Edgar Filing: LIGHTPATH TECHNOLOGIES INC

lightpath-10q_0201.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended December 31, 2010

	OR

¨	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 000-27548

LIGHTPATH TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		86-0708398
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

http://www.lightpath.com

2603 Challenger Tech Ct. Suite 100

Orlando, Florida 32826

(Address of principal executive offices)

(ZIP Code)

(407) 382-4003

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

9,706,596 shares of common stock, Class A, $.01 par value, outstanding as of February 1, 2011.

LIGHTPATH TECHNOLOGIES, INC.

Form 10-Q

Index

Item		Page

Part I	Financial Information

Item 1.	Financial Statements	4

	Consolidated Balance Sheets	4

	Unaudited Consolidated Statements of Operations	5

	Unaudited Consolidated Statement of Stockholders’ Equity	6

	Unaudited Consolidated Statements of Cash Flows	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 4.	Controls and Procedures	26

Part II	Other Information

Item 6.	Exhibits	27

Signatures		30

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

LIGHTPATH TECHNOLOGIES, INC.

Consolidated Balance Sheets

	(unaudited)
	December 31,			June 30,
Assets	2010			2010
Current assets:
Cash and cash equivalents	$	1,095,296		$	1,464,351
Trade accounts receivable, net of allowance of $20,027 and $22,930		1,659,382			1,804,063
Inventories, net		1,460,742			1,137,678
Prepaid interest expense		51,415			167,635
Current debt costs, net		44,036			—
Prepaid expenses and other assets		130,127			223,908
Total current assets		4,440,998			4,797,635
Property and equipment - net		2,565,809			2,344,692
Intangible assets - net		117,567			134,001
Debt costs, net		—			151,530
Other assets		27,737			27,737
Total assets	$	7,152,111		$	7,455,595
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	856,078		$	511,523
Accrued liabilities		345,320			179,370
Accrued payroll and benefits		277,105			396,863
8% convertible debentures to related parties, net of debt discount		239,537			—
8% convertible debentures, net of debt discount		751,672			—
Total current liabilities		2,469,712			1,087,756

Deferred rent		520,839			569,286
8% convertible debentures to related parties, net of debt discount		—			213,890
8% convertible debentures, net of debt discount		—			1,339,975
Total liabilities		2,990,551			3,210,907
Stockholders’ equity:
Preferred stock: Series D, $.01 par value, voting;
5,000,000 shares authorized; none issued and outstanding		—			—
Common stock: Class A, $.01 par value, voting;
40,000,000 shares authorized; 9,706,596 and 8,971,638 shares issued and outstanding, respectively		97,066			89,716
Additional paid-in capital		207,442,308			206,277,806
Foreign currency translation adjustment		(4,850	)		23,466
Accumulated deficit		(203,372,964	)		(202,146,300	)
Total stockholders’ equity		4,161,560			4,244,688
Total liabilities and stockholders’ equity	$	7,152,111		$	7,455,595

The accompanying notes are an integral part of these consolidated statements.

LIGHTPATH TECHNOLOGIES, INC.

Consolidated Statements of Operations

(Unaudited)

	Three months ended						Six months ended
	December 31,						December 31,
	2010			2009			2010			2009
Product sales, net	$	2,528,074		$	2,226,454		$	4,781,996		$	3,783,433
Cost of sales		1,527,941			1,268,531			2,955,415			2,156,874
Gross margin		1,000,133			957,923			1,826,581			1,626,559
Operating expenses:
Selling, general and administrative		997,329			543,703			2,068,527			1,505,465
New product development		248,507			201,764			471,092			427,674
Amortization of intangibles		8,217			8,217			16,434			16,434
Gain on sale of property and equipment		-			-			(540	)		-
Total costs and expenses		1,254,053			753,684			2,555,513			1,949,573
Operating income (loss)		(253,920	)		204,239			(728,932	)		(323,014	)
Other income (expense):
Interest expense		(28,977	)		(45,378	)		(116,299	)		(97,811	)
Interest expense - debt discount		(60,178	)		(84,401	)		(269,844	)		(175,329	)
Interest expense - debt costs		(23,972	)		(33,623	)		(107,494	)		(69,848	)
Other income (expense), net		(6,667	)		839			(4,095	)		1,305
Total other expense, net		(119,794	)		(162,563	)		(497,732	)		(341,683	)
Net income (loss)	$	(373,714	)	$	41,676		$	(1,226,664	)	$	(664,697	)
Income (Loss) per common share (basic)	$	(0.04	)	$	0.01		$	(0.13	)	$	(0.09	)
Number of shares used in per share calculation (basic)		9,705,890			8,163,675			9,359,068			7,739,087

Income (Loss) per common share (diluted)	$	(0.04	)	$	0.00		$	(0.13	)	$	(0.09	)
Number of shares used in per share calculation		9,705,890			8,595,396			9,359,068			7,739,087

The accompanying notes are an integral part of these consolidated statements.

LIGHTPATH TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended December 31, 2010

(Unaudited)

								Foreign
	Class A				Additional			Currency						Total
	Common Stock				Paid-in			Translation			Accumulated			Stockholders’
	Shares		Amount		Capital			Adjustment			Deficit			Equity
Balance at June 30, 2010		8,971,638	$	89,716	$	206,277,806		$	23,466		$	(202,146,300	)	$	4,244,688

Issuance of common stock for:
Employee Stock Purchase Plan		3,237		32		4,856			—			—			4,888
Exercise of employee stock options		5,384		54		5,599			—			—			5,653
Conversion of debentures, net of costs		540,592		5,406		820,346			—			—			825,752
Cashless exercise of warrants		56,695		567		(567	)		—			—			-
Exercise of warrants		129,050		1,291		230,368			—			—			231,659
Stock based compensation on stock
options and restricted stock units		—		—		103,900			—			—			103,900
Foreign currency translation adjustment		—		—		—			(28,316	)		—			(28,316	)
Net loss		—		—		—			—			(1,226,664	)		(1,226,664	)
Comprehensive loss															(1,254,980	)

Balance at December 31, 2010		9,706,596	$	97,066	$	207,442,308		$	(4,850	)	$	(203,372,964	)	$	4,161,560

LIGHTPATH TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

(unaudited)

	Six months ended
	December 31,
	2010			2009
Cash flows from operating activities
Net loss	$	(1,226,664	)	$	(664,697	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		427,270			303,431
Interest from amortization of debt discount		269,844			175,329
Interest from amortization of debt costs		107,494			69,848
Common stock issued for legal settlement		—			50,000
Gain on sale of property and equipment		(540	)		—
Stock based compensation		103,900			64,910
Change in provision for doubtful accounts receivable		(2,903	)		893
Deferred rent		(48,447	)		(21,767	)
Common stock issued for payment of consulting services		—			150,000
Changes in operating assets and liabilities:
Trade accounts receivables		147,584			(494,616	)
Other receivables		—			183,413
Inventories		(323,064	)		(69,684	)
Prepaid expenses and other assets		210,001			70,722
Accounts payable and accrued liabilities		390,747			(297,092	)
Net cash provided by (used in) operating activities		55,222			(479,310	)
Cash flows from investing activities
Purchase of property and equipment		(631,953	)		(472,858	)
Proceeds from sale of equipment		540			—
Net cash used in investing activities		(631,413	)		(472,858	)
Cash flows from financing activities
Proceeds from exercise of stock options		5,653			—
Proceeds from sale of common stock, net of costs		—			1,417,090
Proceeds from sale of common stock from employee stock purchase plan		4,888			3,082
Costs associated with conversion of debentures		(6,748	)		—
Exercise of warrants		231,659			—
Payments on capital lease obligation		—			(5,050	)
Payments on note payable		—			(125,118	)
Net cash provided by financing activities		235,452			1,290,004
Effect of exchange rate on cash and cash equivalents		(28,316	)		(11,645	)
Increase (decrease) in cash and cash equivalents		(369,055	)		326,191
Cash and cash equivalents, beginning of period		1,464,351			579,949
Cash and cash equivalents, end of period	$	1,095,296		$	906,140
Supplemental disclosure of cash flow information:
Interest paid in cash	$	80		$	3,057
Income taxes paid		160			2,110
Supplemental disclosure of non-cash investing & financing activities:
Convertible debentures converted into common stock		832,500			37,500

1. Basis of Presentation

References in this document to “the Company”, “LightPath”, “we”, “us”, or “our” are intended to mean LightPath Technologies, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Securities and Exchange Act of 1934 and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes, included in its Form 10-K for the fiscal year ended June 30, 2010 filed with the Securities and Exchange Commission (the “SEC”). Unless otherwise stated, references to particular years or quarters refer to the Company’s fiscal years ended in June and the associated quarters of those fiscal years.

These consolidated financial statements are unaudited but include all adjustments, which include normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year as a whole.

History:

LightPath was incorporated in Delaware in 1992 to pursue a strategy of supplying hardware to the telecommunications industry. In April 2000, the Company acquired Horizon Photonics, Inc. (“Horizon”), and in September 2000 the Company acquired Geltech, Inc. (“Geltech”). During fiscal 2003, in response to sales declines in the telecommunications industry, the operations of Horizon in California and LightPath in New Mexico were consolidated into the former Geltech facility in Orlando, Florida. In November 2005, the Company announced the formation of LightPath Optical Instrumentation (Shanghai) Co., Ltd, (“LPOI”) a wholly owned manufacturing subsidiary located in Jiading, People’s Republic of China (“PRC”). The manufacturing operations are housed in a 16,000 square foot facility located in the Jiading Industrial Zone near Shanghai. This plant has increased overall production capacity and enabled LightPath to compete for larger production volumes of optical components and assemblies, and strengthened partnerships within the Asia/Pacific region. It also provides a launching point to drive the Company’s sales expansion in the Asia/Pacific region.

The Company is engaged in the production of precision molded aspherical lenses, GRADIUM® glass lenses, collimators and isolator optics used in various markets, including industrial, medical, defense, test & measurement and telecommunications.

Going Concern and Managements Plans

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations and as of December 31, 2010 the Company has an accumulated deficit of approximately $203.37 million. Cash provided by operations was $55,000 for the six months ended December 31, 2010. Cash used in operations was $500,000 and $1.47 million during fiscal years ended 2010 and 2009, respectively. The Company continued to implement the cost reduction initiatives it started in fiscal 2010, including the transition of more precision molded lenses to less expensive glass, increasing tooling life, increasing operator yields and efficiencies, qualifying coating vendors in China and improving yields on our infrared product line. In the first half of fiscal 2011, 15% of our precision molded lenses sales in units were of more expensive glass types, compared to 17% in the prior fiscal year. This decrease was due to a decrease in sales of higher cost lenses made from more expensive glasses. Management is committed to continuing efforts to transition more precision molded lenses to less expensive glass, which will contribute towards achieving profitability assuming we meet our sales targets and goals for producing and selling more low cost lenses at higher volumes.

The fiscal 2011 operating plan and related financial projections were developed anticipating sales growth primarily in the infrared products and the low cost, high volume products, such as industrial laser tools for the imaging markets in Asia, markets we have been targeting since 2009. We expect to hold our previous margin improvements based on production efficiencies and reductions in product costs as a result of the shifting of our manufacturing operations to the Shanghai facility, offset by marginal increases in selling, administrative and new product development expenditures.

We have not met our budgeted net income target through the six months ended December 31, 2010. Our revenues were lower than expected for our precision molded lenses because even though sales of precision molded lens units increased, the average selling prices decreased. The shortfall in forecasted margin dollars did not allow us to cover our selling, general and administrative expenses. However, based on the current quote activity, we expect increased revenue results in the remaining two quarters of fiscal 2011 as compared to the first half.

The Company had a cash balance of approximately $1.10 million at December 31, 2010. In the first half of fiscal 2011, we reduced the Company’s debt obligations by $832,500 through the conversion of convertible debentures into shares of common stock and we received approximately $232,000 in proceeds from the exercise of warrants. To fund future operations, we may seek

external debt or equity financing if it can be obtained in an amount and on terms that are acceptable; however, we may be required to seek external financing regardless of whether the terms would otherwise be acceptable if our cash flow financial resources are not sufficient to sustain our operations or to pursue our business plan. There is no assurance we will be able to achieve the necessary cash flow from sales growth and gross margin improvements to sustain operations. Factors which could adversely affect cash balances in future quarters include, but are not limited to, a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums and increases in other discretionary spending, particularly sales and marketing related. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management has developed an operating plan for fiscal year 2011 and believes the Company has adequate financial resources to achieve that plan and to sustain its current operations through February 2012. Nevertheless, management will be monitoring the plan closely during the year and should the plan objectives not be met during the year, remedial actions will be initiated.

Liquidity

Cash flow and cash management continue to be primary concerns of the Company. In fiscal 2009 and 2010, cash used in operations was approximately $1.47 million and $500,000, respectively. During the six months ended December 31, 2010, the Company derived approximately $55,000 of net cash from operating activities.

For the six months ended December 31, 2010, cash decreased by $369,000 compared to an increase of $326,000 in the same period of the prior fiscal year. The decrease in fiscal 2011 was primarily due to capital spending to expand our press capacity at our Shanghai facility, offset by cash received from the exercise of warrants. The increase in cash in fiscal 2010 was primarily related to net proceeds of $1.4 million received by the Company through a $1.6 million private placement of common stock and warrants in August 2009, offset by spending on labor and benefits, rent and utilities, period expenses, working capital, fixed assets purchases and notes payable.

On April 8, 2010 the Company executed a Securities Purchase Agreement with seven institutional and private investors, with respect to a private placement of an aggregate of 507,730 shares of the Company’s Class A Common Stock, $0.01 par value (the “Common Stock”) at $2.20 per share for all non-insider purchasers, and warrants to purchase 50,776 shares of Common Stock (the “Warrants”). The Warrants are priced at $2.48 per share and are exercisable for a period of five years beginning on October 8, 2010. The Company received aggregate gross cash proceeds from the issuance of the Common Stock (exclusive of proceeds from any future exercise of the Warrants) in the amount $1.1 million. We have used the funds to purchase equipment which will enable us to manufacture an additional 3 million units per year, thereby expanding our pressing capacity, and provided working capital for our operations. Among the investors were J. James Gaynor and Louis Leeburg, both of whom were directors or officers of LightPath as of April 8, 2010, who paid $2.2325 per share of common stock.

The Company paid a commission to the exclusive placement agent for the offering, Garden State Securities, Inc., (“Garden State”) in an amount equal to $89,000 plus costs and expenses. The Company also issued to Garden State and its designees warrants to purchase an aggregate of 50,773 shares of Common Stock at an exercise price equal to $2.48 per share. The Warrants have a five-year term and are exercisable by Garden State and its designees after October 8, 2010.

Management believes the Company currently has sufficient cash to fund its operations through February 2012 assuming revenue stays at current levels and no additional sources of capital are used. The extent to which the Company can sustain its operations beyond this date will depend on the Company’s ability to generate cash from operations on increased revenues from low cost and infrared lenses or sale of non-strategic assets or from future equity or debt financing. Management believes that taking the current booking rate combined with recent quote activity and the existing order backlog the Company will be able to generate increased revenues. If we determine that future revenues are below current projections then we will attempt to implement additional cost savings measures including seeking lower cost suppliers and attempting to negotiate price reductions from current suppliers. We are continuously evaluating our supplier situation to ensure we meet our booked orders.

2. Significant Accounting Policies

Consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and cash equivalents consist of cash in the bank and temporary investments with maturities of 90 days or less when purchased.

Allowance for accounts receivable, is calculated by taking 100% of the total of invoices that are over 90 days past due from due date and 10% of the total of invoices that are over 60 days past due from due date. Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial condition. Recovery of bad debt amounts previously written off is recorded as a reduction of bad debt expense in the period the payment is

collected. If the Company’s actual collection experience changes, revisions to its allowance may be required. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Inventories, which consist principally of raw materials, work-in-process and finished lenses, isolators, collimators and assemblies are stated at the lower of cost or market, on a first-in, first-out basis. Inventory costs include materials, labor and manufacturing overhead. Acquisition of goods from our vendors has a 9% purchase burden added to cover customs, shipping and handling costs. Fixed costs related to excess manufacturing capacity have been expensed. We look at the following criteria for parts to consider for the inventory reserve: items that have not been sold in two years or that have not been purchased in two years or of which we have more than a two year supply. These items as identified are reserved at 100%, as well as reserving 50% for other items deemed to be slow moving within the last twelve months and reserving 25% for items deemed to have low material usage within the last six months. The parts identified are adjusted for recent order and quote activity to determine the final inventory reserve.

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets ranging from one to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets using the straight-line method.

Long-lived assets, such as property, plant, and equipment, tooling and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Intangible assets, consisting of patents and trademarks, are recorded at cost. Upon issuance of the patent or trademark, the assets are amortized on the straight-line basis over the estimated useful life of the related assets ranging from two to seventeen years.

Debt costs consist of third party fees incurred and other costs associated with the issuance of long-term debt. Debt costs are capitalized and amortized to interest expense over the term of the debt using the effective interest method.

Deferred rent relates to certain of the Company’s operating leases containing predetermined fixed increases of the base rental rate during the lease term being recognized as rental expense on a straight-line basis over the lease term. The Company has recorded the difference between the amounts charged to operations and amounts payable under the leases as deferred rent in the accompanying consolidated balance sheets.

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized.

The Company has not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits or penalties has not been provided since there is no unrecognized benefit or penalty since the date of adoption. If there were an unrecognized tax benefit or penalty, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal, state or local, or non-U.S. income tax examinations by tax authorities for years before 2003.

Revenue is recognized from product sales when products are shipped to the customer, provided that the Company has received a valid purchase order, the price is fixed, title has transferred, collection of the associated receivable is reasonably assured, and there are no remaining significant obligations. Revenues from product development agreements are recognized as milestones are completed in accordance with the terms of the agreements and upon shipment of products, reports or designs to the customer. Invoice amounts for sales or VAT taxes are posted to the balance sheet and not included in revenue.

New product development costs are expensed as incurred.

stock closing prices and the expected term was determined based primarily on historical experience of previously outstanding options. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable then the compensation expense will be amortized over the remaining vesting period.

Management makes estimates and assumptions during the preparation of the Company’s consolidated financial statements that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes available, which in turn could impact the amounts reported and disclosed herein.

Financial instruments. The Company accounts for financial instruments in accordance with FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.

Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2010. The Company uses the market approach to measure fair value for its Level 1 financial assets and liabilities, which include cash equivalents of $800,000 at December 31, 2010. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments which include cash, trade receivables, accounts payable and accrued liabilities. Fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand.

On August 1, 2008, the Company executed a Securities Purchase Agreement with respect to the private placement of 8% senior convertible debentures (the “Debentures”) as described in Note 10 to the accompanying consolidated financial statements. The Debentures issued were valued using observable inputs other than quoted prices (Level 2). The fair value of the Debentures as of December 31, 2010 was calculated to be approximately $1.10 million.

The Company does not have other financial or non-financial assets or liabilities that would be characterized as Level 2 or Level 3 instruments.

Derivative Financial Instruments. The Company accounts for derivative instruments in accordance with FASB ASC 815, Derivatives and Hedging (formerly referenced as SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133) (“ASC 815”), which requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect the financial statements.

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.

Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.

amount of the convertible instrument equal to the intrinsic value of the conversion feature. The discounts recorded in connection with the BCF and warrant valuation are recognized as non-cash interest expense- debt discount over the term of the convertible debt, using the effective interest method.

Comprehensive Income (Loss) of the Company is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income (loss) has two components, net income (loss) and other comprehensive income (loss), and is included on the statement of stockholders’ equity. Our other comprehensive income (loss) consists of the foreign currency translation adjustment. For more information see Note 9 to the accompanying consolidated financial statements.

Business segments are required to be reported by the Company. As the Company only operates in principally one business segment, no additional reporting is required.

Recent accounting pronouncements issued by FASB (including EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

3. Inventories

The components of inventories include the following at:

	December 31, 2010			June 30, 2010
	(unaudited)
Raw materials	$	652,454		$	500,515
Work in process		600,157			423,104
Finished goods		333,944			291,098
Reserve for obsolescence		(125,813	)		(77,039	)
	$	1,460,742		$	1,137,678

4. Property and Equipment

Property and equipment are summarized as follows:

	Estimated		December 31,		June 30,
	Life (Years)		2010		2010
			(unaudited)

Manufacturing equipment		5 - 10	$	2,801,561	$	3,988,169
Computer equipment and software		3 - 5		247,352		308,252
Furniture and fixtures		5		85,537		170,045
Leasehold improvements		5 - 7		778,686		793,138
Construction in progress				674,156		355,109
Tooling		1 - 5		902,872		733,037
Total Property and Equipment				5,490,164		6,347,750

Less accumulated depreciation and amortization				2,924,355		4,003,058
Total property and equipment, net			$	2,565,809	$	2,344,692

In the second quarter of fiscal 2011, fixed assets with an original cost of $1,496,493 were written off. These assets were fully depreciated.

5. Intangible Assets

The following table discloses information regarding the carrying amounts and associated accumulated amortization for intangible assets:

	December 31, 2010			June 30, 2010
	(unaudited)

Gross carrying amount	$	621,303		$	621,303

Accumulated amortization		(503,736	)		(487,302	)

Net carrying amount	$	117,567		$	134,001

Amortization expense related to intangible assets totaled approximately $16,000 during both six-month periods ended December 31, 2010 and 2009. The net carrying amount will be amortized over the following schedule:

2011				2012				2013				2014				2015				Total
	16,434				32,868				32,868				32,868				2,529				117,567

6. Accounts Payable

The accounts payable balance includes $43,000 of related party transactions for board of director’s fees as of December 31, 2010 and June 30, 2010.

7. Compensatory Equity Incentive Plan and Other Equity Incentives

Share-Based Compensation Arrangements—The Company’s Amended and Restated Omnibus Incentive Plan (the “Incentive Plan”) included several available forms of stock compensation of which incentive stock options and restricted stock awards have been granted to date.

These two plans are summarized below:

			Award Shares		Available for
	Award Shares		Outstanding		Issuance
	Authorized		at December 31,		at December 31,
Equity Compensation Arrangement			2010		2010
Amended and Restated Omnibus Incentive Plan		1,715,625		937,944		334,174
Employee Stock Purchase Plan		200,000		-		137,810

		1,915,625		937,944		471,984

The 2004 Employee Stock Purchase Plan (“ESPP”) permits employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee’s compensation, at a price not less than 85% of the market value of the stock on specified dates (June 30 and December 31). In no event may any participant purchase more than $25,000 worth of shares in any calendar year and an employee may purchase no more than 4,000 shares on any purchase date within an offering period of 12 months and 2,000 shares on any purchase date within an offering period of six months. The discount on market value is included in selling, general and administrative expense in the accompanying statements of operations and was $486 and $397 for the six months ended December 31, 2010 and 2009, respectively.

Grant Date Fair Values and Underlying Assumptions; Contractual Terms—The Company estimates the fair value of each stock option as of the date of grant using the Black-Scholes-Merton pricing model. The ESPP fair value is the amount of the discounted market value the employee obtains at the date of the purchase transaction.

The Company did not grant any stock options in the first half of fiscal 2010. For stock options granted in the six month period ended December 31, 2010, the Company estimated the fair value of each stock option as of the date of grant using the following assumptions:

	Six months ended
	December 31, 2010
Expected volatility		117	%
Weighted average expected volatility		117	%
Dividend yields		0	%
Risk-free interest rate		1.18	%
Expected term, in years		3 - 7

Most options granted under the Incentive Plan vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture rates used in calculating the fair value of options and restricted stock unit grants with both performance and service conditions were 49% and 0%, respectively, for the six months ended December 31, 2010 and 49% and 5%, respectively, for the six months ended December 31, 2009. The volatility rate and expected term are based on seven-year historical trends in common stock closing prices and actual forfeitures. The interest rate used is the U.S. Treasury interest rate for constant maturities.

Information Regarding Current Share-Based Compensation Awards—A summary of the activity for share-based compensation awards in the six months ended December 31, 2010 is presented below:

								Restricted
				Stock Options				Stock Units ("RSU")
				Weighted		Weighted				Weighted
				Average		Average				Average
				Exercise		Remaining				Remaining
				Price		Contract				Contract
	Shares			(per share)		Life (YRS)		Shares		Life (YRS)
June 30, 2010		437,641		$	6.33		7.3		359,700		1.0
Granted		77,500			2.87		9.8		75,000		2.7
Exercised		(5,384	)		1.05		8.0		-		-
Cancelled		(6,513	)		209.33		-		-		-

December 31, 2010		503,244		$	3.21		7.4		434,700		2.3
		-

Awards exercisable/
vested as of
December 31, 2010		276,994		$	3.66		6.1		209,700		-


Awards unexercisable/
unvested as of
December 31, 2010		226,250		$	2.51		6.1		225,000		2.3
		503,244							434,700

				Stock
				Options		RSU		All Awards
Weighted average fair value
of share awards granted for the six months ended
December 31, 2010				$	2.31	$	2.69	$	2.58

The total intrinsic value of options outstanding and exercisable at December 31, 2010 and 2009 was $43,645 and $45,207, respectively.

The total intrinsic value of RSUs exercised during the six months ended December 31, 2010 and 2009 was $0 and $33,800, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2010 and 2009 was $10,136 and $0, respectively.

The total intrinsic value of RSUs outstanding and exercisable at December 31, 2010 and 2009 was $379,536 and $312,143, respectively.

The total fair value of RSUs vested during the six months ended December 31, 2010 and 2009 was $15,250 and $83,930, respectively.

The total fair value of option shares vested during the six months ended December 31, 2010 and 2009 was $128,369, and $35,335, respectively. As of December 31, 2010, there was $587,631 of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including share options and restricted stock units) granted under the Incentive Plan.

The compensation cost is expected to be recognized as follows:


			Restricted
	Stock		Stock
	Options		Units		Total
Six months ended June 30, 2011	$	61,186	$	81,062	$	142,248
Year ended June 30, 2012		74,293		132,672		206,965
Year ended June 30, 2013		63,324		96,284		159,608
Year ended June 30, 2014		48,522		22,434		70,956
Year ended June 30, 2015		7,854		-		7,854
	$	255,179	$	332,452	$	587,631

The table above does not include shares under the ESPP, which has purchase settlement dates in the second and fourth fiscal quarters of each year. The ESPP is not administered with a look-back option provision and, as a result, there is not a population of outstanding option grants during the employee contribution period.

Restricted stock unit awards vest immediately or from two to four years from the date of grant.

The Company issues new shares of common stock upon the exercise of stock options. The following table is a summary of the number and weighted average grant date fair values regarding the Company’s unexercisable/unvested awards as of December 31, 2010 and changes during the six months then ended:

Unexercisable/unvested awards	Stock Options Shares			RSU Shares			Total Shares			Weighted-Average Grant Date Fair Values (per share)
June 30, 2010		180,000			175,000			355,000		$	2.24
Granted		77,500			75,000			152,500			2.58
Vested		(31,250	)		(25,000	)		(56,250	)		2.55
Cancelled/Issued/Forfeited		-			-			-			-
December 31, 2010		226,250			225,000			451,250		$	2.52

Financial Statement Effects and Presentation—The following table shows total stock-based compensation expense for the six months ended December 31, 2010 and 2009 included in the consolidated statements of operations:

	Six Months Ended		Six Months Ended
	December 31,		December 31,
	2010		2009

Stock options	$	39,579	$	40,135

RSU		64,321		24,775

Total	$	103,900	$	64,910

The amounts above were included in:
General & administrative	$	93,777	$	47,632
Cost of sales		4,513		10,295
New Product Development		5,610		6,983
	$	103,900	$	64,910

8. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing the weighted-average number of shares of Class A common stock outstanding, during each period presented. Diluted earnings per share is computed similarly to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. The computations for basic and diluted earning (loss) per share are the same for each period, except for the three-months ended December 31, 2009. The number of weighted-average shares used in the computation excludes the following shares as their effect would be anti-dilutive:

	(unaudited)					(unaudited)
	Three months ended					Six months ended
	December 31,					December 31,
	2010			2009		2010			2009

Net income (loss)	$	(373,714	)	$	41,676	$	(1,226,664	)	$	(664,697	)

Weighted average common shares outstanding:
Basic		9,705,890			8,163,675		9,359,068			7,739,087

Effect of dilutive securities:
Options to purchase common stock		-			31,802		-			-
Restricted stock units		-			43,089		-			-
Common stock warrants		-			356,830		-			-
Convertible debentures		-			-		-			-
Diluted		9,705,890			8,595,396		9,359,068			7,739,087


Earnings (Loss) per common share:
Basic	$	(0.04	)	$	0.01	$	(0.13	)	$	(0.09	)
Diluted	$	(0.04	)	$	0.00	$	(0.13	)	$	(0.09	)


Excluded from computation:
Options to purchase common stock		503,244			281,924		503,244			353,690
Restricted stock units		434,700			209,700		434,700			284,700
Common stock warrants		2,656,492			712,000		2,656,492			2,900,944
Convertible debentures		715,422			1,402,110		715,422			1,402,110
		4,309,858			2,605,734		4,309,858			4,941,444

9. Foreign Operations

Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the three-month and six-month periods. Gains or losses on the translation of the financial statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, the Renminbi (“RMB”), are reflected as a separate component of equity. The foreign exchange translation adjustment balance reflects net gains of approximately $23,000 at June 30, 2010 and a loss of approximately $5,000 at December 31, 2010. The Company, as of December 31, 2010, had approximately $2.9 million in assets and $2.3 million in net assets located at the Shanghai facility. The Company has purchased and transferred equipment to the Shanghai facility and other equipment owned by the Company was transferred from the Orlando facility to the Shanghai facility during each fiscal year since 2006 through 2010.

10. Convertible Debentures

On August 1, 2008, we executed a Securities Purchase Agreement with twenty-four institutional and private investors with respect to the private placement of 8% senior convertible debentures (the “Debentures”). The Debentures are secured by substantially all of our previously unencumbered assets pursuant to a Security Agreement and are guaranteed by our wholly-owned subsidiaries, Geltech Inc. and LPOI pursuant to a Subsidiary Guarantee. The sale of the Debentures generated gross proceeds of approximately $2.9 million and net proceeds of $2.7 million. We used the funds to provide working capital for our operations. Among the investors were Steven Brueck, J. James Gaynor, Louis Leeburg, Robert Ripp, Gary Silverman and James Magos, all of whom were directors or officers of LightPath as of August 1, 2008. Mr. Magos resigned effective September 2, 2008.

The maturity date of the Debentures is August 1, 2011, on which date the outstanding principal amount of the Debentures will be due. Interest of $39,053 was due on October 1, 2008 and was prepaid by the Company on August 1, 2008 by issuing 27,893 shares of common stock in payment of such interest based upon the closing price of $1.40 per share (the “October Interest Shares”). The remaining interest on the Debentures was prepaid by issuing common stock in December 2008.

Upon issuance the Debentures were immediately convertible into 1,901,948 shares of common stock, based on a conversion price of $1.54 per share, which was 110% of the closing bid price of our common stock on the NASDAQ Capital Market on July 31, 2008. Investors also received warrants to purchase up to 950,974 shares of our common stock (the “Warrants”). The Warrants are exercisable for a period of five years beginning on August 1, 2008 with 65% of the Warrants, exercisable for 618,133 shares, priced at $1.68 per share and the remaining 35% of the Warrants, exercisable for 332,841 shares, priced at $1.89 per share.

Investors who participated in our July 2007 offering were offered an incentive to invest in the debenture offering. Four investors from the July 2007 offering participated in the debenture offering and as a result we reduced the exercise price of the warrants they received in the July 2007 offering from $5.50 per share to $2.61 per share. The reduced exercise price lowered potential proceeds on the exercise of the warrants from the July 2007 offering by $119,212 to $107,663. Additionally, such investors were issued an aggregate of 73,228 shares of common stock (the “Incentive Shares”), valued at $75,131.

We paid a commission to the exclusive placement agent for the offering, First Montauk Securities Corp. (“First Montauk”), in an amount equal to $216,570 plus costs and expenses. We also issued to First Montauk and its designees warrants to purchase an aggregate of 190,195 shares of our common stock at an exercise price equal to $1.68 per share, which was 120% of the closing bid price of the our common stock on the NASDAQ Capital Market on July 31, 2008. The warrants were valued at $194,057 using the Black-Scholes-Merton pricing model and were recorded as debt costs. The warrants are exercisable for a period of five years beginning on August 1, 2008. In addition, the exercise price of 50% of the warrants previously issued to First Montauk and its designees at the closing of the July 2007 offering was reduced from $5.50 to $2.61 per share. This reduced warrant exercise price lowered potential proceeds on the exercise of the warrants issued to First Montauk from the July 2007 offering by $115,600 to $104,400.

The private placement was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act (in that we sold the Debentures, Warrants and shares of common stock in a transaction not involving any public offering) and pursuant to Rule 506 of Regulation D promulgated thereunder. The shares into which the Debentures are convertible, the shares issuable upon exercise of the Warrants, the October Interest Shares and the Incentive Shares have been registered for resale under the Act. The registration was declared effective on October 16, 2008.

The Warrants and the Incentive Shares issued to the debenture holders were valued at issuance at $790,830 and recorded as a discount on the debt. The Incentive Shares were valued using the fair market value of the Company’s stock on the date of issuance. The Warrants were valued using the Black-Scholes-Merton valuation model using assumptions similar to those used to value the Company’s stock options and RSUs. In addition a beneficial conversion feature associated with the Debentures was valued at the date of issuance at $600,635 and was recorded as a discount on the debt. The total debt discount of $1,391,465 will be amortized using the effective interest method over the 36-month term of the Debentures.

On December 31, 2008 the Debentures were amended to allow debenture holders to convert 25% of their Debentures into shares

of common stock. As a result, $732,250 of the Debentures were converted into 475,496 shares of common stock. As an inducement to partially convert the Debentures, we issued additional warrants (valued at $215,975 using the Black-Scholes-Merton method and recorded as interest expense) and prepaid the interest of $453,995 on the unconverted portion of the Debentures through the maturity date of August 1, 2011, which resulted in the issuance of 589,614 shares of common stock. Interest payment of $58,580 for the quarter ended December 31, 2008 resulted in the issuance of 76,078 shares of common stock. As a result of the Debenture conversion, $304,382 of debt discount was written off to interest expense. On May 29, 2009 we filed a registration statement to register those additional interest shares and shares underlying the warrants which were issued in December 2008. The registration statement was declared effective on June 16, 2009.

For the six months ended December 31, 2010 and 2009, $269,844 and $175,329, respectively, of the amortized debt discount was amortized through interest expense on the consolidated statement of operations. The remaining unamortized debt discount was $110,541 at December 31, 2010.

We also incurred debt issuance costs associated with the issuance of the Debentures of $554,308 which will be amortized over the 36-month term using the effective interest method. The costs were for broker commissions, legal and accounting fees, filing fees and $194,057 representing the fair value of the 190,195 warrants shares issued to First Montauk. We used the Black-Scholes-Merton model to determine fair value of the warrants issued to First Montauk. The warrants carry a five year term, expiring on August 1, 2013, and are immediately exercisable at a per share price of $1.68 for one-third of the warrants and $1.89 for two-thirds of the warrants. For the six months ended December 31, 2010 and 2009, $107,494 and $69,848, respectively of the debt issuance costs were amortized through interest expense on the consolidated statement of operations and the remaining unamortized balance was $44,035 as of December 31, 2010.

During the six months ended December 31, 2010, the Company’s debt obligations were reduced by $832,500 through the conversions of certain debentures into shares of common stock. Costs associated with the conversion of these debentures were $6,748, which reduced the proceeds recognized. During the six-months ended December 31, 2009, the Company’s debt obligations were reduced by $37,500 through the conversions of certain debentures into shares of common stock. These transactions increased interest expense by $256,000 and $26,733 for the six months ending December 31, 2010 and 2009, respectively, reflecting debt issue costs, prepaid interest and discount on the debt that were written off as a result of the debt conversions. During the fiscal year ended June 30, 2010, the Company’s debt obligations were reduced by $262,500 through conversion of debentures into shares of common stock.

Total principal outstanding on the Debentures and the amount outstanding for directors’ and officers’ purchases under the Debentures was $1,101,750 and $266,250, respectively at December 31, 2010, less unamortized debt discount of $110,541 and $26,713, respectively.

We can force the debenture holders to convert the Debentures into shares of our common stock if our stock price exceeds $5.00 per share. A forced conversion of the Debentures would include a 10% premium on the face amount. No payment of dividends may be made while the Debentures are outstanding.

11. April 2010 Private Placement

On April 8, 2010 the Company executed a Securities Purchase Agreement with seven institutional and private investors, with respect to a private placement of an aggregate of 507,730 shares of the Company’s Class A Common Stock, $0.01 par value (the “Common Stock”) at $2.20 per share for all non-insider purchasers, and warrants to purchase 50,776 shares of Common Stock (the “Warrants”). The Warrants have an exercise price of $2.48 per share, are exercisable after October 8, 2010, and have a five-year term. The Company received aggregate gross cash proceeds from the issuance of the Common Stock (exclusive of proceeds from any future exercise of the Warrants) in the amount $1,117,000. The Company used the funds to purchase equipment which will enable us to manufacture an additional 3 million units per year, thereby expanding our pressing capacity, and provided working capital for our operations. Among the investors were J. James Gaynor and Louis Leeburg, both of whom were directors as of April 8, 2010, or officers of LightPath as of April 8, 2010, who paid $2.2325 per share for their shares.

The Company paid a commission to the exclusive placement agent for the offering, Garden State Securities, Inc., (“Garden State”) in an amount equal to $89,000 plus costs and expenses. The Company also issued to Garden State and its designees warrants to purchase of an aggregate of 50,773 shares of Common Stock at an exercise price equal to $2.48 per share. The Warrants have a five-year term and are exercisable by Garden State and its designees after October 8, 2010.

The private placement is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) of the Act (in that the shares of Common Stock and Warrants were sold by the Company in a transaction not involving any public offering) and pursuant to Rule 506 of Regulation D promulgated thereunder. The shares of Common Stock and the shares of Common Stock underlying the Warrants were registered for resale under the Act. The registration statement was declared effective on May 20, 2010.

The Securities Purchase Agreement provides the investors with a right to participate in future financing at the then current terms until April 8, 2011.

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

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the LightPath Technologies, Inc. (“LightPath”, the “Company” or “we”). All statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 (the “Quarterly Report”), other than statements of historical facts, which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy and other similar matters are forward-looking statements. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from the forward-looking statements set forth herein as a result of a number of factors, including, but not limited to, limited cash resources and the need for additional financing, our dependence on a few key customers, our ability to transition our business into new markets, our ability to increase sales and manage and control costs and other risks described in our reports on file with the Securities and Exchange Commission (“SEC”). In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.

The discussions of our results as presented in this Quarterly Report include use of the terms “EBITDA” and “gross margin.” Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes manufacturing direct and indirect labor, materials, services, fixed costs for rent, utilities and depreciation, and variable overhead. Gross margin should not be considered an alternative to operating income or net income, which is determined in accordance with GAAP. We believe that gross margin, although a non-GAAP financial measure is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross margin in measuring the performance of our business and have historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.

EBITDA is a non-GAAP financial measure used by management, lenders and certain investors as a supplemental measure in the evaluation of some aspects of a corporation's financial position and core operating performance. Investors sometimes use EBITDA as it allows for some level of comparability of profitability trends between those businesses differing as to capital structure and capital intensity by removing the impacts of depreciation, amortization and interest expense. EBITDA also does not include changes in major working capital items such as receivables, inventory and payables, which can also indicate a significant need for, or source of, cash. Since decisions regarding capital investment and financing and changes in working capital components can have a significant impact on cash flow, EBITDA is not a good indicator of a business's cash flows. We use EBITDA for evaluating the relative underlying performance of the Company's core operations and for planning purposes. We calculate EBITDA by adjusting net loss to exclude net interest expense, income tax expense or benefit, depreciation and amortization, thus the term "Earnings Before Interest, Taxes, Depreciation and Amortization" and the acronym "EBITDA."

Overview

Historical: We are in the business of supplying users with glass lenses and other specialty optical products that have applications in a number of different industries. Due to the emergence of optical technologies in communications, networking and data storage products in the late 1990’s, there was a significant surge in demand for our products, particularly in the period represented by our fiscal years 1999-2001. During this period, our annual revenues increased from less than $2 million in sales to approximately $25 million due to both acquisitions (to add glass lens production capacity and market presence, and isolators to our existing line of collimators and proprietary glass lenses) and organic product line growth.

During fiscal 2002, optical component markets experienced a severe downturn that resulted in a significant decline in the demand for our products. By fiscal 2003, our sales had contracted to just under $7 million. The business infrastructure was too large and diverse to support a business of this reduced size and a decision was made in late fiscal 2002 and implemented during fiscal 2003 to close our isolator production facility in California and our headquarters and collimator and lens production facility in New Mexico. Our manufacturing and production equipment from these locations was consolidated in our headquarters and manufacturing facility in Orlando, Florida and until November 2005 all of the aforementioned products were manufactured there. The consolidation was completed by June 30, 2003, resulting in a significant reduction in net cash used by the business.

In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co., Ltd, (“LPOI”) a wholly owned manufacturing subsidiary, located in Jiading, People’s Republic of China (“PRC”). The manufacturing operations are housed in a 16,000 square foot facility located in the Jiading Industrial Zone near Shanghai. This plant has increased overall production capacity and enabled us to compete for larger production volumes of optical components and assemblies, and strengthened our partnerships

within the Asia/Pacific region.

Since 2006, we have focused on leveraging our facility in Shanghai to address high volume, lower cost applications. These applications include laser tools, laser gun sights and certain imaging applications. We have enhanced our sales channels by adding distribution coverage in North America and Asia, and adding a master distributor in Europe.

We execute all foreign sales from our Orlando facility and intercompany transactions in U.S. dollars, mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-U.S. currencies, primarily the Chinese Renminbi, are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the three-month and six-month periods. During the six months ended December 31, 2010 and 2009 we incurred a $28,316 loss and an $11,645 loss in on foreign currency translation, respectively.

How we operate: We have continuing sales of two basic types: occasional sales via ad-hoc purchase orders of mostly standard product configurations (our “turns” business); and the more challenging and potentially more rewarding business of custom product development. In this latter type of business, we work with customers in the industrial, medical, defense and communications markets to help them determine optical specifications and even create certain optical designs for them, including complex multi-component designs that we call “engineered assemblies.” That is followed by “sampling” small numbers of the product for their test and evaluation. Thereafter, should the customer conclude that our specification or design is the best solution to their product need, we negotiate and “win” a contract (sometimes called a “design win”) – whether of a “blanket purchase order” type or a supply agreement. The strategy is to create an annuity revenue stream that makes the best use of our production capacity as compared to the turns business, which is unpredictable and uneven. A key business objective is to convert as much of our business to the design win and annuity model as possible. We have several challenges in doing so:

●

Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff.

●

Customers that incorporate products such as ours into higher volume commercial applications, continuously work to reduce their expenses, which often leads them to larger or overseas lower-cost suppliers even if sacrificing quality.

●

Because of our limited cash resources and cash flow, we may not be able to support the supply requirements needed to service the demands in the market for high volume, low cost lenses.

Despite these challenges to obtaining more design win business, we nevertheless have been, and believe we can continue to be, successful in procuring this business because of our unique capabilities in optical design engineering. Additionally, we believe that we offer value to some customers as a secondary or backup source of supply in the United States should they be unwilling to commit all of their source of supply of a critical component to a foreign merchant production source. We also continue to have the proprietary GRADIUM lens glass technology to offer to certain laser markets.

Our key indicators:

Usually on a weekly basis, management reviews a number of performance indicators. Some of these indicators are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators such as units of shippable output by major product line, production yield rates by major product line and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully yielded unit production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost and therefore improved margins or improved ability to compete where desirable for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are proprietary information.

Financial indicators that are usually reviewed at the same time include the major elements of the micro-level business cycle:

●

sales backlog;

●

EBITDA;

●

inventory levels; and

●

accounts receivable levels and quality.

These indicators are similarly used to determine tactical operating actions and changes and are discussed in more detail below.

Sales Backlog – We believe that sales growth is our best indicator of success. Our best view into the efficacy of our sales efforts is in our “order book.” Our order book equates to sales “backlog.” It has a quantitative and a qualitative aspect: quantitatively, our backlog’s prospective dollar value and qualitatively, what percent of the backlog is scheduled by the customer for date-certain delivery. We define our “disclosure backlog” as customer orders for delivery within one year which is reasonably likely to be

fulfilled, including customer purchase orders and products to be provided under supply contracts if they meet the aforementioned criteria. At June 30, 2010 our disclosure backlog was approximately $2.95 million.

At December 31, 2010, our disclosure backlog has grown approximately $336,000 to $3.27 million during these slow economic times. We believe this growth to be partially the result of our efforts to enter low cost, high volume commercial markets, like the industrial laser tool market and other imaging related product markets. We have seen increased quote activity for our Black Diamond product line and our new blue lenses. Bookings and quote activity have increased for our industrial low cost lenses in Asia. With the continuing diversification of our backlog we expect to show modest increases in revenue for the remaining quarters of 2011.

	(Unaudited)					(Unaudited)
	Three months ended					Six months ended
	December 31,					December 31,
	2010			2009		2010			2009

Net Income (Loss)	$	(373,714	)	$	41,676	$	(1,226,664	)	$	(664,697	)
Depreciation and amortization		215,727			145,164		427,270			303,431
Interest expense		113,127			163,402		493,637			342,988
EBITDA	$	(44,860	)	$	350,242	$	(305,757	)	$	(18,278	)

EBITDA- Our EBITDA for the six months ended December 31, 2010 declined to a loss of $306,000, compared to a loss of $18,000 for the six months ended December 31, 2009. The decline in EBITDA was principally caused by higher losses. In Fiscal 2010 our losses were offset by a $556,000 reimbursement received from our D&O insurance carrier for legal expenses incurred in connection with litigation. For comparison purposes, net loss was approximately $1,227,000 or $0.13 per basic and diluted common share during the first six months of fiscal 2011, compared with the first six months of fiscal 2010, in which we reported a net loss of approximately $665,000 or $0.09 basic and diluted per common share.

Inventory Levels – We manage our inventory levels to minimize investment in working capital but still have the flexibility to meet customer demand to a reasonable degree. While the mix of inventory is an important factor, including adequate safety stocks of long lead-time materials, an important aggregate measure of inventory in all phases of production is the quarter’s ending inventory expressed as a number of days worth of the quarter’s cost of sales, also known as “days cost of sales in inventory,” or “DCSI.” It is calculated by dividing the quarter’s ending inventory by the quarter’s cost of goods sold, multiplied by 365 and divided by 4. Generally, a lower DCSI measure equates to a lesser investment in inventory and therefore more efficient use of capital. During the six months ended December 31, 2010 and 2009, our DCSI was 87 and 76, respectively compared to 86 for the year ended June 30, 2010. This increase in DCSI for the six months ended December 31, 2010 is due to a higher inventory balance as compared to a higher cost of sales as a result of increasing inventory for future sales and lower than budgeted sales in the first half of fiscal 2011.

Accounts Receivable Levels and Quality – Similarly, we manage our accounts receivable to minimize investment in working capital. We measure the quality of receivables by the proportions of the total that are at various increments past due from our normally extended terms, which are generally 30 days. The most important aggregate measure of accounts receivable is the quarter’s ending balance of net accounts receivable expressed as a number of day’s worth of the quarter’s net revenues, also known as “days sales outstanding,” or “DSO.” It is calculated by dividing the quarter’s ending net accounts receivable by the quarter’s net revenues, multiplied by 365 and divided by 4. Generally, a lower DSO measure equates to a lesser investment in accounts receivable, and therefore, more efficient use of capital. During the six months ended December 31, 2010 and 2009, our DSO was 60. During the year ended June 30, 2010 our DSO was 71. Our DSO is higher than our target DSO of 50 due to 50% of the quarterly revenue earned was from products shipped in December, and therefore, the majority of our total current receivables have not been collected as of December 31, 2010.

Other Key Indicators – Other key indicators include various operating metrics, some of which are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators such as on time delivery trends, units of shippable output by major product line, production yield rates by major product line and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully-yielded unit production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost and therefore improved margins or improved ability to compete where desirable for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes.

Liquidity and Capital Resources

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations and as of December 31, 2010 the Company has an accumulated deficit of approximately $203 million. Cash flow and cash management continue to be primary concerns of the Company. Cash provided by operations was $55,000 for the six months ended December 31, 2010. Cash used in operations was $500,000 and $1.47 million during fiscal years 2010 and 2009, respectively. Management instituted cost reduction initiatives which included reductions in labor, material costs and discretionary expense spending. In addition, we redesigned certain product lines – collimators and precision molded lenses, increased sales prices on GRADIUM products, obtained more favorable material costs by sourcing some purchased components in China, and instituted more efficient management techniques which improved our product yields.

At December 31, 2010 we had a book cash balance of approximately $1.10 million. For the six months ended December 31, 2010, cash decreased from June 30, 2010 by approximately $601,000, excluding the proceeds we received from the exercise of common stock warrants, compared to a decrease of approximately $809,000, excluding the private placement offering proceeds we received in August 2009 in the same period of the prior fiscal year. The use of cash in both periods was primarily for capital expenditures for equipment and tooling to support our growth initiatives. On February 1, 2011, the Company had a book cash balance of approximately $945,000.

Through the first six months of fiscal 2011 we continued to engage in efforts to keep costs under control as we seek renewed sales growth. We continued to implement cost reduction initiatives, including increasing tooling life and increasing operator yields and efficiencies, lowering coating costs by qualifying coating vendors in China, improving yields on our infrared product line, reducing glass cost by moving more production to less expensive cost glasses, lowering labor cost by moving production to our Shanghai facility and improving production yields and efficiencies. In the first six months of fiscal 2011, 15% of our precision molded lenses sales in units were of more expensive glass types, compared to 17% in the prior fiscal year due to this product mix change.

We also expect sales increases and margin improvements during the rest of fiscal year 2011. The increased sales will allow us to spread our overhead cost over a larger base thereby increasing gross margins. Focused efforts are underway to penetrate non-laser markets such as closed circuit T.V. lenses, micro-projector lenses and industrial test equipment. In support of these efforts, the Company is engaged in new product development and customer prospecting for these markets. We believe that cash flow from operations will improve in the future based upon anticipated increases in sales and further cost reductions. We believe these factors will contribute toward achieving profitability assuming we meet our sales targets.

If our efforts at reaching positive cash flow and profitability are not successful, we will need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the sale of certain product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with respect to our technology, or other alternatives.

We continue to face financial challenges arising from current worldwide economic conditions which have affected our customers, suppliers, and others with whom we do business. Management believes the Company currently has sufficient cash to fund its operations through February 2012 assuming our revenue stays at current levels and no additional sources of capital are used. The extent to which the Company can sustain operations beyond this date will depend on the Company’s ability to generate cash from operations on increased revenues from low cost and infrared lenses, or sale of non-strategic assets or from future equity or debt financing. Recent quarterly booking trends have risen over the last fiscal year. Management believes that taking the current booking rates combined with the existing order backlog the Company will be able to generate increased revenues. If we determine that future revenues are below current projections then we will attempt to implement additional cost saving measures including seeking lower cost suppliers and attempting to negotiate price reductions from current suppliers. We are continually evaluating our supplier situation to ensure we meet our booked orders. This also includes seeking new suppliers and looking for price reductions.

Factors which could adversely affect cash balances in future quarters include, but are not limited to, a decline in revenue, poor cash collections from our accounts receivables, increased material costs, increased labor costs, planned production efficiency improvements not being realized, the current recession and economic times and increases in other discretionary spending, particularly sales and marketing costs.

Sources and Uses of Cash

Operating Activities

Our sources of operating cash consist of our limited cash reserves and the cash generated from the collection of receivables after invoicing customers for product shipments. Our uses of cash primarily consist of payments to vendors for materials and services

purchased, payments to employees for wages and compensation, payments to providers of employee benefits, rent, utilities and payments on capital expenditures. Our plan is to minimize our investment in inventory but still support our sales and forecasted anticipated growth. We manage our accounts payable very carefully. We have taken certain actions to conserve our cash including extending payment terms with certain of our suppliers. We have negotiated payment plans with some key vendors and sometimes work with other vendors to develop payment plans.

Investing Activities

Periodically we make expenditures for capital goods. Tooling costs for precision molded lenses are capitalized. Recent capital spending projects have been focused on expanding capacity at our Shanghai facility to meet forecasted demand.

Financing Activities

We do not currently have any availability for borrowing under equipment leases or other loan facilities and we do not currently have any commitment from any party to provide any other financing to the Company. Since 2001, we have experienced negative cash flow or net use of cash from operations. This net use of cash has recently been met by drawing down on our cash and cash equivalent balances and raising additional funds through the sale of shares of common stock or debt convertible into shares of our common stock, such as our private placement offerings over the last five fiscal years. Our cash forecast also includes the repayment of $1,101,750 due in August 2011 on our convertible debentures, assuming the debenture holders have not previously converted the debt to common stock. We have the cash now to pay this obligation and our forecast generates enough cash to support operations for the next twelve months.

In the future, we may be required to replenish cash and cash equivalent balances through the sale of equity securities or by debt financing. The debentures issued by the Company to certain investors in August 2008 contain certain limitations on our ability to issue additional equity securities without the approval of the current debenture holders, or offering to such holders the ability to participate in the equity offerings. Ultimately, this may affect our ability to obtain additional equity financing. There can be no assurances that such financing will be available to us, or, if available, that the terms of such financing will be acceptable to us. As a result, there is significant risk to us in terms of having limited cash resources with which to continue our operations as currently conducted or to pursue new business opportunities. Either of these outcomes would materially and adversely affect our results of operations, financial performance and stock price.

Off Balance Sheet Arrangements

We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.

Results of Operations

Fiscal Second Quarter: Three months ended December 31, 2010 compared to the three months ended December 31, 2009

Revenues:

For the quarter ended December 31, 2010, we reported total revenues of $2.53 million compared to $2.23 million for the second quarter of fiscal 2010, an increase of 14%. The increase from the second quarter of the prior fiscal year was primarily attributable to higher sales volumes of isolators, collimators and GRADIUM lenses. Our molded optics sales units increased and our average selling price increased due to our seasonal business cycle and a product mix change in the quarter’s sales. Growth in sales going forward is expected to be derived primarily from the precision molded lenses product line, particularly our low cost lenses being sold in Asia.

Cost of Sales:

Our gross margin percentage in the second quarter of fiscal 2011 compared to second quarter of fiscal 2010 decreased to 40% from 43%. Total manufacturing cost of $1.53 million was approximately $260,000 higher in the second quarter of fiscal 2011 compared to the same period of the prior fiscal year. Our manufacturing costs were lower in the second quarter of fiscal 2010 due to the favorable impact of a one time accrual reversal in the amount of $69,000 for royalty payments due to the University of Florida. The increase in manufacturing costs, as compared to the same period last year, is a reflection of a product mix change associated with increased sales of isolators and collimators which have a higher material cost. Unit shipment volume in precision molded lenses is up 30% in the second quarter of fiscal 2011 compared to the same period last year. In the second quarter of fiscal 2011, 15% of our precision molded lenses sales in units were of more expensive glass types, compared to 17% in the same period last year. The sales volume was not high enough to absorb overhead costs which resulted in lower fixed cost utilization which increased our unit cost. Direct costs, which include material, labor and services, increased to 28% of revenue in the second quarter of fiscal 2011, as compared to 26% of revenue in the second quarter of fiscal 2010 primarily due to product mix changes, including increased sales of isolators and collimators which have a higher material cost.

The most significant factor creating potential downward pressure on our gross margins is the level of revenue from the sales of

precision molded lenses, collimator and isolator products. Lower revenues generated from sales of these products may affect our ability to cover certain fixed costs related to such products. Our plants were at 69% of combined capacity for the six months ended December 31, 2010 and 39% of combined capacity for the six months ended December 31, 2009. As our revenues increase we expect improvements in gross margins as our fixed overhead costs are amortized over a higher base.

Selling, General and Administrative:

During the second quarter of fiscal 2011, selling, general and administrative (“SG&A”) costs were approximately $997,000, compared to $544,000 in the second quarter of fiscal 2010, an increase of approximately $453,000. This increase was due to a $40,000 increase in wages, $61,000 for sales tax audit fees, $50,000 for investor relations fees and a $26,000 increase in stock compensation expense due to stock options granted in the third quarter of fiscal 2010. During the second quarter of fiscal 2010, we had higher legal costs offset by receipt of $280,000 from our D&O insurance carrier for legal expenses incurred in connection with litigation. We intend to maintain SG&A costs generally at current levels, while continuing to seek additional cost reduction opportunities.

New Product Development:

New product development costs increased to $249,000 in the second quarter of fiscal 2011 from approximately $202,000 and in the second quarter of fiscal 2010. This increase was due to higher wages and materials costs associated with the University of Central Florida research program for our infrared lenses. We anticipate these expenses to increase for the remainder of fiscal year 2011 as we invest in the continued development of our infrared product line.

Amortization of Intangibles:

Amortization expense from intangibles remained the same at approximately $8,000 per quarter in both the fiscal quarters ended December 31, 2010 and 2009.

Other Income (Expense):

Interest expense was approximately $113,000 in the second quarter of fiscal 2011 as compared to $163,000 in the second quarter of fiscal 2010. This lower interest expense resulted from accelerated conversion by certain investors of their debentures into shares of common stock in the second quarter of 2011 which reduced the company’s debt obligation by $100,000, and resulted in the write-off of approximately $56,000 of debt issuance costs, debt discount and prepaid interest related to those conversions. The debentures issued on August 1, 2008 accounted for approximately all of the interest during the quarter ended December 31, 2010, representing periodic interest at 8% and amortization and write-off of the related debt issuance costs and debt discount. Future interest expense on the debentures is expected to be approximately $24,000 per quarter. In future quarters combined amortization of both the debt issuance costs and debt discount is expected to average approximately $88,000 per quarter. Investment and other income was approximately $6,700 in the second quarter of fiscal 2011 and $800 in the second quarter of fiscal 2010.

Net Income (Loss):

Net loss was approximately $374,000 or $0.04 basic and diluted per share during the second quarter of fiscal 2011, compared with the second quarter of fiscal 2010, in which we reported a net income of approximately $42,000 or $0.01 basic per share and $0.0 diluted per share. The $415,000 increase in net loss resulted primarily from the $56,000 charge for interest and debt issuance costs associated with the accelerated conversion of a portion of the debentures into shares of common stock, the $280,000 reimbursement received during the second quarter of fiscal 2010 from our D&O insurance carrier, an increase in wages, an increase in investor relation fees and stock compensation expense during the three months ended December 31, 2010 compared to the same period in the prior year. Weighted-average shares outstanding (basic) increased to 9,705,890 in the second quarter of fiscal 2011 compared to 8,163,675 in the second quarter in fiscal 2010, primarily due to the issuance of shares for the conversion of debentures and warrant exercises in the first quarter of 2011 and the issuance of shares in a private placement in April 2010.

Fiscal First Half: Six months ended December 31, 2010 compared to the six months ended December 31, 2009

Revenues:

For the six months ended December 31, 2010, we reported total revenues of $4.78 million compared to $3.78 million for six months ended December 31, 2010, an increase of 26%. This increase from the first half of fiscal 2010 was primarily attributable to higher sales volumes in all product lines with the majority of the increase in the precision molded lenses, which accounted for 78% of our revenues. The increase in the number of units of precision molded lenses sold was due to our increased production capability and our pursuit of low cost, high volume lens business. Growth in sales going forward is expected to be derived primarily from the precision molded lens product line, particularly our low cost lenses being sold in Asia.

Cost of Sales:

Our gross margin percentage in the first half of fiscal 2011 compared to first half of fiscal 2010 decreased to 38% from 43%. Total manufacturing cost of $2.96 million was approximately $799,000 higher in the first half of fiscal 2011 compared to the same period of the prior fiscal year. This increase was due to higher sales volumes. Unit shipment volume for precision molded lenses is up 22% in the first half of fiscal 2011 compared to the same period last year. In the first half of fiscal 2011, 15% of our precision molded lenses sales in units were of more expensive glass types, compared to 17% in the same period last year. The sales volume

was not high enough to absorb overhead costs which resulted in lower fixed cost utilization which increased our unit cost. Direct costs, which include material, labor and services, increased to 28% of revenue in the first half of fiscal 2011, as compared to 22% of revenue in the first half of fiscal 2010 primarily due to product mix changes which included increased sales of isolators and collimators, both of which have a higher material cost.

The most significant factor creating potential downward pressure on our gross margins is the level of revenue from the sales of precision molded optics, collimator and isolator products. Lower revenues generated from sales of these products may affect our ability to cover certain fixed costs related to such products. Our plants were at 69% capacity for the six months ended December 31, 2010 and 39% of combined capacity for the six months ended December 31, 2009. As our revenues increase we expect improvements in gross margins as our overhead costs are amortized over a higher base.

Selling, General and Administrative:

During the first half of fiscal 2011, SG&A costs were approximately $2.07 million, compared to $1.51 million in the first half of fiscal 2010, an increase of approximately $560,000. This increase was due to a $103,000 increase in wages, a $100,000 increase in sales tax, $38,000 in recruiting fees, $23,000 in outside services for information technology, $11,000 in commissions to our sales force due to higher revenues and $46,000 higher stock compensation expense due to stock options granted in the third quarter of fiscal 2010. During the first half of fiscal 2010, legal expenses decreased by $244,000 due to proceeds received from our D&O insurance carrier for legal expenses incurred in connection with litigation. We intend to maintain SG&A costs generally at current levels, while continuing to seek additional cost reduction opportunities.

New Product Development:

New product development costs increased by $43,000 to approximately $471,000 in the first half of fiscal 2011 compared to $428,000 in the first half of fiscal 2010. This increase was due to an increase in wages and materials costs associated with the University of Central Florida research program for our infrared lenses. We anticipate these expenses to increase for the remainder of fiscal 2011 as we invest in the continued development of our infrared product line.

Amortization of Intangibles:

Amortization expense from intangibles remained the same at approximately $16,000 in each of the six-month periods ended December 31, 2010 and 2009.

Other Income (Expense):

Interest expense was approximately $494,000 in the first half of fiscal 2011 as compared to $343,000 in the first half of fiscal 2010. This higher interest expense resulted from the accelerated conversion by certain investors of their debentures into shares of common stock in the first half of 2011, which reduced the Company’s debt obligation by $832,500, and resulted in the write-off of approximately $256,000 of debt issuance costs, debt discount, and prepaid interest related to those conversions. The debentures issued in August 2008 accounted for approximately all of the interest during the six months ended December 31, 2010 representing periodic interest at 8% and amortization and write-off of the related debt issuance costs and debt discount. Future interest expense on the debentures is expected to be approximately $24,000 per quarter. In future quarters combined amortization of both the debt issuance costs and debt discount is expected to average approximately $88,000 per quarter. Investment and other expense were approximately $4,100 in the first half of fiscal 2011 and other income of $1,300 in the first half of fiscal 2010.

Net Loss:

Net loss was approximately $1.23 million or $0.13 basic and diluted per share during the first half of fiscal 2011, compared with the first half of fiscal 2010, in which we reported a net loss of approximately $665,000 or $0.09 basic and diluted per share. The $562,000 increase in net loss resulted primarily from the $256,000 charge for interest and debt issuance costs, debt discount and prepaid interest associated with the accelerated conversion of a portion of the debentures into common stock, the net reimbursement of $244,000 from our D&O insurance carrier for legal expenses which was received in the first half of fiscal 2010 and an increase in wages. Weighted-average shares outstanding basic increased to 9,326,953 in the first half of fiscal 2011 compared to 7,739,087 in the first half in fiscal 2010, primarily due to the issuance of shares for the conversion of debentures and warrant exercises in the first half of 2011.

Critical Accounting Policies and Estimates:

Allowance for accounts receivable is calculated by taking 100% of the total of invoices that are over 90 days past due from due date and 10% of the total of invoices that are over 60 days past due from due date. Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial condition. Recovery of bad debt amounts which were previously written off is recorded as a reduction of bad debt expense in the period the payment is collected. If the Company’s actual collection experience changes, revisions to its allowance may be required. After attempts to collect a receivable have failed, the receivable is written off against the allowance.

Inventory obsolescence reserve is calculated by reserving 100% for items that have not been sold in two years or that have not been purchased in two years and 25% for products which we have more than a two year supply, as well as reserving 50% for other

items deemed to be slow moving within the last 12 months and reserving 25% for items deemed to have low material usage within the last six months.

Stock based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes-Merton pricing model. Most options granted under our Amended and Restated Omnibus Incentive Plan vest ratably over two to four years and generally have ten-year contract lives. The volatility rate is based on four-year historical trends in common stock closing prices and the expected term was determined based primarily on historical experience of previously outstanding options. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable then the compensation expense will be amortized over the remaining vesting period.

Beneficial Conversion and Warrant Valuation. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt instruments that have conversion features at fixed rates that are in-the-money when issued, and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value using the Black-Scholes-Merton pricing model, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The discounts recorded in connection with the BCF and warrant valuation are recognized as non-cash interest expense over the term of the convertible debt, using the effective interest method.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of December 31, 2010, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010 in reporting on a timely basis information required to be disclosed by us in the reports we file or submit under the Exchange Act.

During the fiscal six months ended December 31, 2010, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 6. Exhibits

The following exhibits are filed herewith as a part of this report.

Exhibit Number	Description	Notes

3.1.1	Certificate of Incorporation of Registrant, filed June 15, 1992 with the Secretary of State of Delaware	1

3.1.2	Certificate of Amendment to Certificate of Incorporation of Registrant, filed October 2, 1995 with the Secretary of State of Delaware	1

3.1.3	Certificate of Designations of Class A common stock and Class E-1 common stock, Class E-2 common stock, and Class E-3 common stock of Registrant, filed November 9, 1995 with the Secretary of State of Delaware	1

3.1.4	Certificate of Designation of Series A Preferred Stock of Registrant, filed July 9, 1997 with the Secretary of State of Delaware	2

3.1.5	Certificate of Designation of Series B Stock of Registrant, filed October 2, 1997 with the Secretary of State of Delaware	3

3.1.6	Certificate of Amendment of Certificate of Incorporation of Registrant, filed November 12, 1997 with the Secretary of State of Delaware	3

3.1.7	Certificate of Designation of Series C Preferred Stock of Registrant, filed February 6, 1998 with the Secretary of State of Delaware	4

3.1.8	Certificate of Designation, Preferences and Rights of Series D Participating Preferred Stock of Registrant filed April 29, 1998 with the Secretary of State of Delaware	5

3.1.9	Certificate of Designation of Series F Preferred Stock of Registrant, filed November 2, 1999 with the Secretary of State of Delaware	6

3.1.10	Certificate of Amendment of Certificate of Incorporation of Registrant, filed February 28, 2003 with the Secretary of State of Delaware	7

3.2	Bylaws of Registrant	1

4.1	Rights Agreement dated May 1, 1998, between Registrant and Continental Stock Transfer & Trust Company	5

4.2	First Amendment to Rights Agreement dated as of February 28, 2008, between LightPath Technologies, Inc. and Continental Stock Transfer & Trust Company	12

10.1	Directors Compensation Agreement dated November 11, 1999 between Robert Ripp and LightPath Technologies, Inc. and First Amendment thereto	8

10.2	Amended and Restated Omnibus Incentive Plan dated October 15, 2002	9

10.3	Employee Letter Agreement dated June 12, 2008, between LightPath Technologies, Inc., and J. James Gaynor, its Chief Executive Officer & President	10

10.4	Form of Common Stock Purchase Warrant dated as of August 1, 2008, issued by LightPath Technologies, Inc., to certain investors	11

10.5	Securities Purchase Agreement dated as of August 1, 2008, by and among LightPath Technologies, Inc., and certain investors	11

10.6	Registration Rights Agreement dated as of August 1, 2008, by and among LightPath Technologies, Inc., and certain investors	11

10.7	Security Agreement dated as of August 1, 2008, by and among LightPath Technologies, Inc. and certain investors	11

10.8	Form of Subsidiary Guarantee dated as of August 1, 2008, by Geltech Inc., and LightPath Optical Instrumentation (Shanghai), Ltd., in favor of certain investors	11

10.9	Form of 8% Senior Secured Convertible Debenture dated as of August 1, 2008, issued by LightPath Technologies, Inc., to certain investors	11

10.10	First Amendment to the 8% Senior Secured Convertible Debenture, dated as of December 31, 2008	13

10.11	Amendment No. 2 to the Amended and Restated LightPath Technologies, Inc. Omnibus Incentive Plan, dated as of December 30, 2008	14

10.12	Form of Common Stock Purchase Warrant dated as of August 19, 2009, issued by LightPath Technologies, Inc., to certain investors	15

10.13	Securities Purchase Agreement dated as of August 19, 2009, by and among LightPath Technologies, Inc. and certain investors	15

10.14	Registration Rights Agreement dated as of August 19, 2009, by and among LightPath Technologies, Inc., and certain investors	15

10.15	Form of Common Stock Purchase Warrant dated as of April 8, 2010, issued by LightPath Technologies, Inc. to certain investors	16

10.16	Securities Purchase Agreement dated as of April 8, 2010, by and among LightPath Technologies, Inc. and certain investors	16

10.17	Registration Rights Agreement dated as of April 8, 2010, by and among LightPath Technologies, Inc., and certain investors	16

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934	*

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934	*

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18 of the United States Code	*

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18 of the United States Code	*

Notes:

1. This exhibit was filed as an exhibit to our Registration Statement on Form SB-2 (File No: 33-80119) filed with the Securities and Exchange Commission on December 7, 1995 and is incorporated herein by reference thereto.

2. This exhibit was filed as an exhibit to our annual report on Form 10-KSB40 filed with the Securities and Exchange Commission on September 11, 1997 and is incorporated herein by reference thereto.

3. This exhibit was filed as an exhibit to our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 1997 and is incorporated herein by reference thereto.

4. This exhibit was filed as an exhibit to our Registration Statement on Form S-3 (File No. 333-47905) filed with the Securities and Exchange Commission on March 13, 1998 and is incorporated herein by reference thereto.

5. This exhibit was filed as an exhibit to our Registration Statement on Form 8-A filed with the Securities and Exchange Commission on April 28, 1998 and is incorporated herein by reference thereto.

6. This exhibit was filed as an exhibit to our Registration Statement on Form S-3 (File No: 333-94303) filed with the Securities and Exchange Commission on January 10, 2000 and is incorporated herein by reference thereto.

7. This exhibit was filed as an exhibit to our Proxy Statement filed with the Securities and Exchange Commission on January 24, 2003 and is incorporated herein by reference thereto.

8. This exhibit was filed as an exhibit to our annual report on Form 10-KSB filed with the Securities and Exchange Commission on August 31, 2000 and is incorporated herein by reference thereto.

9. This exhibit was filed as an exhibit to our Proxy Statement filed with the Securities and Exchange Commission on September 12, 2002 and is incorporated herein by reference.

10. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12, 2008, and is incorporated herein by reference thereto.

11. This exhibit was filed as an exhibit to our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on August 6, 2008, and is incorporated herein by reference thereto.

12. This exhibit was filed as amendment number 1 to form 8A filed with the Securities and Exchange Commission on February 28, 2008, and is incorporated herein by reference thereto.

13. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2009, and is incorporated herein by reference thereto.

14. This exhibit was filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 12, 2009, and is incorporated herein by reference thereto.

15. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2009, and is incorporated herein by reference thereto.

16. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2010, and is incorporated herein by reference thereto.

* Filed herewith.

SIGNATURES

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

		LIGHTPATH TECHNOLOGIES, INC.

Date:	February 3, 2011	By:	/s/ J. James Gaynor
			President and Chief Executive Officer

Date:	February 3, 2011		By:	/s/ Dorothy M. Cipolla
				Chief Financial Officer