**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

**FORM10-QSB**
| **x**                                                                                                                                                                                           | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                            |                                                                                          |
| **For the  quarterly period ended March 31, 2007**                                                                                                                                              |
|                                                                                                                                                                                            |                                                                                          |
| **OR**                                                                                                                                                                                          |
|                                                                                                                                                                                            |                                                                                          |
| **o**                                                                                                                                                                                           | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                            |                                                                                          |
| **For the  transition period from                             to** |

 

**Commissionfile number: 000-50344**

**LPATH, INC.**

(Name of smallbusiness issuer in its charter)

| **Nevada**                       |   | **16-1630142**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

**6335Ferris Square, Suite A, San Diego, CA 92121**

(Address of principal executive offices, including zipcode)

**(858) 678-0800**

(Issuer’stelephone number)

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No   o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes   o No   x

The number of shares ofissuer’s outstanding common stock as of May 10, 2007 was 39,581,266.

Transitional Small BusinessDisclosure Format (check one):    Yes o    No x

 

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**LPATH, INC.**

**FORM10-QSB**

**TABLE OFCONTENTS**
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                       | ** ** |
|------------------|------------------------------------------------------------------------------------------------------------------|------------|
|             |                                                                                                             |       |
| ITEM 1:          | Financial  Statements:                                                                                           |       |
|             |                                                                                                             |       |
|             | Condensed  Consolidated Balance Sheets as of March 31, 2007 (unaudited) and  December 31, 2006              |       |
|             |                                                                                                             |       |
|             | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2007 and 2006 (unaudited) |       |
|             |                                                                                                             |       |
|             | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 and 2006 (unaudited) |       |
|             |                                                                                                             |       |
|             | Notes to  Condensed Consolidated Financial Statements                                                            |       |
|             |                                                                                                             |       |
| ITEM 2:          | Management’s Discussion and Analysis or Plan of  Operations                                                 |       |
|             |                                                                                                             |       |
| ITEM 3:          | Controls and  Procedures                                                                                         |       |
|             |                                                                                                             |       |
| **PART II** | **OTHER INFORMATION**                                                                                            | ** ** |
|             |                                                                                                             |       |
| ITEM 1:          | Legal Proceedings                                                                                                |       |
|             |                                                                                                             |       |
| ITEM 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     |       |
|             |                                                                                                             |       |
| ITEM 3:          | Defaults  upon Senior Securities                                                                                 |       |
|             |                                                                                                             |       |
| ITEM 4:          | Submission  of Matters to a Vote of Security Holders                                                             |       |
|             |                                                                                                             |       |
| ITEM 5:          | Other Information                                                                                                |       |
|             |                                                                                                             |       |
| ITEM 6:          | Exhibits                                                                                                         |       |
|             |                                                                                                             |       |
| **SIGNATURES**   |                                                                                                             |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**LPATH,INC.**

**Condensed Consolidated Balance Sheets**
| ** **                                                                                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                    | ** ** | **(Unaudited)**    | ** ** | **Note**              | ** ** |
| **ASSETS**                                                                                                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                                               |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                  | 669,114    |                  | $          | 1,361,214 |   |
| Grant revenue  receivable                                                                                                                                                                                     |       | —             |       | 118,361               |       |
| Prepaid expenses                                                                                                                                                                                              |       | 193,209            |       | 201,175               |       |
| Total current  assets                                                                                                                                                                                         |       | 862,323            |       | 1,680,750             |       |
|                                                                                                                                                                                                          |       |               |       |                  |       |
| Equipment, net                                                                                                                                                                                                |       | 259,274            |       | 259,135               |       |
| Patents, net                                                                                                                                                                                                  |       | 356,884            |       | 343,747               |       |
| Deposits and other  assets                                                                                                                                                                                    |       | 58,675             |       | 70,603                |       |
|                                                                                                                                                                                                          |       |               |       |                  |       |
| Total assets                                                                                                                                                                                                  |       | $                  | 1,537,156  |                  | $          | 2,354,235 |   |
|                                                                                                                                                                                                          |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                                                                                                          |       |               |       |                  |       |
| Notes payable –  related parties                                                                                                                                                                         |       | $                  | 100,197    |                  | $          | — |   |
| Accounts payable                                                                                                                                                                                              |       | 1,538,667          |       | 494,696               |       |
| Accrued expenses                                                                                                                                                                                              |       | 386,030            |       | 300,763               |       |
| Total current liabilities                                                                                                                                                                                     |       | 2,024,894          |       | 795,459               |       |
|                                                                                                                                                                                                          |       |               |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                    |       |               |       |                  |       |
| Common stock - $.001  par value; 60,000,000 shares authorized; 24,841,015 shares issued and  outstanding and 24,616,393 shares issued and outstanding at March 31, 2007  and December 31, 2006, respectively. |       | 24,841             |       | 24,616                |       |
|                                                                                                                                                                                                          |       |               |       |                  |       |
| Additional paid-in  capital                                                                                                                                                                                   |       | 15,286,076         |       | 14,610,217            |       |
| Accumulated deficit                                                                                                                                                                                           |       | (15,798,655        | )          | (13,076,057           | )          |
| Total  stockholders’ equity                                                                                                                                                                              |       | (487,738           | )          | 1,558,776             |       |
|                                                                                                                                                                                                          |       |               |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                              |       | $                  | 1,537,156  |                  | $          | 2,354,235 |   |

 

Note:The balance sheet at December 31, 2006 has been derived from the auditedconsolidated financial statements at that date.

See accompanyingnotes to condensed consolidated financial statements

3

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**LPATH,INC.**

###### **Condensed Consolidated Statements of Operations**

**(Unaudited)**
| ** **                                                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                                                  | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Grant revenue                                                                                               |       | $                                                | 196,981    |   | $ | 129,475 |   |
|                                                                                                        |       |                                             |       |   |   |
| Expenses:                                                                                                   |       |                                             |       |   |   |
| Research and development expenses                                                                           |       | 2,178,647                                        |       | 953,458 |   |
| General and administrative expenses                                                                         |       | 733,750                                          |       | 550,541 |   |
|                                                                                                        |       |                                             |       |   |   |
| Total expenses                                                                                              |       | 2,912,397                                        |       | 1,503,999 |   |
|                                                                                                        |       |                                             |       |   |   |
| Loss from operations                                                                                        |       | (2,715,416                                       | )          | (1,374,524 | ) |
|                                                                                                        |       |                                             |       |   |   |
| Other income  (expense):                                                                                    |       |                                             |       |   |   |
| Interest income                                                                                             |       | 9,015                                            |       | 53,241 |   |
| Interest expense                                                                                            |       | (16,197                                          | )          | — |   |
| Total other income (expense)                                                                                |       | (7,182                                           | )          | 53,241 |   |
|                                                                                                        |       |                                             |       |   |   |
| Net loss                                                                                                    |       | $                                                | (2,722,598 | ) | $ | (1,321,283 | ) |
|                                                                                                        |       |                                             |       |   |   |
| Basic and  diluted net loss per share                                                                       |       | $                                                | (0.11      | ) | $ | (0.06 | ) |
|                                                                                                        |       |                                             |       |   |   |
| Weighted average number  of common shares outstanding used to compute basic and diluted net loss per  share |       | 24,703,076                                       |       | 23,973,161 |   |

 

See accompanyingnotes to condensed consolidated financial statements

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**LPATH,INC.**

**Condensed Consolidated Statements of Cash Flows**

###### **(Unaudited)**

| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                       |       |                                             |       |   |   |
| Net loss                                                                     |       | $                                                | (2,722,598 | ) | $ | (1,321,283 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                             |       |   |   |
| Stock-based compensation expense                                             |       | 624,709                                          |       | 369,190 |   |
| Depreciation and amortization                                                |       | 21,317                                           |       | 8,965 |   |
| Deferred rent expense                                                        |       | 5,481                                            |       | 11,618 |   |
| Changes in operating assets and liabilities:                                 |       |                                             |       |   |   |
| Grant revenue receivable                                                     |       | 118,361                                          |       | 109,268 |   |
| Prepaid expenses                                                             |       | 7,966                                            |       | (96,285 | ) |
| Deposits and other assets                                                    |       | 2,601                                            |       | — |   |
| Accounts payable and accrued expenses                                        |       | 1,120,293                                        |       | 44,668 |   |
| Net cash used in operating activities                                        |       | (821,870                                         | )          | (873,859 | ) |
|                                                                         |       |                                             |       |   |   |
| Cash flows from  investing activities:                                       |       |                                             |       |   |   |
| Equipment expenditures                                                       |       | (17,817                                          | )          | (35,492 | ) |
| Patent expenditures                                                          |       | (3,788                                           | )          | — |   |
| Net cash used in investing activities                                        |       | (21,605                                          | )          | (35,492 | ) |
|                                                                         |       |                                             |       |   |   |
| Cash flows from  financing activities:                                       |       |                                             |       |   |   |
| Proceeds from sale of common stock and warrants                              |       | —                                           |       | 923,685 |   |
| Proceeds from issuance of notes payable to related  parties                  |       | 100,000                                          |       | — |   |
| Proceeds from exercise of stock options and warrants                         |       | 51,375                                           |       | — |   |
| Net cash provided by financing activities                                    |       | 151,375                                          |       | 923,685 |   |
|                                                                         |       |                                             |       |   |   |
| Net increase (decrease) in cash                                              |       | (692,100                                         | )          | 14,334 |   |
|                                                                         |       |                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 1,361,214                                        |       | 5,190,273 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                | 669,114    |   | $ | 5,204,607 |   |
|                                                                         |       |                                             |       |   |   |
| **Supplemental  Schedule of Non-cash Investing and Financing Activities:**   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Incurred patent  expenditures contained in accrued expenses                  |       | $                                                | 12,988     |   | $ | — |   |

 

See accompanyingnotes to condensed consolidated financial statements

5

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**LPATH,INC.**

**Notes to Condensed ConsolidatedFinancial Statements**

**March 31, 2007**

**Note 1 – ORGANIZATION AND BASIS OF PRESENTATION**

Organization

Lpath, Inc. (“Lpath,” “we,” or “company”) is anemerging drug discovery company focused on bioactive signaling lipids astargets for treating and diagnosing important human diseases.  Lpath has active programs in cancer, heartdisease, and age-related macular degeneration.

Lpath TherapeuticsInc. (“LTI”), a wholly owned subsidiary of Lpath, was founded in 1998. OnNovember 30, 2005, LTI merged with a subsidiary of Neighborhood Connections,Inc. (“NCI”), a publicly traded corporation to form Lpath (“the Merger”).Although NCI (which changed its name to Lpath, Inc. in connection with the Merger)acquired LTI as a result of the Merger, the former shareholders of LTI held amajority of the voting interest in the combined enterprise immediately afterthe Merger. Additionally, the Merger resulted in LTI’s management and Board ofDirectors assuming operational control of Lpath, Inc. Accordingly, the Mergerwas treated as a re-capitalization of LTI and the financial informationpresented here and elsewhere in this Quarterly Report reflects the historicalactivity of LTI, unless otherwise indicated. NCI conducted limited operationsprior to the Merger in a line of business wholly unrelated to biopharmaceuticaloperations, and the results of NCI’s operations are not reflected in thefinancial information of Lpath.

Basis of Presentation

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States, and with the rules andregulations of the Securities and Exchange Commission related to a quarterlyreport on Form 10-QSB.  Accordingly, theydo not include all of the information and disclosures required by accountingprinciples generally accepted in the United States for complete financialstatements. The interim financial statements include all adjustments that, inthe opinion of management, are necessary for a fair presentation of thefinancial condition and results of operations for the periods presented.  Except as otherwise disclosed, all suchadjustments are of a normal recurring nature.

Results for the interim periods are not necessarilyindicative of the results for the entire year. For more complete financial information, these financial statements, andnotes thereto, should be read in conjunction with the audited financialstatements for the year ended December 31, 2006 included in Lpath’s AnnualReport on Form 10-KSB filed with the Securities and Exchange Commission.

The consolidated financial statements include theaccounts of Lpath, Inc. and its wholly-owned subsidiary, LpathTherapeutics Inc.  All significantintercompany balances and transactions have been eliminated in consolidation.

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**Note 2 – SIGNIFICANT ACCOUNTING POLICIES**

Revenue Recognition - Grant Revenue

Lpath’s sole source of revenue to date has been research grantsreceived from the National Institutes of Health.  Lpath recognizes grant revenue as the relatedresearch expenses are incurred, up to contractual limits.

Research and Development

Research and development costs are charged toexpense when incurred.

Cash Equivalents 

Cash equivalents consist of highly liquid investments with maturitiesof three months or less from the original purchase date.  Lpath classifies its securities as “held-tomaturity” in accordance with SFAS 115, *Accounting for CertainInvestments in Debt and Equity Securities*.  Lpath carries these investments at amortizedcost since the company has the positive intent and ability to hold them tomaturity.

Fair Value of Financial Instruments

Lpath has determined the estimated fair value of itsfinancial instruments.  The amountsreported for cash equivalents, grant revenue receivable, notes payable torelated parties, accounts payable, and accrued expenses approximate the fairvalue because of their short maturities.

Concentrationof Credit Risk

Financial instruments thatpotentially subject the company to a significant concentration of credit riskconsist of cash and cash equivalents. The company maintains its cash balances with one major commercial bank.  The balances are insured by the FederalDeposit Insurance Corporation up to $100,000.

Equipment

Equipment is recorded at cost. Depreciation iscomputed using the straight-line method over the estimated useful asset lives,which range from three to five years. Repairs and maintenance are charged toexpense as incurred.

Patents

Legal and filing costs directly associated withobtaining patents are capitalized. Upon issuance of a patent, amortization iscomputed using the straight-line method over the estimated remaining usefullife of the patent.

Long-Lived Assets

The company accounts for the impairment anddisposition of long-lived assets in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.*  In accordance with SFAS No. 144, long-livedassets are reviewed for impairment when events or changes in circumstancesindicate that their carrying value may not be recoverable.

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Deferred Rent

Rent expense is recorded ona straight-line basis over the term of the lease. The difference between rentexpense and amounts paid under the lease agreements is recorded as deferredrent in the accompanying condensed consolidated balance sheets.

Stock-Based Compensation

Prior to January 1, 2006, Lpath followed SFASNo. 123, *Accounting for Stock-Based Compensation*. On January 1, 2006, the company adopted SFAS No. 123R, *Share-Based Payment*, using the modified prospective method,which results in the provisions of SFAS No. 123R being applied to theconsolidated financial statements on a going-forward basis. Prior periods havenot been restated. SFAS No. 123R requires companies to recognize stock-basedcompensation awards granted to its employees as compensation expense based on afair value method. Under the fair value recognition provisions of SFAS No. 123R,stock-based compensation cost is measured at the grant date based on the fairvalue of the award and is recognized as expense over the service period, whichgenerally represents the vesting period. The grant date fair value of stockoptions is calculated using the Black-Scholes option-pricing model. This methodis substantially the same method that the company was using under SFAS No. 123except that under SFAS No. 123R the expense recognized over the service periodis required to include an estimate of the awards that will be forfeited.Previously, the company recorded the effects of forfeitures as theyoccurred.  Management presently estimatesthat the effect of forfeitures on the financial statements will be insignificant. Accordingly, the adoption of SFAS No. 123R had no material effect on prior orcurrent periods.  As of March 31, 2007,total unrecognized compensation expense related to unvested stock-basedcompensation arrangements already granted under our stock option plan was $2.1million, which we expect will be recognized over a weighted-average period of2.3 years.  However, it isdifficult to predict the actual amount of share-based compensation expense thatwe will recognize in future periods because that expense can be affected bychanges in the amount or terms of our stock-based compensation awards issued inthe future, changes in the assumptions used in our model to value those futureawards, changes in our stock price, and changes in interest rates, among otherfactors.

The company accounts for stock-based compensationissued to non-employees under SFAS No. 123R, and Emerging Issues Task Force (“EITF”)Issue 96-18, *Accounting for EquityInvestments that are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services. *As such, the value of such options is periodically remeasuredand income or expense is recognized during their vesting terms.

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Net Loss Per Share

Inaccordance with SFAS No. 128, *Earnings PerShare*, and SEC Staff Accounting Bulletin (“SAB”) No. 98, basic netloss per common share is computed by dividing net loss for the period by theweighted average number of common shares outstanding during the period.  Under SFAS No. 128, diluted net loss pershare is computed by dividing the net loss for the period by the weightedaverage number of common and common equivalent shares, such as stock options,warrants, and convertible securities, outstanding during the period.  As Lpath incurred net losses in the periodsended March 31, 2007 and 2006, we did not include common equivalent shares of13,558,064 and 12,179,916, respectively, in the computation of diluted net lossper share because the effect would be anti-dilutive.

Estimates

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period.  Bytheir nature, estimates are subject to an inherent degree of uncertainty and,as such, actual results may differ from those estimates.

Recent Accounting Pronouncements

In December 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) EITF 00-19-2, “Accounting for RegistrationPayment Arrangements.” This FSP addresses an issuer’s accounting forregistration payment arrangements and specifies that the contingent obligationto make future payments or otherwise transfer consideration under aregistration payment arrangement should be separately recognized and measuredin accordance with FASB No. 5. The guidance in this FSP amends FASB Statements133 and 150 and FASB Interpretation No. 45 to include scope exceptions forregistration payments arrangements. This FSP further clarifies that a financialinstrument subject to a registration payment arrangement should be accountedfor without regard to the contingent obligation to transfer considerationpursuant to the registration payment arrangement. This guidance shall beeffective immediately for registration payment arrangements and the financialinstruments subject to those arrangements that are entered into or modifiedsubsequent to the date of issuance of this FSP (12-21-2006). For registrationpayment arrangements and financial instruments subject to those arrangementsthat were entered into prior to the issuance of this FSP, this guidance shallbe effective for financial statements issued for fiscal years beginning afterDecember 15, 2006, and interim periods within those fiscal years. Based on the registration rights agreementin place as of March 31, 2007 our management does not believe thispronouncement will have a material impact on Lpath’s financial position orresults of operations.  The company iscurrently assessing the impact of this FSP in relation to the registrationobligations entered into in conjunction with our recent private placement.

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InFebruary 2007, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 159, *The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115.*This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Mostof the provisions in SFAS No. 159 are elective; however, the amendment toSFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities,*applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS No. 159 permits all entities to choose to measureeligible items at fair value at specified election dates. A business entitywill report unrealized gains and losses on items for which the fair valueoption has been elected in earnings (or another performance indicator if thebusiness entity does not report earnings) at each subsequent reporting date.The fair value option: (a) may be applied instrument by instrument, with afew exceptions, such as investments otherwise accounted for by the equitymethod; (b) is irrevocable (unless a new election date occurs); and(c) is applied only to entire instruments and not to portions ofinstruments. SFAS No. 159 is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007. The company is currently assessing the impactthis pronouncement will have on its financial statements, if any.

**Note 3 — SUBSEQUENT EVENT****–****RECENT FINANCING**

On April 6, 2007, Lpathreceived gross proceeds of $13,898,741 in the first closing of a privateplacement of shares of common stock and warrants.  The investors in this transaction have, uponcertain conditions, committed to subsequently invest an additional amount to atotal of $16,847,000 in Lpath’s Class A common stock.  In this first closing, Lpath issued14,630,251 shares of Class A common stock at a price of $0.95 per share.  Each investor also received warrants to purchasethe number of shares of Class A common stock equal to 35% of the number ofcommon shares purchased in this financing. This resulted in the issuance of warrants to purchase a total of5,120,590 shares of Class A common stock in this transaction.  The warrants are exercisable at a price of$1.05 per share, and expire on April 6, 2012. Before the second closing can take place Lpath’s stockholders must voteto authorize an increase in the total number of authorized shares of Class Acommon stock and the total number of shares available for issuance under the2005 Plan.  The stockholders vote isexpected to take place before June 30, 2007.

Stock issuancecosts related to the private placement were paid in cash and warrants.  Cash expenses for this transaction totaledapproximately $700,000, including placement agent fees totaling approximately$550,000 and legal and other fees totaling approximately $150,000. In addition,1,271,536 warrants were issued to placement agents.  These warrants carry an exercise price of$1.05 per share, and expire on April 6, 2012. All of the April 2007 warrants issued in conjunction with this financingcontain provisions specifying that in the event that Lpath sells shares of itsClass A Common Stock at a price per share less than the exercise price of theApril 2007 warrants, then both the exercise price of the April 2007 warrantsand the number of shares that may be acquired with the warrants will beadjusted according to formulas specified in the warrants.

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**NOTE 4 –GOING CONCERN**

The accompanying condensed consolidated financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business. Lpath hasincurred net losses since its inception and has an accumulated deficit of$15,799,000 as of March 31, 2007. The company does not expect to generatemeaningful revenues from its drug development programs in the foreseeablefuture.  These factors, among others, raisesubstantial doubt about the company’s ability to continue as a going concern.Lpath’s independent registered public accountants, LevitZacks, indicated intheir audit report on the 2006 consolidated financial statements that there issubstantial doubt about the company’s ability to continue as a goingconcern.  The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

During 2007 the company expects to continue to incur cash losses fromoperations.  While the company had cashtotaling $669,114 as of March 31, 2007, and raised net proceeds ofapproximately $13.2 million in April 2007 from the first tranche of a privateplacement of common stock and warrants (see Note 3 **–**Subsequent Event for the details of this financing), the cost of its ongoingdrug discovery and development efforts, including general and administrativeexpenses, are expected to consume approximately $15,000,000 in the next twelvemonths.  Additional capital will be requiredto continue to fund the company’s research and development projects beyond2007.  The company’s plans to bridge suchcash shortfalls include the following:

1.               Pursue additional fund raising activitiesfrom both existing and potential new investors.

2.               Explore cash generating opportunities fromstrategic alliances, including licensing portions of our technology or enteringinto corporate partnerships or collaborations. In such transactions, Lpath could transfer certain rights to one or moreof its drug discovery or development programs, or to specific indicationswithin those programs, and receive infusions of cash in the short term, andpotentially in the long term as well.

3.               Continue to seek additional research grantsfrom the National Institutes of Health or other sources.

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**Note 5****– NOTES PAYABLE: RELATEDPARTIES**

On March 8, 2007, Scott Pancoast, our President and CEO, and DonaldSwortwood, both being directors of the Company, agreed to commit up to anaggregate of $400,000 in bridge debt financing to us.  Mr. Pancoast and Mr. Swortwood each agreed tocommit up to $200,000. A commitment fee of 4%, or $8,000, was due to each ofMr. Pancoast and Mr. Swortwood as a result of their respective agreements tocommit such funds.  Non-interestedmembers of our Board of Directors and Audit Committee approved the commitmentand its terms.

On March 23, 2007, pursuant to their commitment to provide the bridgedebt financing to us, we and Mr. Pancoast signed a convertible securedpromissory note dated March 23, 2007 in the principal amount of $50,000, andDonald Swortwood and Letitia Swortwood each signed a convertible securedpromissory note dated March 23, 2007 in the principal amount of $25,000.  The promissory notes bear interest at therate of 9% per annum.  The terms of thepromissory notes provide that the outstanding principal balance and all accruedbut unpaid interest will be due upon the earlier of September 30, 2007, or thedate of the next Qualified Financing Round (as defined in the promissorynotes).  All of these promissory noteswere repaid in full, together with accrued interest, on April 10, 2007,following the closing of the Private Placement on April 6, 2007.

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**Note 6****– STOCK BASED COMPENSATION**

In November 2005 the company adopted the Lpath, Inc. 2005 Stock Optionand Stock Purchase Plan (“the plan”), which permits stock option grants toemployees, outside consultants, and directors. There are 5,340,000 commonshares authorized for grant under the plan. The plan allows for grants ofincentive stock options with exercise prices of at least 100% of the fairmarket value of Lpath’s common stock and nonqualified options with exerciseprices of at least 85% of the fair market value of the company’s common stock.All options granted to date have a ten-year life and vest over zero to fouryears.  As of March 31, 2007 atotal of 459,382 shares of common stock were available for future grant underthe plan.

The following table presents stock-based compensation expense asincluded in the company’s condensed consolidated statements of operations:
|                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                    |       |                                             |       |   |   |
| Research and  development General       |       | $                                                | 438,291    |   | $ | 220,563 |   |
| General and  administrative             |       | 186,418                                          |       | 148,627 |   |
| Total  stock-based compensation expense |       | 624,709                                          |       | 369,190 |   |
|                                         |            |                                                  |            |  |  |  |  |

 

Thecompany uses a Black-Scholes option pricing model to estimate the grant-datefair value of share-based awards under SFAS No. 123R.  Fairvalue is determined at the date of grant for employee options and at the dateat which the grantee’s performance is complete for non-employee options.Compensation cost is recognized over the vesting period based on the fair valueof the options.

In accordance withthe adoption of SFAS No. 123R on January 1, 2006, the financial statementeffect of forfeitures is estimated at the time of grant and revised, ifnecessary, if the actual effect differs from those estimates.  As of March 31, 2007, management estimates that the effect offorfeitures on the financial statements will be insignificant.

As of March 31,2007 there was $2.1 million of total unrecognized compensation expense relatedto unvested stock-based compensation under the plan.  That expense is expected to be recognizedover a weighted-average period of 2.3 years. Because of our net operating losses, we did not realize any tax benefitsfor the tax deductions from share-based payment arrangements during the periodsended March 31, 2007 and 2006.

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Thefollowing assumptions were used in the Black-Scholes model in calculating thefair value of options granted in the three month period ended March 31, 2007and 2006:
|                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                           |       |                                             |       |   |   |
| Estimated fair  value of stock |       | $0.90                                            |       | $1.25 to $1.65 |   |
| Expected life of  options (1)  |       | 10  years                                        |       | 10  years |   |
| Dividend yield  (2)            |       | 0%                                               |       | 0% |   |
| Risk-free  interest rate (3)   |       | 4.76%                                            |       | 4.00%  to 4.40% |   |
| Volatility (4)                 |       | 100%                                             |       | 100% |   |

 

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(1)  The expected life of employee stockoptions represents the average of the contractual term of the options.

(2)  No cash dividends have been declaredon the company’s common stock since the company’s inception, and the companycurrently does not anticipate paying cash dividends over the expected term ofthe option and the share purchase right.

(3)  The risk-free interest rate is basedon ten year U.S. Treasury debt securities.

(4)  Volatilityis estimated by management.  As of March31, 2007 the company’s stock had only been trading in the public market for 16months.  Due to the limited tradinghistory of the company’s stock, this estimate considers both an averagevolatility of certain peers within the company’s industry sector as well as thehistorical volatility of the company’s stock.

Based on the above assumptions, for the three month periods ended March31, 2007 and 2006 the per share weighted-average grant date fair value of stockoptions granted were $0.82 and $1.27, respectively.

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A summary of the stockoption activity under the plan for the three months ended March 31, 2007 ispresented below:
| ** **                        | ** ** | **Number  of Shares** | ** ** | **Weighted  Ave.  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
|                              |       |                  |       |                                |       |                                                |       |                            |       |
| Outstanding at  December 31, 2006 |       | 4,456,968             |       | $                                   | 0.52       |                                                |       |                            |       |   |
|                              |       |                  |       |                                |       |                                                |       |                            |       |
| Granted                           |       | 461,400               |       | $                                   | 0.90       |                                                |       |                            |       |   |
| Exercised                         |       | (164,622              | )          | $                                   | 0.09       |                                                |       |                            |       |   |
| Expired                           |       | —                |       | —                              |       |                                                |       |                            |       |
| Forfeited                         |       | (43,750               | )          | $                                   | 1.40       |                                                |       |                            |       |   |
|                              |       |                  |       |                                |       |                                                |       |                            |       |
| Outstanding at  March 31, 2007    |       | 4,709,996             |       | $                                   | 0.57       |                                                | 7.72       |                            | $          | 3,288,259 |   |
|                              |       |                  |       |                                |       |                                                |       |                            |       |
| Exercisable at March  31, 2007    |       | 2,376,874             |       | $                                   | 0.38       |                                                | 6.79       |                            | $          | 2,076,180 |   |

 

The aggregateintrinsic value in the table above represents the total intrinsic value whichwould have been received by the stock option holders had all option holdersexercised their options as of that date. The aggregate intrinsic value is calculated as the difference betweenthe fair market value of the company’s common stock on March 31, 2007 of $1.24 andthe exercise price of stock options, multiplied by the number of shares subjectto such stock options.

At March 31, 2007the company had 3,904,046 stock options outstanding with strike prices belowthe company’s market price of $1.24 on that date, of which 2,080,080 wereexercisable.  The total intrinsic valueof options exercised during the three month period ended March 31, 2007 and2006 was $137,607 and zero, respectively. Cash received from option exercises during the three month periods endedMarch 31, 2007 and 2006 was $15,375 and zero, respectively.  Upon stock option exercises the companyissues new shares of common stock.

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**Note 7****– INCOME TAXES AND CHANGEIN ACCOUNTING PRINCIPLE**

As of December 31,2006, Lpath had federal net operating loss carryforwards of approximately $12.8million that will expire beginning in 2018 and continue expiring through2026.  As of December 31, 2006 thecompany’s California net operating loss carryforwards amount to approximately$12.7 million that will expire beginning in 2008 and continue expiring through2016.  Portions of these net operatingloss carryforwards may be used to offset future taxable income, if any.

As of December 31,2006, Lpath also has federal and California research and development tax creditcarryforwards of $373,000 and $341,000, respectively, available to offsetfuture taxes.  The federal credits beginexpiring in 2019, and the state credits do not expire.

Under theprovisions of Section 382 of the Internal Revenue Code, substantialchanges in Lpath’s ownership may limit the amount of net operating losscarryforwards and tax credit carryforwards that can be utilized annually in thefuture to offset taxable income. A valuation allowance has been established to reserve the potentialbenefits of these carryforwards in Lpath’s financial statements to reflect theuncertainty of future taxable income required to utilize available tax losscarryforwards and other deferred tax assets. If it is determined that a change in Lpath’s ownership occurred in prioryears, or if a change in ownership occurs in the future, Lpath’s ability to useits net operating loss carryforwards in any fiscal year may be significantlylimited.

The companyadopted the provisions of Financial Accounting Standards Board (“FASB”) InterpretationNo. 48, **Accountingfor Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109** (“FIN 48”) on January 1, 2007. FIN 48requires companies to determine whether it is “more likely than not” that a taxposition will be sustained upon examination by the appropriate taxingauthorities before any tax benefit can be recorded in the financial statements.It also provides guidance on the recognition, measurement, classification andinterest and penalties related to uncertain tax positions. The adoption of FIN48 did not have an impact on our results of operations or financial condition.

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**Item 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**

*This discussion and analysis ofour financial condition and results of operations should be read in conjunctionwith our financial statements and notes thereto included in this quarterlyreport on Form 10-QSB (the “Quarterly Report”) and the audited financialstatements and notes thereto included in our annual report on Form 10-KSBfor the year ended December 31, 2006 (the “2006 Annual Report”), as filedwith the Securities and Exchange Commission (the “SEC”).  In addition to historical information, thisdiscussion and analysis contains forward-looking statements that involve risks,uncertainties, and assumptions. Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of certainfactors, including but not limited to those identified in the 2006 AnnualReport in the section entitled “Risk Factors.”*

**Overview**

Lpath Therapeutics, Inc. (“LTI”), a wholly ownedsubsidiary of Lpath, was founded in 1998. On November 30, 2005, LTI merged witha publicly traded corporation, Neighborhood Connections, Inc. (“NCI”), toform Lpath (“the Merger”). Although NCI (which changed its name to Lpath,Inc. in connection with the Merger) acquired LTI as a result of the Merger, theformer stockholders of LTI held a majority of the voting interest in thecombined enterprise immediately after the Merger. Additionally, the Mergerresulted in LTI’s management and Board of Directors assuming operationalcontrol of Lpath, Inc. Accordingly, the Merger has been treated as are-capitalization of LTI and the financial information presented here andelsewhere in this Quarterly Report reflects the historical activity of LTI,unless otherwise indicated. NCI conducted limited operations prior to themerger in a line of business wholly unrelated to biopharmaceutical operations,and the results of NCI’s operations are not reflected in the financial informationof Lpath.

Lpath, Inc. is a biotechnology company focused onthe discovery and development of lipidomic-based therapeutics.  Lipidomics is an emerging field of medicalscience whereby bioactive signaling lipids are targeted to treat importanthuman diseases.  Our lead productcandidate, **SphingomabTM**, is a humanized monoclonalantibody against a validated cancer target, sphingosine-1-phosphate (S1P), andhas demonstrated compelling results in preclinical studies against multipleforms of cancers, against age-related macular degeneration (AMD), and againstheart failure.  Our second productcandidate, LpathomabTM, is a monoclonal antibody against lysophosphatidic acid(LPA), a key bioactive lipid that has long been recognized as a significantpromoter of cancer-cell growth and metastasis in a broad range of tumor typesand a significant contributor to neuropathic pain.  We believe we are the only company to havedeveloped functional monoclonal antibodies against bioactive lipids such as S1Pand LPA.  These unique antibodies wereproduced using our ImmuneY2TM technology, a series of proprietary processesdeveloped by the company.  We arecurrently applying the ImmuneY2 process to other lipid-signaling agents thatare validated targets for disease treatment, thereby creating a potentialpipeline of monoclonal antibody-based drug candidates.

Lpath has incurred significant netlosses since its inception. As of March 31, 2007, Lpath had an accumulateddeficit of approximately $15.8 million. Lpath expects its operating losses to increase for the next several yearsas it pursues the clinical development of its product candidates.

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# **Revenue**

Lpath has generated $1.9 million in revenue to datefrom research grants awarded by the National Institutes of Health.  Lpath expects to continue to receive smallamounts of revenue from research grants. Lpath does not expect to generate any revenue from licensing,milestones, or product sales until it executes a partnership or collaborationarrangement or is able to commercialize its first product.

# **Researchand Development Expenses**

Lpath’s research and development expenses consistprimarily of salaries and related employee benefits, research supplies andmaterials, external costs associated with its drug discovery research, andexternal costs incurred in preparation for clinical development, includingpreclinical testing and regulatory expenses. Lpath’s historical research and development expenses are principallyrelated to the research and drug discovery efforts in creating its lead productcandidate, *Sphingomab*.

Lpath charges all research and development expensesto operations as incurred.  Lpath expectsits research and development expenses to increase significantly in the futureas its product candidates move through pre-clinical testing and into clinicaltrials.

At this time, due to the risks inherent in the drugdiscovery and clinical trial process and given the early stage of our productdevelopment programs, Lpath is unable to estimate with any certainty the costsit will incur in the continued development of its product candidates forpotential commercialization.  Clinicaldevelopment timelines, the probability of success and development costs varywidely.  While Lpath is currently focusedon advancing each of its product development programs, Lpath anticipates thatit will continually make determinations as to the scientific and clinicalsuccess and assessments as to the commercial potential of each of its productcandidates.  In addition, Lpath cannotforecast with any degree of certainty which product candidates will be subjectto future partnering, when such arrangements will be secured, if at all, and to what degree sucharrangements would affect our development plans and capital requirements. As aresult, Lpath cannot be certain when and to what extent it will receive cashinflows from the commercialization of its product candidates.

Lpath expects its research and development expensesto be approximately $24 million over the two year period ending December 31,2008.  This estimate includes theexpenses to complete preclinical testing and initiate clinical trials for *Sphingomab*, our most advanced product candidate, as well asto initiate preclinical testing of our second product candidate,Lpathomab.  Lpath expects theseexpenditures to increase as it continues the advancement of its productdevelopment programs. To date, Lpath has not yet initiated clinical trials forany of its product candidates.  Thelengthy process of completing clinical trials and seeking regulatory approvalfor its product candidates typically requires expenditures in excess ofapproximately $50 million.  Any failureby Lpath or delay in completing clinical trials, or in obtaining regulatoryapprovals, would cause Lpath’s research and development expenses to increaseand, in turn, have a material adverse effect on Lpath’s results of operationsand its ability to continue as a going concern.

## **Generaland Administrative Expenses**

Lpath’s general and administrative expensesprincipally comprise salaries and benefits and professional fees related toLpath’s administrative, finance, human resources, legal, and internal systemssupport functions.  In addition, generaland administrative expenses include insurance and an allocated portion offacilities costs.

Lpath anticipates increases in general and administrativeexpenses as it adds personnel, becomes subject to the Sarbanes-Oxley complianceobligations applicable to publicly-held companies, and continues to develop andprepare for the commercialization of its product candidates.

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**Results of Operations**

***Three MonthsEnded March 31, 2007 and March 31, 2006***

*Grant Revenue.* Grant revenue for the three month periodended March 31, 2007 increased to $197,000 from $129,000 for thethree month period ended March 31, 2006. The increase of $68,000 was primarily a result of receiving approval foran additional grant in January 2007.

*Research and Development Expenses.* Research and development expenses increased from $953,000 for the firstquarter of 2006 to $2,179,000 for the first quarter of 2007.  The increase of $1,226,000 reflects theprogress of the company and its capabilities from the first quarter of 2006 tothe first quarter of 2007.  Outsideservices expense increased by approximately $892,000 primarily due to thepre-clinical studies performed or initiated during the first quarter of2007.  The use of consultants and othercontracted services to augment the capabilities of our research and developmentteam also contributed to the increase in expenditures for outside services.  Employee compensation and benefits expenseincreased by approximately $116,000, commensurate with the increase in researchand development staffing.  The increasealso included a $218,000 increase in stock-based compensation expense relatedto consultants used to support research and development activities.

*General and AdministrativeExpenses.*  General and administrative expenses increasedfrom $551,000 for the three month period ended March 31, 2006 to $734,000 forthe three month period ended March 31, 2007. Legal fees, accounting fees, investor relations, stock administration,and insurance expenses increased, in aggregate, by approximately $101,000.  This increase was primarily due to the costsof outside services necessary to support a publicly-traded company, and topursue corporate collaboration and financing opportunities.  Employee compensation and related benefitexpense increased by approximately $44,000, reflective of the changes ingeneral and administrative personnel between the two years.  Stock-based compensation charges also increasedby $38,000 due to the increase in administrative headcount over the priorperiod.

*Interest Income. *Interest income was $9,000 for the quarter ended March 31, 2007,compared with $53,000 for the quarter ended March 31, 2006.  The $44,000 decrease was principally a resultof lower levels of invested cash as compared to the prior year.

*Interest Expense. *Interest expense was $16,000 for the quarter ended March 31, 2007,compared with zero for the quarter ended March 31, 2006.  Lpath’s interest expense during 2007 was aresult of the bridge financing commitment fees and accrued interest.

**Liquidity and Capital Resources**

**Recent Financing**

On April 6, 2007, Lpathreceived gross proceeds of $13,898,741 in the first closing of a privateplacement of shares of common stock and warrants (“the Private Placement”).  The investors in this transaction have, uponcertain conditions, committed to subsequently invest additional amounts up to atotal of $16,847,000 in Lpath’s Class A common stock.  In this first closing, Lpath issued14,630,251 shares of Class A common stock at a price of $0.95 per share.  Each investor also received warrants topurchase the number of shares of Class A common stock equal to 35% of thenumber of common shares purchased in this financing.  This resulted in the issuance of warrants topurchase a total of 5,120,590 shares of Class A common stock in thistransaction.  The warrants areexercisable at a price of $1.05 per share, and expire on April 6, 2012.  Before the second closing can take placeLpath’s stockholders must vote to authorize an increase in the total number ofauthorized shares of Class A common stock and the total number of sharesavailable for issuance under the 2005 Stock Option/Stock Issuance Plan.  The stockholders vote is expected to takeplace before June 30, 2007.

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Stock issuancecosts related to the private placement were paid in cash and warrants.  Cash expenses for this transaction totaledapproximately $700,000, including placement agent fees totaling approximately$550,000 and legal and other fees totaling approximately $150,000. In addition,1,271,536 warrants were issued to placement agents.  These warrants carry an exercise price of$1.05 per share, and expire on April 6, 2012. All of the April 2007 warrants issued in conjunction with this financingcontain provisions specifying that in the event that Lpath sells shares of itsClass A Common Stock at a price per share less than the exercise price of theApril 2007 warrants, then either the exercise price of the April 2007 warrantsor the number of shares that may be acquired with the warrants will be adjustedaccording to formulas specified in the warrants.

**Liquidity and Capital Resources as ofMarch 31, 2007**

**Since Lpath’s inception, itsoperations have been financed through the private placement of equity and debtsecurities.  Through March 31, 2007Lpath had received net proceeds of approximately $12,600,000 from the sale ofequity securities and from the issuance of convertible promissory notes.  As of March 31, 2007, Lpath had cash andcash equivalents totaling $669,114.**

During the quarter ended March 31, 2007, weused net cash of $822,000 for operating activities compared to $874,000 in thefirst quarter of 2006.  The decrease innet cash used in operating activities was a result of the company allowingaccounts payable to increase in anticipation of closing the Private Placementin April 2007.

Net cash used in investing activities during thefirst quarter of 2007 amounted to $22,000 compared to $35,000 in the firstquarter of 2006.  Of the amount used forinvesting activities in the first quarter of 2007, $18,000 was used to purchasedocument management software to support our development activities and $4,000was invested in the prosecution of additional patents.  In the comparable period of 2006 $35,000 wasused to purchase new equipment.

Net cash provided from financing activities duringthe three month period ended March 31, 2007 totaled approximately $151,000compared to $924,000 in the first three months of 2006.  During the first quarter of 2007 $15,375 wasreceived from stock option exercises, $36,000 was received from warrantexercises, and $100,000 was borrowed under the terms of the promissory notespayable to related parties. In the first quarter of 2006 Lpath sold commonstock and warrants to purchase common stock for $924,000, net of issuancecosts.

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In August 2005 we entered into a five-yearfacilities lease.  A portion of thefacility is subleased to a company that is co-owned by two of Lpath’s largestshareholders.  The sublease was approvedby the landlord.  The following tabledescribes Lpath’s commitments to settle contractual obligations in cash as ofMarch 31, 2007:
| ** **                   | ** ** | **Payments Due by Period**       | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **Nine-months  ended  December 31,  2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
|                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations |       | $                                               | 118,933    |   | $ | 206,372 |   | $ | 212,483 |   | $ | 182,639 |   | $ | 720,427 |   |
|                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Sublease income              |       | 34,275                                          |       | 60,300 |   | 62,110 |   | 53,050 |   | 209,735 |   |
|                         |       |                                            |       |   |   |   |   |   |   |   |   |
| **Total**                    |       | $                                               | 84,658     |   | $ | 146,072 |   | $ | 150,373 |   | $ | 129,589 |   | $ | 510,692 |   |

 

Lpath has entered into a collaborationagreement with another biomedical research company to utilize their proprietaryprocesses to assist Lpath in preparing its lead drug candidate for clinicaltrials.  Lpath has also entered intoagreements with third parties to perform specialized drug discovery tasks,manufacture product candidates, conduct preclinical studies, and provideanalytical services.  Lpath’s paymentobligations under these agreements depend upon the progress of its discoveryand development programs.  Therefore,Lpath is unable to estimate with certainty the future costs it will incur underthese agreements.  In addition, under theterms of the existing collaboration agreement Lpath is obligated to makeadditional milestone payments upon the occurrence of certainproduct-development events and certain royalty payments.  These milestone payments and royalty paymentsunder Lpath’s license agreements are not included in the table above becauseLpath cannot, at this time, determine when or if the related milestones will beachieved or the events triggering the commencement of payment obligations willoccur.

**We expect our cash requirements toincrease significantly in the foreseeable future as we continue to: (i)increase our research and development, especially preclinical activities, (ii)begin the process of seeking regulatory approvals, and (iii) pursuecommercialization and strategic partnering of our current productcandidates.  As we expand our research anddevelopment efforts and pursue additional product opportunities, we anticipatesignificant cash requirements associated with hiring additional personnel,capital expenditures, and investment in equipment and facilities.  The costs of filing and prosecuting patentsto protect our intellectual property will also increase.  The amount and timing of cash requirementswill depend on regulatory and market acceptability of our product candidates,if any, and the resources we devote to the research, development, regulatory,manufacturing, and commercialization activities required to support our productcandidates.**

**We believe that our existing cashtogether with the net proceeds of approximately $13.2 million from the firsttranche of the private placement completed in April 2007 as well as theanticipated proceeds of approximately $2.8 million from the second tranche ofthe private placement and approximately $1.4 million from the exercise ofwarrants expiring on May 31, 2007 to purchase Lpath Class A Common Stock willbe sufficient to meet Lpath’s projected operating requirements into the secondquarter of 2008.**

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**Until we can generate significantcash other than from infusions of equity, we expect to continue to fund ouroperations with the proceeds from offerings of our equity securities, debtfinancing and strategic collaboration agreements.  However, we may not be successful inobtaining additional equity or debt financing or entering into collaborationagreements.  If we do enter intocollaboration agreements, we may not be successful in receiving milestone orroyalty payments under such executed collaboration agreements.  In addition, we cannot be sure that itsexisting cash and investment resources will be adequate or that additionalfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or to our stockholders.  Having insufficient funds may require us todelay, scale back, or eliminate some or all of our development programs,relinquish some or even all rights to product candidates at an earlier stage ofdevelopment, or renegotiate less favorable terms than we would otherwisechoose. Failure to obtain adequate financing may also adversely affect ourability to operate as a going concern. If we raise additional funds from the issuance of equity securities,substantial dilution to our existing stockholders would likely result.  If we raise additional funds by incurringdebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.**

**Recent Accounting Pronouncements**

In December 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) EITF 00-19-2, “Accounting for RegistrationPayment Arrangements.” This FSP addresses an issuer’s accounting forregistration payment arrangements and specifies that the contingent obligationto make future payments or otherwise transfer consideration under aregistration payment arrangement should be separately recognized and measuredin accordance with FASB No. 5. The guidance in this FSP amends FASB Statements133 and 150 and FASB Interpretation No. 45 to include scope exceptions forregistration payments arrangements. This FSP further clarifies that a financialinstrument subject to a registration payment arrangement should be accountedfor without regard to the contingent obligation to transfer considerationpursuant to the registration payment arrangement. This guidance shall beeffective immediately for registration payment arrangements and the financialinstruments subject to those arrangements that are entered into or modifiedsubsequent to the date of issuance of this FSP (12-21-2006). For registrationpayment arrangements and financial instruments subject to those arrangementsthat were entered into prior to the issuance of this FSP, this guidance shallbe effective for financial statements issued for fiscal years beginning afterDecember 15, 2006, and interim periods within those fiscal years. Based on the registration rights agreementin place as of March 31, 2007 our management does not believe thispronouncement will have a material impact on Lpath’s financial position orresults of operations.  The company iscurrently assessing the impact of this FSP in relation to the registrationobligations entered into in conjunction with our recent private placement.

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 159, *The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115.*This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Mostof the provisions in SFAS No. 159 are elective; however, the amendment toSFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities,*applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS No. 159 permits all entities to choose to measure eligibleitems at fair value at specified election dates. A business entity will reportunrealized gains and losses on items for which the fair value option has beenelected in earnings (or another performance indicator if the business entitydoes not report earnings) at each subsequent reporting date. The fair valueoption: (a) may be applied instrument by instrument, with a fewexceptions, such as investments otherwise accounted for by the equity method;(b) is irrevocable (unless a new election date occurs); and (c) isapplied only to entire instruments and not to portions of instruments. SFASNo. 159 is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. The company is currently assessing the impact this pronouncement willhave on its financial statements, if any.

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**Item 3.****                                   CONTROLSAND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

Our management, including the Chief ExecutiveOfficer and the Chief Financial Officer, has conducted an evaluation of theeffectiveness of our disclosure controls and procedures pursuant to Rule13a-15(e) under the Securities Exchange Act of 1934.  Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that, as of March 31, 2007,our disclosure controls and procedures were effective.

**Changes in Internal Controls Over Financial Reporting**

There have been no significant changes in ourinternal controls over financial reporting during the quarter ended March 31,2007 that have materially affected, or that are reasonably likely to materiallyaffect, our internal control over financial reporting.

**PART II – OTHER INFORMATON**

###### **Item 1.****           ****LEGAL PROCEEDINGS**

In the ordinary course of our business, we may become involved invarious disputes regarding our business. However, we do not believe that the ultimate resolution of any suchdispute will be material to our business, financial condition, or results ofoperations.

**Item 2.****                                  ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

None.

**Item 3.**                                   DEFAULTS UPON SENIOR SECURITIES

None.

**Item 4.****            SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

**Item 5.****            OTHERINFORMATION**

None.

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**Item 6.****            EXHIBITS**

Thefollowing exhibit index shows those exhibits filed with this report and thoseincorporated by reference: 
| 2.1*   | Agreement and Plan of Reorganization, by and between  Neighborhood Connections, Inc., Neighborhood Connections Acquisition  Corporation, and Lpath Therapeutics Inc. dated July 15, 2005.                                                                                                     |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                         |
| 2.2    | Acquisition Agreement and Plan of Merger, dated as  of March 19, 2004, between Neighborhood Connections, Inc. and JCG, Inc.  (filed as Exhibit 2.1 to the Current Report on Form 8-K filed on March 22,  2004 and incorporated herein by reference).                                                         |
|   |                                                                                                                                                                                                                                                                                                         |
| 3.1*   | Amendment to Articles of Incorporation filed  December 1, 2005.                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                         |
| 3.2    | Articles of Incorporation filed on  September 18, 2002 (filed as Exhibit 3.1 to Amendment No. 1 to  the Annual Report on Form 10-KSB/A for the year ended December 31,  2003 (the “2003 Amended 10-KSB”) (filed on March 25, 2004 and incorporated  herein by reference). |
|   |                                                                                                                                                                                                                                                                                                         |
| 3.3    | Amendment to Articles of Incorporation filed on  December 27, 2002 (filed as Exhibit 3.3 to the Current Report on Form  8-K/A filed on January 9, 2006 and incorporated herein by reference).                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                         |
| 3.4    | Amended and Restated By-laws (filed as  Exhibit 3.4 to the Quarterly Report on Form 10-QSB filed on November 13,  2006 and incorporated herein by reference).                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.1*   | Form of Warrant issued to Western States  Investment Corporation for lease guaranty.                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.2*   | Form of Warrant issued pursuant to the Common  Stock and Warrant Purchase Agreement dated June 30, 2005.                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.3*   | Form of Warrant issued to Johnson &  Johnson Development Corporation dated April 3, 2002.                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.4*   | Form of Warrant issued to purchasers of Convertible  Secured Promissory Notes as amended by the Omnibus Amendment to Convertible  Secured Promissory Notes and Warrants dated November 30, 2005.                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.5*   | Form of Warrant issued pursuant to the Common  Stock and Warrant Purchase Agreement dated November 30, 2005.                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.6#   | Form of Warrant issued pursuant to the Common  Stock and Warrant Purchase Agreement dated January 31, 2006.                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                         |
| 4.7    | Form of Warrant issued pursuant to the Common Stock  and Warrant Purchase Agreement dated March 28, 2006 (filed as Exhibit 4.7 to  the registration statement on Form SB-2 filed on March 30, 2006, SEC File No.  333-132850, and  incorporated herein by reference).                                        |
|   |                                                                                                                                                                                                                                                                                                         |
| 10.1*  | Lease Agreement dated August 12, 2005 between  Lpath Therapeutics Inc. and Pointe Camino Windell, LLC.                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                         |
| 10.2*  | Research Agreement dated January 28, 2004  between Medlyte, Inc. and San Diego State University, together with  Amendments No.1 and No.2.                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                         |
| 10.3*  | Assignment Agreement dated June 9, 2005 between  Lpath Therapeutics Inc. and LPL Technologies, Inc.                                                                                                                                                                                                |

 

24

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| 10.4    | Research Collaboration Agreement dated  August 2, 2005 between Lpath Therapeutics Inc. and AERES Biomedical  Limited (filed as Exhibit 10.4 to the Current Report on Form 8-K/A filed on  January 9, 2006 and incorporated herein by reference) (portions of this  exhibit have been omitted pursuant to a request for confidential treatment).                                           |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5*   | Consultant Agreement dated July 1, 2005 between  Lpath Therapeutics Inc. and William Garland.                                                                                                                                                                                                                                                                                             |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6*   | Consultant Agreement dated September 1, 2005 between  Lpath Therapeutics Inc. and Roger Sabbadini.                                                                                                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7*   | 2005 Stock Option/Stock Issuance Plan.+                                                                                                                                                                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8#   | Assignment and Assumption Agreement dated December  1, 2005 by and between Lpath, Inc. and Lpath Therapeutics, Inc.                                                                                                                                                                                                                                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9**  | Form of Employment Agreement between Lpath, Inc. and  Scott R. Pancoast dated as of January 1, 2006.+                                                                                                                                                                                                                                                                                          |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10** | Form of Employment Agreement between Lpath, Inc. and  Gary Atkinson dated as of February 6, 2006.+                                                                                                                                                                                                                                                                                             |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11** | Form of Consultant Agreement between Lpath, Inc. and  William Garland dated as of January 1, 2006.+                                                                                                                                                                                                                                                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12** | Form of Consultant Agreement between Lpath, Inc. and  Roger Sabbadini dated as of February 1, 2006.+                                                                                                                                                                                                                                                                                           |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13   | Development and Manufacturing Services Agreement  dated August 16, 2006 between Lpath Inc. and Laureate Pharma, Inc.  (filed as Exhibit 10.13 to the Quarterly Report on Form 10-QSB for the  quarter ended September 30, 2006 filed on November 13, 2006 and incorporated  by reference) (portions of this exhibit have been omitted pursuant to a request  for confidential treatment). |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 14.1#   | Code of Ethics of Lpath, Inc.                                                                                                                                                                                                                                                                                                                                                                  |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1#   | List of Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1    | Section 302 Certification by Chief Executive Officer  of Lpath, Inc.                                                                                                                                                                                                                                                                                                                           |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2    | Section 302 Certification by Chief Financial Officer  of Lpath, Inc.                                                                                                                                                                                                                                                                                                                           |
|    |                                                                                                                                                                                                                                                                                                                                                                                           |
| 32      | Section 906 Certification by CEO and CFO of Lpath,  Inc.                                                                                                                                                                                                                                                                                                                                       |

 

----

*Filedas an exhibit to the Current Report on Form 8-K filed with the SEC on December6, 2005 and incorporated herein by reference

#Filed as an exhibit to the Annual Report onForm 10-KSB for the year ended December 31, 2005 filed with the SEC on March16, 2006 and incorporated herein by reference

**Filedas an exhibit to the Current Report on Form 8-K filed with the SEC on March 29,2006 and incorporated herein by reference

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##### **SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated. 
|                     | **Lpath, Inc.**               |
|---------------------|-------------------------------|
|                | ** **                    |
|                | ** **                    |
| Date: May 14,  2007 | /s/ Scott R. Pancoast         |   |
|                | Scott R. Pancoast             |
|                | President and Chief Executive |
|                | Officer                       |
|                | (Principal executive officer) |
|                |                          |
|                |                          |
|                | /s/ Gary J.G. Atkinson        |   |
|                | Gary J.G. Atkinson,           |
|                | Vice President and Chief      |
|                | Financial Officer             |
|                | (Principal financial and      |
|                | accounting officer)           |
|                     |                               |  |  |

 

26

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