

	Nine MonthsEnded September 30,
	2011		2010
Interest related to the Facility Agreement	$	2.9	$	3.2
Amortization of the discount on the Facility Agreement		1.8		1.9
Amortization of deferred financing costs		0.8		0.8
Amortization of derivative on the Facility Agreement		0.2		0.2
Interest related to the Revolving Credit Facility		0.1		0.1
Interest expense	$	5.8	$	6.2

Gain (loss) on warrant valuation. For the nine months ended September 30, 2011, we recorded a non-cash valuation loss of $24.9 million, or $0.59 per diluted share, as compared to a non-cash valuation gain of $7.2 million, or $0.17 per diluted share, for the nine months ended September 30, 2010. The change in the valuation of the warrants for the nine months ended September 30, 2011 and 2010 was primarily driven by changes in our stock price and offset by related volatility. For the nine months ended September 30, 2011, the warrant valuation also was impacted by the exercise of 8.1 million warrants by some of the Lenders and their assignees as we reclassified the relevant warrant liability to equity upon the issuance of the shares of common stock.

~~Liquidity~~Legal ~~and~~Proceedings ~~Capital Resources~~

AsBromfenac ofRoyalty ~~September 30,~~Litigation: ~~2011~~In April 2010, we ~~had~~stopped ~~$51.9~~making ~~million~~royalty payments and initiated legal action against Senju seeking a declaratory judgment with regard to our royalty obligations in ~~cash~~connection ~~and~~with ~~negative~~bromfenac ~~working~~products ~~capital~~and a recovery of $7overpaid XIBROM royalties and other damages.5 ~~million~~The only U.S. Inpatent ~~August~~applicable ~~2011~~to XIBROM and, wenow ~~repaid~~to ~~$21.5~~BROMDAY, expired in January 2009 ~~million~~and, according to U.S. case law and the terms of our ~~$65~~license ~~million~~agreement ~~Facility~~with ~~Agreement~~Senju, ~~out~~we ofasserted ~~cash~~that onno ~~hand~~bromfenac product royalties are due after patent expiration. ~~Historically~~In August 2010, wethe ~~have~~U.S. ~~financed~~District ~~our~~Court ~~operations~~for ~~primarily~~the ~~through~~Central ~~sales~~District of California stayed our ~~debt~~action against Senju, and, ~~equity~~in ~~securities~~September 2010, ~~and~~Senju ~~cash~~initiated ~~receipts~~an ~~from~~arbitration ~~product~~proceeding ~~sales~~regarding the same dispute with the International Chamber of Commerce, or the ICC. ~~Since~~In March ~~2000~~2012, we ~~have~~settled ~~received~~all ~~gross~~outstanding claims with Senju and ~~proceeds~~entered into the Fourth Amendment of ~~approximately~~our ~~$352~~bromfenac license agreement with Senju.9 ~~million~~In ~~from~~connection ~~sales~~with the Fourth Amendment, we made a one-time payment of ~~our~~$24 ~~common~~million ~~stock~~to Senju. As a result, ~~including~~for the ~~recent~~three ~~issuance~~months ofended March 31, 2012, we reduced our royalties ~~common~~payable ~~stock~~balance ~~upon~~by ~~the~~$33.3 ~~exercise~~million, resulting in a one-time benefit to cost of ~~warrants~~products sold of $9.3 million. Effective January 1, ~~and~~2012, ~~the~~royalties ~~issuance~~to be paid on future revenues of ~~promissory~~BROMDAY ~~notes~~were ~~and~~reduced ~~convertible~~by ~~debt.~~approximately one-half.

~~Under~~In ~~our revolving credit facility with Silicon Valley Bank~~June 2010, ~~or the Revolving Credit Facility,~~ we ~~may~~stopped ~~borrow~~making uproyalty topayments ~~the lesser of $25.0 million or 80% of eligible accounts receivable, plus the lesser of 25% of net cash~~ and ~~cash~~initiated ~~equivalents~~a orlegal ~~$10.0~~action ~~million.~~by Asfiling ofa ~~September 30,~~Complaint ~~2011,~~against ~~we had $24.4 million available under the Revolving Credit Facility~~AcSentient, ~~of which we borrowed $24.0~~ ~~million.~~seeking ~~All outstanding amounts under the Revolving Credit Facility bear interest at~~ a ~~variable~~declaratory ~~rate~~judgment ~~equal~~with regard to ~~the~~our ~~lender’s~~bromfenac ~~prime~~royalty ~~rate~~obligations ~~plus~~under ~~a margin of 0.50%. In no event shall~~ the ~~interest~~Asset ~~rate~~Purchase onAgreement ~~outstanding~~dated ~~borrowings be less than 4.50%~~May 3, ~~which~~ is2002 ~~payable~~between onAcSentient aand ~~monthly basis~~us. The ~~Revolving~~only ~~Credit~~U.S. ~~Facility~~patent ~~also~~applicable ~~contains~~to ~~customary~~XIBROM ~~covenants~~and, ~~regarding~~now, ~~the~~to ~~operation~~BROMDAY ofexpired ~~our~~in ~~business~~January 2009 and, ~~financial~~according ~~covenants relating~~ to ~~ratios~~U.S. ofcase ~~current~~law ~~assets to current liabilities~~ and isthe ~~collateralized~~terms ~~by all~~ of our ~~assets.~~agreement Anwith ~~event of default under the Revolving Credit Facility will occur if~~AcSentient, ~~among other things, (i)~~ we ~~are~~believe ~~delinquent~~no inXIBROM ~~making~~and ~~payments~~BROMDAY ofroyalties ~~principal~~are ordue ~~interest~~after onpatent ~~the~~expiration. ~~Revolving~~A ~~Credit~~declaratory ~~Facility;~~judgment ~~(ii) we~~that ~~fail to cure a breach of a covenant or term of the Revolving Credit Facility; (iii)~~ we ~~make~~are aseeking ~~representation~~from ~~or warranty under~~ the ~~Revolving~~court ~~Credit~~in ~~Facility~~regard ~~that is materially inaccurate; (iv) we are unable~~ to ~~pay our debts as they become due, certain~~royalty ~~bankruptcy~~obligations ~~proceedings~~to ~~are~~AcSentient ~~commenced~~may orapply ~~certain~~not ~~orders~~only ~~are granted against us, or we otherwise become insolvent; or (v) an acceleration event occurs under certain types of other indebtedness outstanding from time~~ to ~~time. If an event of default occurs~~XIBROM, ~~the~~but ~~indebtedness~~also to ~~Silicon Valley Bank could be accelerated~~BROMDAY, ~~such~~which ~~that~~was itapproved ~~becomes~~by ~~immediately~~the ~~due~~FDA ~~and~~in ~~payable.~~October ~~We also had letters of credit of $0~~2010.6 ~~million~~In ~~outstanding.~~November ~~As of September 30~~2010, ~~2011,~~the weSuperior ~~were~~Court ~~in compliance with all~~ of the ~~covenants~~ ~~under~~State ~~the~~of ~~Revolving Credit Facility. During certain months in the fourth quarter~~California, weCounty ~~may~~of ~~not~~Orange bestayed ~~able to fulfill~~ our ~~adjusted~~case ~~quick~~against ~~ratio~~AcSentient ~~covenant. We are in discussions with Silicon Valley Bank,~~ and~~, if successful, will either modify~~ ~~the~~ruled ~~covenant~~that ~~under~~ the ~~Revolving~~dispute ~~Credit~~had ~~Facility~~to ~~or seek a waiver for the covenant. However, no assurance can~~ be ~~given as to the outcome of our negotiations~~arbitrated. ~~Our~~We ~~failure~~will tohave ~~amend the covenant or obtain a waiver could cause us~~ an ~~inability~~opportunity to ~~borrow~~ ~~under~~appeal ~~our~~that ~~Revolving~~court’s ~~Credit~~ruling ~~Facility. All~~after ~~amounts~~the ~~borrowed~~final injudgment ~~September~~is ~~2011~~entered ~~under~~by the ~~Revolving Credit Facility were repaid in October 2011~~court. AsIn ofJanuary ~~November 4,~~ 2011, ~~there~~AcSentient ~~were~~filed noa ~~borrowings~~request ~~under~~for ~~the~~arbitration ~~Revolving~~with ~~Credit~~the ~~Facility~~ICC. ~~The~~This ~~Revolving~~arbitration ~~Credit~~is ~~Facility~~in ~~expires~~its onearly ~~March 31, 2012~~stages.

~~Pursuant~~There tocan abe ~~facility~~no ~~agreement,~~assurance about when or how the ~~Facility~~AcSentient ~~Agreement, certain~~dispute ~~investors~~will ~~and~~be ~~lenders~~resolved, ~~collectively~~and we ~~called~~cannot predict the ~~Lenders,~~final ~~loaned~~outcome usor ~~$65~~financial ~~million~~impact. OnThe ~~September 30,~~parties ~~2011,~~could weelect ~~had~~to ~~total~~settle ~~indebtedness~~the ~~under~~dispute, allow the ~~Facility~~dispute ~~Agreement~~to ofbe ~~$43.6~~resolved ~~million,~~in ~~which~~arbitration ~~excludes~~or ~~unamortized~~the ~~discounts~~U.S. ~~of $3~~courts.1 ~~million~~Until ~~and~~this ~~the value~~dispute ofis ~~the~~resolved, ~~derivative~~for ofaccounting ~~$0.1~~purposes, ~~million.~~we ~~Outstanding~~have ~~amounts~~been ~~under~~and intend ~~the~~to ~~Facility~~continue ~~Agreement~~to ~~accrue~~reserve ~~interest~~for atBROMDAY aand ~~rate~~XIBROM ~~of 6.5% per annum~~royalties, ~~payable~~which ~~quarterly~~would inhave ~~arrears.~~been Wepayable ~~are required~~ to ~~repay~~AcSentient if the ~~Lenders~~relevant ~~33%~~contractual ofroyalty ~~the~~obligations ~~original~~were ~~principal~~existing ~~amount~~and ~~(or $21~~enforceable.5 ~~million)~~As onof ~~September 26~~March 31, 2012, ~~and~~we ~~34%~~had ofapproximately ~~the~~$5.3 ~~original~~million reserved ~~principal~~for ~~amount~~such ~~(or~~contingent ~~$22.0~~XIBROM ~~million)~~and onBROMDAY ~~September 26, 2013~~royalties.

~~Any~~Subpoenas ~~amounts~~From ~~drawn~~the ~~under~~U.S. ~~the~~Attorney, ~~Facility~~Western ~~Agreement~~District ~~may~~of ~~become~~New ~~immediately~~York. In ~~due~~April ~~and~~2008, ~~payable~~we ~~upon~~received ~~(i) an~~subpoenas ~~“event~~from the office of ~~default,”~~the asU.S. ~~defined~~Attorney infor the ~~Facility~~Western ~~Agreement,~~District inof ~~which~~New ~~case~~York requesting information regarding the ~~Lenders~~marketing ~~would~~activities related to XIBROM. We are cooperating with the government’s investigation. From April 2008 through March 31, 2012, we have ~~the~~incurred ~~right~~approximately to$6.0 ~~require~~million usin legal fees associated with this criminal investigation and expect to ~~repay~~incur ~~100%~~significant ofexpenses in the ~~principal~~future. ~~amount~~In ofOctober ~~the~~2011, ~~loan~~we, ~~plus~~and ~~any~~certain ~~accrued~~of our officers and ~~unpaid~~current ~~interest~~and ~~thereon,~~former oremployees ~~(ii)~~ received correspondence from the ~~consummation~~government ofidentifying ~~certain~~them ~~change~~as targets. Tolling agreements have been executed to allow cooperation and discussions regarding resolution. The Company has executed indemnification agreements with each of ~~control~~the ~~transactions~~individual targets, inand ~~which~~each ~~case~~target ~~the~~has ~~Lenders~~executed ~~would~~a ~~have~~corresponding undertaking agreement. If the ~~right~~government chooses to ~~require~~ engage in civil litigation or initiate a criminal prosecution against us, toour ~~repay~~officers or ~~110%~~our ofcurrent ~~the~~or ~~outstanding~~former ~~principal~~employees, ~~amount~~as a result of its review of the ~~loan~~requested documents and other evidence, ~~plus~~we may have to incur significant amounts to defend such actions or pay or incur substantial fines or penalties, on behalf of ourselves, our officers or our current or former employees, any ~~accrued~~of ~~and~~which ~~unpaid~~could ~~interest~~significantly ~~thereon~~deplete our cash resources. AnThe ~~event~~case ofis ~~default~~ongoing ~~under~~and the ~~Facility~~likelihood ~~Agreement~~of ~~will~~an ~~occur~~unfavorable ~~if,~~outcome ~~among~~and/or ~~other~~the ~~things~~amount/range of loss or additional expenses, ~~(i) we~~cannot ~~fail~~be reasonably estimated.

TRICARE Retail Pharmacy Program. Section 703 of the National Defense Authorization Act of 2008, enacted on January 28, 2009, requires that pharmaceutical products purchased through the Department of Defense, or DoD, TRICARE Retail Pharmacy program be subject to the Federal Ceiling Price discount under the Veterans Health Care Act of 1992. DoD issued a rule pursuant to Section 703 that requires manufacturers to provide DoD with a quarterly refund on pharmaceutical products utilized through the TRICARE Retail Pharmacy program, and to pay rebates to DoD on TRICARE Retail Pharmacy purchases retroactive to January 28, 2008. We have requested a waiver of the retroactive rebate for TRICARE Retail Pharmacy utilization for the period from January 28, 2008 to May 26, 2009 (the effective date of the DoD rule). In addition, the regulation was the subject of litigation by others, and it was our position that the retroactive application of the regulation was contrary to established case law. In October 2011, the United States District Court for the District of Columbia issued its decision in Coalition for Common Sense in Government Procurement v. United States, No. 08-996 (D.D.C. Oct. 25, 2011) upholding the DoD’s regulation. That case has been appealed to the United States Circuit Court for the District of Columbia. It is uncertain whether such appeal will be successful. In addition, the foregoing court decision does not impact our currently pending request for a waiver of the retroactive rebate. As of March 31, 2012, we determined that our payment of the retroactive rebate (from January 28, 2008 to May 26, 2009) created by the regulation is neither reasonably estimable nor probable.

toFDA ~~make~~Complaint. ~~payment~~In ~~when~~March ~~due;~~2011, ~~(ii)~~ we ~~fail~~filed toa ~~comply~~Citizens inPetition, ~~any~~or ~~material~~a ~~respect~~CP, with ~~any~~the ~~covenant~~Food and ofDrug Administration, or the ~~Facility~~FDA. ~~Agreement,~~The ~~and~~CP ~~such~~requested ~~failure~~the isFDA ~~not~~to ~~cured;~~refrain ~~(iii) any~~from ~~representation~~granting tentative or ~~warranty made~~final byapproval usof in any ~~transaction~~abbreviated ~~document~~New ~~was~~Drug ~~incorrect~~Application, ~~false~~or ANDA, orfor ~~misleading~~bromfenac insodium ~~any~~ophthalmic ~~material~~solution ~~respect~~0.09% asthat ofutilizes the ~~date~~labeling itfor XIBROM, ~~was~~or ~~made;~~omits ~~(iv) we~~any ~~are~~portion ~~generally~~of ~~unable~~the BROMDAY label relating to ~~pay~~the once-per-day dosing. In May 2011, the FDA partially denied our ~~debts~~CP asand ~~they~~approved ~~become~~a ~~due~~generic orversion of XIBROM. In May 2011, we filed a ~~bankruptcy~~Complaint orin ~~similar~~the ~~proceeding~~United isStates ~~commenced~~District Court for bythe orDistrict ~~against~~of ~~us;~~Columbia oralleging ~~(v) cash~~that ~~and~~the ~~cash~~FDA’s ~~equivalents~~approval onof ~~the~~a ~~last~~generic ~~day~~version of ~~each~~XIBROM ~~calendar~~was ~~quarter~~arbitrary, ~~are~~capricious, ~~less~~and ~~than~~contrary ~~$10~~to ~~million~~law. We ~~The~~also ~~Facility~~filed ~~Agreement~~papers ~~also~~seeking ~~contains~~injunctive ~~customary~~relief ~~covenants~~with ~~regarding~~respect ~~operations~~to the FDA’s approval of a generic version of twice-daily XIBROM and relief from denial of our ~~business.~~2011 AsCP requesting that the FDA refrain from granting tentative or final approval of ~~September~~any ANDA that utilizes the labeling for XIBROM or omits any portion of the BROMDAY label relating to the once-per-day dosing. ~~30,~~Although our request for a temporary injunction was denied by the court in May 2011, we ~~were~~our insubsequent ~~compliance~~motion ~~with~~for ~~all~~summary judgment seeking revocation of the ~~covenants~~approval ~~under~~of the ~~Facility~~generic ~~Agreement~~bromfenac product, as well as the FDA’s counter-motion for summary judgment, have been fully briefed before the court.

In ~~connection~~October ~~with~~2010, ~~the~~we ~~Facility~~submitted ~~Agreement,~~a wesupplemental ~~entered~~New ~~into~~Drug Application, or sNDA, to add a ~~security~~2.4 ~~agreement~~mL ~~with~~size to the ~~Lenders,~~already ~~pursuant~~existing toNew ~~which~~Drug Application, asor ~~security~~NDA, approval for ~~our~~1.7 ~~repayment~~mL ~~obligations~~size ~~under~~of BROMDAY. In February 2011, the ~~Facility~~FDA’s ~~Agreement~~Center for Drug Evaluation and Research, weor ~~granted~~CDER, toissued a Complete Response letter, stating that the ~~Lenders~~sNDA could not be approved because a ~~security~~single ~~interest~~bottle should not be used to treat more than one eye in ~~certain~~a ofpost-operative ~~our~~setting. In ~~intellectual~~May ~~property~~2011, ~~including intellectual~~we ~~property~~requested ~~relating~~a hearing on the proposal to ~~BROMDAY~~deny approval of the sNDA. In August 2011, ~~BEPREVE~~CDER issue a Notice of Opportunity for a Hearing, ~~ISTALOL~~proposing to deny approval of the 2.4 mL size. The FDA was required to hold the hearing or grant itself summary judgment by December 3, ~~VITRASE~~2011. In November 2011, ~~REMURA~~we contacted CDER, ~~PROLENSA~~saying ~~and~~it ~~XIBROM~~had ~~and~~violated ~~each~~its ~~other~~own ~~product~~rules ~~marketed~~by not commencing the hearing in time to meet the December 3 deadline. The FDA responded by orsaying ~~under~~that ~~license~~any ~~from~~ruling ~~us,~~on the matter should be deferred until a meeting of the FDAs Dermatologic and ~~certain~~Ophthalmic ~~personal~~Drugs ~~property~~Advisory ~~relating~~Committee, ~~thereto~~or DODAC, could be held on the issue of whether a single bottle should be used to treat more than one eye in a post-operative session. We then requested the FDA to grant summary judgment because of CDER’s persistent refusal to act on this matter or that CDER be ordered to commence a hearing forthwith.

~~For~~On ~~the~~February ~~nine months ended September 30~~27, ~~2011~~2012, weDODAC ~~used~~met ~~$23.3~~to ~~million~~discuss ofthe ~~cash~~appropriateness ~~from~~of ~~operations,~~using ~~primarily~~a ~~the~~single ~~result~~bottle of aanti-inflammatory ~~net~~drops ~~loss, partially~~to ~~offset~~treat byboth ~~certain non~~eyes post-~~cash~~operatively ~~charges~~ and athe ~~net~~appropriate ~~reduction~~fill involume ~~working capital~~ of ~~$14.7~~these ~~million~~drugs. WeDODAC ~~incurred~~agreed athat ~~net~~it ~~loss~~may ofbe ~~$40.7~~appropriate ~~million,~~to ~~which~~use ~~included~~ a ~~loss~~single onbottle ~~warrant~~for ~~valuation~~both ~~($24.9~~eyes ~~million)~~with ~~and~~a ~~other~~vote ~~non-cash charges~~ of ~~$7.2~~five ~~million. Non-cash charges consisted primarily of stock-based compensation costs~~ (~~$2.9 million~~5), ~~amortization~~“yes” ~~of discounts on the Facility Agreement ($2.0 million)~~votes, ~~depreciation~~four ~~and amortization~~ (~~$1.7 million~~4) ~~and~~“no” ~~amortization of deferred financing costs ($0.8 million)~~votes, and ~~offset~~two ~~by the gain on derivative valuation~~ (~~$0.1 million~~2). ~~For the nine months ended September 30~~abstentions. However, ~~2010,~~DODAC weagreed ~~generated~~that ~~$14.9~~it ~~million~~is ofnot ~~cash~~appropriate ~~from operations, primarily due~~ to ~~increase~~label ina ~~royalties’~~product ~~payable~~for ofsuch ~~$13.3 million~~use ~~and~~with ~~other~~a ~~changes~~vote ~~in operating assets and liabilities, offset by the increase in accounts receivable~~ of ~~$9.1~~one ~~million. We had net income of $3.~~(1) ~~million,~~“yes” ~~which~~vote ~~included the warrant valuation gain of $7.2 million~~ and ~~other~~ten ~~non-cash~~(10) ~~charges~~“no” ~~of $6.6~~votes, ~~million.~~mainly ~~Non-cash~~because ~~charges~~there ~~consisted~~is ~~primarily~~no offormal ~~stock-based~~clinical ~~compensation~~study ~~costs ($2.9 million), amortization of discounts~~ on ~~the~~this ~~Facility Agreement ($2~~use.1 ~~million),~~DODAC ~~depreciation~~stated ~~and~~that ~~amortization~~the decision ~~($0.9~~to ~~million)~~use ~~and~~one ~~amortization~~bottle offor ~~deferred financing~~two ~~costs~~eyes ~~($0.8~~should ~~million),~~be ~~partially~~entirely ~~offset~~in by the ~~gain~~physician’s ~~on derivative valuation ($0~~discretion.1 ~~million).~~

~~For~~Shareholder ~~the~~Class ~~nine~~Action Complaints. ~~months~~We, our directors, Parent and Merger Sub were named as defendants in four putative class action complaints. The first case, captioned Hutt v. ISTA Pharmaceuticals, Inc., et al., C.A. 7367, was filed on March 29, 2012 in the ~~ended~~Court ~~September~~of Chancery of the State of Delaware. 30An amended complaint was filed in the Hutt action on April 27, ~~2011~~2012. The plaintiff and ~~2010~~Mr. Peter Barton Hutt, weone ~~used~~of $2our directors, are not related.0 ~~million~~The second, third, and $1fourth complaints, captioned Salina v. ISTA Pharmaceuticals, Inc., et al., Hijab v. ISTA Pharmaceuticals, Inc., et al., and Kretz v. ISTA Pharmaceuticals, Inc., et al., were filed on or about April 5, ~~million~~2012, April 10, 2012, and April 25, 2012 respectively, in the Superior Court for the State of ~~cash~~California. On April 30, 2012, an amended complaint was filed in the Hijab action. The actions, purportedly brought on behalf of a class of stockholders, allege that our directors breached their fiduciary duties in connection with the proposed acquisition by, among other things, failing to disclose all material information concerning the Merger, and failing to maximize stockholder value and obtain the best financial and other terms and act in the best interests of public stockholders. The complaints further allege that Bausch & Lomb aided and abetted the directors’ purported breaches. The plaintiffs seek injunctive and other equitable relief, including enjoining us from ~~investing~~consummating ~~activities~~the Merger, ~~primarily~~and ~~due~~damages, in addition to fees and costs. On May 1, 2012, the ~~purchases~~plaintiff in the Salina action filed a request for voluntary dismissal of ~~property~~that case. We believe that the claims asserted in these suits are without merit and ~~equipment~~intend to vigorously defend these matters.

For the nine months ended September 30, 2011, we used cash from financing activities of $1.6 million, primarily due to the repayment of the first installment of the $21.5 million against the Facility Agreement, offset by net borrowings under our Revolving Credit Facility ($11.0 million), exercises of warrants ($6.2 million), exercises of stock options granted to our employees ($2.4 million) and issuance of stock to our employees under our Employee Stock Purchase Plan ($0.3 million). For the nine months ended September 30, 2010, we generated negligible cash from financing activities.

We believe that current cash and cash equivalents, together with amounts available for borrowing under our Revolving Credit Facility and cash generated from operations, will be sufficient to meet anticipated cash needs for operating and capital expenditures for at least the next twelve months.

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

• the success of the commercialization of our products;

• our sales and marketing activities;

• the expansion of our commercial infrastructure related to our approved products and product candidates;

• the results of our clinical trials and requirements to conduct additional clinical trials;

• the introduction of potential generic products;

• the rate of progress of our research and development programs;

• the time and expense necessary to obtain regulatory approvals;

• activities and payments in connection with potential acquisitions of companies, products or technologies;

• scheduled principal payments under our Facility Agreement;

• the outcome of pending litigation;

• competitive, technological, market and other developments; and

• our ability to establish and maintain partnering relationships.

These factors may cause us to seek to raise additional funds through additional sales of our debt, or equity or other securities. We have a universal shelf registration statement on file with the SEC where we will be able to offer and sell up to $150 million of any

~~form~~Item ~~of securities including, but not limited to, equity, debt and other securities as described in the registration statement~~3. ~~Our~~Quantitative ~~intent with respect to the registration statement is to provide us with flexibility for financing future growth through acquisitions~~ and ~~strategic~~Qualitative ~~transactions,~~Disclosures ~~and~~About ~~does~~Market ~~not reflect a change in our financing strategy~~Risk. At present, we have no specific plans to issue any form of securities under the registration statement. Also, there can be no assurance that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, our stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock.

We have incurred losses since inception and have a stockholders’ deficit of $34.8 million through September 30, 2011. Excluding the non-cash warrant valuation adjustment during the fiscal year 2010, we generated a net income of $2.2 million. While we anticipate continuing to be profitable in 2011 and beyond (excluding any non-cash warrant valuation adjustments, non-cash stock based compensation and non-cash interest), we might not be able to remain profitable.

Legal Proceedings

Bromfenac Royalty Litigation. We initiated legal action in April 2010 against Senju seeking a declaratory judgment with regard to our royalty obligations to Senju in connection with bromfenac products and a recovery of overpaid XIBROM royalties and other damages. The only U.S. patent applicable to XIBROM and, now to BROMDAY, expired in January 2009 and, according to U.S. case law and the terms of our agreement with Senju, we believe no bromfenac product royalties are due after patent expiration. In August 2010, the U.S. District Court for the Central District of California stayed our action against Senju, and, in September 2010, Senju initiated an arbitration proceeding regarding the same dispute with the International Chamber of Commerce, or the ICC. The order staying our action against Senju will not become appealable until after the arbitration is concluded and a judgment is entered in the court case. The arbitration proceeding, the outcome of which may also affect our BROMDAY royalty obligations, is in its early stages.

In June 2010, we initiated a legal action by filing a Complaint against AcSentient, Inc. and AcSentient II, LLC, which we collectively refer to as AcSentient, seeking a declaratory judgment with regard to our bromfenac royalty obligations under the Asset Purchase Agreement dated May 3, 2002 between the Company and AcSentient, Inc. The only U.S. patent applicable to XIBROM and, now, to BROMDAY expired in January 2009 and, according to U.S. case law and the terms of our agreement with AcSentient, Inc., we believe no XIBROM and BROMDAY royalties are due after patent expiration. A declaratory judgment that we are seeking from the Court in regard to royalty obligations to AcSentient may apply not only to XIBROM, but also to BROMDAY, which was approved by the FDA in October 2010. In November 2010, the Superior Court of the State of California, County of Orange stayed our case against AcSentient and ruled that the dispute had to be arbitrated. We will have an opportunity to appeal that Court’s ruling after the final judgment is entered by the Court. In January 2011, AcSentient filed a request for arbitration with the ICC. That arbitration is in its early stages.

(from January 28, 2008 to May 26, 2009) created by the regulation is neither reasonably estimable nor probable as of September 30, 2011. In late October 2011, the United States District Court for the District of Columbia issued its decision in Coalition for Common Sense in Government Procurement v. United States, No. 08-996 (D.C. Dist. Ct. Oct. 25, 2011) upholding the DoD's regulation. It is uncertain whether the decision will be appealed, and if so, whether such appeal would be successful. In addition, the foregoing court decision does not impact our currently pending request for a waiver of the retroactive rebate.

FDA Complaint. We filed a Citizen Petition, or CP, with the FDA in March 2011. The CP requested the FDA to refrain from granting tentative or final approval of any abbreviated new drug application, or ANDA, for bromfenac sodium ophthalmic solution 0.09% that utilizes the labeling for discontinued XIBROM (bromfenac ophthalmic solution)® 0.09% or omits any portion of the BROMDAY label relating to the once-per-day dosing. In May 2011, the FDA partially denied our CP and approved a generic version of twice-daily bromfenac ophthalmic solution 0.09%, which is substitutable for one bottle size of our twice-daily XIBROM (bromfenac ophthalmic solution)® 0.09%. In May 2011, we filed a Complaint in the United States District Court for the District of Columbia alleging that the FDA’s approval of a generic version of XIBROM was arbitrary, capricious, and contrary to law. We also filed papers seeking injunctive relief with respect to the FDA’s approval of a generic version of twice-daily bromfenac ophthalmic solution 0.09% and relief from denial of our 2011 CP requesting that the FDA refrain from granting tentative or final approval of any abbreviated new drug application for bromfenac sodium ophthalmic solution 0.09% that utilizes the labeling for discontinued XIBROM or omits any portion of the BROMDAY label relating to the once-per-day dosing. Although our request for a temporary injunction was denied by the Court in May 2011, our subsequent motion for summary judgment seeking revocation of the approval of the generic bromfenac product, as well as the FDA’s counter-motion for summary judgment, have been fully briefed before the Court.

New Accounting Pronouncements

In June 2011, the FASB updated the accounting guidance on Topic 220, entitled “Comprehensive Income”, relating to presentation of comprehensive income. This guidance requires companies to present total comprehensive income, the components of net income and the components of other comprehensive income, or OCI, either in a single continuous statement of comprehensive income or in two but consecutive statements. Additionally, companies are required to present on the face of the financial statements the reclassification adjustments that are reclassified from OCI to net income, where the components of net income and the components of OCI are presented. This guidance is effective beginning in our fiscal 2012 year. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In December 2010, the FASB issued an Accounting Standards Update, Entitled “Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers (A consensus of the FASB Emerging Issues Task Force)”. ASU 2010-27 addresses how pharmaceutical companies should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, of 2010 and the Health Care and Education Affordability Reconciliation Act of 2010 and subsequent legislation passed during the third quarter of 2010, which we collectively refer to as the Healthcare Reform Act. The Healthcare Reform Act impose an annual fee on the pharmaceutical manufacturing industry for each year beginning on or after January 1, 2011. For reporting entities that are subject to the pharmaceutical fee mandated by the Healthcare Reform Act, the amendments in ASU 2010-27 specify the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight–line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2010-27 is effective for calendar years beginning after December 31, 2010, or our 2011 fiscal year, when the fee initially becomes payable. We adopted the provisions of ASU 2010-27 on January 1, 2011 and the adoption did not have a material effect to our financial position or results of operations.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic 605): Milestone Method of Revenue Recognition, or ASU 2010-17. ASU 2010-17 provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. Under ASU 2010-17, entities can make an accounting policy to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met for the milestones to be considered substantive. ASU 2010-17 is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010, which for us means our fiscal year 2011. We adopted the provisions of ASU 2010-17 on January 1, 2011 and the adoption did not have a material effect to our financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment policy is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk.

Interest Rate Risk

Some of the securities that we have invested in ~~are~~were subject to 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 interest rate and the prevailing interest rate later increases, the principal amount of our investment will probably decline. Seeking to minimize this risk, historically we maintained 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 and auction rate securities. All of our cash is held in non-interest bearing accounts, which is fully insured by the Federal Deposit Insurance Corporation. When our cash is invested in short-term investments, the average duration is usually less than one year.

All outstanding amounts under our Revolving Credit Facility bear interest at a variable rate equal to the lender’s prime rate ~~plus a margin of 0~~.~~50%.~~ In no event shall the interest rate on outstanding borrowings be less than 4.5000%. Interest is payable on a monthly basis and may expose us to market risk due to changes in interest rates. As of ~~September~~March 3031, ~~2011~~2012, we had $2415.0 million in borrowings under our Revolving Credit Facility. The interest rate at ~~September~~ March 3031, ~~2011~~2012 was 4.5000%. A 10% change in interest rates on our Revolving Credit Facility would not have had a material effect on our net ~~loss~~income for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012.

We have operated primarily in the United States. Accordingly, we have not had any significant exposure to foreign currency rate fluctuations.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

Our management, with the participation and under the supervision of our Chief Executive Officer ~~(principal executive officer)~~ and Chief Financial Officer ~~(principal financial officer)~~, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. The Chief Executive Officer ~~(principal executive officer)~~ and Chief Financial Officer ~~(principal financial officer)~~ have concluded, based on their evaluation of these controls and procedures required by paragraph (b) of Rules 13a-15 and 15d under the Exchange Act, that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms promulgated by the Securities and Exchange Commission. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls are met, and no evaluation of controls can provide absolute assurance that all controls and instances of fraud, if any, within a company have been detected.

Changes in internal control over financial reporting

We have not made any significant changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~September~~March 3031, ~~2011~~2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

Subpoenas From the U.S. Attorney, Western District of New York. In April 2008, we received subpoenas from the office of the U.S. Attorney for the Western District of New York requesting information regarding the marketing activities related to XIBROM. We are cooperating with the government’s investigation. From April 2008 through March 31, 2012, we have incurred approximately $6.0 million in legal fees associated with this criminal investigation and expect to incur significant expenses in the future. In October 2011, we, and certain of our officers and current and former employees received correspondence from the government identifying them as targets. Tolling agreements have been executed to allow cooperation and discussions regarding resolution. The Company has executed indemnification agreements with each of the individual targets, and each target has executed a corresponding undertaking agreement. If the government chooses to engage in civil litigation or initiate a criminal prosecution against us, our officers or our current or former employees, as a result of its review of the requested documents and other evidence, we may have to incur significant amounts to defend such actions or pay or incur substantial fines or penalties, on behalf of ourselves, our officers or our current or former employees, any of which could significantly deplete our cash resources. The case is ongoing and the likelihood of an unfavorable outcome and/or the amount/range of loss or additional expenses, cannot be reasonably estimated.

FDA Complaint. In March 2011, we filed a Citizen Petition, or a CP, with the FDA. The CP requested the FDA to refrain from granting tentative or final approval of any ANDA for bromfenac sodium ophthalmic solution 0.09% that utilizes the labeling for XIBROM, or omits any portion of the BROMDAY label relating to the once-per-day dosing. In May 2011, the FDA partially denied our CP and approved a generic version of XIBROM. In May 2011, we filed a Complaint in the United States District Court for the District of Columbia alleging that the FDA’s approval of a generic version of XIBROM was arbitrary, capricious, and contrary to law. We also filed papers seeking injunctive relief with respect to the FDA’s approval of a generic version of twice-daily XIBROM and relief from denial of our 2011 CP requesting that the FDA refrain from granting tentative or final approval of any ANDA that utilizes the labeling for XIBROM or omits any portion of the BROMDAY label relating to the once-per-day dosing. Although our request for a temporary injunction was denied by the court in May 2011, our subsequent motion for summary judgment seeking revocation of the approval of the generic bromfenac product, as well as the FDA’s counter-motion for summary judgment, have been fully briefed before the court.

In October 2010, we submitted a sNDA to add a 2.4 mL size to the already existing NDA approval for 1.7 mL size of BROMDAY. In February 2011, the FDA’s Center for Drug Evaluation and Research, or CDER, issued a Complete Response letter, stating that the sNDA could not be approved because a single bottle should not be used to treat more than one eye in a post-operative setting. In May 2011, we requested a hearing on the proposal to deny approval of the sNDA. In August 2011, CDER issue a Notice of Opportunity for a Hearing, proposing to deny approval of the 2.4 mL size. The FDA was required to hold the hearing or grant itself summary judgment by December 3, 2011. In November 2011, we contacted CDER, saying it had violated its own rules by not commencing the hearing in time to meet the December 3 deadline. The FDA responded by saying that any ruling on the matter should be deferred until a meeting of the FDA’s Dermatologic and Ophthalmic Drugs Advisory Committee, or DODAC, could be held on the issue of whether a single bottle should be used to treat more than one eye in a post-operative session. We then requested the FDA to grant summary judgment because of CDER’s persistent refusal to act on this matter or that CDER be ordered to commence a hearing forthwith.

On February 27, 2012, DODAC met to discuss the appropriateness of using a single bottle of anti-inflammatory drops to treat both eyes post-operatively and the appropriate fill volume of these drugs. DODAC agreed that it may be appropriate to use a single bottle for both eyes with a vote of five (5) “yes” votes, four (4) “no” votes, and two (2) abstentions. However, DODAC agreed that it is not appropriate to label a product for such use with a vote of one (1) “yes” vote and ten (10) “no” votes, mainly because there is no formal clinical study on this use. DODAC stated that the decision to use one bottle for two eyes should be entirely in the physician’s discretion.

Shareholder Class Action Complaints. We, our directors, Parent and Merger Sub were named as defendants in four putative class action complaints. The first case, captioned Hutt v. ISTA Pharmaceuticals, Inc., et al., C.A. 7367, was filed on March 29, 2012 in the Court of Chancery of the State of Delaware. An amended complaint was filed in the Hutt action on April 27, 2012. The plaintiff and Mr. Peter Barton Hutt, one of our directors, are not related. The second, third, and fourth complaints, captioned Salina v. ISTA Pharmaceuticals, Inc., et al., Hijab v. ISTA Pharmaceuticals, Inc., et al., and Kretz v. ISTA Pharmaceuticals, Inc., et al., were filed on or about April 5, 2012, April 10, 2012, and April 25, 2012 respectively, in the Superior Court for the State of California. On April 30, 2012, an amended complaint was filed in the Hijab action. The actions, purportedly brought on behalf of a class of stockholders, allege that our directors breached their fiduciary duties in connection with the proposed acquisition by, among other things, failing to disclose all material information concerning the Merger, and failing to maximize stockholder value and obtain the best financial and other terms and act in the best interests of public stockholders. The complaints further allege that Bausch & Lomb aided and abetted the directors’ purported breaches. The plaintiffs seek injunctive and other equitable relief, including enjoining us from consummating the Merger, and damages, in addition to fees and costs. On May 1, 2012, the plaintiff in the Salina action filed a request for voluntary dismissal of that case. We believe that the claims asserted in these suits are without merit.

Item 1A.

Risk Factors.

Information about material risks related to our business, financial condition and results of operations for the quarterly period ended March 31, 2012 does not materially differ from that described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as amended, as filed with the SEC on February 27, 2012, other than the following additional risk factor:

The proposed transaction with Bausch & Lomb is subject to certain closing conditions that could result in the Merger not being completed, which may in turn result in a decline in the price of our common stock.

The proposed Merger with Inga Acquisition Corporation, a wholly-owned subsidiary of Bausch & Lomb Incorporated is subject to customary closing conditions including, among others, adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon, the absence of any governmental order or law that makes the merger illegal or otherwise enjoins, restrains, prevents or prohibits consummation of the Merger, and as a condition to Bausch & Lomb’s obligation to complete the Merger, the absence of a Company “material adverse effect” since the date of the Merger Agreement and but is not subject to any condition with regard to financing the transaction. Many of the conditions to closing are outside of our control. If any condition to the closing of the Merger is not satisfied or, if permissible, waived, the Merger will not be completed. Furthermore, certain lawsuits have been filed challenging the Merger. These lawsuits could result in the Merger not being completed or in a delay in the completion of the Merger.

If we do not complete the Merger, the price of our common stock may decline significantly from the current market price which reflects a market assumption that the Merger will be completed with stockholders receiving $9.10 in cash for each common share held. We also will be obligated to pay certain professional fees and related expenses in connection with the Merger, whether or not the Merger is completed. In addition, we have expended, and will continue to expend, significant management resources in connection with the Merger.

Items

2 – 5. Not applicable.

~~PART~~Item II6. ~~- OTHER INFORMATION~~ Exhibits.

Item 1. Legal Proceedings


Exhibit Number		Description

10.39		Fourth Amendment to Bromfenac License Agreement dated March 26, 2012, by and between Senju Pharmaceutical Co. Ltd. and the Registrant.(1)

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

101		The following materials furnished from the ISTA Pharmaceuticals, Inc. Annual Report on Form 10-Q for the three months ended March 31, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Balance Sheets (ii) the Statements of Operations and Comprehensive Income, (iii) the Statements of Cash Flows and (iv) the Notes to the Financial Statements, tagged as blocks of text.

~~Legal~~(1) ~~Proceedings~~Portions of this exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to ISTA’s application requesting confidential treatment under Rule 24b-2 of the Exchange Act of the Securities Exchange Act of 1934.

TRICARE Retail Pharmacy Program. Section 703 of the National Defense Authorization Act of 2008, enacted on January 28, 2009, requires that pharmaceutical products purchased through the Department of Defense, or DoD, TRICARE Retail Pharmacy program be subject to the Federal Ceiling Price discount under the Veterans Health Care Act of 1992. DoD issued a rule pursuant to Section 703 that requires manufacturers to provide DoD with a quarterly refund on pharmaceutical products utilized through the TRICARE Retail Pharmacy program, and to pay rebates to DoD on TRICARE Retail Pharmacy purchases retroactive to January 28, 2008. We have requested a waiver of the retroactive rebate for TRICARE Retail Pharmacy utilization for the period from January 28, 2008 to May 26, 2009 (the effective date of the DoD rule). In addition, the regulation was the subject of litigation by others, and it was our position that the retroactive application of the regulation was contrary to established case law. As of September 30, 2011, we determined that our payment of the retroactive rebate (from January 28, 2008 to May 26, 2009) created by the regulation is neither reasonably estimable nor probable as of September 30, 2011. In late October 2011, the United States District Court for the District of Columbia issued its decision in Coalition for Common Sense in Government Procurement v. United States, No. 08-996 (D.C. Dist. Ct. Oct. 25, 2011) upholding the DoD's regulation. It is uncertain whether the decision will be appealed, and if so, whether such appeal would be successful. In addition, the foregoing court decision does not impact our currently pending request for a waiver of the retroactive rebate.

Item 1A. Risk Factors

Information about material risks related to our business, financial condition and results of operations for the quarterly period ended September 30, 2011 does not materially differ from that described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on February 25, 2011, other than the following additional risk factor:

If generic manufacturers obtain approval for generic versions of our products, our business, results of operations and financial condition may suffer.

In January 2009, the patent on XIBROM expired, and we lost regulatory exclusivity for XIBROM. Because of the patent expiration, competitors became eligible to receive approval for ANDAs for ophthalmic formulations of bromfenac with indications identical to XIBROM. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products. Rather, they are permitted to rely on the innovator’s data regarding safety and efficacy. Thus, generic manufacturers can sell their products at prices much lower than those charged by innovative pharmaceutical companies who have incurred substantial expenses associated with the research and development of the product.

InSignatures October 2010, the FDA approved BROMDAY for the treatment of postoperative inflammation and reduction of ocular pain in patients who have undergone cataract extractions. We were granted three years of marketing exclusivity under the Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Act. There can be no assurances that we will be able to generate revenues from BROMDAY similar to the levels achieved from sales of XIBROM. We launched BROMDAY in November 2010, and we focused our sales and marketing efforts on encouraging physicians to transition from prescribing twice-daily XIBROM to prescribing once-daily BROMDAY.

InPursuant ~~May~~to ~~2011,~~ the ~~FDA approved~~requirements ~~a generic version~~ of ~~twice-daily~~the ~~bromfenac~~Securities ~~ophthalmic~~Exchange ~~solution~~Act ~~0.09%, which is substitutable for one bottle size~~ of ~~our~~1934, ~~twice-daily~~the ~~XIBROM~~registrant ~~(bromfenac~~has ~~ophthalmic~~duly ~~solution)®~~caused ~~0.09%.~~this Wereport ~~stopped~~to ~~shipping~~be ~~XIBROM~~signed ~~after February 2011. The introduction of a generic version of XIBROM could have an adverse impact~~ on ~~our~~its behalf ~~business,~~by ~~results~~the ~~of operations~~undersigned ~~and~~thereunto ~~financial~~duly ~~condition~~authorized.

Item 6. Exhibits


		ISTA PHARMACEUTICALS, INC. (Registrant)

Dated: May 4, 2012		/S/ VICENTE ANIDO, JR., Ph.D.

		Vicente Anido, Jr., Ph.D. President and Chief Executive Officer

Dated: May 4, 2012		/S/ LAUREN P. SILVERNAIL

		Lauren P. Silvernail Chief Financial Officer and Vice President, Corporate Development

Exhibit Number		Description
31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, ISTA Pharmaceuticals, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ISTA PHARMACEUTICALS, INC. (Registrant)
Dated: November 4, 2011		/s/ Vicente Anido, Jr., Ph.D.
		Vicente Anido, Jr., Ph.D. President and Chief Executive Officer (Principal Executive Officer)
Dated: November 4, 2011		/s/ Lauren P. Silvernail
		Lauren P. Silvernail Chief Financial Officer and Vice President, Corporate Development (Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit Number		Description
31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
10.39		Fourth Amendment to Bromfenac License Agreement dated March 26, 2012, by and between Senju Pharmaceutical Co. Ltd. and the Registrant.(1)
31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
32.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS		XBRL Instance Document
32.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.SCH		XBRL Taxonomy Extension Schema Document
101		The following materials furnished from the ISTA Pharmaceuticals, Inc. Annual Report on Form 10-Q for the three months ended March 31, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Balance Sheets (ii) the Statements of Operations and Comprehensive Income, (iii) the Statements of Cash Flows and (iv) the Notes to the Financial Statements, tagged as blocks of text.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

32(1) Portions of this exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to ISTA’s application requesting confidential treatment under Rule 24b-2 of the Exchange Act of the Securities Exchange Act of 1934.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · ISTA PHARMACEUTICALS INC