**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 
| **x**                                                                                                                                                                                                              | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                               |                                                                                          |
| **For the quarterly period ended September  30, 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                ** |
|                                                                                                                                                                                                               |
| **Commission File Number: 000-50344**                                                                                                                                                                              |

 

**LPATH, INC.**

(Name of small business issuer in its charter)

 

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

 

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

(Address of principal executive offices, including zip code)

 

**(858) 678-0800**

(Issuer’s telephone number)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  x No  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes  o No  x

 

Thenumber of shares of issuer’s outstanding Class A common stock as of November 9,2007 was 45,008,337.

 

TransitionalSmall Business Disclosure Format (check one): Yes o    No x

 

** **

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**LPATH, INC.**

**FORM 10-QSB**

 

**TABLE OF CONTENTS**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                 |   |   |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|             |                                                                                                                                      |   |   |
| ITEM  1:         | Financial  Statements:                                                                                                                    |   |   |
|             |                                                                                                                                      |   |   |
|             | Condensed  Consolidated Balance Sheets as of September 30, 2007 (unaudited) and  December 31, 2006                                   |   |   |
|             |                                                                                                                                      |   |   |
|             | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2007 and 2006 (unaudited)              |   |   |
|             |                                                                                                                                      |   |   |
|             | Condensed Consolidated Statement of Changes in  Stockoholders’ Equity for the nine months ended September 30, 2007  (unaudited) |   |   |
|             |                                                                                                                                      |   |   |
|             | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2007 and 2006 (unaudited)                        |   |   |
|             |                                                                                                                                      |   |   |
|             | Notes to  Condensed Consolidated Financial Statements                                                                                     |   |   |
|             |                                                                                                                                      |   |   |
| ITEM 2:          | Management’s Discussion and Analysis or Plan of  Operation                                                                           |   |   |
|             |                                                                                                                                      |   |   |
| 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. FINANCIALINFORMATION**

**Item 1.    FINANCIAL STATEMENTS**

 

**LPATH, INC.**

**CondensedConsolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                            | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                            | ** ** | **(Unaudited)**              | ** ** | **Note**                    | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                            |       |                         |       |                        |       |
| Current Assets:                                                                                                                                                                                                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                             |       | $                            | 10,758,196 |                        | $          | 1,361,214 |   |
| Accounts receivable                                                                                                                                                                                                                                                   |       | 12,602                       |       | 118,361                     |       |
| Prepaid expenses                                                                                                                                                                                                                                                      |       | 136,371                      |       | 201,175                     |       |
| Total current assets                                                                                                                                                                                                                                                  |       | 10,907,169                   |       | 1,680,750                   |       |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Equipment and leasehold improvements, net                                                                                                                                                                                                                             |       | 430,605                      |       | 259,135                     |       |
| Patents, net                                                                                                                                                                                                                                                          |       | 412,216                      |       | 343,747                     |       |
| Deposits and other assets                                                                                                                                                                                                                                             |       | 51,970                       |       | 70,603                      |       |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                                                                                          |       | $                            | 11,801,960 |                        | $          | 2,354,235 |   |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                         | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Liabilities:                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                                      |       | $                            | 1,067,048  |                        | $          | 494,696 |   |
| Accrued expenses                                                                                                                                                                                                                                                      |       | 374,893                      |       | 300,763                     |       |
| Current portion of leasehold improvement  debt                                                                                                                                                                                                                        |       | 18,601                       |       | —                      |       |
| Total current liabilities                                                                                                                                                                                                                                             |       | 1,460,542                    |       | 795,459                     |       |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Leasehold improvement debt, less current  portion                                                                                                                                                                                                                     |       | 34,028                       |       | —                      |       |
| Long-term accrued liabilities                                                                                                                                                                                                                                         |       | 771,489                      |       | —                      |       |
| Total liabilities                                                                                                                                                                                                                                                     |       | 2,266,059                    |       | 795,459                     |       |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Stockholders’ Equity:                                                                                                                                                                                                                                            |       |                         |       |                        |       |
| Class A Common stock - $.001 par value;  100,000,000 and 60,000,000 shares authorized at September 30, 2007 and  December 31, 2006, respectively; 44,999,920 and 24,616,393 shares issued and  outstanding at September 30, 2007 and December 31, 2006, respectively. |       | 45,000                       |       | 24,616                      |       |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Additional paid-in capital                                                                                                                                                                                                                                            |       | 33,403,543                   |       | 14,610,217                  |       |
| Accumulated deficit                                                                                                                                                                                                                                                   |       | (23,912,642                  | )          | (13,076,057                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                       |       | 9,535,901                    |       | 1,558,776                   |       |
|                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                       |       | $                            | 11,801,960 |                        | $          | 2,354,235 |   |

 

Note: The balance sheet atDecember 31, 2006 has been derived from the audited consolidated financialstatements at that date.

 

See accompanying notes to condensedconsolidated financial statements

 

3

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**LPATH, INC.**

###### **Condensed ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Grant and royalty revenue                                                     |       | $                                                    | 11,926     |                                                | $          | 97,077 |   | $ | 361,846 |   | $ | 411,211 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Expenses:                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development expenses                                             |       | 4,114,359                                            |       | 883,012                                             |       | 9,120,869 |   | 2,926,517 |   |
| General and administrative expenses                                           |       | 653,837                                              |       | 525,991                                             |       | 2,354,267 |   | 1,686,939 |   |
| Total expenses                                                                |       | 4,768,196                                            |       | 1,409,003                                           |       | 11,475,136 |   | 4,613,456 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from operations                                                          |       | (4,756,270                                           | )          | (1,311,926                                          | )          | (11,113,290 | ) | (4,202,245 | ) |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Other income (expense):                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                                               |       | 162,985                                              |       | 36,242                                              |       | 296,761 |   | 137,846 |   |
| Interest expense                                                              |       | (3,588                                               | )          | —                                              |       | (20,056 | ) | — |   |
| Total other income (expense)                                                  |       | 159,397                                              |       | 36,242                                              |       | 276,705 |   | 137,846 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                                      |       | $                                                    | (4,596,873 | )                                                   | $          | (1,275,684 | ) | $ | (10,836,585 | ) | $ | (4,064,399 | ) |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted net loss per share                                          |       | $                                                    | (0.10      | )                                                   | $          | (0.05 | ) | $ | (0.30 | ) | $ | (0.17 | ) |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average number of common shares  outstanding used in the calculation |       | 44,915,735                                           |       | 24,616,393                                          |       | 36,665,193 |   | 24,403,844 |   |

 

See accompanying notes to condensedconsolidated financial statements

 

4

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**LPATH, INC.**

###### **Condensed ConsolidatedStatement of Changes in Stockholders’ Equity**

**(Unaudited)**

 
| ** **                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**        | ** ** | ** **             | ** ** | **Total ** | ** **  |
|----------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------------|------------|------------------------|------------|-----------------|-------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated ** | ** ** | **Stockholders’** | ** ** |
| ** **                                               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**           | ** ** | **Deficit**            | ** ** | **Equity**      | ** **  |
|                                                     |       |                  |       |        |       |                  |       |                   |       |            |        |
| Balance, Dec. 31, 2006                                   |       | 24,616,393            |       | $           | 24,616     |                  | $          | 14,610,217             |       | $               | (13,076,057 | ) | $ | 1,558,776 |   |
|                                                     |       |                  |       |        |       |                  |       |                   |       |            |        |
| Common stock and warrants issued, net of  issuance costs |       | 17,733,737            |       | 17,734      |       | 15,831,793            |       |                   |       | 15,849,527      |        |
| Warrants exercised                                       |       | 2,165,000             |       | 2,165       |       | 1,415,675             |       |                   |       | 1,417,840       |        |
| Stock options exercised                                  |       | 484,790               |       | 485         |       | 67,827                |       |                   |       | 68,312          |        |
| Stock-based compensation                                 |       |                  |       |        |       | 1,478,031             |       |                   |       | 1,478,031       |        |
| Net loss                                                 |       |                  |       |        |       |                  |       | (10,836,585            | )          | (10,836,585     | )           |
|                                                     |       |                  |       |        |       |                  |       |                   |       |            |        |
| Balance, September 30, 2007                              |       | 44,999,920            |       | $           | 45,000     |                  | $          | 33,403,543             |       | $               | (23,912,642 | ) | $ | 9,535,901 |   |

 

See accompanying notes to condensedconsolidated financial statements

 

5

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**LPATH, INC.**

**CondensedConsolidated Statements of Cash Flows**

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

 
| ** **                                                                      | ** ** | **Nine Months Ended  September 30,** | ** **  |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                                                      | ** ** | **2007**                                            | ** **  | **2006** | ** ** |
| Cash flows from operating activities:                                           |       |                                                |        |   |   |
| Net loss                                                                        |       | $                                                   | (10,836,585 | ) | $ | (4,064,399 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:    |       |                                                |        |   |   |
| Stock-based compensation expense                                                |       | 1,478,031                                           |        | 709,397 |   |
| Depreciation and amortization                                                   |       | 125,775                                             |        | 32,538 |   |
| Deferred rent expense                                                           |       | 34,082                                              |        | 34,850 |   |
| Changes in operating assets and  liabilities:                                   |       |                                                |        |   |   |
| Accounts receivable                                                             |       | 105,759                                             |        | 90,987 |   |
| Prepaid expenses                                                                |       | 64,804                                              |        | 16,925 |   |
| Deposits and other assets                                                       |       | (2,150                                              | )           | — |   |
| Accounts payable and accrued expenses                                           |       | 1,303,723                                           |        | 181,818 |   |
| Net cash used in operating activities                                           |       | (7,726,561                                          | )           | (2,997,884 | ) |
|                                                                            |       |                                                |        |   |   |
| Cash flows from investing activities:                                           |       |                                                |        |   |   |
| Equipment expenditures                                                          |       | (100,327                                            | )           | (138,735 | ) |
| Patent expenditures                                                             |       | (89,870                                             | )           | (115,238 | ) |
| Net cash used in investing activities                                           |       | (190,197                                            | )           | (253,973 | ) |
|                                                                            |       |                                                |        |   |   |
| Cash flows from financing activities:                                           |       |                                                |        |   |   |
| Proceeds from sale of common stock and  warrants, net                           |       | 15,841,690                                          |        | 923,685 |   |
| Proceeds from exercise of stock options and  warrants, net                      |       | 1,486,152                                           |        | 250 |   |
| Proceeds from issuance of notes payable to  related parties                     |       | 100,000                                             |        | — |   |
| Repayment of notes payable to related  parties, including loan fees             |       | (108,163                                            | )           | — |   |
| Repayment of leasehold improvement debt                                         |       | (5,939                                              | )           | — |   |
| Net cash provided by financing activities                                       |       | 17,313,740                                          |        | 923,935 |   |
|                                                                            |       |                                                |        |   |   |
| Net increase (decrease) in cash                                                 |       | 9,396,982                                           |        | (2,327,922 | ) |
|                                                                            |       |                                                |        |   |   |
| Cash and cash equivalents at beginning of  period                               |       | 1,361,214                                           |        | 5,190,273 |   |
| Cash and cash equivalents at end of period                                      |       | $                                                   | 10,758,196  |   | $ | 2,862,351 |   |
|                                                                            |       |                                                |        |   |   |
| **Supplemental Schedule of Non-cash Investing  and Financing Activities:**      |       |                                                |        |   |   |
| Incurred patent expenditures contained in  accrued expenses                     |       | $                                                   | 20,521      |   | $ | — |   |
| Reversal of estimated fair value of  potential liability for liquidated damages |       | $                                                   | —      |   | $ | (71,000 | ) |
| Common stock issued in payment of loan fees                                     |       | $                                                   | 7,837       |   | $ | — |   |
| Leasehold improvements financed by landlord                                     |       | $                                                   | 58,568      |   | $ | — |   |
| Leasehold improvements paid by landlord                                         |       | $                                                   | 80,428      |   | $ | — |   |

 

See accompanying notes to condensedconsolidated financial statements

 

6

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**LPATH, INC.**

**Notesto Condensed Consolidated Financial Statements**

**September 30, 2007**

 

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

 

Organization

 

Lpath, Inc. (“Lpath,” “we,” or “the company”) is abiotechnology company and is using its proprietary technology to discover anddevelop lipidomic-based therapeutics. Lipidomics is an emerging field ofmedical science that targets bioactive signaling lipids to treat importanthuman diseases. Lpath has active programs in cancer, and other systemicdiseases, as well as age-related macular degeneration and other retinaldiseases.

 

Lpath Therapeutics Inc. (“LTI”), the predecessor company to Lpath, wasfounded in 1998. On November 30, 2005, LTI merged with a subsidiary ofNeighborhood Connections, Inc. (“NCI”), a publicly traded corporation, 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 shareholders of LTI held a majority of the voting interest in the combinedenterprise immediately after the Merger. Additionally, the Merger resulted inLTI’s management and Board of Directors assuming operational control of Lpath,Inc. Accordingly, the Merger was treated as a re-capitalization of LTI and thefinancial information presented here and elsewhere in this Quarterly Reportreflects the historical activity of LTI, unless otherwise indicated. NCIconducted limited operations prior to the Merger in a line of business whollyunrelated to biopharmaceutical operations, and the results of NCI’s operationsare not reflected in the financial information of Lpath.

 

Basisof Presentation

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States, and with the rules and regulations of the Securities andExchange Commission related to a quarterly report on Form 10-QSB. Accordingly,they do not include all of the information and disclosures required byaccounting principles generally accepted in the United States for completefinancial statements. The interim financial statements include all adjustmentsthat, in the opinion of management, are necessary for a fair presentation ofthe financial condition and results of operations for the periods presented. Exceptas otherwise disclosed, all such adjustments are of a normal recurring nature.

 

Resultsfor the interim periods are not necessarily indicative of the results for theentire year. For more complete financial information, these financialstatements, and notes thereto, should be read in conjunction with the auditedfinancial statements for the year ended December 31, 2006 included in Lpath’sAnnual Report on Form 10-KSB filed with the Securities and Exchange Commission.

 

Theconsolidated financial statements include the accounts of Lpath, Inc. andits wholly-owned subsidiary, Lpath Therapeutics Inc. All significantintercompany balances and transactions have been eliminated in consolidation.

 

7

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**Note 2 –SIGNIFICANT ACCOUNTING POLICIES**

 

RevenueRecognition – Grant and Royalty Revenue

 

*Grant Revenue.*Lpath’sprimary source of revenue to date has been research grants received from theNational Institutes of Health. Lpath recognizes grant revenue as the relatedresearch expenses are incurred, up to contractual limits.

 

*Royalty Revenue.*  Lpath recognizes royalty revenuefrom licensed products when earned in accordance with the terms of the licenseagreements. Net sales figures used for calculating royalties include deductionsfor costs of unsaleable returns, cash discounts, freight, postage andinsurance.

 

Researchand Development

 

Researchand development costs are charged to expense when incurred.

 

Cashand Cash Equivalents 

 

Cashand cash equivalents consist of highly liquid investments with maturities ofthree months or less from the original purchase date. Lpath classifies itssecurities as “held-to maturity” in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. Lpath carries theseinvestments at amortized cost since the company has the positive intent andability to hold them to maturity.

 

FairValue of Financial Instruments

 

Lpathhas determined the estimated fair value of its financial instruments. Theamounts reported for cash equivalents, accounts receivable, accounts payable,accrued expenses, and long-term accrued liabilities approximate the fair valuebecause of their short maturities.

 

Concentration of Credit Risk

 

Financialinstruments that potentially subject the company to a significant concentrationof credit risk consist of cash and cash equivalents. The company invests itsexcess cash in money market mutual funds, in certificates of deposit offederally insured financial institutions, and in debt instruments of financialinstitutions and corporations with strong credit ratings. The company hasestablished guidelines relative to diversification of its cash investments andtheir maturities that are intended to secure safety and liquidity. Theseguidelines are periodically reviewed. To date, the company has not experiencedany impairment losses on its cash equivalents.

 

Equipment& Leasehold Improvements

 

Equipmentand leasehold improvements are recorded at cost. Equipment depreciation iscomputed using the straight-line method over the estimated useful asset lives,which range from three to five years. Leasehold improvements are amortized overthe shorter of their estimated useful lives or the remainder of the lease term.Repairs and maintenance are charged to expense as incurred.

 

8

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Patents

 

Legaland filing costs directly associated with obtaining patents are capitalized.Upon issuance of a patent, amortization is computed using the straight-linemethod over the estimated remaining useful life of the patent.

 

Long-LivedAssets

 

Thecompany accounts for the impairment and disposition of long-lived assets inaccordance with SFAS No. 144, *Accounting forthe Impairment or Disposal of Long-Lived Assets.*In accordance withSFAS No. 144, long-lived assets are reviewed for impairment when events orchanges in circumstances indicate that their carrying value may not berecoverable.

 

Deferred Rent

 

Rentexpense is recorded on a straight-line basis over the term of the lease. Thedifference between rent expense and amounts paid under the lease agreements isrecorded as deferred rent in the accompanying condensed consolidated balance sheetsas a component of long-term accrued liabilities. Lease incentives, includingtenant improvement allowances, are also recorded to deferred rent and amortizedon a straight-line basis over the lease term.

 

Stock-BasedCompensation

 

Priorto January 1, 2006, Lpath followed SFAS No. 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 thefair value of the award and is recognized as expense over the service period,which generally represents the vesting period. The grant date fair value ofstock options is calculated using the Black-Scholes option-pricing model. Thismethod is substantially the same method that the company was using under SFASNo. 123 except that under SFAS No. 123R the expense recognized over the serviceperiod is required to include an estimate of the financial statement effects ofthe awards that will be forfeited. Previously, the company recorded the effectsof forfeitures as they occurred. Management presently estimates that the effectof 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 September 30, 2007, total unrecognized compensationexpense related to unvested stock-based compensation arrangements alreadygranted under our stock option plan was $1.5 million, which we expect will berecognized over a weighted-average period of 1.8 years. However, it is difficult to predict theactual amount of share-based compensation expense that we will recognize infuture periods because that expense can be affected by changes in the amount orterms of our stock-based compensation awards issued in the future, changes inthe assumptions used in our model to value those future awards, changes in ourstock price, and changes in interest rates, among other factors.

 

9

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Thecompany accounts for stock-based compensation awards issued to non-employeesunder SFAS No. 123R, and Emerging Issues Task Force (“EITF”) Issue 96-18, *Accounting for Equity Investments that are Issued toOther than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.*As such, the value of such awards is periodicallyremeasured until performance is complete, and income or expense is recognizedduring their vesting terms.

 

### **PerShare Data**

### ** **

Inaccordance with SFAS No. 128, Earnings Per Share, and SEC Staff AccountingBulletin (“SAB”) No. 98, basic net loss per common share is computed bydividing net loss for the period by the weighted average number of commonshares outstanding during the period.  Under SFAS No. 128, diluted netloss per share is computed by dividing the net loss for the period by theweighted average number of common and common equivalent shares, such as stockoptions, warrants, and convertible securities, outstanding during the period.

 

Basicand diluted net loss applicable to common stock per share is computed using theweighted average number of common shares outstanding during the period. Commonstock equivalents from stock options and warrants of 18,954,030 and 17,059,800for the three and nine months ended September 30, 2007, respectively, andcommon stock equivalents from stock options and warrants of 13,220,739 and12,799,667 for the three and nine months ended September 30, 2006,respectively, are excluded from the calculation of diluted net loss per sharebecause the effect is anti-dilutive.

 

Estimates

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. By their nature, estimates are subject to aninherent degree of uncertainty and, as such, actual results may differ fromthose estimates.

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.

 

RecentAccounting Pronouncements

 

InJune 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), **Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109**. 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. FIN 48 iseffective as of the beginning of an entity’s first fiscal year that beginsafter December 15, 2006. The adoptionof the provisions of FIN 48 on January 1, 2007 did not have an impact on ourresults of operations or financial condition.

 

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InDecember 2006, the FASB issued Staff Position (“FSP”) EITF 00-19-2, “*Accounting for Registration Payment Arrangements*.”This FSP addresses an issuer’s accounting for registration payment arrangementsand specifies that the contingent obligation to make future payments orotherwise transfer consideration under a registration payment arrangementshould be separately recognized and measured in accordance with FASB No. 5. Theguidance in this FSP amends FASB Statements 133 and 150 and FASB InterpretationNo. 45 to include scope exceptions for registration payments arrangements. ThisFSP further clarifies that a financial instrument subject to a registrationpayment arrangement should be accounted for without regard to the contingentobligation to transfer consideration pursuant to the registration paymentarrangement. This guidance shall be effective immediately forregistration payment arrangements and the financial instruments subject tothose arrangements that are entered into or modified subsequent to the date ofissuance of this FSP (12-21-2006). For registration payment arrangements andfinancial instruments subject to those arrangements that were entered intoprior to the issuance of this FSP, this guidance shall be effective forfinancial statements issued for fiscal years beginning after December 15, 2006,and interim periods within those fiscal years. Based on the registration rights agreements in place as of September30, 2007 our management does not believe this pronouncement will have amaterial impact on Lpath’s financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115.*Thisstandard permits an entity to choose to measure many financial instruments andcertain other items at fair value. Most of the provisions in SFAS No. 159are elective; however, the amendment to SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities,*applies to all entities with available-for-sale andtrading securities. The fair value option established by SFAS No. 159permits all entities to choose to measure eligible items at fair value atspecified election dates. A business entity will report unrealized gains andlosses on items for which the fair value option has been elected in earnings(or another performance indicator if the business entity does not reportearnings) at each subsequent reporting date. The fair value option:(a) may be applied instrument by instrument, with a few exceptions, suchas investments otherwise accounted for by the equity method; (b) isirrevocable (unless a new election date occurs); and (c) is applied onlyto entire instruments and not to portions of instruments. SFAS No. 159 iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. Management does not believe this pronouncement will have a materialimpact on Lpath’s financial position or results of operations.

 

In June 2007, the FASB ratified a consensus opinion reached by theEmerging Issues Task Force (EITF) on EITF Issue 07-3, “*Accounting for Nonrefundable Advance Payments forGoods or Services Received for Use in Future Research and DevelopmentActivities*.” The guidance in EITF Issue 07-3 requires us to deferand capitalize nonrefundable advance payments made for goods or services to beused in research and development activities until the goods have been deliveredor the related services have been performed. If the goods are no longerexpected to be delivered nor the services expected to be performed, we would berequired to expense the related

 

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capitalized advance payments. The consensus in EITF Issue 07-3****is effective for fiscal years, and interimperiods within those fiscal years, beginning after December 15, 2007 and is tobe applied prospectively to new contracts entered into on or after December 15,2007. Early adoption is not permitted. Retrospective application of EITF Issue07-3 is also not permitted. We intend to adopt EITF Issue 07-3 effectiveJanuary 1, 2008. The impact of applying this consensus will depend on the termsof our future research and development contractual arrangements entered into onor after December 15, 2007.

 

**Note 3 –PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS**

 

Inthe second quarter of 2007 the company received gross proceeds of $16,847,000from the sale of common stock and warrants through a private placement. Lpathissued 17,733,737 shares of Class A common stock at a price of $0.95 per share.Each investor also received warrants to purchase the number of shares of ClassA common stock equal to 35% of the number of common shares purchased in thisfinancing. This resulted in the issuance of warrants to purchase a total of 6,206,809shares of Class A common stock in this transaction. The warrants areexercisable at a price of $1.05 per share, and expire five years from the dateof issue.

 

Stock issuance costs related to the private placement were paid in cashand warrants. Cash expenses for this transaction totaled $998,000, includingplacement agent fees totaling $790,000 and legal and other fees totaling$208,000. In addition, 1,707,894 warrants were issued to placement agents. Thesewarrants carry an exercise price of $1.05 per share, and expire five years fromthe date of issue. All of the warrants issued in conjunction with thisfinancing contain provisions specifying that in the event that Lpath sellsshares of its Class A Common Stock at a price per share less than the exerciseprice of the warrants, then both the exercise price of the warrants and thenumber of shares that may be acquired with the warrants will be adjustedaccording to formulas specified in the warrants.

 

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**Note 4 —OBLIGATIONS UNDER REGISTRATION RIGHTS AGREEMENTS**

 

Thecompany entered into a Registration Rights Agreement (the “2007 RegistrationRights Agreement”) with the investors in the 2007 private placement. Thecompany met its initial obligation under the 2007 Registration Rights Agreementwhen the company registered with the Securities and Exchange Commission (the “SEC”)the Class A common stock issued in the private placement, together with theClass A common stock to be issued upon exercise of the warrants, in the company’sRegistration Statement (the “2007 Registration Statement”) that was declaredeffective by the SEC on July 26, 2007. The 2007 Registration Rights Agreementalso provides that if the 2007 Registration Statement ceases to remain continuouslyeffective for more than 30 consecutive days or more than an aggregate of 60calendar days during any 12-month period, the company may be required to makecash payments, as partial liquidated damages, to each investor in the privateplacement in an amount equal to 1.25% of the aggregate amount invested by suchinvestor for each 30-day period, or any portion of a 30-day period followingJuly 31, 2007. The 2007 Registration Rights Agreement provides that the maximumaggregate liquidated damages payable by the company shall be 8.75% of theaggregate amount invested. The company’s obligation to maintain theeffectiveness of the 2007 Registration Statement will continue until all of theshares issued in this private placement have been sold, or the date on whichthese shares may be sold pursuant to Rule 144(k). Based on the company’sexperience since filing its first registration statement in 2006, the companybelieves that it is unlikely that it will be required to pay any liquidateddamages under the provisions of the 2007 Registration Rights Agreement, andtherefore has not recorded a liability for that potential obligation.

 

The company entered into a Registration Rights Agreement (the “2005Registration Rights Agreement”) with the investors in the November 30, 2005,the January 31, 2006, and the March 27, 2006 private placements. The companymet its initial obligations under that 2005 Registration Rights Agreement whenthe company’s Registration Statement on Form SB-2 (the “2006 RegistrationStatement”) was declared effective by the SEC on April 21, 2006. The 2005Registration Rights Agreement also provides that if the 2006 RegistrationStatement ceases to remain continuously effective for more than 20 consecutivedays or more than an aggregate of 45 days during any 12-month period, thecompany may be required to make cash payments, as liquidated damages, to eachinvestor in the private placement in an amount equal to 1.25% of the aggregateamount invested by such investor for each 30-day period or pro rata for anyportion of a 30-day period. The company’s obligation to maintain theeffectiveness of the 2006 Registration Statement will continue until theearliest of (i) September 30, 2010, (ii) the date on which all of the sharesissued in this private placement have been sold, or (iii) the date on which theshares issued in this financing may be sold pursuant to Rule 144(k). Based onthe company’s experience since filing the 2006 Registration Statement, thecompany believes that it is unlikely that it will be required to pay anyliquidated damages under the provisions of the 2005 Registration RightsAgreement, and therefore has not recorded a liability for that potentialobligation.

 

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**Note 5 –GOING CONCERN**

 

Theaccompanying condensed consolidated financial statements have been prepared ona going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. Lpath hasincurred net losses since its inception and has an accumulated deficit of$23,913,000 as of September 30, 2007. The company does not expect to generatemeaningful revenues from its drug development programs in the foreseeablefuture. These factors, among others, raise substantial doubt about the company’sability to continue as a going concern. Lpath’s independent registered publicaccountants, LevitZacks, indicated in their audit report on the 2006consolidated financial statements that there is substantial doubt about thecompany’s ability to continue as a going concern. The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

Thecompany expects to continue to incur cash losses from operations for theforeseeable future. While the company had cash totaling $10,758,000 as ofSeptember 30, 2007, the cost of its ongoing drug discovery and developmentefforts, including general and administrative expenses, are expected to consumeapproximately $15,000,000 in the next twelve months. Given the presentanticipated expenditures, additional capital will be required to continue tofund the company’s research and development projects beyond approximately Juneof 2008. The company’s plans to bridge such cash shortfalls include thefollowing:

 

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, Lpathcould transfer certain rights to one or more of its drug discovery ordevelopment programs, or to specific indications within those programs, andreceive infusions of cash in the short term, and potentially in the long termas well.

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

 

# **Note6 – NOTES PAYABLE: RELATED PARTIES**

#  

OnMarch 8, 2007, Scott Pancoast, our President and CEO, and Donald Swortwood,both being directors of the company, agreed to commit up to an aggregate of$400,000 in bridge debt financing to us. Mr. Pancoast and Mr. Swortwood eachagreed to commit up to $200,000. A commitment fee of 4%, or $8,000, was due toeach of Mr. Pancoast and Mr. Swortwood as a result of their respectiveagreements to commit such funds. Non-interested members of our Board ofDirectors and Audit Committee approved the commitment and its terms.

 

OnMarch 23, 2007, pursuant to their commitment to provide the bridge debtfinancing to us, we and Mr. Pancoast signed a convertible secured promissorynote dated March 23, 2007 in the principal amount of $50,000, and DonaldSwortwood and Letitia Swortwood each signed a convertible secured promissorynote dated March 23, 2007 in the principal amount of $25,000. The promissorynotes bear interest at the rate of 9% per annum. The terms of the promissorynotes provide that the outstanding principal balance and all accrued but unpaidinterest will be due upon the earlier of September 30, 2007, or the date of thenext Qualified Financing Round (as

 

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definedin the promissory notes). All of these promissory notes were repaid in full,together with accrued interest, on April 10, 2007.

 

# **Note 7 – RESEARCH AND LICENSE AGREEMENTS**

In August 2006, Lpath and Lonza Biologics PLC, entered into aLicense Agreement (the “agreement”) granting Lpath the use of certainproprietary technology to assist in the development of monoclonal antibodies.  Under the terms of the agreement an annual license fee of approximately$600,000 per year began to accrue during the third quarter of 2007, when Lpathutilized the Lonza technology in the manufacture of drug substance to be usedin clinical trials.  Under the terms ofthe License Agreement, payment of this annual license fee will be deferreduntil Lpath’s drug candidate utilizing that technology begins Phase II clinicaltrials.  While it is not possible to accuratelypredict when, or if, the drug candidate will progress to the initiation ofPhase II clinical trials, management believes that it is unlikely that paymentof this annual fee will occur prior to 2009. Accordingly, this fee was accrued and is carried on the balance sheet asa long-term liability.

 

# **Note8 – SHARE-BASED PAYMENTS**

#  

InNovember 2005 the company adopted the Lpath, Inc. 2005 Stock Option and StockPurchase Plan (“the plan”), which permits stock option grants to employees,outside consultants, and directors. In October 2007, Lpath’s stockholdersapproved the amendment of this plan which was concurrently renamed the Lpath,Inc. Amended and Restated 2005 Equity Incentive Plan. There are 10,390,000shares of Class A common stock authorized for grant under the plan. The planallows for grants of incentive stock options with exercise prices of at least100% of the fair market value of Lpath’s common stock and nonqualified optionswith exercise prices of at least 85% of the fair market value of the company’scommon stock. All options granted to date have a ten-year life and vest overzero to five years. As of September 30, 2007 a total of 5,626,408 sharesof Class A common stock were available for future grant under the plan. The following table presents stock-basedcompensation expense as included in the company’s condensed consolidatedstatements of operations:

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development               |       | $                                                    | 426,120    |                                                | $          | 31,074 |   | $ | 1,069,292 |   | $ | 328,247 |   |
| General and administrative             |       | 118,005                                              |       | 111,621                                             |       | 408,739 |   | 381,150 |   |
| Total stock-based compensation expense |       | $                                                    | 544,125    |                                                | $          | 142,695 |   | $ | 1,478,031 |   | $ | 709,397 |   |

 

The company uses a Black-Scholes option pricing model to estimate thegrant-date fair value of share-based awards under SFAS No. 123R. Fair value is determined at the date of grantfor employee and director options and at the date at which the grantee’sperformance is complete for non-employee options. Compensation cost isrecognized over the vesting period based on the fair value of the options.

 

In accordance with the adoption of SFAS No. 123R on January 1, 2006,the financial statement effect of forfeitures is estimated at the time of grantand revised, if necessary, if the actual effect differs from those estimates. Asof September 30, 2007, management estimates that the effect of forfeitures on the financialstatements will be insignificant.

 

As of September 30, 2007 there was $1.5 million of total unrecognizedcompensation expense related to unvested stock-based compensation under theplan. That expense is expected to be recognized over a weighted-average periodof 1.8 years. Because of our net operating losses, we did not realize any taxbenefits for the tax deductions from share-based payment arrangements duringthe periods ended September 30, 2007 and 2006.

 

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# **Note9 – WARRANTS**

 

Thefollowing table summarizes warrants outstanding as of September 30, 2007:

 
| **Warrant  Expiration Date** | ** ** | ** ** | ** ** | **Number of  Shares** | ** ** | ** **         | ** ** | **Exercise Price  per Share** | ** ** |
|------------------------------|------------|------------|------------|----------------------------|------------|--------------------|------------|-----------------------------------------|------------|
|                         |       |       |       |                       |       |               |       |                                    |       |
| May 30, 2008                 |       |       |       | 108,125                    |       |               |       | $                                       | 0.80       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Jul 31, 2008                 |       |       |       | 22,988                     |       |               |       | $                                       | 0.95       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Sep 28, 2008                 |       |       |       | 23,400                     |       |               |       | $                                       | 0.95       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Apr 3, 2009                  |       |       |       | 390,000                    |       |               |       | $                                       | 0.05       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Sep 30, 2010                 |       |       |       | 288,672                    |       |               |       | $                                       | 0.80       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Sep 30, 2010                 |       |       |       | 22,906                     |       |               |       | $                                       | 0.95       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Sep 30, 2010                 |       |       |       | 5,294,855                  |       |               |       | $                                       | 1.50       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Apr 6, 2012                  |       |       |       | 6,392,126                  |       |               |       | $                                       | 1.05       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Jun 13, 2012                 |       |       |       | 1,522,577                  |       |               |       | $                                       | 1.05       |   |
|                         |       |       |       |                       |       |               |       |                                    |       |
| Oct 31, 2012                 |       |       |       | 531,394                    |       |               |       | $                                       | 0.16       |   |
|                         |       | Total:     |       | 14,597,043                 |       | Weighted  Average: |       | $                                       | 1.15       |   |

 

Theterms of all outstanding warrants permit the company, upon exercise of thewarrants, to settle the contract by the delivery of unregistered shares.

 

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**Item 2.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

 

*This discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our financial statements andnotes thereto included in this quarterly report on Form 10-QSB (the “QuarterlyReport”) and the audited financial statements and notes thereto included in ourannual report on Form 10-KSB for the year ended December 31, 2006(the “2006 Annual Report”), as filed with the Securities and Exchange Commission(the “SEC”). In addition to historical information, this discussion andanalysis contains forward-looking statements that involve risks, uncertainties,and assumptions. Our actual results may differ materially from thoseanticipated in these forward-looking statements as a result of certain factors,including but not limited to those identified in the 2006 Annual Report in thesection entitled “Market Risks.”*

 

**Overview**

 

LpathTherapeutics, Inc. (“LTI”), the predecessor company to Lpath, was founded in1998. On November 30, 2005, LTI merged with a publicly traded corporation,Neighborhood Connections, Inc. (“NCI”), to form Lpath (“the Merger”).Although NCI (which changed its name to Lpath, Inc. in connection with theMerger) acquired LTI as a result of the Merger, the former stockholders of LTIheld a majority of the voting interest in the combined enterprise immediatelyafter the Merger. Additionally, the Merger resulted in LTI’s management andBoard of Directors assuming operational control of Lpath, Inc. Accordingly, theMerger has been treated as a re-capitalization of LTI and the financialinformation presented here and elsewhere in this Quarterly Report reflects thehistorical activity of LTI, unless otherwise indicated. NCI conducted limitedoperations prior to the merger in a line of business wholly unrelated tobiopharmaceutical operations, and the results of NCI’s operations are notreflected in the financial information of Lpath.

 

Lpath,Inc. is a biotechnology company focused on the discovery and development oflipidomic-based therapeutics. Lipidomics is an emerging field of medicalscience whereby bioactive signaling lipids are targeted to treat importanthuman diseases. Our lead product candidate, **SphingomabTM**, is ahumanized monoclonal antibody against a validated cancer target,sphingosine-1-phosphate (S1P), and has demonstrated compelling results inpreclinical studies against multiple forms of cancers, against age-relatedmacular degeneration (AMD) and other retinal diseases. 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 onlycompany to have developed functional monoclonal antibodies against bioactivelipids such as S1P and LPA. These unique antibodies were produced using ourImmuneY2TM technology, a series of proprietary processes developed by thecompany. We are currently applying the ImmuneY2 process to otherlipid-signaling agents that are validated targets for disease treatment,thereby creating a potential pipeline of monoclonal antibody-based drugcandidates.

 

Lpath has incurredsignificant net losses since its inception. As of September 30, 2007, Lpath hadan accumulated deficit of approximately $23.9 million. Lpath expects itsoperating losses to increase for the next several years as it pursues theclinical development of its product candidates.

 

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# **Revenue**

#  

Lpathhas generated $2.1 million in revenue from inception to date from researchgrants awarded by the National Institutes of Health. Lpath expects to continueto receive small amounts of revenue from research grants.

 

Lpathhas generated $12,000 in royalty revenue to date from a licensing agreementwith a company that produces novel research assays. Lpath expects to continueto receive small amounts of royalty revenue under this agreement.

 

Lpathdoes not expect to generate any revenue from licensing, milestones, or productsales until it executes a partnership or collaboration arrangement or is ableto commercialize its first product.

 

# **Research and Development Expenses**

#  

Lpath’sresearch and development expenses consist primarily of salaries and relatedemployee benefits, research supplies and materials, external costs associatedwith its drug discovery research, and external costs incurred in preparation forclinical development, including preclinical testing and regulatory expenses. Lpath’shistorical research and development expenses are principally related to thedrug discovery and preclinical development activities associated with creatingits first two product candidates, *Sphingomab*and Lpathomab.

 

Lpathcharges all research and development expenses to operations as incurred. Lpathexpects its research and development expenses to increase significantly in thefuture as its product candidates move through pre-clinical testing and intoclinical trials.

 

Atthis time, due to the risks inherent in the drug discovery and clinical trialprocess and given the early stage of our product development programs, Lpath isunable to estimate with any certainty the costs it will incur in the continueddevelopment of its product candidates for potential commercialization. Clinicaldevelopment timelines, the probability of success and development costs varywidely. While Lpath is currently focused on advancing each of its productdevelopment programs, Lpath anticipates that it will continually makedeterminations as to the scientific and clinical success and assessments as tothe commercial potential of each of its product candidates. In addition, Lpathcannot forecast with any degree of certainty which product candidates will besubject to future partnering, when such arrangements will be secured,if at all, and to what degree such arrangements would affect our developmentplans and capital requirements. As a result, Lpath cannot be certain when andto what extent it will receive cash inflows from the commercialization of itsproduct candidates.

 

Lpathexpects its research and development expenses to be approximately $24 millionover 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. Lpathexpects these expenditures to increase as it continues the advancement of itsproduct development programs. To date, Lpath has not yet initiated clinicaltrials for any of its product candidates. The lengthy process of completingclinical trials and seeking regulatory approval for its product candidatestypically requires expenditures in excess of approximately $50 million. Anyfailure by Lpath or delay in completing clinical trials, or in obtainingregulatory approvals, would cause Lpath’s research and development expenses toincrease and, in turn, have a material adverse effect on Lpath’s results ofoperations and its ability to continue as a going concern.

 

## ***General and AdministrativeExpenses***

## *** ***

Lpath’sgeneral and administrative expenses principally comprise salaries and benefitsand professional fees related to Lpath’s administrative, finance, investorrelations, human resources,

 

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legal,and information systems support functions. In addition, general and administrativeexpenses include insurance and an allocated portion of facilities costs.

 

Lpathanticipates increases in general and administrative expenses as it addspersonnel, becomes subject to the Sarbanes-Oxley compliance obligationsapplicable to publicly-held companies, and continues to develop and prepare forthe commercialization of its product candidates.

 

**Results of Operations**

 

***Comparison of theThree Months Ended September 30, 2007 and September 30, 2006***

 

*Grant and Royalty Revenue.* Grant and royalty revenue for thethree-month period ended September 30, 2007 decreased to $12,000 from$97,000 for the three-month period ended September 30, 2006. The decreaseof $85,000 was due to the fact that the level of effort required by certaingrants declined as these grants wound-down to completion in the second quarterof 2007. Revenue in the third quarter was comprised entirely of royalties.

 

*Research and Development Expenses.*Research and development expenses increasedfrom $883,000 for the third quarter of 2006 to $4,114,000 for the third quarterof 2007. The increase of $3,231,000 reflects the progress of pre-clinicalresearch and development activities from the third quarter of 2006 to the thirdquarter of 2007. Outside services expense increased by approximately $2,667,000primarily due to the costs of IND-enabling studies performed or initiatedduring the third quarter of 2007, and the costs of manufacturing drug suppliesto be used in clinical trials. The use of consultants and other contractedservices to augment the capabilities of our research and development team alsocontributed to the increase in expenditures for outside services byapproximately $112,000. Employee compensation and benefits expense increased byapproximately $59,000, commensurate with the increase in research anddevelopment staffing. The amount spent for research supplies and otherdepartmental expenses decreased by approximately $2,000 as compared to theprior year. The increase in research and development expenses also included a$395,000 increase in stock-based compensation expense related to consultantsused to support research and development activities.

 

*General and Administrative Expenses.*General and administrative expenses increasedfrom $526,000 for the three-month period ended September 30, 2006 to $654,000for the three-month period ended September 30, 2007. Legal fees, accountingfees, investor relations, stock administration, and insurance expensesincreased, in aggregate, by approximately $55,000. This increase was primarily dueto the costs of outside services necessary to support a publicly-tradedcompany, and to pursue corporate collaboration and financing opportunities. Employeecompensation, benefits, and general facility expenses increased byapproximately $67,000, reflective of the changes in general and administrativepersonnel between the two years. Stock-based compensation charges increased by$6,000.

 

*Interest Income*. Interest income was $163,000 for thequarter ended September 30, 2007, compared with $36,000 for the quarter endedSeptember 30, 2006. The $127,000 increase was principally a result of higherlevels of invested cash as compared to the prior year.

 

*Interest Expense*. Interest expense was $4,000 for the quarterended September 30, 2007, compared with zero for the quarter ended September30, 2006. The $4,000 increase was due to interest paid to our landlord forfinancing leasehold improvements, which were completed in July 2007. Thelandlord provided financing for the improvements that will be repaid monthly overthe remaining term of the lease.

 

***Comparison of theNine Months Ended September 30, 2007 and September 30, 2006***

 

*Grant and Royalty Revenue.* Grant and royalty revenue for thenine-months ended September 30, 2007 was $362,000 compared with $411,000 for thenine-months ended September 30, 2006, a

 

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decreaseof $49,000. This decrease reflects the fact that Lpath completed all of itsexisting grants during the second quarter of 2007.

 

*Research and Development Expenses.*Research and development expenses were$9,121,000 for the nine-months ended September 30, 2007, compared with$2,927,000 for the comparable period in 2006. The $6,194,000 increase inexpenses reflects the progress of pre-clinical research and developmentactivities from the nine-month period ended September 30, 2007 compared to thesame period in 2006. Outside service expenses increased by approximately$4,705,000 primarily due to the IND-enabling studies performed or initiated forthe nine-months ended September 30, 2007 as compared to the same period in 2006.The use of consultants and other contracted services to augment thecapabilities of our research and development team also contributed to theincrease in expenditures for outside services by approximately $384,000. Theamount spent for research supplies and other departmental expenses increased by$59,000 as we increased the level of effort on key drug discovery anddevelopment projects. Employee compensation and benefits expenses increased by approximately $305,000 for the nine-monthperiod, commensurate with the increase in research and development staffing. Theincrease in expenses for the nine-month period ended also included a $741,000increase in stock-based compensation expense related to consultants used tosupport research and development activities.

 

*General and Administrative Expenses.*General and administrative expenses increased$667,000 for the nine-month period ended from $1,687,000 in 2006 to $2,354,000in 2007. Legal fees, accounting fees, investor relations, stock administration,and insurance expenses increased, in aggregate, by approximately $332,000. Thisincrease was primarily due to the costs of outside services necessary tosupport a publicly-traded company, and to pursue corporate collaboration andfinancing opportunities. Employee compensation, benefits, and general facilityexpenses increased by approximately $307,000, reflective of the changes ingeneral and administrative personnel between the two years. Stock-basedcompensation charges increased by $28,000.

 

*Interest Income.*Interest income was $297,000 for thenine-months ended September 30, 2007 as compared to $138,000 for thenine-months ended September 30, 2006. The $159,000 increase was a result ofhigher levels of invested cash as compared to the prior year.

 

*Interest Expense.*Interest expense was $20,000 for thenine-month period ended September 30, 2007, compared with zero for thecomparable period in 2006. Lpath’s interest expense during 2007 is comprised ofinterest and commitment fees arising from the bridge financing in the firstquarter as well as interest expense for leasehold improvements financed by ourlandlord.

 

**Liquidity and Capital Resources**

 

**Since Lpath’sinception, its operations have been financed primarily through the privateplacement of equity and debt securities. Through September 30, 2007 Lpath hadreceived net proceeds of approximately $29,900,000 from the sale of equitysecurities and from the issuance of convertible promissory notes. As ofSeptember 30, 2007, Lpath had cash and cash equivalents totaling $10,758,000.**

** **

Duringthe nine-months ended September 30, 2007, we used net cash of $7,727,000 foroperating activities compared to $2,998,000 for the nine-months ended September30, 2006. The increase in net cash used in operating activities was primarilydriven by increased expenses related to the preclinical development activitiesfor our lead drug candidate SphingomabTM, including IND-enabling studies,increased headcount, outside services, and consulting costs. Legal, accounting,and other costs also increased in support of the company’s businessdevelopment, financing, and investor relations efforts.

 

Netcash used in investing activities during the nine-month period ended September30, 2007 amounted to $190,000 compared to $254,000 for the same period in 2006.Of the amount used for investing activities in the nine-month period endedSeptember 30, 2007, $100,000 was used to

 

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purchaseequipment and $90,000 was invested in patents to protect our proprietarytechnology. In the comparable period in 2006, $139,000 was used to purchaseequipment and $115,000 was spent on patent activities.

 

Netcash provided from financing activities during the nine-month period endedSeptember 30, 2007 totaled $17,314,000 compared to $924,000 in the nine-monthsended September 30, 2006. In the first nine-months of 2007 Lpath raised$15,842,000, net of issuance costs, from the sale of common stock and warrantsto purchase common stock. In addition, the company received proceeds of$1,486,000, net of issuance costs, from the exercise of warrants and stockoptions. The company also used $8,000 to pay loan fees under the terms of thepromissory notes to related parties and used $6,000 to pay for leaseholdimprovements financed by the landlord. In the comparable nine-month periodended September 30, 2006 Lpath sold common stock and warrants to purchasecommon stock for $924,000, net of issuance costs, and received proceeds of $250from the exercise of stock options.

 

InAugust 2005 we entered into a five-year facilities lease. In December 2006 weassumed additional “must take” lease space under terms of the lease. The leaseprovided the landlord would pay for the first $20 per rentable square foot andone-half the amount in excess of the $20 per rentable square foot of theleasehold improvements made to the must take space. The leasehold improvementswere completed in July 2007. We capitalized the total cost as a leaseholdimprovement and recorded an offsetting deferred rent amount for the portionspaid by the landlord. A portion of the leasehold improvements was financed bythe landlord and will be repaid by Lpath over the remaining term of the lease. Theamount of this financing was recorded as leasehold improvement debt. A portionof the facility is subleased to a company that is co-owned by two of Lpath’slargest shareholders. The landlord approved the sublease. This sublease wasamended effective April 1, 2007 to reflect Lpath’s increased use of thepremises and the corresponding decrease in utilization of space in Lpath’sfacility by the sublessee. The following table describes Lpath’s commitments tosettle contractual obligations in cash as of September 30, 2007:

 
| ** **                    | ** ** | **Payments Due by Period**        | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **Three-months  ended  December 31,  2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
|                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating lease obligations   |       | $                                                | 46,924     |   | $ | 190,460 |   | $ | 196,571 |   | $ | 176,446 |   | $ | 610,401 |   |
|                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Sublease income               |       | 3,230                                            |       | 13,110 |   | 13,506 |   | 12,107 |   | 41,953 |   |
|                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Sub-total                     |       | 43,694                                           |       | 177,350 |   | 183,065 |   | 164,339 |   | 568,448 |   |
|                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Leasehold improvement debt    |       | 8,127                                            |       | 14,108 |   | 15,278 |   | 15,116 |   | 52,629 |   |
|                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Other contractual commitments |       | —                                           |       | — |   | 614,310 |   | — |   | 614,310 |   |
|                          |       |                                             |       |   |   |   |   |   |   |   |   |
| **Total**                     |       | $                                                | 51,821     |   | $ | 191,458 |   | $ | 812,653 |   | $ | 179,455 |   | $ | 1,235,387 |   |

 

21

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Lpath has entered into variousagreements with third parties to perform specialized drug discovery tasks,license proprietary technology, manufacture product candidates, conductpreclinical studies, and provide analytical services. Lpath’s payment obligationsunder these agreements depend upon the progress of its discovery anddevelopment programs. Therefore, Lpath is unable to estimate with certainty thefuture costs it will incur under these agreements. In one such arrangement,Lpath has entered into a collaboration agreement with a biomedical researchcompany to utilize their proprietary processes to assist Lpath in preparing itslead drug candidate for clinical trials. Under the terms of that collaborationagreement Lpath is obligated to make additional milestone payments andspecified royalty payments upon the achievement of certain product-developmentevents and commercialization objectives. Under the terms of a license agreementwith another biomedical research company, an annual license fee of approximately$600,000 per year began to accrue during the third quarter of 2007 followingthe occurrence of certain events. Pursuant to that agreement, payment of thatannual license fee will be deferred until Lpath’s drug candidate incorporatingthat technology begins Phase II clinical trials. While it is not possible topredict when, or if, the drug candidate will progress to the commencement ofPhase II clinical trials, and consequently when payment would be required, weestimate that the earliest date that payment of this licensing fee will be madeis in 2009. Accordingly, a liability for this amount has been accrued and theultimate payment of this amount is included in the payments due in 2009 in thetable above. Other deferred license fees, milestone payments and royaltypayments under Lpath’s various agreements are not included in the table abovebecause Lpath cannot, at this time, determine when, or if, the relatedmilestones will be achieved or the events triggering the commencement ofpayment obligations will occur.

 

**We expect ourcash requirements to increase significantly in the twelve-month period endingSeptember 30, 2008 as we continue to: (i) increase our drug developmentefforts, with two projects expected to be in clinical trials in 2008, (ii) carryon the process of seeking regulatory approvals, and (iii) pursuecommercialization and strategic partnering of our current product candidates. Aswe expand our research and development efforts and pursue additional productopportunities, we anticipate significant cash requirements associated withadditional outside services and consultants, hiring additional personnel,capital expenditures, and investment in equipment and facilities. The costs offiling and prosecuting patents to protect our intellectual property will alsoincrease. The amount and timing of cash requirements will depend on regulatoryand market acceptability of our product candidates, if any, and the resourceswe devote to the research, development, regulatory, manufacturing, and commercializationactivities required to support our product candidates.**

** **

We believe that our existing cash will be sufficient to meet Lpath’sprojected operating requirements until the second quarter of 2008.

 

**Until we cangenerate significant cash other than from our capital raising efforts, weexpect to continue to fund our operations with the proceeds from offerings ofour equity securities, debt financing and strategic collaboration agreements. However,we may not be successful in obtaining additional equity or debt financing orentering into collaboration agreements. If we do enter into collaborationagreements, we may not be successful in receiving milestone or royalty paymentsunder such executed collaboration agreements. In addition, we cannot be surethat our existing cash and investment resources will be adequate or thatadditional financing will be available when needed or that, if available,financing will be obtained on terms favorable to us or to our stockholders. Havinginsufficient funds may require us to delay, scale back, or eliminate some orall of our development programs, relinquish some or even all rights to productcandidates at an earlier stage of development, or renegotiate less favorableterms than we would otherwise choose. Failure to obtain adequate financing mayalso adversely affect our ability to operate as a**

** **

**22**

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** **

**going concern. Ifwe raise additional funds from the issuance of equity securities, substantialdilution to our existing stockholders would likely result. If we raiseadditional funds by incurring debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specificfinancial ratios that may restrict our ability to operate our business.**

** **

**Recent Accounting Pronouncements**

 

InJune 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48, **Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109** (“FIN 48”).FIN 48 requires companies to determine whether it is “more likely than not”that a tax position will be sustained upon examination by the appropriatetaxing authorities before any tax benefit can be recorded in the financialstatements. It also provides guidance on the recognition, measurement,classification and interest and penalties related to uncertain tax positions.FIN 48 is effective as of the beginning of an entity’s first fiscal yearthat begins after December 15, 2006. Theadoption of the provisions of FIN 48 on January 1, 2007 did not have an impacton our results of operations or financial condition.

 

InDecember 2006, the FASB issued Staff Position (“FSP”) EITF 00-19-2, “*Accounting for Registration Payment Arrangements*.”This FSP addresses an issuer’s accounting for registration payment arrangementsand specifies that the contingent obligation to make future payments orotherwise transfer consideration under a registration payment arrangementshould be separately recognized and measured in accordance with FASB No. 5. Theguidance in this FSP amends FASB Statements 133 and 150 and FASB InterpretationNo. 45 to include scope exceptions for registration payments arrangements. ThisFSP further clarifies that a financial instrument subject to a registrationpayment arrangement should be accounted for without regard to the contingentobligation to transfer consideration pursuant to the registration paymentarrangement. This guidance shall be effective immediately forregistration payment arrangements and the financial instruments subject tothose arrangements that are entered into or modified subsequent to the date ofissuance of this FSP (12-21-2006). For registration payment arrangements andfinancial instruments subject to those arrangements that were entered intoprior to the issuance of this FSP, this guidance shall be effective forfinancial statements issued for fiscal years beginning after December 15, 2006,and interim periods within those fiscal years. Based on the registration rights agreements in place as of September30, 2007 our management does not believe this pronouncement will have amaterial impact on Lpath’s financial position or results of operations.

 

In February 2007, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115.*This standard permits anentity to choose to measure many financial instruments and certain other itemsat fair value. Most of the provisions in SFAS No. 159 are elective;however, the amendment to SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities,*applies toall entities with available-for-sale and trading securities. The fair valueoption established by SFAS No. 159 permits all entities to choose tomeasure eligible items at fair value at specified election dates. A businessentity will report unrealized gains and losses on items for which the fairvalue option has been elected in earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate. The fair value option: (a) may be applied instrument by instrument,with a few exceptions, such as investments otherwise accounted for by theequity method; (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. Management does not believe thispronouncement will have a material impact on Lpath’s financial position orresults of operations.

 

23

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In June 2007, the FASB ratified a consensus opinion reached by theEmerging Issues Task Force (EITF) on EITF Issue 07-3, “*Accounting for Nonrefundable Advance Payments forGoods or Services Received for Use in Future Research and DevelopmentActivities*.” The guidance in EITF Issue 07-3 requires us to deferand capitalize nonrefundable advance payments made for goods or services to beused in research and development activities until the goods have been deliveredor the related services have been performed. If the goods are no longerexpected to be delivered nor the services expected to be performed, we would berequired to expense the related capitalized advance payments. The consensus inEITF Issue 07-3 is effective for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2007 and is to be applied prospectivelyto new contracts entered into on or after December 15, 2007. Early adoption isnot permitted. Retrospective application of EITF Issue 07-3 is also notpermitted. We intend to adopt EITF Issue 07-3 effective January 1, 2008. Theimpact of applying this consensus will depend on the terms of our futureresearch and development contractual arrangements entered into on or afterDecember 15, 2007.

 

**Item 3.    CONTROLS AND PROCEDURES**

** **

**Evaluation of Disclosure Controlsand Procedures**

 

Ourmanagement, including the Chief Executive Officer and the Chief FinancialOfficer, has conducted an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15(e) under the SecuritiesExchange Act of 1934. Based on that evaluation, the Chief Executive Officer andthe Chief Financial Officer concluded that, as of September 30, 2007, ourdisclosure controls and procedures were effective.

 

**Changes in Internal Controls OverFinancial Reporting**

 

Therehave been no significant changes in our internal controls over financialreporting during the quarter ended September 30, 2007 that have materiallyaffected, or that are reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II – OTHER INFORMATON**

 

**Item 1.    LEGALPROCEEDINGS**

 

None.

 

**Item 2.    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**Item 3.    DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

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

 

On October 9, 2007 we held our Annual Meeting of Stockholders in SanDiego, California for the following purposes:

 

1.               To elect five directors to serve until our2008 Annual Meeting of Stockholders. The vote for the nominees for director wasas follows:

 

24

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Scott Pancoast – 36,812,871 shares were voted infavor of nominee; no shares withheld their vote for this nominee.

 

Roger Sabbadini – 36,712,871 shares were voted infavor of nominee; 100,000 shares withheld their vote for this nominee.

 

Jeffrey Ferrell – 36,812,871 shares were voted infavor of nominee; no shares withheld their vote for this nominee.

 

Charles Mathews – 36,812,871 shares were voted infavor of nominee; no shares withheld their vote for this nominee.

 

Donald R. Swortwood – 36,812,871 shares were votedin favor of nominee; no shares withheld their vote for this nominee.

 

2.               To ratify and approve the Company’s Amendedand Restated 2005 Equity Incentive Plan (the “2005 Plan”) for the purpose of(i) expanding the type of grants permitted under the prior plan and (ii)limiting the size of awards that a participant may receive in any fiscal year. Thenumber of votes for, against, and abstaining was 34,140,127, 2,500 and 1,000,respectively.

 

3.               To ratify the appointment of LevitZacks asthe Company’s independent registered public accounting firm for the fiscal yearending December 31, 2007. The number of votes for, against, and abstaining was36,721,621, zero and 91,250, respectively.

 

**Item 5.    OTHERINFORMATION**

 

None.

 

25

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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).                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 3.5    |   | Amended and Restated Bylaws, as amended on  April 3, 2007 (conformed) (filed as Exhibit 3.5 to the Registration  Statement on Form SB-2, SEC File No. 144199 (the “June 2007 SB-2”) and  incorporated herein by reference).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 3.6    |   | Certificate of Amendment of Articles of  Incorporation filed June 8, 2007 (filed as Exhibit 3.6 to the June 2007 SB-2  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).                                        |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 4.8    |   | Form of Warrant issued pursuant to the Securities  Purchase Agreement dated April 6, 2007                                                                                                                                                                                                                    |

 

26

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|    |   | (April 2007 Warrants) (filed as Exhibit 4.7 to the  June 2007 SB-2 and incorporated herein by reference).                                                                                                                                                                                                                                                                                      |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.9     |   | Form of Warrant issued pursuant to the Securities  Purchase Agreement dated April 6, 2007 (June 2007 Warrants) (filed as  Exhibit 4.8 to the June 2007 SB-2 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.                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 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    |   | Lpath, Inc. Amended and Restated 2005 Equity  Incentive Plan (filed as Appendix A to the company’s  Schedule 14-A Proxy Statement filed on August 28, 2007 and incorporated  herein by reference). +                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 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). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14   |   | Securities Purchase Agreement, dated as of April  6, 2007, by and among Lpath, Inc. and each investor identified therein (filed  as Exhibit 10.14 to the June 2007 SB-2 and incorporated herein by reference).                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15   |   | Registration Rights Agreement, dated as of April  6, 2007, by and among Lpath, Inc. and each investor identified therein (filed  as Exhibit 10.15 to the June 2007 SB-2 and                                                                                                                                                                                                                    |

 

27

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|   |   | incorporated herein by reference).                                                                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 10.16  |   | Licence Agreement dated August 8, 2006 between  Lonza Biologics PLC and Lpath, Inc. (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.                                                                                                                             |

 

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

 

#Filed asan exhibit to the Annual Report on Form 10-KSB for the year ended December 31,2005 filed with the SEC on March 16, 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

 

+Thisexhibit includes a management contract, compensatory plan or arrangement inwhich one or more directors or executive officers of the Registrant participate.

 

28

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##### ***SIGNATURES***

##### *** ***

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 

 
| ** **               | **Lpath,  Inc.**               |
|--------------------------|--------------------------------|
| ** **               | ** **                     |
| ** **               | ** **                     |
| Date:  November 13, 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)           |
|                          |                                |  |  |

 

29

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