**UNITED STATES**SECURITIES ANDEXCHANGE COMMISSION

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 
| **ý**                                                                                                                                                                                           | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF**   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| ** **                                                                                                                                                                                           | **THE  SECURITIES EXCHANGE ACT OF 1934**                             |
| ** **                                                                                                                                                                                           | ** **                                                           |
| ** **                                                                                                                                                                                           | **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,  2005**               |
|                                                                                                                                                                                                 |                                                                 |
| **OR**                                                                                                                                                                                               |
| ** **                                                                                                                                                                                           | ** **                                                           |
| **o**                                                                                                                                                                                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF** |
| ** **                                                                                                                                                                                           | **THE  SECURITIES EXCHANGE ACT OF 1934**                             |
| ** **                                                                                                                                                                                           | ** **                                                           |
| **For the transition period from               to               ** |

 

**COMMISSION FILE NUMBER 0-22743**

 

**iVOW, INC.**

(Exact name of registrant as specified in its charter)

 
| **DELAWARE**                                                    | ** ** | **94-3184035**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**2101 FARADAY AVENUE**

**CARLSBAD, CA 92008**

(Address of principal executive offices)

 

**(760) 603-9120**

(Registrant’s telephone number, including area code)

 

INDICATE BY CHECK MARKWHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BYSECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THEPRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WASREQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILINGREQUIREMENTS FOR THE PAST 90 DAYS:

 
| ** ** | **(1) ** | **Yes****ý** | ** ** | **No****o** | ** ** |
|------------|---------------|-------------------|------------|-------------|------------|
| ** ** | ** **    | ** **        | ** ** | ** **  | ** ** |
| ** ** | **(2) ** | **Yes****ý** | ** ** | **No****o** | ** ** |

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes  o   No  ý

 

As of November 3, 2005 therewere 2,303,469 shares of $.01 par value common stock outstanding.

 

TransitionalSmall Business Disclosure Format   Yes  o   No  ý

 

 

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iVOW, INC.

FORM 10-QSB

TABLE OF CONTENTS

 
| PART 1.   FINANCIAL  INFORMATION |                                                                                                                             |
|-------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                             |
| Item 1.                                         | Financial Statements (unaudited)                                                                                                 |   |
|                                            |                                                                                                                             |
|                                            | Condensed Balance Sheets as of  September 30, 2005 and December 31, 2004                                               |   |
|                                            | Condensed Statements of Operations and  Comprehensive Loss for the three and nine months ended  September 30, 2005 and 2004 |   |
|                                            | Condensed Statements of Cash Flows for the  nine months ended September 30, 2005 and 2004                                   |   |
|                                            | Notes to Condensed Financial Statements                                                                                          |   |
|                                            |                                                                                                                             |
| Item 2.                                         | Management’s Discussion and Analysis or  Plan of Operation                                                                  |   |
|                                            |                                                                                                                             |
| Item 3.                                         | Controls and Procedures                                                                                                          |   |
|                                            |                                                                                                                             |
| PART II. OTHER INFORMATION                 |                                                                                                                             |
|                                            |                                                                                                                             |   |
| Item 1.                                         | Legal Proceedings                                                                                                                |   |
|                                            |                                                                                                                             |   |
| Item 2.                                         | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                     |   |
|                                            |                                                                                                                             |   |
| Item 3.                                         | Defaults Upon Senior Securities                                                                                                  |   |
|                                            |                                                                                                                             |   |
| Item 4.                                         | Submission of Matters to a Vote of Security  Holders                                                                             |   |
|                                            |                                                                                                                             |   |
| Item 5.                                         | Other Information                                                                                                                |   |
|                                            |                                                                                                                             |   |
| Item 6.                                         | Exhibits                                                                                                                         |   |
|                                            |                                                                                                                             |   |
| SIGNATURES                                      |                                                                                                                             |

 

2

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PART I.  FINANCIALINFORMATION

 

## Item 1.    Financial Statements (Unaudited)

iVOW, Inc.

Condensed Balance Sheets

 
| ** **                                                                                                                             | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                             | ** ** | **(Unaudited)**             | ** ** | ** **                 | ** ** |
| ASSETS                                                                                                                                 |       |                        |       |                       |       |
| Current assets:                                                                                                                        |       |                        |       |                       |       |
| Cash and cash equivalents                                                                                                              |       | $                           | 2,200,273  |                       | $          | 1,969,561 |   |
| Accounts receivable                                                                                                                    |       | 101,717                     |       | 176,291                    |       |
| Royalty receivable from Viking Systems,  Inc.                                                                                          |       | 125,000                     |       | —                     |       |
| Due from Viking Systems, Inc.                                                                                                          |       | —                      |       | 188,797                    |       |
| Inventories                                                                                                                            |       | 75,288                      |       | 62,094                     |       |
| Prepaid insurance                                                                                                                      |       | 154,990                     |       | 197,551                    |       |
| Other current assets                                                                                                                   |       | 186,945                     |       | 51,812                     |       |
| Total current assets                                                                                                                   |       | 2,844,213                   |       | 2,646,106                  |       |
| Equipment, net of accumulated depreciation                                                                                             |       | 21,638                      |       | 31,743                     |       |
| Investment in marketable equity securities  of Viking Systems, Inc.-available for sale                                                 |       | 827,000                     |       | 1,306,660                  |       |
| Total assets                                                                                                                           |       | $                           | 3,692,851  |                       | $          | 3,984,509 |   |
|                                                                                                                                   |       |                        |       |                       |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                              |       |                        |       |                       |       |
| Current liabilities:                                                                                                                   |       |                        |       |                       |       |
| Accounts payable                                                                                                                       |       | $                           | 363,542    |                       | $          | 288,083 |   |
| Current portion of capital lease  obligations                                                                                          |       | 10,515                      |       | 16,969                     |       |
| Short-term notes                                                                                                                       |       | 109,669                     |       | 128,219                    |       |
| Accrued compensation                                                                                                                   |       | 109,372                     |       | 164,937                    |       |
| Related party liabilities                                                                                                              |       | 32,849                      |       | 35,659                     |       |
| Deferred revenue                                                                                                                       |       | 33,809                      |       | 31,250                     |       |
| Accrued liabilities                                                                                                                    |       | 82,003                      |       | 85,896                     |       |
| Total current liabilities                                                                                                              |       | 741,759                     |       | 751,013                    |       |
|                                                                                                                                   |       |                        |       |                       |       |
| Long term portion of capital lease obligations                                                                                         |       | —                      |       | 10,516                     |       |
|                                                                                                                                   |       |                        |       |                       |       |
| Total liabilities                                                                                                                      |       | 741,759                     |       | 761,529                    |       |
|                                                                                                                                   |       |                        |       |                       |       |
| Stockholders’ equity:                                                                                                             |       |                        |       |                       |       |
| Preferred stock, $.01 par value:                                                                                                       |       |                        |       |                       |       |
| Authorized shares - 5,000,000                                                                                                          |       |                        |       |                       |       |
| Issued and outstanding shares - none at  September 30, 2005 and 915,000 at December 31, 2004 (Liquidation  value $3,477,000) |       | —                      |       | 1,108,592                  |       |
| Common stock, $.01 par value:                                                                                                          |       |                        |       |                       |       |
| Authorized shares - 70,000,000                                                                                                         |       |                        |       |                       |       |
| Issued and outstanding shares – 2,116,816  at September 30, 2005 and 1,094,626 at December 31, 2004                     |       | 21,168                      |       | 10,946                     |       |
| Additional paid-in capital                                                                                                             |       | 75,807,745                  |       | 72,801,367                 |       |
| Accumulated other comprehensive income                                                                                                 |       | 793,920                     |       | 1,273,580                  |       |
| Deferred compensation                                                                                                                  |       | —                      |       | (7,896                     | )          |
| Accumulated deficit                                                                                                                    |       | (73,671,741                 | )          | (71,963,609                | )          |
| Total stockholders’ equity                                                                                                        |       | 2,951,092                   |       | 3,222,980                  |       |
|                                                                                                                                   |       |                        |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                        |       | $                           | 3,692,851  |                       | $          | 3,984,509 |   |

 

Note: The balance sheet atDecember 31, 2004 has been derived from the audited financial statementsat that date but does not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.

 

See accompanying notes to Condensed FinancialStatements.

 

3

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IVOW, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 
| ** **                                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                     |       | $                                         | 319,575    |                                     | $          | 374,777 |   | $ | 812,172 |   | $ | 1,277,492 |   |
| Costs and expenses:                                          |       |                                      |       |                                     |       |   |   |   |   |
| Costs of revenues                                            |       | 289,739                                   |       | 217,583                                  |       | 812,768 |   | 849,697 |   |
| Product development                                          |       | 11,750                                    |       | 96,376                                   |       | 112,153 |   | 275,341 |   |
| Sales and marketing                                          |       | 179,347                                   |       | 352,165                                  |       | 668,137 |   | 772,803 |   |
| General and administrative                                   |       | 431,747                                   |       | 506,197                                  |       | 1,398,003 |   | 1,246,086 |   |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Total costs and expenses                                     |       | 912,583                                   |       | 1,172,321                                |       | 2,991,061 |   | 3,143,927 |   |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Loss from operations                                         |       | (593,008                                  | )          | (797,544                                 | )          | (2,178,889 | ) | (1,866,435 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Other income (expense), net                                  |       | 13,559                                    |       | (39,064                                  | )          | 23,770 |   | (36,292 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Loss from continuing operations                              |       | (579,449                                  | )          | (836,608                                 | )          | (2,155,119 | ) | (1,902,727 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Gain (loss) from discontinued operations                     |       | 75,000                                    |       | —                                   |       | 207,645 |   | (632,516 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Net loss                                                     |       | (504,449                                  | )          | (836,608                                 | )          | (1,947,474 | ) | (2,535,243 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Accretion of dividends on preferred stock                    |       | (31,933                                   | )          | (32,865                                  | )          | (67,170 | ) | (103,057 | ) |
| Reversal of dividends previously accreted                    |       | 306,512                                   |       | —                                   |       | 306,512 |   |   |   |
| Deemed dividend on redemption of preferred  stock            |       | —                                    |       | —                                   |       | — |   | (131,985 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Net loss applicable to common stockholders                   |       | $                                         | (229,870   | )                                        | $          | (869,473 | ) | $ | (1,708,132 | ) | $ | (2,770,285 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Other comprehensive loss:                                    |       |                                      |       |                                     |       |   |   |   |   |
| Net loss                                                     |       | (504,449                                  | )          | —                                   |       | (1,947,474 | ) | — |   |
| Unrealized loss on available-for-sale securities             |       | —                                    |       | —                                   |       | (479,660 | ) | — |   |
| Total comprehensive loss                                     |       | $                                         | (504,449   | )                                        | —     |   | $ | (2,427,134 | ) | — |   |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Income (loss) per common share basic and  diluted:           |       |                                      |       |                                     |       |   |   |   |   |
| Continuing operations                                        |       | $                                         | (0.17      | )                                        | $          | (0.80 | ) | $ | (1.42 | ) | $ | (2.68 | ) |
| Discontinued operations                                      |       | 0.05                                      |       | —                                   |       | 0.16 |   | (0.79 | ) |
| Net loss per common share applicable to  common stockholders |       | $                                         | (0.12      | )                                        | $          | (0.80 | ) | $ | (1.26 | ) | $ | (3.47 | ) |
|                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Shares used in computing basic and diluted  loss per share   |       | 1,839,184                                 |       | 1,090,587                                |       | 1,350,578 |   | 797,305 |   |

 

See accompanying notes to Condensed FinancialStatements.

 

4

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iVOW, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 
| ** **                                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | ** **                               | ** ** | ** ** | ** ** |
| OPERATING ACTIVITIES                                                                |       |                                     |       |   |   |
| Net loss                                                                            |       | $                                        | (1,947,474 | ) | $ | (2,535,243 | ) |
| Adjustments to reconcile net loss to net  cash flows used for operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                       |       | 26,914                                   |       | 31,145 |   |
| Amortization of deferred compensation                                               |       | 7,896                                    |       | 19,086 |   |
| Changes in operating assets and  liabilities:                                       |       |                                     |       |   |   |
| Accounts receivable                                                                 |       | 74,574                                   |       | 114,902 |   |
| Royalty receivable from Viking Systems,  Inc.                                       |       | (125,000                                 | )          | — |   |
| Inventories                                                                         |       | (13,194                                  | )          | (71,333 | ) |
| Prepaid insurance                                                                   |       | 42,561                                   |       | (2,550 | ) |
| Other current assets                                                                |       | (135,133                                 | )          | (37,228 | ) |
| Accounts payable                                                                    |       | 75,459                                   |       | 157,031 |   |
| Accrued compensation                                                                |       | (55,565                                  | )          | (40,411 | ) |
| Deferred revenue                                                                    |       | 2,559                                    |       | (286,250 | ) |
| Accrued and other liabilities                                                       |       | (6,703                                   | )          | (73,203 | ) |
| Changes in assets and liabilities related  to discontinued operations               |       | —                                   |       | 379,073 |   |
| Net cash flows used in operating activities                                         |       | (2,053,106                               | )          | (2,344,981 | ) |
|                                                                                |       |                                     |       |   |   |
| INVESTING ACTIVITIES                                                                |       |                                     |       |   |   |
| Maturities of short-term investments                                                |       | —                                   |       | 183,495 |   |
| Purchases of equipment                                                              |       | (16,809                                  | )          | (33,126 | ) |
| Proceeds from sale of business                                                      |       | 188,797                                  |       | 351,103 |   |
| Net cash flows provided by investing  activities                                    |       | 171,988                                  |       | 501,472 |   |
|                                                                                |       |                                     |       |   |   |
| FINANCING ACTIVITIES                                                                |       |                                     |       |   |   |
| Issuance of common stock and warrants, net                                          |       | 2,273,523                                |       | 4,662,182 |   |
| Redemption of Series A preferred stock                                              |       | (126,174                                 | )          | (200,000 | ) |
| Issuance of short term notes                                                        |       | 173,792                                  |       | 114,262 |   |
| Payment of short term notes                                                         |       | (192,341                                 | )          | (32,646 | ) |
| Payment of capital lease obligations                                                |       | (16,970                                  | )          | (3,855 | ) |
| Payment of short-term bank borrowings                                               |       | —                                   |       | (200,000 | ) |
| Net cash flows provided by financing  activities                                    |       | 2,111,830                                |       | 4,339,943 |   |
| Net increase in cash and cash equivalents                                           |       | 230,712                                  |       | 2,496,434 |   |
| Cash and cash equivalents at beginning of  period                                   |       | 1,969,561                                |       | 448,943 |   |
| Cash and cash equivalents at end of period                                          |       | $                                        | 2,200,273  |   | $ | 2,945,377 |   |

 

See accompanying notes to Condensed FinancialStatements.

 

5

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iVOW, INC.

Notes to Condensed Financial Statements

 (UNAUDITED)

 

### 1.                 Basis of Presentation

###  

The auditedfinancial statements of iVOW, Inc. (the “Company”) and the notes theretofor the year ended December 31, 2004 included in our Annual Report onForm 10-K previously filed with the Securities and Exchange Commission (“SEC”),contain additional information about us, our operations, and our financialstatements and accounting practices, and should be read in conjunction withthis quarterly report on Form 10-QSB. The accompanying unaudited condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America, pursuant to the rules and regulations of theSEC, and certain information and footnote disclosures normally contained infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted, unless significant changes have taken place since the end of the mostrecent fiscal year.

 

Ouraccompanying unaudited financial statements reflect all adjustments of a normalrecurring nature, which are, in the opinion of management, necessary for a fairpresentation of the financial position, results of operations and cash flowsfor all periods presented.  The interimfinancial information contained herein is not necessarily indicative of resultsfor any future interim periods or for the full fiscal year endingDecember 31, 2005.

 

On July 19,2005, the stockholders of the Company voted to grant authority to the Board tofile an amendment to the Company’s Second Restated Certificate of Incorporationto effect, at the discretion of the Board, a reverse stock split of the issuedand outstanding common stock in a ratio for such split that was not less than1:2 nor greater than 1:10. On October 6, 2005, the Board acted on its authorityto effect the reverse split of all common stock issued and outstanding at arate of 1:10. As a result of the reverse split, all share and per share informationin the accompanying condensed financial statements and these notes has beenretroactively adjusted.

 

We incurrednet losses and negative net cash flows from operating activities in 2004, 2003,2002, and in the first three quarters of 2005, and at September 30, 2005,had an accumulated deficit of $73.9 million. At September 30, 2005, we had cash and cash equivalents of $2.2million.  We believe that our cash andcash equivalents, together with our projected product revenues, royalties andinterest income, including projected amounts resulting from our acquisition ofSound Health Solutions (see note 8) may not be sufficient to meet ouranticipated capital requirements through at least September 30, 2006. ** **As aresult, we may have to raise additional capital to fund our operations prior toand/or beyond September 30, 2006.  Thesefactors raise substantial doubt about our ability to continue as a goingconcern.  Should we be unable successfullyintegrate the recently completed aquisition, or raise sufficient funds in thefuture to fund our operations through and beyond September 30, 2006, we may berequired to curtail our operating plans and possibly relinquish rights toportions of our intellectual property or products.  In addition, increases in expenses and delaysin signing new management and consulting contracts may adversely impact ourcash position and require further cost reductions.  No assurance can be given that we will beable to operate profitably on a consistent basis, or at all, in the future.

 

The accompanying condensed financial statements have been prepared on agoing concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.  The condensed financial statements do notinclude any adjustments relating to the recoverability and classification ofassets or the amounts and classification of liabilities that might be necessaryshould we be unable to continue as a going concern.

 

### 2.                 Discontinued Operations

###  

OnApril 15, 2004 we sold our Visualization Technology business unit toViking Systems, Inc. (“Viking”) under an Asset Purchase Agreement (the “AssetPurchase Agreement”) signed on December 22, 2003.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, the financialresults of this business have been reported separately as discontinued operations.  Prior to the sale we conducted our operationsthrough two separate business units.  TheObesity Surgical and Medical Management Services business unit (operated viaour wholly-owned subsidiary, VOW Solutions, Inc.), based in Carlsbad, CA,provides services to physicians and hospitals involved in the surgicaltreatment of morbid obesity.  Inaddition, our former Visualization Technology business unit, based inWestborough, Massachusetts, developed, manufactured and marketed products thatprovide information to physicians performing minimally invasive generalsurgical, cardiac surgical and other selected endoscopic and interventionalprocedures.

 

Under theAsset Purchase Agreement, we sold all the operating assets and relatedliabilities of the Visualization

 

6

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Technology business toViking.  In return, Viking agreed to(a) pay us $159,000 at closing, (b) issue to us 3,054,000 shares ofViking common stock, representing approximately 10% of its common sharesoutstanding on a fully diluted basis, and (c) remit to us the value of anyformer Visualization Technology inventory sold by Viking before April 15,2005.  We also entered into a licenseagreement with Viking that will pay us royalties over the five year period fromthe date of our agreement based on sales of the acquired products of theVisualization Technology business with minimum royalties during the five yearperiod totaling $1,425,000, payable as follows: first year $150,000, years twothrough four $300,000 and year five $375,000, and with a maximum aggregateroyalty of $4,500,000 over the five year period.  We will maintain ownership rights of allintellectual property and product rights under the license agreement withViking until at least the minimum royalty obligations have been satisfied, atwhich time we will transfer such ownership rights to Viking.

 

The netoperating assets sold to Viking and the total consideration paid orcontractually due from Viking, exclusive of any proceeds from the subsequentsale of Visualization Technology inventory by Viking, are as follows:

 

| Net assets sold       | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| Accounts receivable   |       | $          | 372,027    |   |
| Inventories           |       | 787,657    |       |
| Accounts payable      |       | (351,934   | )          |
| Other liabilities     |       | (61,136    | )          |
|                  |       | $          | 746,614    |   |
| Viking  consideration |       |       |       |
| Cash                  |       | $          | 158,718    |   |
| Viking common shares  |       | 61,080     |       |
| Minimum royalties     |       | 1,425,000  |       |
|                  |       | $          | 1,644,798  |   |

 

Underaccounting principles generally accepted in the United States of America, thetransaction is principally the exchange of non-monetary assets between Vikingand us.  As a result, the carrying valueof the net assets sold of $746,614 was considered to be equal to the value ofthe net assets received and a gain was not recognized at the time of thetransaction.  The Viking consideration,exclusive of cash, was considered non-monetary because Viking was a relativelynew company that had not raised substantial funds and may have been unable toraise sufficient funds to sustain its operations or fund its growth plan.  All proceeds received, including paymentsderived by the sale of inventory, from Viking were initially credited againstthe Due from Viking Systems, Inc. account. As of September 30, 2005, the balance Due from VikingSystems, Inc. was repaid in full. For the three and nine months ended September 30, 2005, proceeds of $0and $82,645, respectively, in excess of the carrying value of the net assetssold have been recorded as a gain from discontinued operations and, beginningin May 2005, future minimum royalties due from Viking have been recognized on astraight-line basis during the year as a gain from discontinuedoperations.  At September 30, 2005, the$150,000 year one minimum royalties and $125,000 of the $300,000 year twominimum royalties under the licensing agreement with Viking have been recognizedas a gain from discontinued operations. At September 30, 2005, the year one royalty was paid and $125,000 of theyear two royalty is classified on the balance sheet as "Royalty receivablefrom Viking Systems, Inc."

 

Our financialresults for the nine months ended September 30, 2004 have been restated toshow the results of operations for the Visualization Technology business as adiscontinued operation.  The operatingresults of the discontinued operations were as follows:

 

| ** **                        | ** ** | **Nine Months  Ended  September  30, 2004** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| Sales                             |       | $                                           | 1,227,672  |   |
| Costs and expenses                |       |                                        |       |
| Costs of sales                    |       | 1,035,667                                   |       |
| Research and development          |       | 330,014                                     |       |
| Sales and marketing               |       | 78,678                                      |       |
| General and administrative        |       | 415,529                                     |       |
| Total costs and expenses          |       | 1,859,888                                   |       |
| Interest expense                  |       | 300                                         |       |
| Loss from discontinued operations |       | $                                           | (632,516   | ) |

 

7

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The equipmentfinancing costs associated with the equipment sold to Viking has been includedin discontinued operations.

 

3.                 Investmentin equity securities of Viking Systems, Inc.

 

The cost andfair value of Viking’s securities are as follows:

 
| ** **                       | ** ** | ** ** | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|------------|------------|------------------------|------------|-----------------------|------------|
| **Corporate Equity Securities:** | ** ** | **Cost**   | ** ** | **Unrealized  Gain**   | ** ** | **Fair Value**        | ** ** | **Unrealized  Gain** | ** ** | **Fair Value** | ** ** |
| Viking  Systems, Inc.            |       | $          | 33,080     |                   | $          | 793,920               |       | $ | 827,000 |   | $ | 1,273,580 |   | $ | 1,306,660 |   |
|                                  |            |            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

### The decrease in the fair value of the equitysecurities during the nine months ended September 30, 2005 of $479,660 hasbeen included in other comprehensive loss.

###  

### 4.                 Inventories

###  

Inventoriesare stated at lower of cost (determined on a first-in, first-out basis) ormarket and include vitamin finished goods and consulting services work inprogress associated with our disease state management of morbid obesitybusiness.

 

### 5.                 Loss Per Share

###  

Basic net lossper share is calculated based on the weighted average number of common sharesoutstanding during the period. Diluted net loss per share incorporates thedilutive effect of potentially dilutive shares of common stock, includingshares attributable to stock options, warrants and other convertiblesecurities.  Potentially dilutive sharesof common stock have been excluded from the calculation of weighted averagenumber of diluted common shares, as their effect would be antidilutive for allperiods presented.  For the purpose ofdetermining basic and diluted net loss per share, dividends accreted onpreferred stock and the deemed dividend with respect to the preferred stockredemption (see Note 7) have been added to the net loss to arrive at net lossapplicable to common stockholders.  Forthe three and nine month periods ended September 30,2005, potentially dilutive shares of common stock that have been excluded fromthe calculation of the weighted average number of dilutive common shares were1,593,935 shares, comprised of 1,417,765 warrants to purchase shares andoptions to purchase up to 176,170 shares of common stock.  For the three and nine month periods ended September 30, 2004, potentiallydilutive shares of common stock that have been excluded from the calculation ofthe weighted average number of dilutive common shares were 538,573 shares,comprised of 376,495 warrants to purchase shares, 91,500 convertible preferredshares and options to purchase up to 70,578 shares of common stock.

 

### 6.                 Stock-Based Compensation

###  

SFASNo. 123, “*Accounting for Stock-Based Compensation*,”established a fair value based approach for valuing stock options.  We follow the disclosure-only alternativeafforded by SFAS 123.  However, weaccount for stock-based compensation to non-employees using the fair valuemethod prescribed by SFAS 123.

 

We apply theprinciples of Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*,” (“APB No. 25”)and related interpretations in accounting for its employee stock option compensationplans. Under APB No. 25, compensation expense is measured using theintrinsic value method as the difference, if any, between the option exerciseprice and the fair value of our common stock at the date of grant.  We have historically granted options toemployees and directors at exercise prices equal to the fair value of theCompany’s common stock. Accordingly, no compensation expense has beenrecognized for our employee stock-based compensation plans.

 

Hadcompensation costs for stock options issued to employees and directors beendetermined based on the estimated fair value at the grant dates as calculatedin accordance with SFAS 123 using the Black-Scholes option pricing model andamortized over the vesting period, our reported net loss and basic and dilutednet loss per common share for the three and

 

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nine months ended September 30, 2005 and 2004 wouldhave been adjusted to the pro forma amounts indicated below:

 
| ** **                                                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss applicable to common stockholders:                                     |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                     |       | $                                         | (229,870   | )                                        | $          | (869,473 | ) | $ | (1,708,132 | ) | $ | (2,770,285 | ) |
| Pro forma compensation expense using fair  value method                         |       | (123,701                                  | )          | (65,575                                  | )          | (297,749 | ) | (193,436 | ) |
| Pro forma net loss                                                              |       | $                                         | (353,571   | )                                        | $          | (935,048 | ) | $ | (2,005,881 | ) | $ | (2,963,721 | ) |
|                                                                            |       |                                      |       |                                     |       |   |   |   |   |
| Basic and diluted net loss per common share  applicable to common stockholders: |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                     |       | $                                         | (0.12      | )                                        | $          | (0.80 | ) | $ | (1.26 | ) | $ | (3.47 | ) |
| Pro forma                                                                       |       | $                                         | (0.19      | )                                        | $          | (0.86 | ) | $ | (1.49 | ) | $ | (3.72 | ) |

 

As a result ofamendments to SFAS 123, the Company will be required to expense the fair valueof employee stock options over the service period beginning with the quarterending March 31, 2006.

 

7.                 Stockholders’ Equity

 

Preferred Stock

 

In March 2003, we authorized and issued 1,000,000 shares ofSeries A Convertible Preferred Stock (the “Series A Shares”), whichwere created pursuant to the terms of a Certificate of Designations, for anaggregate of $950,000 in cash.  EachSeries A Share was convertible into .1 share of common stock.  In connection with the financing, thepurchasers of Series A Shares were granted several significant rightssenior to the rights of holders of our common stock. Among other rights, in theevent of a liquidation, dissolution or winding up of our Company (includingconsolidations, mergers or other sales), holders of Series A Shares wereentitled to receive $3.80 per share, in preference to any distribution to theholders of common stock.  Also, pursuantto the Certificate of Designations, we were required to obtain the consent ofthe holders of at least two-thirds of the outstanding Series A Shares inorder to undertake certain actions, including significant capital expendituresand the issuance of equity securities. Additionally, for as long as Series A Shares remained outstandingbeyond April 2004, the holders of Series A Shares were entitled toelect the greater of (i) two members of our Board of Directors or(ii) 25% of the total members of our Board of Directors.

 

In June 2004, we amended theSeries A Certificate of Designations to allow us the right to issue equitysecurities for less than $0.20 per share. For that right, the Series A holders received 1,400,000 shares ofViking common stock valued at $28,000, and we redeemed 85,000 Series AShares for $200,000.  In addition, weobtained the right to redeem an additional 300,000 Series A Shares at anytime on or before January 15, 2006 for $500,000. The fair value of theViking shares distributed of $28,000 and the $103,985 excess of the $200,000payment over the prior contractual redemption value of the Series A shareswere accounted for as a deemed dividend of $131,985.

 

In January 2005,88,553 Series A Shares, with a carrying value of $107,669 includingaccrued dividends, were converted by one holder for 8,855 shares of our commonstock.

 

The holders ofthe outstanding Series A Shares had the right to one vote for each shareof common stock into which such Series A Shares could then be converted,and with respect to such vote, such holder had full voting rights and powersequal to the voting rights and powers of the holders of common stock.

 

The holders ofSeries A Shares were entitled to receive dividends, out of any assetslegally available therefore, prior and in preference to any declaration orpayment of any cash dividend on the common stock, at the rate of $0.1425 pershare per annum.

 

In connectionwith the private placement closed on July 26, 2005, we completed an exchangewith the holders of the outstanding Series A Preferred Stock.  In this transaction, the holders of Series APreferred Stock exchanged their 826,447 shares of Series A Preferred Stock for124,608 Units, 52,644 shares of common stock and $126,174 in cash. Each unitwas

 

9

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identical to the units sold inthe private placement described below and accordingly, we issued 177,252 sharesof common stock and warrants to purchase 124,608 shares of common stock in theexchange. As a result of this exchange, there was $306,512 in previouslyaccreted dividends reversed against net loss available to common stockholders. Thevalue of the consideration paid approximated the fair value of the preferredstock surrendered, including accreted but unpaid dividends and therefore nogain or loss was recorded.

 

Following thisexchange, we have no outstanding shares of Series A Preferred Stock.

 

Common stock

 

On July 19, 2005, at the annual meeting of the stockholders we receivedapproval to issue securities representing more than 20% of the outstandingvoting power in connection with a private placement financing, to increase theaggregate number of shares of common stock available for issuance under our1997 Stock Option/Stock Issuance plan from 259,500 to 400,000, to increase theaggregate number of shares of common stock available for issuance under our1997 Employee Stock Purchase Plan from 15,000 to 30,000 and to amend our SecondRestated Certificate of Incorporation to increase the authorized shares ofcommon stock from 35,000,000 to 70,000,000.

 

On July 26,2005, we closed the private placement of 833,328 Units at a purchase price of$3.00 per Unit, with each Unit consisting of one share of common stock and awarrant to purchase one share of common stock, for aggregate gross proceeds ofapproximately $2.5 million, or $2.2 million net of expenses.  The warrants have an exercise price of $3.00per share and have a term of five years. Together with the issuance of commonstock exchanged for preferred stock discussed above, a total of 1,010,582shares of common stock were issued.

 

8.             Subsequent Event

 

On November 1,2005, the Company completed its acquisition of Sound Health Solutions, Inc. (“SHS”).,a Seattle-based healthcare provider specializing in the medical treatment ofobesity. The purchase price for the acquisition was $125,500 in cash, the assumptionof notes payable of approximately $317,000 to be secured by a bank certificateof deposit and up to a maximum of 294,278 shares of common stock contigentlyissuable based upon SHS achieving certain revenue and net income targets in2006 and 2007. At closing, there were 184,477 shares of common stock issued. Inconnection with the acquisition, the Company expects to incur fees and expensesof approximately $300,000. The acquisition will be accounted for as a purchase.

 

10

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**Item 2.   Management’s Discussion and Analysis or Planof Operation**

** **

THIS QUARTERLY REPORT MAY CONTAINPREDICTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE ANUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT “RISKSAND UNCERTAINTIES.”  WHILE THIS OUTLOOKREPRESENTS OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCHRISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROMANY FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANYREVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS ORCIRCUMSTANCES ARISING AFTER THE DATE OF THIS QUARTERLY REPORT.  THE FOLLOWING DISCUSSION SHOULD BE READ INCONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETOINCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-QSB AND OUR 2004ANNUAL REPORT ON FORM 10-K AS AMENDED, FILED WITH THE SECURITIES ANDEXCHANGE COMMISSION.

 

**Overview of our business**

# * *

Our company,iVOW, Inc., formerly Vista Medical Technologies, Inc., was founded in1993 primarily to develop advanced visualization technologies for complexminimally invasive surgical procedures. It was through the application of thistechnology in laparoscopic gastric bypass surgery that we subsequentlydeveloped a suite of consulting products and services for the initiation,operation and management of obesity surgery programs. Starting in early 2003,our Visualization Technology business, located in Westborough, Massachusetts,and our Obesity Surgery Management Services business unit, located in Carlsbad,California, functioned as individual business units.  In April 2004, we sold the VisualizationTechnology business to concentrate on the obesity surgery services market.  We changed our name to iVOW, Inc. inFebruary 2005, after merging our wholly owned subsidiary VOWSolutions, Inc., to align our corporate name with the brand name of ourchronic and morbid obesity disease management business, which is now ourexclusive focus.

 

We originallybegan offering training and consulting services to the obesity surgery marketin 2001.  As a result of the dispositionof our Visualization Technology business, we are now a pure play company in thebariatric market. We develop and market products and services for the bariatricsurgery market. Bariatrics is the medical science of weight reduction andnutrition; bariatric surgery, a specialized area of general surgery, is focusedon surgical weight reduction solutions for the very severely or morbidlyobese.  We are exclusively focused onimplementing disease management strategies for the control of chronic andsevere obesity.  Our vision is to enablehealthcare providers and organizations in the ongoing evolution of the higheststandards of treatment and services to optimize the quality of life for chronicand morbidly obese patients. Our mission is to deliver the leading managementportfolio of services and products for the clinical and business development ofcontinually successful medical and surgical programs for the treatment ofchronic and morbid obesity.

 

Our goal is tobecome the leading disease management and consulting company focused on chronicand morbid obesity.  Our initial focus onthe severely obese patient and gastric bypass surgery as the solution is the platformupon which we will expand service to new obesity therapies as they aredeveloped. We also plan to integrate a bariatric medical model into oursurgical protocols, both to facilitate the long term care of post-surgicalpatients, and in due course, to treat obese patients who are not qualified forsurgery.

 

**SignificantEvents**

 

On July 19, 2005, at the annual meeting of the stockholders we receivedapproval to issue securities representing more than 20% of the outstandingvoting power in connection with a private placement financing, to increase theaggregate number of shares of common stock available for issuance under our1997 Stock Option/Stock Issuance plan from 259,500 to 400,000, to increase theaggregate number of shares of common stock available for issuance under our1997 Employee Stock Purchase Plan from 15,000 to 30,000 and to amend our SecondRestated Certificate of Incorporation to increase the authorized shares ofcommon stock from 35,000,000 to 70,000,000.

 

On July 26,2005, we closed a private placement of 833,328 Units at a purchase price of$3.00 per Unit, with each Unit consisting of one share of common stock and awarrant to purchase one share of common stock, for aggregate gross proceeds ofapproximately $2.5 million, or $2.2 million net of expenses.  The warrants have an exercise price of $3.00per share and have a term of five years. We have filed a registration statementcovering the shares of common stock and the common stock underlying thewarrants sold in the private placement, and intend to request the SEC todeclare the the registration statement effective as soon as practical followingthe filing of this Form 10-QSB.

 

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We intend touse the net proceeds of the private placement for development and expansion ofour Obesity Surgery Management Services business, including working capital,funding of anticipated operating losses, infrastructure development, expensesassociated with marketing efforts and payment of corporate overhead, the recentacquisition of Sound Health Solutions, Inc. and may also use a portion of theproceeds, currently intended for general corporate purposes, to invest in otheracquisitions, joint ventures or other collaborative arrangements, or to investin or acquire products or services.

 

In connectionwith the private placement, we also completed an exchange with the holders ofthe outstanding Series A Preferred Stock. In this transaction, the holders of Series A Preferred Stock exchangedtheir 826,447 shares of Series A Preferred Stock for 124,608 Units, 52,644shares of common stock and $126,406 in cash. Each Unit was identical to the Units sold in the private placementdiscussed above. As a result of this exchange, we have no outstanding shares ofSeries A Preferred Stock after July 26, 2005.

 

On July 19,2005, the stockholders of the Company voted to grant authority to the Board tofile an amendment to the Company’s Second Restated Certificate of Incorporationto effect, at the discretion of the Board, a reverse stock split of the issuedand outstanding common stock in a ratio for such split that is not less than1:2 nor greater than 1:10. On October 6, 2005, the Board acted on its authorityto effect the split of all common stock issued and outstanding at a rate of1:10. As a result of the split, all share and per share information has beenretroactively adjusted.

 

On November 1,2005, we completed our previously announced acquisition of Sound HealthSolutions, Inc (“SHS”)., a Seattle-based healthcare provider specializing inthe medical treatment of obesity. The purchase price for the acquisition is$125,500 cash, assumption of notes payable of approximately $317,000 to besecured by a bank certificate of deposit and up to a maximum of 294,278 sharesof common stock subject to SHS achieving certain revenue and net income targetsin 2006 and 2007.

 

**CriticalAccounting Policies**

 

Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States of Americarequires management to make judgments, assumptions and estimates that affectthe amounts reported in our condensed financial statements and the accompanyingnotes.  The amounts of assets andliabilities reported in our balance sheets and the amounts of revenues andexpenses reported for each of our fiscal periods are affected by estimates andassumptions which are used for, but not limited to, accounting for productreturns, allowance for doubtful accounts, inventories and income taxes.  Actual results could differ from theseestimates.  The following criticalaccounting policies are significantly affected by judgments, assumptions andestimates used in the preparation of the condensed financial statements.

 

**RevenueRecognition**

 

Revenuegenerated from our disease state management of morbid obesity business isrecognized (i) with regard to management services, upon completion of theservice period and (ii) with regard to training services or otherconsulting services, upon completion of the related training or consulting component,provided that a contract exists, there are no uncertainties regarding customeracceptance, the sales price is fixed or determinable and collection isreasonably assured.  Any paymentsreceived in advance of completion of the service are recorded as deferredrevenue.  Sales of vitamins are similarlyrecognized upon shipment provided that a purchase order has been received,there are no uncertainties regarding customer acceptance, the sales price isfixed or determinable and collection is reasonably assured.

 

Sales returnsare estimated based on the historical experience and management’s expectationsand are recorded at the time product revenue is recognized.

 

Annual minimum royalty payments received, as part of the sale of ourtechnology business to Viking in April 2004, are recorded as gain fromdiscontinued operations.  Future royaltypayments due after April 15, 2005 will be recognized as revenue on astraight-line basis over the related royalty payment term.

 

We received semi-annual payments as a result of fulfilling certainobligations related to our strategic alliance agreement with EthiconEndo-Surgery, Inc. (EES).  Thesepayments were recognized as revenue on a straight-line basis over the relatedcontract term.  The strategic allianceagreement ended in December 2004.

 

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**Ourresults of operations for three-months and nine-months ended September 30,2005 versus three-months and nine-months ended September 30, 2004**

 

Revenues.  Management and consulting services, productsales and contract revenue for the three and nine-months endedSeptember 30, 2005 were $320,000 and $812,000, respectively, compared to$375,000 and $1,277,000 for the same periods ended September 30, 2004.  The decrease in revenue for the period wasassociated with lower training and consulting services and contract revenue.While total revenues for the three and nine-month periods decreased, our iVOWprogram management fees increased as a result of signing up our secondfull-fledged iVOW center in April 2005. We also saw an increase in vitamin sales for both periods.  We anticipate that revenues in the fourthquarter will increase over current levels with greater quarterly growthexpected in later quarters partly due to the addition of Sound HealthSolutions, Inc., which will begin contributing to revenue in November 2005. Thedecrease associated with lower training and consulting fees was the result of achange in the market as demand shifted from the requirement to be surgically trainedto more of a focus on the operational aspects of bariatric programs.  Also playing a part in the reduction waspayor uncertainty in the insurance market. Contract revenue decreased as a result of our strategic allianceagreement with EES ending in December 2004 and the reluctance of hospitalsto explore a Bariatric Surgical division without the Medicare announcementslated for November 2005.

 

| **Increase/(decrease) over prior  year** | ** ** | **Three Months ended  September 30,  2005** | ** ** | **Nine months  ended  September 30,  2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Management  fees                         |       | $                                                | 114,000    |                                             | $          | 264,000 |   |
| Training and  consulting fees            |       | (49,000                                          | )          | (398,000                                         | )          |
| Vitamins  sales                          |       | 5,000                                            |       | 44,000                                           |       |
| Contract  revenue                        |       | (125,000                                         | )          | (375,000                                         | )          |
|                                     |       | $                                                | (55,000    | )                                                | $          | (465,000 | ) |

 

Cost ofrevenues.  Our cost of revenues includesdirect costs associated with generating management and consulting servicesrevenues along with the fully burdened cost of our vitamin sales.  Costs of revenues for the three andnine-months ended September 30, 2005 were $290,000 and $813,000,respectively, compared to $218,000 and $850,000 for the three and nine-monthsended September 30, 2004.  Theincrease in the three-months ended September 30, 2005 was primarily due toan increase in personnel requirements for the new iVOW Center established inApril 2005 and Vitamin cost of goods sold (COGS).  The Vitamin COGS increase was $31,000 due tothe growth of Vitamin revenue.  Thedecrease for the nine-month period ended September 30, 2005 was primarilydue to lower spending in direct training and consulting services costs directlyrelated to the decrease of $465,000 in revenues in the related areas along witha reduction in staff in March 2005. Increased revenues in future quarters may bring an increase in cost ofrevenues.  The level of increase isdifficult to project due to varying costs associated with each revenue type.

 

Productdevelopment.  Product developmentexpenses were $12,000 and $112,000 for the three and nine-months endedSeptember 30, 2005, respectively, compared to $96,000 and $275,000 for thethree and nine-months ended September 30, 2004, respectively.  This $84,000 decrease in the three monthperiod ended September 30, 2005 was primarily related to a reduction in stafftime being invested in the development of training programs due to staff reductionsthat took effect at the end of March 2005 and the completion of the trainingprograms that were under development. The staff reduction was the primary cause for the decrease of $179,000in product development expense for the nine-month period ended September 30,2005.

 

Sales andmarketing expenses.  Sales and marketingexpenses were $179,000 and $668,000 for the three and nine-months endedSeptember 30, 2005, respectively, and $352,000 and $773,000 for the threeand nine-months ended September 30, 2004, respectively.  The $173,000 decrease for the three monthperiod ended September 30, 2005 over the same period in 2004 was due to staffreductions of $63,000, related expense allocations for facilities of approximately$19,000, and a reduction in advertising and promotion expense of $91,000.  The decrease in expense of $105,000 for thenine month period ended September 30, 2005 over the same period in 2004 wasprimarily due to staff reductions and related expense allocations forfacilities of approximately $77,000.  Therest of the decrease was related to less money being spent for advertising andpromotion.  We expect to see an increasein our sales and marketing expenses during the coming quarters as we increaseour market presents.

 

General andadministrative expenses.  General andadministrative expenses were $432,000 and $1,398,000 for the three andnine-months ended September 30, 2005, respectively, and $506,000 and$1,246,000 for the three and nine-months ended September 30, 2004,respectively.  Overall, there was an$75,000 reduction in the general and administrative expenses for the threemonth period ended September 30, 2005 over the same period in 2004.  Of that, there was a $92,000 decrease in

 

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the three months endedSeptember 30, 2005 for the professional fees primarily related to the financialstatement reclassifications and the sale of the technology business to VikingSystems in the 3rd quarter of 2004. There was also a $14,000 reduction in public company expense in thethree months ended September 30, 2005 related to the financing that occurred inthe 2nd quarter of 2004. However, the reduction in the professional and public company expenseswere offset by a $9,000 increase in staff and other related expenses forfinancial statement reporting and an additional $23,000 increase forconsultants and board related compensation. The $152,000 increase in general and administrative for the nine monthperiod ended September 30, 2005 over the same period in 2004 was primarily dueto a $159,000 increase in staff related fees and $81,000 in consulting andboard related fees.  This was offset by areduction in expense of professional fees of $68,000 and public companyexpenses of $20,000 over the same period in 2004.  The reduction in professional fees and publiccompany expenses can be attributed to the increased general and administrativeexpense related to the 2nd quarter financing, the financialstatement reclassification, and the sale of the technology business to VikingSystems.

 

Other incomeand expense.  For the three andnine-months ended September 30, 2005 other income, net of expense was$14,000 and $24,000, respectively, compared to an expense of $39,000 and$36,000, respectively, for the same periods last year.  The increase for the three months ended wasprimarily due to higher cash balances, a cash influx related to the 2ndquarter 2005 financing and one time expense of $48,000 incurred during the 3rdquarter in 2004 due to S-3 filing related fees. The increase for the nine-months ended was primarily related to interestincome earned on higher average cash balances and the one time S-3 relatedexpenses that occurred in 3rd quarter 2004.

 

Discontinuedoperations.  For the three and nine-monthsended September 30, 2005 we recognized $75,000 and $208,000, respectively,in income from the gain on the sale of our technology business.  The gain on the sale is the result of havingrecognized and collected payments from the buyer, Viking Systems, Inc.,greater than the value of the assets sold in April 2004 along with therecognition of royalties receivable on the $300,000 minimum royalty due inOctober 2005 for the period May 2005 through October 2005.  For the three-month period ended September30, 2005 we collected and recognized $75,000 of the royalty due.  For the nine-month period ended September 30,2005 we collected and recognized $83,000 and recognized $125,000 of the royaltydue.  We expect to recognize additionalgains in the future as minimum royalties are recognized on a straight-linebasis over the coming periods.  The lossfrom discontinued operations for the quarter ended September 30, 2004 was$0 and for the six-months it was $633,000.

 

**Liquidityand capital resources**

 

Net cash usedin operating activities for the nine-months ended September 30, 2005 was$2,053,000 compared to net cash used of $2,345,000 for the correspondingnine-month period in 2004.  The $292,000decrease in net cash used in operating activities during the 2005 period isprimarily attributable to reduced operating expenses due to staff reductionsand other associated expenses

.

Net cashprovided by investing activities was $172,000 for the nine-months endedSeptember 30, 2005 compared to net cash provided by investing activitiesof $501,000 in the same period in 2004. The $329,000 decrease in net cash provided by investing activitiesduring 2004 over 2005 was primarily attributable to maturities of short-terminvestments of $184,000 in 2004 with the difference attributed to higherequipment purchases in 2004 over 2005 of $16,000 and higher proceeds from thesale of the Visualization Technology business of $351,000 in 2004.

 

Net cashprovided by financing activities was $2,112,000 for the nine months endedSeptember 30, 2005, compared to net cash provided by financing activities of$4,340,000 for the same period in 2004. The $2,228,000 decrease in net cash provided by financing activities in2005 over 2004 period was primarily attributable to 2004 activity that includedthe private placement of shares of our common stock for net proceeds ofapproximately $4,662,000, $200,000 redemption of our Series A preferred stockand payment on short-term bank borrowings of $200,000, compared to 2005activity that included 2,274,000 in net proceeds related to the privateplacement closed in July 2005, redemption of series A preferred stock of$126,000 and repayment of $35,000 in short-term borrowings associated withfinancing our insurance premiums.

 

We incurrednet losses and negative net cash flows from operating activities in 2004, 2003,2002, and in the first three quarters of 2005, and at September 30, 2005,had an accumulated deficit of $73.9 million. At September 30, 2005, we had cash and cash equivalents of $2.2million.  We believe that our cash andcash equivalents, together with our projected product revenues, royalties andinterest income, including projected amounts resulting from our acquisition ofSound Health Solutions (see note 8) may not be sufficient to meet our anticipatedcapital requirements through at least September 30, 2006. ** **As aresult, we may have to raise additional capital to fund our operations prior toand/or through and beyond September 30, 2006. These factors raise substantial doubt about our ability to continue as agoing concern.  Should we be unable successfullyintegrate the recently completed aquisition, or to raise sufficient funds inthe future to fund our operations beyond September 30, 2006, we may be requiredto curtail our operating plans and possibly relinquish rights to portions ofour intellectual property or products. In addition, increases in expenses and delays in signing new

 

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management and consultingcontracts may adversely impact our cash position and require further costreductions.  No assurance can be giventhat we will be able to operate profitably on a consistent basis, or at all, inthe future.

 

## **Quantitative and Qualitative DisclosuresAbout Market Risk**

##  

At September30, 2005, our investment portfolio included no fixed-income securities.

 

At September 30, 2005, our investment in equity securities of VikingSystems, Inc. is held as available for sale securities. Accordingly, thereis a significant risk of adjustment to the carrying value due to possiblemarket fluctuations in their stock price.

 

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## **RISKS ANDUNCERTAINTIES**

##  

*You should carefully consider the followingrisks and uncertainties before you invest in our common stock.  Investing in our common stock involvesrisk.  If any of the following risks oruncertainties actually occur, our business, financial condition or results ofoperations could be materially adversely affected.  Additional risks and uncertainties of whichwe are unaware or which we currently believe are immaterial could alsomaterially adversely affect our business, financial condition or results ofoperations.  In any case, the tradingprice of our common stock could decline, and you could lose all or part of yourinvestment.*

 

**Risks Related to ourBusiness and Industry**

 

**We have a history oflosses and may never become profitable.**

 

Since our formation in July 1993, and as of September 30, 2005, we haveincurred cumulative net losses of $73.9 million. Specifically, we incurred netlosses of $1.1 million in 2002, $2.2 million in 2003, $3.9 million in 2004 and$1.9 million in the first nine months of 2005. We expect to incur losses for the next several quarters as we continue toimplement our business plan.  However, wemay never achieve or sustain profitability in the future.  Even if we achieve profitability, we may notbe able to sustain it on an ongoing basis.

 

**As a company, we havelimited experience in the management of health care service businesses.**

 

Although we have been involved in the development of bariatric surgicalprograms since 2000, we have never directly managed these programs.  As such, we have only a limited and indirectoperating history upon which an evaluation of our prospects can be based.  In addition, the bariatric surgical market isrelatively new and is expanding rapidly, which can cause changes in the wayclients react to the services offered. We have yet to prove that our management model is appropriate for themarket we are addressing.  To besuccessful, it is crucial that we develop strong affiliations with hospitalsand surgical centers, and we have not yet proven our ability to do so.  We have established only two****significant operating agreements withhospitals to date.  To successfullyimplement our business plan, we must establish many more such relationships.

 

Our business has been and continues to be adversely impacted by changesin reimbursement and uncertainty concerning Medicare’s decision on whether toprovide coverage for gastric bypass surgery. Doctors, hospitals, surgical practices and those companies that supportthe obesity surgery market will adapt their businesses to the evolvingreimbursement and payor policies. We believe that for many of these partiesMedicare’s decision on the coverage of gastric bypass surgery is a criticalstep in their business analysis, which has resulted in a slowdown in marketgrowth.

 

Also, we must respond to competitive developments and attract, retainand motivate experienced staff.  Therecan be no assurance that we will be successful in addressing those marketconditions or in implementing our business strategy.  There can be no assurance that we will beable to achieve or sustain revenue growth or profitability.

** **

**Our future financialresults will fluctuate significantly.**

 

As a result of our limited operating history and the short period oftime during which we have focused on the provision of obesity surgerymanagement services, we cannot predict our future revenues or operatingresults.  We expect our future revenuesand operating results to fluctuate unpredictably due to a combination offactors, including the potential costs of establishing additional iVOW Centers.

 

Our future operating expenses are expected to increase in futureperiods as we intend to establish iVOW Centers, expand our sales and marketingoperations, expand our service capabilities, improve our internal operating andfinancial systems, and continue to comply with the stringent requirements ofthe Sarbanes-Oxley Act of 2002 (including Section 404 thereof).  In addition, our operating expenses are basedon our expectations of future revenues, and are relatively fixed in the shortterm.  We may be unable to adjustspending quickly enough to offset any unexpected revenue shortfall.  If we have a shortfall in revenues inrelation to our expenses, or if our expenses increase before our revenues do,then our business for a particular period would be materially adverselyaffected.

 

16

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Because of all of these factors and the other risks discussed in thissection, we believe that our quarterly and annual revenues, expenses andoperating results likely will vary significantly in the future.  If this occurs, any or all of the followingmay result:

 

•      the market trading price of our common stockmay fluctuate, negatively impacting the ability of stockholders to buy and sellour shares at consistent prices;

•      we may have difficulty raising funds in thefuture at prices that are acceptable to us; and

•      investorsmay be less willing to purchase our shares for lack of consistent operatingresults.

 

**Our revenue model reliessolely on the provision of services and we have no ownership stake in surgicalcenters.**

 

Our business model is to provide management services to owners ofsurgical programs.  As a result, we willnot have an ownership interest in those programs, which will make it moredifficult to sustain revenues.  We willnot enjoy directly increased revenue based on the profitability or increasedvalue of particular surgical centers. Likewise, without an ownership interest in surgical centers, we aresubject to all the risks of any service provider; our services could beterminated at the end of any contract period.

** **

**Roll-out of our iVOW Centersdepends on our entering into agreements with hospitals and surgeons; the timeto conclude these agreements may be extended and thereby delay or prevent theimplementation of our strategy.**

 

We plan to set up our iVOW Centers in conjunction with hospitals andsurgeons.  There can be no assurance thatwe will be able to negotiate the establishment of these Centers in a timelymanner or on terms satisfactory to us, if at all.  Our experience to date is limited to twoexisting management contract in place since February 2004, one contract enteredinto in August 2004 and an additional contract entered into in April 2005.  We are in active negotiation for others;however, we cannot accurately predict the time and expense involved in thesenegotiations, and any unexpected delays could negatively impact the executionof our strategic plan.  Any inability totimely establish additional iVOW Centers will harm our cash position andincrease our need to raise additional capital.

** **

**We need to increasemarket awareness and acceptance of our new business model.**

 

To our company’s knowledge, the comprehensive services offered by ournew iVOW business model have not been available to date on a nationallevel.  While we have previously suppliedclinical training and consulting services to various clients, we have onlybegun to promote our program management services.  As a result, providers of bariatric surgeryare not yet generally aware of the services we offer.  In order to accomplish our strategic andbusiness plans, we will have to quickly and effectively increase marketawareness of our management model and the iVOW brand name, and convincedoctors, hospitals and patients of the benefits of these services.  Among other things, this will require thatwe:

 

•      increase awareness of our complete serviceoffering;

•      strengthen our brand name to increasevisibility;

•      continue to upgrade and expand our services;and

•      increase awareness of the availability ofsurgery as a means of treating severe obesity.

 

We cannot assure you that we will be able toaccomplish these objectives with the limited operating capital we currentlyhave available, if at all.

 

**After establishing iVOWCenters, we must continue to prove our value proposition.**

 

In order to successfully negotiate and complete agreements with doctorsand hospitals to establish iVOW Centers, we will need to present them with ourprojected revenues and operational metrics. We cannot assure you that our projections will prove accurate or that wewill be able to provide the anticipated metrics.  Our projections are based on limited inputand operational history and failure to meet such projections will negativelyimpact our relationships with surgical centers and our ability to attractbusiness from additional centers.

 

**Thelicense fees Viking Systems, Inc. owes us may not exceed the minimum royaltyamounts.**

 

As part of the sale of our Visualization Technology business unit toViking Systems, Inc., we entered a license

 

17

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agreement with Viking under which Viking agreed to pay us royaltiesover the next five years based on sales from this business unit, with minimumroyalties during the five year period.  Viking paid us the minimum royaltyof $150,000 for the first year of the license.  Viking is a relatively newcompany, and there is no assurance that its will be successful in selling asignificant number of products based on the Visualization Technologybusiness.  As a result, there can be no assurance that Viking will owe usmore than the minimum royalties set forth in the license agreement. Additionally, if Viking’s business does not succeed, it may not have sufficientfunds in the future to pay us the minimum royalty amounts owed to us under thelicense agreement.

 

**We need to raise additionalfunds to support our operations.  Thesefunds may not be available on acceptable terms, if at all.**

 

At September 30, 2005, we had cash and cash equivalents of $2,200,000.  We believe that our cash and cashequivalents, together with the recent acquisition of Sound Health Solutions,Inc and the projected product revenues, royalties and interest income, will besufficient to meet our anticipated capital requirements through September 2006.** **However, we may need to raiseadditional capital to fund our operations beyond September 2006.  Any future funding transaction may require usto relinquish rights to some of our intellectual property or products, and willbe dilutive to our existing stockholders. We cannot guarantee that we will be able to complete any suchtransaction or secure additional funds on a timely basis, or at all, and wecannot assure that such transaction will be on reasonable terms.  If we are unable to secure additionalcapital, we may be unable to sustain operations beyond September 2006, and youmay lose your entire investment in our company.

 

We expect that the cash flows produced by our iVOW business will beunpredictable in the near term, and we expect to continue to experienceoperating losses for the foreseeable future, which increases our need forsignificant additional funding.  Theamount of additional capital that we need to raise will depend on many factors,including:

 

•      the extent to which the iVOW Centers andother services gain market acceptance;

•      the speed with which we can execute ourbusiness plan, including our sales and marketing activities and the costs toestablish iVOW Centers;

•      the levels of reimbursement for proceduresperformed; and

•      theextent of competition.

 

**Our liquidity and capitalrequirements will be difficult to predict.**

 

Our liquidity and capital requirements will depend upon other numerousfactors, including the following:

 

•      the extent to which our products and servicesgain market acceptance;

•      costs associated with establishing marketing,and operating our obesity related programs and disease state managementbusiness, including the iVOW Center;

•      the timing and costs of product and servicesintroductions;

•      the extent of our ongoing product and servicedevelopment programs;

•      the costs of sponsorship training of thephysicians to become proficient in the use of our products and procedures; and

•      the costs of developing marketing anddistribution capabilities for our consumer products.

 

Even if we are successful in raising additional funds, circumstances,including slow rate of market acceptance of our services or our inability toefficiently manage our operations, would accelerate our use of proceeds fromany offering we might do and require us to seek additional funds to support ouroperating requirements.

 

**The provision of healthcare services is subject to considerable regulation by state and federalagencies, including regulations under HIPAA and Stark.**

 

The Centers we intend to establish in cooperation with surgeryproviders, which we refer to as Centers, will need to comply with many laws andregulations, both state and federal, which govern the provision of health careservices.  If they fail to comply withany such laws and regulations, then the penalties involved could be serious,time-consuming for

 

18

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management and expensive. Inexperience in health care services could contribute to an inadvertentbreach of laws or regulations.

 

There are numerous federal and state regulations addressing patientinformation privacy and security concerns. In particular, the federal regulations issued under the Health InsurancePortability and Accountability Act of 1996, or HIPAA, contain provisions that:

 

•      protectindividual privacy by limitingthe uses and disclosures of patient information;

•      requirethe implementation of security safeguards to ensure the confidentiality, integrity and availability of individuallyidentifiable health information in electronic form; and

•      prescribespecific transaction formats anddata code sets for certain electronic transactions.

 

Compliance with these regulations is costly and requires our managementto spend substantial time and resources when working with our clients.  We are unable to estimate the total financialimpact of our continuing compliance with HIPAA requirements or of any futurechanges in these requirements.

 

In addition, the federal Stark Law restricts referrals by physicians ofMedicare, Medicaid and other government-program patients to providers of a broadrange of designated health services with which they have ownership or certainother financial arrangements.  Manystates have adopted or are considering similar legislative proposals toprohibit the payment or receipt of remuneration for the referral of patientsand physician self-referrals, regardless of the source of the payment for thecare.  These laws and regulations areextremely complex, and little judicial or regulatory interpretation exists.  If the activities of a client of ours orother entity with which we have a business relationship were found toconstitute a violation of anti-referral laws, and we were found to haveknowingly participated in such activities, we could be subject to sanction orliability under such law.

** **

**We operate in a competitivemarket; new technologies, procedures, or pharmaceuticals could radically changethe modality of treatment of morbid obesity and negatively impact the economicsof our obesity surgery business.**

 

The market for products and services that address morbid obesity isattractive and therefore competitive and new offerings and technologies are indevelopment by several companies.  Forexample, we are aware of developments, primarily involving stimulation orballoon technology, which may come to the market in the next few years.  These devices would be implanted in arelatively simple endoscopic procedure. These alternatives may prove to be more effective, less risky and/orcheaper than gastric bypass.  If thisturns out to be the case, our ability to generate revenues will be negativelyaffected. Also, many pharmaceutical companies are researching drug therapiesfor combating obesity.  If they provesuccessful in finding a more effective solution for morbid obesity, then demandfor a surgical option is likely to decline substantially.  We cannot guarantee that we will competesuccessfully against our current or potential competitors, especially thosewith significantly greater financial resources or brand name recognition.

** **

**We expect to compete withseveral companies that have the same objectives as us.**

 

There are several companies which intend to provide services to themorbid obesity market; while their business model is not identical to ours, theend result is likely to be that we will compete with each other in offeringconsulting and program management services. Three of these companies, to our knowledge, include bariatric surgeonsin their management or ownership.  Thismay prove to be an advantage over us in gaining access to potential clientsbecause we do not have bariatric surgeons on our staff.  Other companies have only a partial serviceoffering, which may allow them, because of lower overhead, to operate in theirniche at a price advantage to full-service companies such as ours.  In any case, we expect that the market willcontinue to be attractive and that new entrants are likely.

** **

**If we fail to retain ourkey personnel and hire, train and retain additional qualified and experiencedemployees, we may not be able to compete effectively, or expand our consultingbusiness and the number of Centers as planned, both of which could result inreduced revenues.**

 

Our future success will depend to a large extent on retaining our coreoperating management team and recruiting sufficient qualified employees to manageand staff our Centers.  There is likelyto be a competitive labor market for such staff and there is no assurance thatwe will be able to attract and retain an adequate number of suitable employees.  If we are unable to do this, then we may notbe able to operate and expand our Centers as planned, which may reduce ourrevenues.

 

To be successful, we must strengthen awareness of our services throughour marketing efforts and through

 

19

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establishment of additional iVOW Centers.  We have a limited marketing and businessdevelopment force through which the efforts will be conducted, and we will relyheavily on each of these individuals.  Wecannot assure you that we will be able to attract and retain sufficientqualified personnel.

 

Our current key employees are Michael H. Owens, M.D., Chief ExecutiveOfficer, President and Chief Medical Officer; J. Bradford Hanson, ChiefFinancial Officer; Joann Harper, Vice President of Product: development,implementation, and operations; Mary Lou Walen, Associate Vice President,Customer Relations; Mary Pat Finn, Vice President of Sales and Aimee Johnston,Associate Vice President, Marketing Management Services.  We do not maintain key personnel lifeinsurance policies on any of these individuals.

** **

**If we are not able toattract and retain key doctors to participate in our advisory board, it mayadversely affect our ability to develop our products and services and expandour business.**

 

Members of our clinical advisory board consult with us exclusively butare free to consult with other non-competing companies and are employedelsewhere on a full-time basis.  As aresult, they only spend a limited amount of time on our business.  Although we have entered into consultingagreements, including confidentiality provisions with each of the members ofour clinical advisory board, the consulting and confidentiality agreementsbetween us and each of the members ofour clinical advisory board may be terminated or breached.

** **

**Our failure toeffectively manage our growth could have a material adverse effect on ourbusiness.**

 

Growth in our business will place a significant strain on ourmanagement systems and resources.  Wehave only recently begun to focus on providing management services, and we havehired persons with appropriate skills. However, these people have not previously worked together, and it willtake time and effort to develop efficient working processes and relationships.  We will need to continue to improve ouroperational and financial systems and managerial controls and procedures, andwe will need to continue to expand, train and manage our workforce.  We are a small company with limitedresources, so we lack the ability to increase our capacity to provide servicesprior to assurances that those services will be paid for by customers.  As a result, each new management contractwill require significant operational efforts as we hire personnel to staff thenew project.  We will have to maintainclose coordination among our technical, accounting, finance, marketing andsales departments.

 

**Risks Related to theSecurities Markets, Ownership of our Common Stock and the Offering**

 

**Our commonstock may be subject to delisting from the Nasdaq SmallCap Market because wefail to maintain compliance with continued listing criteria.**

 

The quantitative standards for continued listing on the Nasdaq SmallCapMarket requires a company to maintain a bid price for its stock of $1.00 pershare and maintain a stockholders’ equity of at least $2,500,000 (or satisfyalternative requirements).  Failure tocomply with these requirements subjects a company to delistingproceedings.  We have twice over the past3 years been subjected to delisting proceedings from Nasdaq for failure to meetthe minimum stockholders’ equity requirement. Each time we eventually regained compliance by raising additionaloperating capital.

 

20

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Wecannot assure you that we will be able to maintain our stockholders’ equityabove $2,500,000 or maintain our stock price above $1.00 per share.  In addition, we received 1,654,000 shares ofcommon stock of Viking Systems in connection with the sale of our VisualizationTechnology business. We currently value those shares at a total of $827,000,which represents the trading price of Viking common stock at September 30,2005. Viking’s common stock is thinly traded and sales of even small numbers ofshares can significantly affect the trading price. Because of this, the tradingprice of Viking’s common stock is likely to fluctuate substantially over time,and this will affect the value we ascribe to our shares.  A significant drop in the trading price ofViking’s common stock would negatively affect our financial position and,specifically, our stockholders’ equity balance. Any reduction in ourstockholders’ equity associated with a drop in the trading price of Vikingcommon stock would subject us to delisting proceedings by Nasdaq.

 

If we are unable to comply with Nasdaq’s continued listing requirements,our securities will be delisted from the Nasdaq SmallCap Market. The delistingof our common stock from the Nasdaq SmallCap Market may materially impair ourstockholders’ ability to buy and sell shares of our common stock and could havean adverse effect on the market price of, and the efficiency of the tradingmarket for, our common stock.  Inaddition, the delisting of our common stock could significantly impair ourability to raise capital should we desire to do so in the future.

** **

**We will have substantial discretion over the use ofproceeds.**

 

Our******management will retain broaddiscretion over the use of proceeds from the private placement we closed onJuly 26, 2005.  The amounts and timing ofthe expenditures may vary significantly depending on numerous factors,including our ability to develop and expand our Obesity Surgery ManagementServices business, the competitive environment for our service offerings andthe availability of opportunities to acquire or invest in complementarybusinesses, products and services.

 

**Futuresales of our common stock in the public market could cause our stock price tofall.**

 

In the private placement financing we completed on July 26, 2005, weissued 833,328 shares of common stock and warrants to purchase 833,328 sharesof common stock.  We also issued 41,666shares of common stock and a warrant to purchase 41,666 shares of common stockto our placement agent, Dawson James Securities.  In connection with the private placement, weissued 177,253 shares of common stock and warrants to purchase 124,608 sharesof common stock in exchange for the 826,447 outstanding shares of Series Apreferred stock.  In total, we issued1,010,582 shares of common stock and warrants to purchase 1,041,270 shares ofcommon stock in the private placement and the Series A exchange.

 

As of November 3, 2005, we had 2,303,469 shares of outstanding commonstock.  As a result, the 2,051,852 sharesof common stock we issued in the private placement and the Series A exchange(assuming the exercise of all warrants issued as part of the private placementand the Series A exchange) represents 64% of our capital stock.

 

As part of these transactions, we have filed a registration statement,covering the 957,937 shares of common stock and warrants to purchase the1,041,270 shares of common stock issued in the private placement and the SeriesA exchange.

 

21

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Following the effective date of the registration statement, theseshares will be transferable in the public market (subject to applicabletransfer restrictions on the shares held by our affiliates).  Sales of these shares of common stock, or theperception that such sales might occur, could cause the market price of ourcommon stock to decline.

** **

**There is a limited marketfor our common stock and therefore investors may not be able to liquidate theirinvestment in the foreseeable future, if at all.**

 

There is a limited market for our common stock even though it ispublicly quoted, and the market is not expected to increase significantly inthe foreseeable future.  For example, weonly have approximately 220 stockholders of record and the average dailytrading volume in our stock is approximately 2,700****shares.  Since thereverse split, effective October 11, 2005 through November 9, 2005, the averagetrading volume has been approximately 6,200 shares per day. The limited tradingmarket for our common stock may cause fluctuations in the market value of ourcommon stock to be exaggerated, leading to price volatility in excess of thatwhich would occur in a more active trading market.  The lack of an active trading market in ourstock may also cause investors to be unable to sell all of their desired sharesof common stock on short notice and the sale of a large number of shares at one time could temporarily depressthe market price. An investment in our company is highly speculative, and aninvestor should be able to withstand a total loss of the investment.

** **

**On November1, 2005, we acquired Sound Health Solutions (“Sound Health”) as a wholly-ownedsubsidiary. We may not realize the expected benefits of the acquisition becauseof integration and other challenges, which could adversely affect our business.**

 

We have limited experiencein acquisition activities and integrating the operations, technologies,products, services and personnel of iVow and Sound Health may be a complex,time consuming and expensive process that could significantly disrupt thebusiness of the combined company. Employees and management of each of iVow and Sound Health have played akey role in creating each company and the integration of these two companieswill alter prior relationships and may affect productivity. If we fail tosuccessfully meet the challenges involved in integration or otherwise fail torealize any of the anticipated benefits of the acquisition, then the results ofoperations of the combined company could be seriously harmed. Realizing thebenefits of the acquisition, if any, will depend in part on the successfulintegration of products, services, operations and personnel.

 

We may not successfullyintegrate the operations of Sound Health and iVow in a timely manner, or atall, and the combined company may not realize the anticipated benefits of theacquisition to the extent, or in the timeframe, anticipated. The anticipatedbenefits of the acquisition are based on projections and assumptions, includingsuccessful integration, not actual experience. In addition to the integrationrisks discussed above, the combined company’s ability to realize those benefitscould be adversely effected by practical or legal constraints on its ability tocombine operations.

 

**Our stock price couldcontinue to be volatile and your investment in our common stock could suffer adecline in value, adversely affecting our ability to raise additional capital.**

 

The market prices and trading volumes for securities of emergingcompanies, like ours, have historically been highly volatile and haveexperienced significant fluctuations unrelated to the operating performance.  The market price of our common stock hashistorically been highly volatile.  Forexample, between November 2004 and November 2005, the trading price of ourcommon stock ranged from $2.30 to $13.90. The trading price of our common stock may continue to be

 

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significantly affected by factors such as:

 

•      actual or anticipated fluctuations in ouroperating results,

 

•      our ability to remain listed on Nasdaq,

 

•      changes in financial estimates by securitiesanalysts,

 

•      announcements of technological innovations,

 

•      new products or new contracts by us or ourcompetitors,

 

•      regulatory announcements,

 

•      developments with respect to patents orproprietary rights,

 

•      conditions and trends in the medical deviceand other technology industries,

 

•      adoption of new accounting standardsaffecting the medical device industry, and

 

•      general market conditions.

 

In addition, the stock market has from time to time experiencedsignificant price and volume fluctuations that have particularly affected themarket prices for shares of early stage companies.  These broad market fluctuations may adverselyaffect the market price of our common stock. In the past, following periods of volatility in the market price of aparticular company’s securities, securities class action litigation has oftenbeen brought against that company.  Suchlitigation, if brought against us, could result in substantial costs and adiversion of management’s attention and resources.

** **

**We may make futureissuances of additional shares of our securities.**

 

In the future, we may seek to raise additional capital to meet ourfinancial needs at any time and from time to time as our Board of Directorsdeems necessary and in our best interests, through the sale of equity or othersecurities.  Potential investors shouldbe aware that any security issuance may result in reduction of the book valueor market price, if any, of the outstanding shares of common stock.  If we issue any additional shares of commonstock or preferred stock, such issuance will reduce the proportionate ownershipand voting power of each other stockholder. Further, any new issuance of shares may result in a change of control ofour management or us.

 

**Anti-takeover provisionsin our organizational documents and Delaware law may discourage or prevent achange of control, even if an acquisition would be beneficial to ourstockholders, which could affect our stock price adversely and prevent attemptsby our stockholders to replace or remove our current management.**

 

Our certificate of incorporation and bylaws contain provisions thatcould delay or prevent a change of control of our company or changes in ourboard of directors that our stockholders might consider favorable. Some ofthese provisions:

 

•      authorize the issuance of preferred stockwhich can be created and issued by the board of directors without priorstockholder approval, with rights senior to those of the common stock;

 

•      provide for a classified board of directors,with each director serving a staggered three-year term;

 

•      prohibit our stockholders from filling boardvacancies, calling special stockholder meetings, or taking action by writtenconsent;

 

•      prohibiting our stockholders from makingcertain changes to our restated certificate of incorporation or restated bylawsexcept with 66 2/3% stockholder approval; and

 

•      require advance written notice of stockholderproposals and director nominations.

 

In addition, we are subject to the provisions of Section 203 of theDelaware General Corporation Law, which may prohibit certain businesscombinations with stockholders owning 15% or more of our outstanding votingstock. These and other provisions in our certificate of incorporation, bylawsand Delaware law could make it more difficult for stockholders or potentialacquirers to obtain control of our board of directors or initiate actions thatare opposed by our then-current board of directors, including delay or impede amerger, tender offer, or proxy contest involving our company. Any delay orprevention of a change of control transaction or changes in our board ofdirectors could cause the market price of our common stock to decline.

 

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**Risks Related to ourIntellectual Property and Potential Litigation**

 

**We depend on our intellectual property forthe establishment and operation of our iVOW Centers.**

 

We rely on a combination of trade secrets, know-how and confidentialityrestrictions for the establishment and operation of our iVOW Centers.  Despite these precautions, it may be possiblefor unauthorized parties to copy our intellectual property or otherwise obtainand use information that we regard as proprietary.  We do not have any patent protection for ourbusiness, and existing intellectual property laws provide only limitedprotection.  We have expended significantefforts devising the types of products and services we will offer and themanner in which these will be delivered. Our ability to maintain the secrecy and confidentiality of our tradesecrets and internal knowledge are crucial to the success of our business.  Any failure to do so may negatively impactour prospects.  We also may not be ableto detect unauthorized use and take appropriate steps to enforce ourintellectual property rights.

 

**We may be subject toproduct liability claims and have limited insurance coverage.**

 

We face an inherent and significant business risk of exposure toproduct liability claims in the event that the use of our products, which weresold by us prior to the sale of the Visualization Technology business, resultsin personal injury or death.  Also, inthe event that any of those products proves to be defective, we may be requiredto recall or redesign such products. Product liability insurance is expensive and in the future may not beavailable to us on acceptable terms, if at all. A successful product liability claim or series of claims brought againstus in excess of our insurance coverage would negatively impact our business.

 

**If we are unable to protectour intellectual property related to the technology transferred to VikingSystems, we may be unable to prevent other companies from using this technologyin competitive products.**

 

We maintain ownership of the technology transferred to Viking Systems,Inc. in connection with the sale of our Visualization Technology business inApril 2004.  In the event Viking Systemsdoes not make the required royalty payments to us, their rights in thetechnology will be terminated.  In suchcase, we will be able to continue to commercialize that technology.  To the extent we decide to incorporate thattechnology into our business, our future success will depend, in part, on ourability to continue developing patentable products, enforcing our patents andobtaining patent protection for our products both in the United States and inother countries.  The patent positions ofmedical device companies, however, are generally uncertain and involve complexlegal and factual questions.  Patents maynever issue from any patent applications owned by or licensed to us.  Even if patents do issue, the claims allowedmay not be sufficiently broad to protect our technology.  In addition, issued patents owned by orlicensed to us may be challenged, invalidated or circumvented, or the rightsgranted thereunder may not provide us with competitive advantages.  Further, the medical device industry has beencharacterized by extensive litigation regarding patents and other intellectualproperty rights.  Litigation, which wouldresult in substantial expense, may be necessary to enforce any patents issuedor licensed to us and/or to determine the scope and validity of proprietaryrights of third parties or whether our products, processes or proceduresinfringe any such third-party proprietary rights.

 

In addition to patents, we rely on unpatented trade secrets to protectour business and our proprietary technology. Others may independently develop or otherwise acquire the same orsubstantially equivalent plans or technologies or otherwise gain access to ourproprietary technology or disclose our plans or technology.  It is difficult to protect rights tounpatented ideas, plans or proprietary technology.  Third parties may obtain patent rights tothese unpatented trade secrets, which patent rights could be used to assertclaims against us.  We also rely onconfidentiality agreements with our collaborators, employees, advisors, vendorsand consultants to protect our proprietary technology.  These agreements may be breached, we may nothave adequate remedies for any breach and our trade secrets may otherwisebecome known or be independentlydeveloped by competitors.  In addition,our agreements with employees and consultants require disclosure of ideas,developments, discoveries or inventions conceived during employment orconsulting, as the case may be, and assignment to us of proprietary rights tosuch matters related to our business and technology.  The extent to which efforts by others willresult in patents and the effect on us of the issuance of such patents isunknown.

 

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**Item 3.  Controls and Procedures**

 

(a)    Evaluation of disclosurecontrols and procedures

 

As required bythe Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation,under the supervision and with participation of our management, including ourchief executive officer and chief financial officer, of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report.  Based on the foregoing, ourexecutive officer and chief financial officer concluded that as of the end of September30, 2005, our disclosure controls and procedures were effective.

 

(b)  Changes in internalcontrols of our financial reporting

 

There has beenno change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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# ***PART II.*****               ****OTHER INFORMATION**

# * *

## Item 1.    Legal Proceedings

##  

From time totime, we may be involved in litigation relating to claims arising out of ouroperations in the normal course of business. We have been notified of a Notice of Intent to Initiate Litigationagainst us regarding a medical malpractice lawsuit in process in Florida.  We are contesting the Notice of Intent, andhave not yet been formally added to the lawsuit.  We intend to defend this action vigorously ifformally added as a party to the lawsuit. As of the date of this report, we are not party to any materiallegal proceedings.

 

Item 2.    Unregistered Sales of EquitySecurities and Use of Proceeds.

 

None.

 

## Item 3.    Defaults upon Senior Securities

 

None.

 

## Item 4.    Submission of Matters to a Vote of Security Holders

 

None.

 

## Item 5.    Other Information

##  

None.

 

## Item6.    Exhibits

##  

(a)           Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                           |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  (1)        |       | Second Restated  Certificate of Incorporation.                                                                                            |
|            |       |                                                                                                                                      |
| 3.2  (2)        |       | Certificate of Amendment  of Second Restated Certificate of Incorporation.                                                                |
|            |       |                                                                                                                                      |
| 3.3  (3)        |       | Certificate of Amendment  of Second Restated Certificate of Incorporation.                                                                |
|            |       |                                                                                                                                      |
| 3.4  (1)        |       | Restated Bylaws.                                                                                                                          |
|            |       |                                                                                                                                      |
| 4.1  (4)        |       | Form of Certificate for  Common Stock.                                                                                                    |
|            |       |                                                                                                                                      |
| 10.1(5)         |       | Form of Subscription  Agreement                                                                                                           |
|            |       |                                                                                                                                      |
| 10.2(5)         |       | Form of Warrants                                                                                                                          |
|            |       |                                                                                                                                      |
| 10.3(5)         |       | Warrant issued to Dawson  James Securities                                                                                                |
|            |       |                                                                                                                                      |
| 10.4(3)         |       | Amendment to 1997 Stock  Option/Stock Issuance Plan.                                                                                      |
|            |       |                                                                                                                                      |
| 10.5(3)         |       | Amendment to Employee  Stock Purchase Plan                                                                                                |
|            |       |                                                                                                                                      |
| 31.1  *         |       | Certification of Principal  Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the  Securities Exchange Act of 1934. |
|            |       |                                                                                                                                      |
| 31.2  *         |       | Certification of Principal  Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the  Securities Exchange Act of 1934. |

 

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| 32.1  * |   | Certification of Principal  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                    |
| 32.2  * |   | Certification of Principal  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*              Filedherewith.

 

(1)           Incorporated byreference to our Registration Statement on Form S-1, as amended, filedMarch 7, 1997.

 

(2)           Incorporated by referenceto our Form 10-Q, filed November 14, 2001.

 

(3)           Incorporated byreference to our Proxy Statement, June 27, 2005, filed March 31, 2003.

 

(4)           Incorporated byreference to our Registration Statement on Form S-1, as amended, filedJune 25, 1997.

 

(5)           Incorporated byreference to our Form 10-QSB filed on August 15, 2005, as amended.

 

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#### **SIGNATURES**

 

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

 

 
|                          | iVOW, INC.                                                                                                                           |
|-------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                 |
|                          |                                                                                                                                 |
| Date:  November 14, 2005 |    /s/ Michael H. Owens                                                                                               |   |
|                          | Michael H.  Owens, M.D.  President, Chief Executive Officer and  Director                                                            |
|                          |                                                                                                                                 |
| Date:  November 14, 2005 |    /s/ J. Bradford Hanson                                                                                             |   |
|                          | J. Bradford  Hanson  Vice President of Finance,  Chief Financial Officer and Secretary  (Principal financial and accounting officer) |
|                               |                                                                                                                                      |  |  |

 

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