** **

**UNITEDSTATES**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 JUNE 30,2005**

 

**OR**

 
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF** |
|------------|------------|----------------------------------------------------------------------|
| ** ** | ** ** | **THE SECURITIES EXCHANGE ACT OF 1934**                              |

**For thetransition period from                     to**

 

**COMMISSIONFILE NUMBER 0-22743**

 

**iVOW****, INC.**

(Exact name of registrant asspecified in its charter)

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

 

**2101FARADAY AVENUE**

**CARLSBAD,CA 92008**

(Address of principal executiveoffices)

 

**(760) 603-9120**

(Registrant’s telephone number,including area code)

 

INDICATEBY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TOBE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THEREGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TOSUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:

 

**(1) ****                    Yes****ý****                      No****o**

** **

**(2) ****                    Yes****ý****                      No****o**

 

As of August 1, 2005, there were 21,168,167 shares of $.01 parvalue common stock outstanding.

 

Transitional Small BusinessDisclosure Format   Yes  o   No  ý

 

 

----

 

iVOW, INC.

FORM 10-QSB

TABLE OF CONTENTS

 
| PART 1.    FINANCIAL INFORMATION | ** **                                                                                                                 |
|-------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                       |   |
| Item  1.                                        | Financial  Statements (unaudited)                                                                                          |   |
|                                            |                                                                                                                       |   |
|                                            | Condensed  Balance Sheets as of June 30, 2005 and December 31, 2004                                              |   |
|                                            | Condensed  Statements of Operations and Comprehensive Loss for the three and six months  ended June 30, 2005 and 2004 |   |
|                                            | Condensed  Statements of Cash Flows for the six months ended June 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

----

 

PART I.     FINANCIAL INFORMATION

 

## Item 1.             Financial Statements (Unaudited)

iVOW, Inc.

Condensed Balance Sheets

 
| ** **                                                                                                                                                                                                                               | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| ASSETS                                                                                                                                                                                                                                   |       |                   |       |                       |       |
| Current assets:                                                                                                                                                                                                                          |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                |       | $                      | 643,582    |                       | $          | 1,969,561 |   |
| Accounts receivable                                                                                                                                                                                                                      |       | 114,831                |       | 176,291                    |       |
| Royalty receivable from Viking  Systems, Inc.                                                                                                                                                                                       |       | 50,000                 |       | —                     |       |
| Due from Viking Systems, Inc.                                                                                                                                                                                                       |       | —                 |       | 188,797                    |       |
| Inventories                                                                                                                                                                                                                              |       | 114,532                |       | 62,094                     |       |
| Prepaid insurance                                                                                                                                                                                                                        |       | 52,537                 |       | 197,551                    |       |
| Other current assets                                                                                                                                                                                                                     |       | 98,638                 |       | 51,812                     |       |
| Total current assets                                                                                                                                                                                                                     |       | 1,074,120              |       | 2,646,106                  |       |
| Equipment, net of accumulated depreciation                                                                                                                                                                                               |       | 12,419                 |       | 31,743                     |       |
| Investment in marketable equity securities  of Viking Systems, Inc.-available for sale                                                                                                                                              |       | 827,000                |       | 1,306,660                  |       |
| Total assets                                                                                                                                                                                                                             |       | $                      | 1,913,539  |                       | $          | 3,984,509 |   |
|                                                                                                                                                                                                                                     |       |                   |       |                       |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                |       |                   |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                     |       |                   |       |                       |       |
| Accounts payable                                                                                                                                                                                                                         |       | $                      | 243,306    |                       | $          | 288,083 |   |
| Current portion of capital lease  obligations                                                                                                                                                                                            |       | 15,013                 |       | 16,969                     |       |
| Short-term notes                                                                                                                                                                                                                         |       | 19,588                 |       | 128,219                    |       |
| Accrued compensation                                                                                                                                                                                                                     |       | 140,437                |       | 164,937                    |       |
| Related party liabilities                                                                                                                                                                                                                |       | 67,212                 |       | 35,659                     |       |
| Deferred revenue                                                                                                                                                                                                                         |       | 37,500                 |       | 31,250                     |       |
| Accrued liabilities                                                                                                                                                                                                                      |       | 62,011                 |       | 85,896                     |       |
| Total current liabilities                                                                                                                                                                                                                |       | 585,067                |       | 751,013                    |       |
|                                                                                                                                                                                                                                     |       |                   |       |                       |       |
| Long term portion of capital lease  obligations                                                                                                                                                                                          |       | —                 |       | 10,516                     |       |
|                                                                                                                                                                                                                                     |       |                   |       |                       |       |
| Total liabilities                                                                                                                                                                                                                        |       | 585,067                |       | 761,529                    |       |
|                                                                                                                                                                                                                                     |       |                   |       |                       |       |
| Stockholders’ equity:                                                                                                                                                                                                               |       |                   |       |                       |       |
| Preferred stock, $.01 par value: Authorized  shares - 5,000,000 Issued and outstanding shares – 826,447 at June 30,  2005 (Liquidation value $3,140,499) and 915,000 at December 31, 2004  (Liquidation value $3,477,000) |       | 1,059,704              |       | 1,108,592                  |       |
| Common stock, $.01 par value: Authorized  shares - 35,000,000 Issued and outstanding shares – 11,062,346 at  June 30, 2005 and 10,946,264 at December 31, 2004                                                            |       | 110,624                |       | 109,462                    |       |
| Additional paid-in capital                                                                                                                                                                                                               |       | 72,808,246             |       | 72,702,851                 |       |
| Accumulated other comprehensive income                                                                                                                                                                                                   |       | 793,920                |       | 1,273,580                  |       |
| Deferred compensation                                                                                                                                                                                                                    |       | (2,148                 | )          | (7,896                     | )          |
| Accumulated deficit                                                                                                                                                                                                                      |       | (73,441,874            | )          | (71,963,609                | )          |
| Total stockholders’ equity                                                                                                                                                                                                          |       | 1,328,472              |       | 3,222,980                  |       |
|                                                                                                                                                                                                                                     |       |                   |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                      | 1,913,539  |                       | $          | 3,984,509 |   |

 

Note: The balance sheet at December 31, 2004has been derived from the audited financial statements at that date but doesnot include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

See accompanying notes to Condensed FinancialStatements.

 

3

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IVOW, Inc.

CondensedStatements of Operations and ComprehensiveLoss

(Unaudited)

 
| ** **                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | ** **                           | ** ** | **(Restated)**                     | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                                     |       | $                                    | 252,916    |                               | $          | 302,911 |   | $ | 492,597 |   | $ | 902,715 |   |
| Cost and expenses:                                           |       |                                 |       |                               |       |   |   |   |   |
| Cost of revenues                                             |       | 237,431                              |       | 253,241                            |       | 523,028 |   | 632,114 |   |
| Product development                                          |       | 22,956                               |       | 96,865                             |       | 100,403 |   | 178,965 |   |
| Sales and marketing                                          |       | 216,076                              |       | 249,247                            |       | 488,794 |   | 420,638 |   |
| General and administrative                                   |       | 394,478                              |       | 370,373                            |       | 966,253 |   | 739,889 |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Total cost and expenses                                      |       | 870,941                              |       | 969,726                            |       | 2,078,478 |   | 1,971,606 |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Loss from operations                                         |       | (618,025                             | )          | (666,815                           | )          | (1,585,881 | ) | (1,068,891 | ) |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Other income, net                                            |       | 4,490                                |       | 3,577                              |       | 10,212 |   | 2,772 |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Loss from continuing operations                              |       | (613,535                             | )          | (663,238                           | )          | (1,575,669 | ) | (1,066,119 | ) |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Gain (loss) from discontinued operations                     |       | 128,588                              |       | (133,212                           | )          | 132,644 |   | (632,516 | ) |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                                     |       | (484,947                             | )          | (796,450                           | )          | (1,443,025 | ) | (1,698,635 | ) |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Accretion of dividends on preferred stock                    |       | (29,362                              | )          | (34,665                            | )          | (35,237 | ) | (70,192 | ) |
| Deemed dividend on redemption of preferred  stock            |       | —                               |       | (131,985                           | )          | — |   | (131,985 | ) |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Net loss applicable to common stockholders                   |       | $                                    | (514,309   | )                                  | $          | (963,100 | ) | $ | (1,478,262 | ) | $ | (1,900,812 | ) |
| Other comprehensive loss:                                    |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                                     |       | (484,947                             | )          | —                             |       | (1,443,025 | ) | — |   |
| Unrealized loss on available-for-sale  securities            |       | (330,800                             | )          | —                             |       | (479,660 | ) | — |   |
| Total comprehensive loss                                     |       | $                                    | (815,747   | )                                  | —     |   | $ | (1,922,685 | ) | — |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Loss per share basic and diluted:                            |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Continuing operations                                        |       | $                                    | (0.06      | )                                  | $          | (0.10 | ) | $ | (0.14 | ) | $ | (0.19 | ) |
| Discontinued operations                                      |       | 0.01                                 |       | (0.02                              | )          | 0.01 |   | (0.10 | ) |
| Net loss per common share applicable to common  stockholders |       | $                                    | (0.05      | )                                  | $          | (0.12 | ) | $ | (0.13 | ) | $ | (0.29 | ) |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Shares used in computing basic and diluted  loss per share   |       | 11,062,346                           |       | 7,728,995                          |       | 11,049,175 |   | 6,495,282 |   |

 

See accompanying notes to Condensed FinancialStatements.

 

4

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iVOW, Inc.

CondensedStatements of Cash Flows

(Unaudited)

 
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | ** **                         | ** ** | **(Restated)** | ** ** |
| OPERATING ACTIVITIES                                                          |       |                               |       |   |   |
| Net loss                                                                      |       | $                                  | (1,443,025 | ) | $ | (1,698,635 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                 |       | 28,590                             |       | 17,853 |   |
| Amortization of deferred compensation                                         |       | 5,748                              |       | 5,536 |   |
| Changes in operating assets and  liabilities:                                 |       |                               |       |   |   |
| Accounts receivable                                                           |       | 61,460                             |       | 260,594 |   |
| Royalty receivable from Viking  Systems, Inc.                            |       | (50,000                            | )          | — |   |
| Inventories                                                                   |       | (52,438                            | )          | 34,182 |   |
| Prepaid insurance                                                             |       | 145,015                            |       | 103,494 |   |
| Other current assets                                                          |       | (46,828                            | )          | (89,229 | ) |
| Accounts payable                                                              |       | (44,777                            | )          | (16,854 | ) |
| Accrued compensation                                                          |       | (24,500                            | )          | 74 |   |
| Deferred revenue                                                              |       | 6,250                              |       | (182,500 | ) |
| Accrued liabilities                                                           |       | 7,664                              |       | (85,844 | ) |
| Changes in assets and liabilities related  to discontinued operations         |       | —                             |       | 379,073 |   |
| Net cash flows used in operating activities                                   |       | (1,406,841                         | )          | (1,272,256 | ) |
|                                                                          |       |                               |       |   |   |
| INVESTING ACTIVITIES                                                          |       |                               |       |   |   |
| Maturities of short-term investments                                          |       | —                             |       | 183,708 |   |
| Purchases of equipment                                                        |       | (9,266                             | )          | (25,575 | ) |
| Proceeds from sale of business                                                |       | 188,797                            |       | 218,919 |   |
| Net cash flows provided by investing  activities                              |       | 179,531                            |       | 377,052 |   |
|                                                                          |       |                               |       |   |   |
| FINANCING ACTIVITIES                                                          |       |                               |       |   |   |
| Issuance of common stock, net                                                 |       | 22,431                             |       | 4,660,109 |   |
| Payment on short-term notes                                                   |       | (108,630                           | )          | — |   |
| Redemption of Series A preferred stock                                   |       | —                             |       | (200,000 | ) |
| Payment on capital lease obligations                                          |       | (12,470                            | )          | 49 |   |
| Repayment of short-term bank borrowings                                       |       | —                             |       | (200,000 | ) |
| Net cash flows provided by (used in)  financing activities                    |       | (98,669                            | )          | 4,260,158 |   |
| Net increase (decrease) in cash and cash  equivalents                         |       | (1,325,979                         | )          | 3,364,954 |   |
| Cash and cash equivalents at beginning of  period                             |       | 1,969,561                          |       | 448,943 |   |
| Cash and cash equivalents at end of period                                    |       | $                                  | 643,582    |   | $ | 3,813,897 |   |
|                                                                          |       |                               |       |   |   |
| Non-cash transactions:                                                        |       |                               |       |   |   |
| Accretion of dividends on preferred stock                                     |       | $                                  | (35,237    | ) | $ | 70,192 |   |
| Conversion of Series A preferred stock  to common stock                  |       | 84,125                             |       | 61,080 |   |
|                                                                          |       |                               |       |   |   |
| Supplementary cash flow information:   Interest paid                          |       | $                                  | 3,236      |   | $ | 28,000 |   |

 

See accompanying notes to Condensed FinancialStatements.

 

5

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iVOW,INC.

Notes to Condensed Financial Statements

June 30, 2005

(UNAUDITED)

 

### 1.                                                 Basis of Presentation

###  

The audited financial statements of iVOW, Inc.(the “Company”) and the notes thereto for the year ended December 31, 2004included in our Annual Report on Form 10-K, as amended, previously filedwith the Securities and Exchange Commission (“SEC”), contain additionalinformation about us, our operations, and our financial statements andaccounting practices, and should be read in conjunction with this quarterlyreport on Form 10-QSB. The accompanying unaudited condensed financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America, pursuant to the rules andregulations of the SEC, and certain information and footnote disclosuresnormally contained in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted, unless significant changes have taken place sincethe end of the most recent fiscal year.

 

Our accompanying unaudited financialstatements reflect all adjustments of a normal recurring nature, which are, inthe opinion of management, necessary for a fair presentation of the financialposition, results of operations and cash flows for all periods presented. Theinterim financial information contained herein is not necessarily indicative ofresults for any future interim periods or for the full fiscal year ending December 31,2005.

 

We incurred net losses and negative net cashflows from operating activities in 2004, 2003, 2002, and in the first twoquarters of 2005, and at June 30, 2005, had an accumulated deficit of$73.4 million. At June 30, 2005, we had cash and cash equivalents of$644,000. We believe that our cash and cash equivalents, together with therecently closed $2.5 million private placement in July 2005 (see Note 8)and the projected product revenues, royalties and interest income, will besufficient to meet our anticipated capital requirements through at least June 2006.As a result, we may have to raise additional capital to fund our operationsbeyond June 2006. These factors raise substantial doubt about our abilityto continue as a going concern. Should we be unable to raise sufficient fundsin the future to fund our operations beyond June 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 anddelays in signing new management and consulting contracts may adversely impactour cash position and require further cost reductions. No assurance can begiven that we will be able to operate profitably on a consistent basis, or atall, 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 condensedfinancial statements do not include any adjustments relating to therecoverability and classification of assets or the amounts and classificationof liabilities that might be necessary should we be unable to continue as agoing concern.

 

### 2.                                                 Discontinued Operations

###  

On April 15, 2004, we sold ourVisualization Technology business unit to Viking Systems, Inc. (“Viking”)under an Asset Purchase Agreement (the “Asset Purchase Agreement”) signed on December 22,2003. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, the financial results of this business have beenreported separately as discontinued operations and the financial statements forall prior periods have been restated accordingly.    Prior to the sale we conducted our operations through twoseparate business units. The Obesity Surgical and Medical Management Servicesbusiness unit (operated via our wholly-owned subsidiary, VOW Solutions, Inc.),based in Carlsbad, CA, provides services to physicians and hospitals involvedin the surgical treatment of morbid obesity. In addition, our formerVisualization 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 the Asset Purchase Agreement, we soldall the operating assets and related liabilities of the VisualizationTechnology business to Viking. In return, Viking agreed to (a) pay us$159,000 at closing, (b) issue to us 3,054,000 shares of Viking commonstock, representing approximately 10% of its common shares outstanding on afully diluted basis, and (c) remit to us the value of any formerVisualization Technology inventory sold by Viking before April 15, 2005. Wealso entered into a license agreement with Viking that will pay us royaltiesover the next five years based on sales of the acquired products of theVisualization Technology business with minimum royalties during the five yearperiod as follows: first year

 

6

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$150,000,years two through four $300,000 and year five $375,000 with a maximum aggregateroyalty of $4,500,000 over the five year period. Wewill maintain ownership rights of all intellectual property and product rightsunder the license agreement with Viking until at least the minimum royaltyobligations have been satisfied, at which time we will transfer such ownershiprights to Viking. In April 2005, we received the final payment of the firstyear minimum royalty.

 

The net operating assets sold to Viking andthe total consideration paid or contractually due from Viking, exclusive of anyproceeds from the subsequent sale of Visualization Technology inventory byViking, 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  |   |

 

Under accounting principles generallyaccepted in the United States of America, the transaction is principally theexchange of non-monetary assets between Viking and us. As a result, thecarrying value of the net assets sold, $746,614, is considered to be equal tothe value of the net assets received and a gain is not recognized at the timeof the transaction. The Viking consideration, exclusive of cash, is considerednon-monetary because Viking is a relatively new company that has not raisedsubstantial funds and may be unable to raise sufficient funds to sustain itsoperations or fund its growth plan. All proceeds received, including paymentsderived by the sale of inventory, from Viking have been credited against theDue from Viking Systems, Inc. account. As of June 30, 2005, thebalance Due from Viking Systems, Inc. was repaid in full. For the threeand six months ended June 30, 2005, proceeds of $78,588 and $82,644,respectively, in excess of the carrying value of the net assets sold have beenrecorded as a gain from discontinued operations and, beginning in May 2005,future minimum royalties due from Viking will be recognized on a straight-linebasis during the year as a gain from discontinued operations. At June 30,2005, $50,000 of the $300,000 year two minimum royalties under the licensingagreement with Viking has been recognized as a gain from discontinuedoperations and has been included as royalty receivable from Viking Systems, Inc.

 

Our financialresults for the three and six months ended June 30, 2004 have beenrestated to show the results of operations for the Visualization Technologybusiness as a discontinued operation. The operating results of the discontinuedoperations were as follows:

 
| ** **                        | ** ** | **Three Months   Ended June  30, 2004** | ** ** | **Six Months   Ended June  30, 2004** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| Sales                             |       | $                                       | 116,045    |                                  | $          | 1,227,672 |   |
| Costs and Expenses                |       |                                    |       |                                  |       |
| Cost of sales                     |       | 110,636                                 |       | 1,035,667                             |       |
| Research and development          |       | 70,556                                  |       | 330,014                               |       |
| Sales and marketing               |       | 14,860                                  |       | 78,678                                |       |
| General and administrative        |       | 52,905                                  |       | 415,529                               |       |
| Total cost and expenses           |       | 248,957                                 |       | 1,859,888                             |       |
| Interest expense                  |       | 300                                     |       | 300                                   |       |
| Loss from discontinued operations |       | $                                       | (133,212   | )                                     | $          | (632,516 | ) |

 

The equipment financing costs associated withthe equipment sold to Viking has been included in discontinued operations.

 

The Company had a severance agreement with aformer employee who became an employee of Viking upon the sale of theVisualization Technology business. Under the agreement, the Company may berequired to pay the employee one year’s compensation (approximately $200,000)if the employee is terminated under certain circumstances within 18 monthsfollowing the sale of the business or prior to October 2005. No provisionfor such payment has been included in the results 

 

7

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ofdiscontinued operations and will not be provided for until such payment isprobable.

 

### 3.                                                 Investmentin equity securities of Viking Systems, Inc.

 

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

 
| ** **                       | ** ** | ** ** | ** ** | **June 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 decreasein the fair value of the equity securities during the six months ended June 30,2005 of $479,660 has been included in other comprehensive loss.

 

### 4.                                                 Inventories

###  

Inventories are stated at lower of cost(determined on a first-in, first-out basis) or market and include vitaminfinished goods and consulting services work in progress associated with ourdisease state management of morbid obesity business.

 

### 5.                                                 Loss PerShare

###  

Basic net loss per share is calculated basedon the weighted average number of common shares outstanding during the period.Diluted net loss per share incorporates the dilutive effect of potentiallydilutive shares of common stock, including shares attributable to stockoptions, warrants and other convertible securities. 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 of determining basic and diluted net lossper share, dividends accreted on preferred stock and the deemed dividend withrespect to the preferred stock redemption (see Note 7) have been added to thenet loss to arrive at net loss applicable to common stockholders. For the threeand six month periods ended June 30,2005, potentially dilutive shares of common stock that have been excluded fromthe calculation of the weighted average number of dilutive common shares were5,849,111 shares, comprised 3,751,748 warrant shares, 826,447 convertiblepreferred shares and options to purchase up to 1,270,916 shares of commonstock. For the three and six month periods ended June 30, 2004, potentially dilutive shares of common stockthat have been excluded from the calculation of the weighted average number ofdilutive common shares were 5,372,764 shares, comprised of 3,764,953 warrantshares, 915,000 convertible preferred shares and options to purchase up to692,811shares of common stock.

 

### 6.                                                 Stock-Based Compensation

###  

SFAS No. 123, “*Accountingfor Stock-Based Compensation*,” establishes a fair value basedapproach for valuing stock options. We follow the disclosure-only alternativeafforded by SFAS 123. However, we account for stock-based compensation tonon-employees using the fair value method prescribed by SFAS 123.

 

We apply the principles of AccountingPrinciples Board Opinion No. 25, “*Accounting for StockIssued to Employees*,” (“APB No. 25”) and relatedinterpretations in accounting for its employee stock option compensation plans.Under APB No. 25, compensation expense is measured using the intrinsicvalue method as the difference, if any, between the optionexercise price and the fair value of our common stock at the date of grant. Wehave historically granted options to employees and directors at exercise pricesequal to the fair value of the Company’s common stock. Accordingly, no 

 

8

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compensationexpense has been recognized for our employee stock-based compensation plans.

 

Had compensation costs for stock optionsissued to employees and directors been determined based on the estimated fairvalue at the grant dates as calculated in accordance with SFAS 123 using theBlack-Scholes option pricing model and amortized over the vesting period, ourreported net loss and basic and diluted net loss per common share for the threeand six months ended June 30,2005 and 2004 would have been adjusted to the pro forma amounts indicatedbelow:

 
| ** **                                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss applicable to common stockholders:                          |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                          |       | $                                    | (514,309   | )                                  | $          | (963,100 | ) | $ | (1,478,262 | ) | $ | (1,900,812 | ) |
| Pro forma compensation expense using fair  value method              |       | (80,908                              | )          | (66,427                            | )          | (146,943 | ) | (126,685 | ) |
| Pro forma net loss                                                   |       | $                                    | (595,217   | )                                  | $          | (1,029,527 | ) | $ | (1,625,205 | ) | $ | (2,027,497 | ) |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Basic and diluted loss per share applicable  to common stockholders: |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                          |       | $                                    | (0.05      | )                                  | $          | (0.12 | ) | $ | (0.13 | ) | $ | (0.29 | ) |
| Pro forma                                                            |       | $                                    | (0.05      | )                                  | $          | (0.13 | ) | $ | (0.15 | ) | $ | (0.31 | ) |

 

As a result of amendments to SFAS 123, theCompany will be required to expense the fair value of employee stock optionsover the service period beginning with the quarter ending March 31, 2006.

 

7.                                       Stockholders’ Equity

 

Preferred Stock

 

In March 2003, we authorized and issued 1,000,000shares of Series A Convertible Preferred Stock(the “Series A Shares”), which were created pursuant to the terms of aCertificate of Designations, for an aggregate of $950,000 in cash. Each Series A Share is convertible into one share of common stock. Inconnection with this financing, the purchasers of Series A Shares were granted several significant rights senior tothe rights of holders of our common stock. Among other rights, in the event ofa liquidation, dissolution or winding up of our Company (includingconsolidations, mergers or other sales), holders of Series A Shares willbe entitled to receive $3.80 per share, in preference to any distribution tothe holders of common stock. Also, pursuant to the Certificate of Designations,we must obtain the consent of the holders of at least two-thirds of theoutstanding Series A Shares in order to undertakecertain actions, including significant capital expenditures and the issuance ofequity securities. Additionally, for as long as Series A Shares remainoutstanding beyond April 2004, the holders of Series A Shares will beentitled to elect the greater of (i) two members of our Board of Directorsor (ii) 25% of the total members of our Board of Directors.

 

In June 2004,we amended the Series A Certificate ofDesignations to allow us the right to issue equity securities for less than$2.00 per share. For that right, the Series A holders received 1,400,000shares of Viking common stock valued at $28,000, and we redeemed 85,000 Series A Shares for $200,000. In addition, we have obtained theright to redeem an additional 300,000 Series AShares at any time on or before January 15, 2006 for $500,000. The fairvalue of the Viking shares distributed of $28,000 and the $103,985 excess ofthe $200,000 payment over the prior contractual redemption value of the Series Ashares have been 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 an equal number of shares ofour common stock.

 

The holders of the outstanding Series A Shares have the right to one vote for each share of commonstock into which such Series A Shares could then be converted, and withrespect to such vote, such holder shall have full voting rights and powersequal to the voting rights and powers of the holders of common stock.

 

The holders of Series AShares are entitled to receive dividends, out of any assets legally availabletherefore, prior and in preference to any declaration or payment of any cashdividend on the common stock, at the rate of $0.1425 per share per annum.

 

9

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8.                                       Subsequent Events

 

On July 19, 2005, at the annual meetingof the stockholders we received approval to issue securities representing morethan 20% of the outstanding voting power in connection with a private placementfinancing, to increase the aggregate number of shares of common stock availablefor issuance under our 1997 Stock Option/Stock Issuance plan from 2,592,500 to 4,000,000,to increase the aggregate number of shares of common stock available forissuance under our 1997 Employee Stock Purchase Plan from 150,000 to 300,000and to amend our Second Restated Certificate of Incorporation to increase theauthorized shares of common stock from 35,000,000 to 70,000,000.

 

On July 26, 2005, we closed the private placement of 8.33 millionUnits at a purchase price of $0.30 per Unit, with each Unit consisting of oneshare of common stock and a warrant to purchase one share of common stock, foraggregate gross proceeds of approximately $2.5 million, or $2.2 million net ofexpenses. The warrants have an exercise price of $0.30 per share and have aterm of five years. We have agreed to file a registration statement coveringthe shares of common stock and the common stock underlying the warrants sold inthe private placement on or before September 9, 2005.

 

We intend to use the net proceeds of the private placement fordevelopment and expansion of our Obesity Surgery Management Services business,including working capital, funding of anticipated operating losses,infrastructure development, expenses associated with marketing efforts andpayment of corporate overhead and may also use a portion of the proceeds,currently intended for general corporate purposes, to invest in acquisitions,joint ventures or other collaborative arrangements, or to invest in or acquireproducts or services.

 

In connection with the private placement, wecompleted an exchange with the holders of the outstanding Series A Preferred Stock. In this transaction, the holders of Series A Preferred Stock exchanged their 826,447 shares of Series APreferred Stock for 1,246,086 Units, 526,447 shares of common stock and$126,406 in cash. As a result of this exchange, we have no outstanding sharesof Series A Preferred Stock after July 26,2005.

 

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 OUTLOOK REPRESENTS OUR CURRENT JUDGMENT ON THEFUTURE DIRECTION OF OUR BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSEACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTEDBELOW. 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 FOLLOWINGDISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIALSTATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ONFORM 10-QSB AND OUR 2004 ANNUAL REPORT ON FORM 10-K AS AMENDED, FILEDWITH THE SECURITIES AND EXCHANGE COMMISSION.

 

**Overview of our business**

** **

Our company, iVOW, Inc., formerly VistaMedical Technologies, Inc., was founded in 1993 primarily to developadvanced visualization technologies for complex minimally invasive surgicalprocedures. It was through the application of this technology in laparoscopicgastric bypass surgery that we subsequently developed a suite of consultingproducts and services for the initiation, operation and management of obesity surgeryprograms. Starting in early 2003, our Visualization Technology business,located in Westborough, Massachusetts, and our Obesity Surgery ManagementServices business unit, located in Carlsbad, California, functioned asindividual business units. In April 2004, we sold the VisualizationTechnology business to concentrate on the obesity surgery services market. Wechanged our name to iVOW, Inc. in February 2005, after merging ourwholly owned subsidiary VOW Solutions, Inc., to align our corporate name withthe brand name of our chronic and morbid obesity disease management business,which is now our exclusive focus.

 

We originally began offering training andconsulting services to the obesity surgery market in 2001. As a result of thedisposition of our Visualization Technology business, we are now a pure playcompany in the bariatric market. We develop and market products and servicesfor the bariatric surgery market. Bariatrics is the medical science of weightreduction and nutrition; bariatric surgery, a specialized area of generalsurgery, is focused on surgical weight reduction solutions for the veryseverely or morbidly obese. We are exclusively focused on implementing diseasemanagement strategies for the control of chronic and severe obesity. Our visionis to enable healthcare providers and organizations in the ongoing evolution ofthe highest standards of treatment and services to optimize the quality of lifefor chronic and morbidly obese patients. Our mission is to deliver the leadingmanagement portfolio of services and products for the clinical and businessdevelopment of continually successful medical and surgical programs for thetreatment of chronic and morbid obesity.

 

Our goal is to become the leading diseasemanagement and consulting company focused on chronic and morbid obesity. Ourinitial focus on the severely obese patient and gastric bypass surgery as thesolution is the platform upon which we will expand service to new obesitytherapies as they are developed. We also plan to integrate a bariatric medicalmodel into our surgical protocols, both to facilitate the long term care ofpost-surgical patients, and in due course, to treat obese patients who are notqualified for surgery.

 

**Subsequent Events**

 

On July 19, 2005, at the annual meetingof the stockholders we received approval to issue securities representing morethan 20% of the outstanding voting power in connection with a private placementfinancing, to increase the aggregate number of shares of common stock availablefor issuance under our 1997 Stock Option/Stock Issuance plan from 2,592,500 to4,000,000, to increase the aggregate number of shares of common stock availablefor issuance under our 1997 Employee Stock Purchase Plan from 150,000 to300,000 and to amend our Second Restated Certificate of Incorporation toincrease the authorized shares of common stock from 35,000,000 to 70,000,000.

 

On July 26, 2005, we closed the private placement of 8.33 millionUnits at a purchase price of $0.30 per Unit, with each Unit consisting of oneshare of common stock and a warrant to purchase one share of common stock, foraggregate gross proceeds of approximately $2.5 million, or $2.2 million net ofexpenses. The warrants have an exercise price of $0.30 per share and have aterm of five years. We have agreed to file a registration statement coveringthe shares of common stock and the common stock underlying the warrants sold inthe private placement on or before September 9, 2005.

 

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We intend to use the net proceeds of the private placement fordevelopment and expansion of our Obesity Surgery Management Services business,including working capital, funding of anticipated operating losses,infrastructure development, expenses associated with marketing efforts andpayment of corporate overhead and may also use a portion of the proceeds,currently intended for general corporate purposes, to invest in acquisitions,joint ventures or other collaborative arrangements, or to invest in or acquireproducts or services.

 

In connection with the private placement, wecompleted an exchange with the holders of the outstanding Series A Preferred Stock. In this transaction, the holders of Series A Preferred Stock exchanged their 826,447 shares of Series APreferred Stock for 1,246,086 Units, 526,447 shares of common stock and$126,406 in cash. As a result of this exchange, we have no outstanding sharesof Series A Preferred Stock after July 26,2005.

 

**Critical Accounting Policies**

 

The preparation of financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States of America requires management to make judgments,assumptions and estimates that affect the amounts reported in our condensedfinancial statements and the accompanying notes. 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. Actualresults could differ from these estimates. The following critical accountingpolicies are significantly affected by judgments, assumptions and estimatesused in the preparation of the condensed financial statements.

 

**Revenue Recognition**

 

Revenue generated from our disease statemanagement of morbid obesity business is recognized (i) with regard tomanagement services, upon completion of the service period and (ii) withregard to training services or other consulting services, upon completion ofthe related training or consulting component, provided that a contract exists,there are no uncertainties regarding customer acceptance, the sales price isfixed or determinable and collection is reasonably assured. Any paymentsreceived in advance of completion of the service are recorded as deferredrevenue. Sales of vitamins are similarly recognized upon shipment provided thata purchase order has been received, there are no uncertainties regardingcustomer acceptance, the sales price is fixed or determinable and collection isreasonably assured.

 

Sales returns are estimated based on thehistorical experience and management’s expectations and are recorded at thetime 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 royalty payments due after April 15, 2005will be recognized as revenue on a straight-line basis over the related royaltypayment term.

 

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

 

**Our results of operations for three-monthsand six-months ended June 30, 2005 versus three-months and six-monthsended June 30, 2004**

 

Revenues.   Managementand consulting services, product sales and contract revenue for the three andsix-months ended June 30, 2005 were $253,000 and $493,000, respectively,compared to $303,000 and $903,000 for the same periods ended June 30,2004.     The decrease in revenue forperiod was associated with lower training and consulting services and contractrevenue. While total revenues for the three and six-month periods decreased,our iVOW program management fees increased as a result of signing up our secondfull-fledged iVOW center in April 2005. We also saw an increase in vitaminsales for both periods. We anticipate that revenues in the third quarter willincrease slightly over current levels with greater quarterly growth expected inlater quarters. The decrease associated with lower training and consulting feeswas the result of a change in the market as demand shifted from the requirementto be surgically trained to more of a focus on the operational aspects ofbariatric programs. Also playing a part in the reduction was payor uncertainty.Contract revenue decreased as a result of our strategic alliance agreement withEES ending in December 2004.

 

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| **Increase/(decrease) over prior year** | ** ** | **Three Months   ended   June 30, 2005** | ** ** | **Six months   ended   June 30, 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| Management fees                         |       | $                                             | 104,000    |                                        | $          | 150,000 |   |
| Training and consulting fees            |       | (46,000                                       | )          | (349,000                                    | )          |
| Vitamins sales                          |       | 17,000                                        |       | 39,000                                      |       |
| Contract revenue                        |       | (125,000                                      | )          | (250,000                                    | )          |
|                                    |       | $                                             | (50,000    | )                                           | $          | (410,000 | ) |

 

Cost of revenues. Our cost of revenuesincludes direct costs associated with generating management and consultingservices revenues along with the fully burdened cost of our vitamin sales. Costsof revenues for the three and six-months ended June 30, 2005 were $237,000and $523,000, respectively, compared to $253,000 and $632,000 for the three andsix-months ended June 30, 2004. The decrease in the three-months ended June 30,2005 was primarily due to lower spending associated with a reduction in staffthat resulted in a savings of $14,000 along with a reduction of $52,000 indirect costs related to the decrease of $46,000 in revenues in the areas oftraining and consulting services. These reductions were offset by an increasein the area of management fee costs of $49,000 due to signing up a new iVOWcenter early in the second quarter of 2005. The decrease for the six-monthperiod ended June 30, 2005 was primarily due to lower spending of $253,000in direct training and consulting services costs directly related to thedecrease of $349,000 in revenues in the related areas along with an offset of$134,000 due to increased management fee costs associated with preparing forand signing up the new iVOW center in early April 2005. Increased revenuesin future quarters may bring an increase in cost of revenues. The level ofincrease is difficult to project due to varying costs associated with eachrevenue type.

 

Productdevelopment. Product development expenses were$23,000 and $100,000 for the three and six-months ended June 30, 2005,respectively, compared to $97,000 and $179,000 for the three and six-monthsended June 30, 2004, respectively. This $74,000 decrease in the threemonth period ended June 30, 2005 was primarily related to a reduction instaff time being invested in the development of training programs due to staffreductions that took effect at the end of March 2005 and the completion ofthe training programs that were under development. The quarter ended June 30,2005 decrease was the primary cause for the decrease of $79,000 in productdevelopment expense for the six-month period ended June 30, 2005.

 

Sales andmarketing expenses. Sales and marketing expenseswere $216,000 and $489,000 for the three and six-months ended June 30,2005, respectively, and $249,000 and $421,000 for the three and six-monthsended June 30, 2004, respectively. The $33,000 decrease was primarily dueto lower salaries of $9,000 due to staff reduction and related expenseallocations for facilities of approximately $34,000 offset by increasedadvertising and promotion expense of $10,000. The increase in expense of$68,000 for the six month period ended June 30, 2005 over the same periodin 2004 was primarily due to first quarter spending associated with staffingexpenses of $38,000, travel related expense of $10,000 and advertising andpromotion of $56,000. The increase in expenses was offset by a decrease infacility expense allocation. We expect to see an increase in our sales andmarketing expenses during the coming quarters as we increase our marketpresents.

 

General andadministrative expenses. General and administrativeexpenses were $394,000 and $966,000 for the three and six-months ended June 30,2005, respectively, and $370,000 and $740,000 for the three and six-monthsended June 30, 2004, respectively. The $24,000 increase in the threemonths ended June 30, 2005 was primarily the result of public companyexpense associated with compensation paid to our independent board members in2005 for which there was no expense in 2004. The majority of the increase of$226,000 for the six months ended 2005 over 2004 was a result of an increasedstaffing expense of approximately $93,000, which was primarily associated withthe quarter ended March 31, 2005 and prior to staff reductions late inthat quarter, public company expenses, specifically board compensation expensesof $53,000, for which there was no expense in 2004 and facility allocationexpense of $51,000. We expect our general and administrative expenses toincrease during the coming quarters as we continue to implement procedures tocomply with the Sarbanes-Oxley Act of 2002.

 

Other incomeand expense. For the three and six-months ended June 30,2005 other income, net of expense was $4,000 and $10,000, respectively,compared to $4,000 and $3,000, respectively, for the same periods last year. Thisincrease for the six-months ended was primarily related to interest incomeearned on higher average cash balances.

 

Discontinuedoperations. For the three and six-months ended June 30,2005 we recognized $129,000 and $133,000, respectively, in income from the gainon the sale of our technology business. The gain on the sale is the result ofhaving recognized and collected payments from the buyer, Viking Systems, Inc.,greater than the value of the assets sold in 

 

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April 2004 along with therecognition of royalties receivable on the $300,000minimum royalty due in October 2005 for the period May 2005 through October 2005.  For the three-month period ended June 30,2005 we collected and recognized $79,000 and recognized $50,000 of the royaltydue. For the six-month period we collected and recognized $83,000 andrecognized $50,000 of the royalty due. We expect to recognize additional gainsin the future as minimum royalties are recognized on a straight-line basis overthe coming periods. The loss from discontinued operations for the quarter endedJune 30, 2004 was $133,000 and for the six-months it was $633,000.

 

**Liquidity and capital resources**

 

Net cash used in operating activities for thesix-months ended June 30, 2005 was $1,407,000 compared to net cash used of$1,272,000 for the corresponding six-month period in 2004. The $135,000increase in net cash used in operating activities during the 2005 period isprimarily attributable the cash generated from changes in assets andliabilities related to discontinued operations of $379,000 in 2004 and offsetby a lower net loss of $256,000 for 2005 with the difference of $12,000 relatedto other balance sheet account activities.

 

Net cash provided by investing activities was$180,000 for the six-months ended June 30, 2005 compared to net cash providedby investing activities of $377,000 in the same period in 2004. The $197,000increase in net cash provided by investing activities during 2004 over 2005 wasprimarily attributable to maturities of short-term investments of $184,000 in2004 with the difference attributed to higher equipment purchases in 2004 over2005 of $17,000 and higher proceeds from the sale of the VisualizationTechnology business of $30,000 in 2004.

 

Net cash used in financing activities was$99,000 for the three-months ended June 30, 2005, compared to net cashprovided by financing activities of $4,260,000 for the same period in 2004. The$4,359,000 decrease in net cash provided by financing activities in 2005 comparedto 2004 period was primarily attributable to 2004 activity that included theprivate placement of units of our common stock and warrants for net proceeds ofapproximately of $4,660,000, less payment of $200,000 for the redemption of ourSeries A preferred stock and payment on short-term bank borrowings of$200,000, compared to 2005 activity that included repayment of $109,000 inshort-term borrowings associated with financing our insurance premiums and in2004.

 

Since our formation in July 1993, and asof June 30, 2005, we have incurred cumulative net losses of $73.4 million.At June 30, 2005, we had cash and cash equivalents of $644,000. We believethat our cash and cash equivalents, together with the recently closed $2.5million private placement in July 2005 and the projected product revenues,royalties and interest income, will be sufficient to meet our anticipatedcapital requirements through at least June 2006. As a result, we may haveto raise additional capital to fund our operations beyond June 2006. Thesefactors raise substantial doubt about our ability to continue as a goingconcern. Should we be unable to raise sufficient funds in the future to fundour operations beyond June 2006, we may be required to curtail ouroperating plans and possibly relinquish rights to portions of our intellectualproperty or products. In addition, increases in expenses and delays in signingnew management and consulting contracts may adversely impact our cash positionand 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.

 

## **Item 3**                                                              **Quantitative andQualitative Disclosures About Market Risk**

##  

At June 30, 2005, our investmentportfolio included no fixed-income securities.

 

At June 30, 2005, our investment in equitysecurities of Viking Systems, Inc. is held as available for salesecurities. Accordingly, there is a significant risk of negative adjustments tothe carrying value due to possible market fluctuations in its stock price.

 

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## **RISKSAND UNCERTAINTIES**

##  

*You should carefullyconsider the following risks and uncertainties before you invest in our commonstock. Investing in our common stock involves risk. If any of the followingrisks or uncertainties actually occur, our business,financial condition or results of operations could be materially adverselyaffected. Additional risks and uncertainties of which we are unaware or whichwe currently believe are immaterial could also materially adversely affect ourbusiness, financial condition or results of operations. In any case, thetrading price of our common stock could decline, and you could lose all or partof your investment.*

 

**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 June 30, 2005, wehave incurred cumulative net losses of $73.4 million. Specifically, we incurrednet losses of $1.1 million in 2002, $2.2 million in 2003, $3.9 million in 2004and $1.4 million in the first half of 2005. We expect to incur losses for thenext several quarters as we continue to implement our business plan. However,we may never achieve or sustain profitability in the future. Even if we achieveprofitability, we may not be able to sustain it on an ongoing basis.

 

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

** **

Although we have been involved in the development of bariatric surgicalprograms since 2000, we have never directly managed these programs. As such, wehave only a limited and indirect operating history upon which an evaluation ofour prospects can be based. In addition, the bariatric surgical market isrelatively new and is evolving rapidly, which can cause changes in the wayclients react to the services offered. We have yet to prove that our managementmodel is appropriate for the market we are addressing. To be successful, it iscrucial that we develop strong affiliations with hospitals and surgicalcenters, and we have not yet proven our ability to do so. We have establishedonly two****significant operatingagreements with hospitals to date. To successfully implement 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 to providecoverage for gastric bypass surgery. Doctors, hospitals, surgical practices andthose companies that support the obesity surgery market will adapt theirbusinesses to the evolving reimbursement and payor policies. We believe thatfor many of these parties Medicare’s decision on the coverage of gastric bypasssurgery is a critical step in their business analysis, which has resulted in aslowdown in market growth.

 

Also, we must respond to competitive developments and attract, retainand motivate experienced staff. There can be no assurance that we will besuccessful in addressing those market conditions or in implementing ourbusiness strategy. There can be no assurance that we will be able to achieve orsustain 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 revenues and operating results to fluctuateunpredictably due to a combination of factors, including the potential costs ofestablishing 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). Inaddition, our operating expenses are based on our expectations of futurerevenues, and are relatively fixed in the short term. We may be unable toadjust spending quickly enough to offset any unexpected revenue shortfall. Ifwe have a shortfall in revenues in relation to our expenses, or if our expensesincrease before our revenues do, then our business for a particular periodwould be materially adversely affected.

 

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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 following may result:

 

•                  the market trading price of our common stock mayfluctuate, negatively impacting the ability of stockholders to buy and sell ourshares at consistent prices;

 

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

 

•                  investors may be less willing to purchase our sharesfor lack of consistent operating results.

 

**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 will not have an ownership interest in thoseprograms, which will make it more difficult to sustain revenues. We will notenjoy directly increased revenue based on the profitability or increased valueof particular surgical centers. Likewise, without an ownership interest insurgical centers, we are subject to all the risks of any service provider; ourservices could be terminated at the end of any contract period.

 

**Roll-out of our iVOWCenters depends on our entering into agreements with hospitals and surgeons;the time to conclude these agreements may be extended and thereby delay orprevent the implementation of our strategy.**

** **

We plan to set up our iVOW Centers in conjunction with hospitals andsurgeons. There can be no assurance that we will be able to negotiate theestablishment of these Centers in a timely manner or on terms satisfactory tous, if at all. Our experience to date is limited to two existing managementcontract in place since February 2004, one contract entered into in August 2004and an additional contract entered into in March 2005. We are in activenegotiation for others; however, we cannot accurately predict the time andexpense involved in these negotiations, and any unexpected delays couldnegatively impact the execution of our strategic plan. Any inability to timelyestablish additional iVOW Centers will harm our cash position and increase ourneed to raise additional capital.

 

**We need to increase marketawareness 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 national level. Whilewe have previously supplied clinical training and consulting services tovarious clients, we have only begun to promote our program management services.As a result, providers of bariatric surgery are not yet generally aware of theservices we offer. In order to accomplish our strategic and business plans, wewill have to quickly and effectively increase market awareness of ourmanagement model and the iVOW brand name, and convince doctors, hospitals andpatients of the benefits of these services. Among other things, this willrequire that we:

 

•                  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 ourprojections will prove accurate or that we will be able to provide theanticipated metrics. Our projections are based on limited input and operationalhistory and failure to meet such projections will negatively impact ourrelationships with surgical centers and our ability to attract business fromadditional centers.

 

**Thelicense fees Viking Systems, Inc. owes us may not exceed the minimumroyalty amounts.**

 

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

 

16

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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 it 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 raiseadditional funds to support our operations. These funds may not be available onacceptable terms, if at all.**

** **

At June 30, 2005, we had cash and cash equivalents of $644,000. Webelieve that our cash and cash equivalents, together with the recently closed$2.5 million private placement in July 2005 and the projected productrevenues, royalties and interest income, will be sufficient to meet ouranticipated capital requirements through June 2006. As a result, we mayneed to raise additional capital to fund our operations beyond June 2006. Anyfuture funding transaction may require us to relinquish rights to some of ourintellectual property or products, and will be dilutive to our existingstockholders. 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 areunable to secure additional capital, we may be unable to sustain operationsbeyond June 2006, and you may 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. The amount of additional capital that we needto raise will depend on many factors, including:

 

•                  the extent to which the iVOW Centers and otherservices gain market acceptance;

 

•                  the speed with which we can execute our businessplan, including our sales and marketing activities and the costs to establishiVOW Centers;

 

•                  the levels of reimbursement for proceduresperformed; and

 

•                  the extent 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 with any such laws and regulations, then thepenalties involved could be serious, time-consuming for management andexpensive. Inexperience in health care services could contribute to aninadvertent breach of laws or 

 

17

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regulations.

 

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

 

•                  protect individual privacy by limiting theuses and disclosures of patient information;

 

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

 

•                  prescribe specific transaction formats and datacode 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 areunable to estimate the total financial impact of our continuing compliance withHIPAA requirements or of any future changes 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. Many states have adopted or are consideringsimilar legislative proposals to prohibit the payment or receipt ofremuneration for the referral of patients and physician self-referrals,regardless of the source of the payment for the care. These laws andregulations are extremely complex, and little judicial or regulatoryinterpretation exists. If the activities of a client of ours or other entity withwhich we have a business relationship were found to constitute a violation ofanti-referral laws, and we were found to have knowingly participated in suchactivities, we could be subject to sanction or liability 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. For example, we are aware of developments,primarily involving stimulation or balloon technology, which may come to themarket in the next few years. These devices would be implanted in a relativelysimple endoscopic procedure. These alternatives may prove to be more effective,less risky and/or cheaper than gastric bypass. If this turns out to be thecase, our ability to generate revenues will be negatively affected. Also, manypharmaceutical companies are researching drug therapies for combating obesity. Ifthey prove successful in finding a more effective solution for morbid obesity,then demand for a surgical option is likely to decline substantially. We cannotguarantee that we will compete successfully against our current or potentialcompetitors, especially those with significantly greater financial resources orbrand 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 ourknowledge, include bariatric surgeons in 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 haveonly a partial service offering, which may allow them, because of loweroverhead, to operate in their niche at a price advantage to full-servicecompanies such as ours. In any case, we expect that the market will continue tobe 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 tomanage and staff our Centers. There is likely to be a competitive labor marketfor such staff and there is no assurance that we will be able to attract andretain an adequate number of suitable employees. If we are unable to do this,then we may not be able to operate and expand our Centers as planned, which mayreduce our revenues.

 

To be successful, we must strengthen awareness of our services throughour marketing efforts and through establishment of additional iVOW Centers. Wehave a limited marketing and business development force through which the 

 

18

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efforts will beconducted, and we will rely heavily on each of these individuals. We cannotassure you that we will be able to attract and retain sufficient qualified personnel.

 

Our current key employees are Michael H. Owens, M.D., Chief ExecutiveOfficer, President and Chief Medical Officer; Howard Sampson, Chief FinancialOfficer; Joann Harper, Vice President of Product: development, implementation,and operations; Mary Lou Walen, Associate Vice President, Customer Relations;and Aimee Johnston, Associate Vice President, Sales and Bariatric ManagementServices. We do not maintain key personnel life insurance policies on any ofthese 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 a result, they only spend a limited amountof time on our business. Although we have entered into consulting agreements,including confidentiality provisions with each of the members of our clinicaladvisory board, the consulting and confidentiality agreements between us andeach of the members of our clinicaladvisory 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. We have only recently begun to focus onproviding management services, and we have hired persons with appropriateskills. However, these people have not previously worked together, and it willtake time and effort to develop efficient working processes and relationships. Wewill need to continue to improve our operational and financial systems andmanagerial controls and procedures, and we will need to continue to expand,train and manage our workforce. We are a small company with limited resources,so we lack the ability to increase our capacity to provide services prior toassurances that those services will be paid for by customers. As a result, eachnew management contract will require significant operational efforts as we hirepersonnel to staff the new project. We will have to maintain close coordinationamong our technical, accounting, finance, marketing and sales departments.

 

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

 

**Our common stock may besubject to delisting from the Nasdaq SmallCap Marketbecause we fail to maintain compliance with continued listing criteria.**

** **

The quantitative standards for continued listing onthe Nasdaq SmallCap Market requires a company to maintain a bid pricefor its stock of $1.00 per share and maintain a stockholders’ equity of atleast $2,500,000 (or satisfy alternative requirements). Failure to comply withthese requirements subjects a company to delisting proceedings. We have twiceover the past 3 years been subjected to delisting proceedings from Nasdaq for failure to meet the minimum stockholders’ equityrequirement. Each time we eventually regained compliance by raising additionaloperating capital.

 

On April 28, 2005, we received notification from Nasdaq indicatingthat for the last 30 consecutive business days, the bid price of our commonstock closed below the minimum $1.00 per share requirement for continuedinclusion under Marketplace Rule 4310(c)(4). The Nasdaq notice indicatedthat we will be provided 180 calendar days, or until October 25, 2005, toregain compliance by having the bid price of our common stock close at $1.00per share or above for a minimum of 10 consecutive trading days prior to October 25,2005. At our Annual Meeting on July 19, 2005, our stockholders authorizedour Board of Directors, and its discretion, to effecta reverse stock split of our common stock by filing an amendment to ourexisting Certificate of Incorporation. Our Board has not effectedthe reverse stock split, but will continue to monitor the bid price of ourcommon stock to determine whether to complete a reverse stock split prior tothe October 25, 2005 compliance deadline. We also cannot assure you thatif we increase the bid price of our common stock by effectinga reverse stock split, that our common stock will maintain a bid price of atleast $1.00 per share as required by Nasdaq.

 

If we have not regained compliance by October 25, 2005, the Staffof the Nasdaq will determine whether we meet theinitial listing criteria for the Nasdaq SmallCap Market set forth inMarketplace Rule 4310(c), except for the bid price requirement. If we meetthe initial listing criteria, the Staff will provide us an additional 180calendar day compliance period. If we are not eligible for an additionalcompliance period, the Staff will provide written notification that oursecurities will be delisted. At that time, we may appeal the Staff’sdetermination to delist our common stock to a Listing Qualifications Panel.

 

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On May 17, 2005, wereceived a second notification from Nasdaq indicating that we were not incompliance with Marketplace Rule 4310(c)(2)(B),which requires us to have a minimum of $2,500,000 in stockholders’ equity,$35,000,000 market value of listed securities or $500,000 of net income fromcontinuing operations for the most recently completed fiscal year or two of thethree most recently completed fiscal years.  Nasdaqalso requested us to submit a detailed plan regarding our proposal to achieveand subsequently comply with all of the continued listing requirements of theNasdaq SmallCap Market.We submitted a plan to Nasdaq on June 1, 2005, in which we indicated that weintended to achieve and maintain compliance with the $2,500,000 stockholders’equity requirement by completing a private placement and by reducing operatingcosts.  On July 20, 2005, we received a letter from Nasdaq stating that it believed we had provided a definitiveplan to achieve and sustain compliance with the $2,500,000 stockholders’ equityrequirement, and as a result, granted an extension of time to complete privateplacement. We completed theprivate placement on July 26, 2005, raising aggregate gross proceeds ofapproximately $2.5 million.  With the completion of this privateplacement, our stockholders’ equity exceeds $2,500,000 as of the date of thisquarterly report.  On August 3, 2005, we received a letter fromNasdaq stating that it has determined that we comply with Rule 4310(c)(2)(B)(i).  Nasdaq, however,will continue to monitor our ongoingcompliance with the stockholders’ equity requirement and, if at the time of itsnext periodic report (a Form 10-QSB due November 14, 2005 for thequarter ending September 30, 2005), we do not evidence compliance, we maybe subject to delisting.  In the event we do not comply with thestockholders’ equity requirement for the quarter ended September 30, 2005,Nasdaq will provide us with a written notificationthat its securities will be delisted.  In such event, we may appeal thedecision to a Nasdaq Listing Qualifications Panel.

 

We cannot assure you that we will be able to maintain our stockholders’equity above $2,500,000. In addition, we received 1,654,000 shares of commonstock 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 June 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 inthe trading price of Viking’s common stock would negatively affect ourfinancial position and, specifically, our stockholders’ equity balance. Anyreduction in our stockholders’ equity associated with a drop in the tradingprice of Viking common stock would subject us to delisting proceedings by Nasdaq.

 

If we are unable to comply with Nasdaq’scontinued listing requirements, our securities will be delisted from the NasdaqSmallCap Market. The delisting of our common stock from the Nasdaq SmallCapMarket may materially impair our stockholders’ ability to buy and sell sharesof our common stock and could have an adverse effect on the market price of,and the efficiency of the trading market for, our common stock. In addition,the delisting of our common stock could significantly impair our ability toraise capital should we desire to do so in the future.

 

**We will have substantialdiscretion over the use of proceeds.**

 

Our******management will retain broaddiscretion over the use of proceeds from the private placement we closed on July 26,2005.    The amounts and timing of theexpenditures may vary significantly depending on numerous factors, includingour ability to develop and expand our Obesity Surgery Management Servicesbusiness, the competitive environment for our service offerings and theavailability of opportunities to acquire or invest in complementary businesses,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,we issued 8,333,288 shares of common stock and warrants to purchase 8,333,288shares of common stock. We also issued a warrant for 416,664 shares of commonstock and for a warrant to purchase 416,664 shares of common stock to ourplacement agent, Dawson James Securities. In connection with the privateplacement, we issued 1,772,533 shares of common stock and warrants to purchase1,246,086 shares of common stock in exchange for the 826,447 outstanding sharesof Series A preferred stock. In total, we issued10,105,821 shares of common stock and warrants to purchase 10,412,702 shares ofcommon stock in the private placement and the Series Aexchange.

 

As of August 1, 2005, we had 21,168,167 shares of outstandingcommon stock. As a result, the 20,518,523 shares of common stock we issued inthe 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 agreed to file a registrationstatement on or before September 9, 2005, covering the 9,579,374 shares ofcommon stock and warrants to purchase the 10,412,702 shares of common stockissued in the private 

 

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placement and theSeries A exchange. Following the effective date of the registrationstatement, these shares will be transferable in the public market (subject toapplicable transfer restrictions on the shares held by our affiliates). Salesof these shares of common stock, or the perception that such sales might occur,could cause the market price of our common 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, we only have approximately 220stockholders of record and the average daily trading volume in our stock isapproximately 27,000****shares. Thelimited trading market for our common stock may cause fluctuations in themarket value of our common stock to be exaggerated, leading to price volatilityin excess of that which would occur in a more active trading market. The lackof an active trading market in our stock may also cause investors to be unableto sell all of their desired shares of common stock on short notice and thesale of a large number of shares at onetime could temporarily depress the market price. An investment in our companyis highly speculative, and an investor should be able to withstand a total lossof the investment.

 

**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. Themarket price of our common stock has historically been highly volatile. Forexample, between July 2004 and July 2005, the trading price of ourcommon stock ranged from $0.30 to $3.00. The trading price of our common stockmay continue to be significantly affected by factors such as:

 

•                  actual or anticipated fluctuations in our operatingresults,

 

•                  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 or proprietaryrights,

 

•                  conditions and trends in the medical device and othertechnology industries,

 

•                  adoption of new accounting standards affecting themedical 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 marketfluctuations may adversely affect the market price of our common stock. In thepast, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often been broughtagainst that company. Such litigation, if brought against us, could result insubstantial costs and a diversion 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 should be aware that any security issuance mayresult in reduction of the book value or market price, if any, of theoutstanding shares of common stock. If we issue anyadditional shares of common stock or preferred stock, such issuance will reducethe proportionate ownership and voting power of each other stockholder. Further,any new issuance of shares may result in a change of control of our managementor 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 our stockholders,which could affect our stock price adversely**

 

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**and**prevent attempts by our stockholders to replace or remove our currentmanagement.

** **

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 ofthe Delaware 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.

 

**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. Despitethese precautions, it may be possible for unauthorized parties to copy ourintellectual property or otherwise obtain and use information that we regard asproprietary. We do not have any patent protection for our business, andexisting intellectual property laws provide only limited protection. We haveexpended significant efforts devising the types of products and services wewill offer and the manner in which these will be delivered. Our ability tomaintain the secrecy and confidentiality of our trade secrets and internalknowledge are crucial to the success of our business. Any failure to do so maynegatively impact our prospects. We also may not be able to detect unauthorizeduse and take appropriate steps to enforce our intellectual 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, in the event that any of those productsproves to be defective, we may be required to recall or redesign such products.Product liability insurance is expensive and in the future may not be availableto us on acceptable terms, if at all. A successful product liability claim orseries of claims brought against us in excess of our insurance coverage wouldnegatively impact our business.

 

**If we are unable toprotect our intellectual property related to the technology transferred toViking Systems, we may be unable to prevent other companies from using thistechnology in competitive products.**

** **

We maintain ownership of the technology transferred to Viking Systems, Inc.in connection with the sale of our Visualization Technology business in April 2004.In the event Viking Systems does not make the required royalty payments to us,their rights in the technology will be terminated. In such case, we will beable to continue to commercialize that technology. To the extent we decide toincorporate that technology into our business, our future success will depend,in part, on our ability to continue developing patentable products, enforcingour patents and obtaining patent protection for our products both in the UnitedStates and in other countries. The patent positions of medical devicecompanies, however, are generally uncertain and involve complex legal andfactual questions. Patents may never issue from any patent applications ownedby or licensed to us. Even if patents do issue, the claims allowed may not besufficiently broad to protect our technology. In addition, issued patents ownedby or licensed to us may be challenged, invalidated or circumvented, or the 

 

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rights grantedthereunder may not provide us with competitive advantages. Further, the medicaldevice industry has been characterized by extensive litigation regardingpatents and other intellectual property rights. Litigation, which would resultin substantial expense, may be necessary to enforce any patents issued orlicensed to us and/or to determine the scope and validity of proprietary rightsof third parties or whether our products, processes or procedures infringe anysuch third-party proprietary rights.

 

In addition to patents, we rely on unpatented trade secrets to protectour business and our proprietary technology. Others may independently developor otherwise acquire the same or substantially equivalent plans or technologiesor otherwise gain access to our proprietary technology or disclose our plans ortechnology. It is difficult to protect rights to unpatented ideas, plans orproprietary technology. Third parties may obtain patent rights to theseunpatented trade secrets, which patent rights could be used to assert claimsagainst us. We also rely on confidentiality agreements with our collaborators,employees, advisors, vendors and consultants to protect our proprietarytechnology. These agreements may be breached, we may not have adequate remediesfor any breach and our trade secrets may otherwise become known or be independently developed by competitors. Inaddition, our agreements with employees and consultants require disclosure ofideas, developments, discoveries or inventions conceived during employment orconsulting, as the case may be, and assignment to us of proprietary rights to suchmatters related to our business and technology. The extent to which efforts byothers will result in patents and the effect on us of the issuance of suchpatents is unknown.

 

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Item 3. Controls and Procedures

 

(a)            Evaluation ofdisclosure controls and procedures

 

As required by the Securities and ExchangeCommission Rule 13a-15(b), we carried out an evaluation, under thesupervision and with participation of our management, including our chiefexecutive officer and chief financial officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on the foregoing, our chief executive officer and chief financialofficer concluded that as of June 30, 2005, our disclosure controls andprocedures were effective.

 

In connection with the audit of our 2004financial statements, management, together with J. H. Cohn LLP, our independentregistered public accounting firm, identified the existence of severalsignificant deficiencies related to the preparation of our financial statementsand notes thereto. These significant deficiencies collectively amounted to amaterial weakness in our internal control over financial reporting.

 

In response to the matters identified, wehave taken steps to strengthen our internal control over financial reporting toremediate the significant deficiencies. Specifically, we have taken, or intendto take, the following steps, among others:

 

•             During the firstquarter of 2005 we have expanded and enhanced our accounting and reportingstaff by adding a full time accountant and have started to train our financialanalyst in financial reporting;

 

•             During the secondquarter of 2005 we expanded our financial disclosure and reporting knowledgethrough continuing education courses so as to minimize our financial reportingdeficiencies in the future and will continue in future quarters to expanded our financial disclosure and reporting knowledge.

 

(b)  Changes in internal controls of our financial reporting

 

Other than as set forth above, 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 [TO BE UPDATED]**

# * *

## Item 1.             Legal Proceedings

##  

From time to time, we may be involved inlitigation relating to claims arising out of our operations in the normalcourse of business. We have been notified of a Notice of Intent to InitiateLitigation against us regarding a medical malpractice lawsuit in process inFlorida. We are contesting the Notice of Intent, and have not yet been formallyadded to the lawsuit. We intend to defend this action vigorously if formallyadded as a party to the lawsuit.  Asof the date of this report, we are not party to any material legal proceedings.

 

Item 2.             Unregistered Sales of Equity Securities and Use of Proceeds.

 

We previously disclosed the sale of unregistered equity securities on Form 8-K,filed July 27, 2005.

 

## Item 3.             Defaults upon Senior Securities

##  

None.

 

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

##  

*Annual Meeting ofStockholders*

 

At our 2005 Annual Meeting of Stockholders,held July 19, 2005, stockholders voted to elect the director nominees,ScottR. Pancoast and C. Fred Toney, as Class I directors to serve for aterm of three years, or until their respective successors are dully elected andqualified. The number of votes for, against/abstained and the broker non-votesfor the director nominees were as follows:

 
| ** **        | ** ** | **Number of Shares** | ** ** |
|-------------------|------------|----------------------|------------|
| ** **        | ** ** | **Vote For**         | ** ** | **Voted Against/   Abstain** | ** ** | **Broker   Non-Votes** | ** ** |
| ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Scott R. Pancoast |       | 9,992,072            |       | 111,034 |   | 0 |   |
|              |       |                 |       |   |   |   |   |
| C. Fred Toney     |       | 9,978,479            |       | 124,627 |   | 0 |   |

 

George B. DeHuff, James D. Durham and Michael H. Owens, M.D., whoseterms as directors of our company expire at our 2006 Annual Meeting ofStockholders, and James Hornthal and John R. Lyon, whose terms as directors ofour company expire at our 2007 Annual Meeting of Stockholders, will continue toserve as directors of our company until their respective terms expire or untiltheir respective success.

 

Atthe 2005 Annual Meeting, our stockholders approved each of the followingactions as set forth below:

 
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Number of Shares** | ** ** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Vote For**         | ** ** | **Voted Against** | ** ** | **Abstentions** | ** ** | **Broker   Non-Votes** | ** ** |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1.         | Approved the  issuance of shares of our common stock representing more than 20% of the  outstanding shares in connection with a private placement and a stock  exchange with the holders of Series A Preferred Stock.                                                                                                                                         |       | 6,871,249            |       | 38,626 |   | 2,675 |   | 3,190,556 |   |
|       |                                                                                                                                                                                                                                                                                                                                                               |       |                 |       |   |   |   |   |   |   |
| 2.         | Approved an  amendment tothe 1997 Stock Option/Stock Issuance Plan (the “Plan”) to increase  the number of shares available for issuance under the Plan, to extend the  term of the Plan to December 31, 2015, and to provide for an automatic  annual increase in the number of our shares of common stock available for  issuance under the Plan. |       | 6,675,880            |       | 232,880 |   | 3,790 |   | 3,190,556 |   |
|       |                                                                                                                                                                                                                                                                                                                                                               |       |                 |       |   |   |   |   |   |   |
| 3.         | Approved an  amendment to the 1997 Employee Stock Purchase Plan (the “Purchase Plan”) to  increase the number of shares available for issuance under the Purchase Plan  and to extend the term of the Purchase Plan to December 31, 2015.                                                                                                           |       | 6,725,434            |       | 182,876 |   | 4,240 |   | 3,190,556 |   |
|       |                                                                                                                                                                                                                                                                                                                                                               |       |                 |       |   |   |   |   |   |   |
| 4.         | Approved an  amendment to our Second Restated Certificate of Incorporation to increase the  authorized shares of Common Stock from 35,000,000 to 70,000,000.                                                                                                                                                                                                       |       | 6,769,517            |       | 140,508 |   | 2,525 |   | 3,190,556 |   |
|       |                                                                                                                                                                                                                                                                                                                                                               |       |                 |       |   |   |   |   |   |   |
| 5.         | Authorized  the Board of Directors of the Company to effect a  reverse split of our Common Stock by filing a Certificate of Amendment to our  Second Restate Certificate of Incorporation.                                                                                                                                                                         |       | 9,568,322            |       | 531,666 |   | 3,118 |   | 0 |   |
|       |                                                                                                                                                                                                                                                                                                                                                               |       |                 |       |   |   |   |   |   |   |
| 6.         | Ratified the  selection of J. H. Cohn LLP as our independent auditors for fiscal year 2005.                                                                                                                                                                                                                                                                        |       | 10,086,450           |       | 13,486 |   | 3,170 |   | 0 |   |

 

25

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## Item 5.             Other Information

##  

None.

 

## Item 6.             Exhibits and Reports on Form 8-K

##  

(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 (5)              |       | Form of Certificate for Common Stock.                                                                                                     |
|                 |       |                                                                                                                                           |
| 10.1*                |       | Form of Subscription Agreement between us and each investor in  our financing that closed July 26, 2005                                   |
|                 |       |                                                                                                                                           |
| 10.2*                |       | Form of Common Stock Purchase Warrant issued to each investor in  our financing that closed July 26, 2005                                 |
|                 |       |                                                                                                                                           |
| 10.3*                |       | Form of Selling Agent’s Warrant issued to Dawson James Securities                                                                         |
|                 |       |                                                                                                                                           |
| 10.4*                |       | Selling Agreement between us and Dawson  James Securities as selling agent, dated May 3, 2005                                                  |
|                 |       |                                                                                                                                           |
| 10.5(3)              |       | Amendment to 1997 Stock Option/Stock Issuance Plan.                                                                                            |
|                 |       |                                                                                                                                           |
| 10.6(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. |
|                 |       |                                                                                                                                           |
| 32.1 *               |       | Certification of Principal Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant                                |

 

26

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|   |   | 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. |

 

----

*                                         Filedherewith.

 

(1)                                  Incorporatedby reference to our Registration Statement on Form S-1, as amended, filed March 7,1997.

 

(2)                                  Incorporatedby reference to our Form 10-Q, filed November 14, 2001.

 

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

 

(4)                                  Incorporatedby reference to our Registration Statement on Form S-1, as amended, filed June 25,1997.

 

27

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#### **SIGNATURES**

####  

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

 

 
|                       | iVOW, INC.                                                                                                                      |
|----------------------------|---------------------------------------------------------------------------------------------------------------------------------|
|                       |                                                                                                                            |
|                       |                                                                                                                            |
| Date: August 15, 2005 | /s/ MICHAEL  H. OWENS                                                                                                           |   |
|                       | Michael H. Owens, M.D.  President, Chief Executive Officer and  Director                                                        |
|                       |                                                                                                                            |
| Date: August 15, 2005 | /s/ HOWARD  SAMPSON                                                                                                             |   |
|                       | Howard Sampson  Vice President of Finance,  Chief Financial Officer and Secretary  (Principal financial and accounting officer) |
|                            |                                                                                                                                 |  |  |

 

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