**UNITED STATES**SECURITIES AND EXCHANGE 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 MARCH 31,  2006**              |
|                                                                                                                                                                                                                                                                                                   |                                                                 |
| **OR**                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                             | ** **                                                           |
| **o**                                                                                                                                                                                                                                                                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF** |
| ** **                                                                                                                                                                                                                                                                                             | **THE  SECURITIES EXCHANGE ACT OF 1934**                             |
| **For the transition period from                         to                       ** |
| ** **                                                                                                                                                                                                                                                                                             | ** **                                                           |
| **COMMISSION FILE NUMBER 0-22743**                                                                                                                                                                                                                                                                     |

 

**iVOW, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**11455 EL CAMINO REAL, SUITE 140**

**SAN DIEGO, CA 92130**

(Address of principal executive offices)

 

**(858) 703-2820**

(Registrant’s telephone number, includingarea 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** |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).
|   | Yes  o   No  ý |
|--------|--------------------------------------------------------|

 

As of May 3, 2006 there were 2,669,947 shares of $.01 par valuecommon stock outstanding.

 
| Transitional Small Business Disclosure Format | Yes  o   No  ý |
|-----------------------------------------------|--------------------------------------------------------|

 

 

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iVOW, INC. AND SUBSIDIARY

FORM 10-QSB

TABLE OF CONTENTS

 
| PART 1.   FINANCIAL INFORMATION |                                                                                                                            |
|------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                                            |   |
| Item 1.                                        | Financial Statements (unaudited)                                                                                                |   |
|                                           |                                                                                                                            |   |
|                                           | Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31,  2005                                     |   |
|                                           | Condensed Consolidated Statements of Operations and Comprehensive  Loss for the three months ended March 31, 2006 and 2005 |   |
|                                           | Condensed Consolidated Statement of Stockholders’ Equity for the three  months ended March 31, 2006                   |   |
|                                           | Condensed Consolidated Statements of Cash Flows for the three months  ended March 31, 2006 and 2005                        |   |
|                                           | Notes to Condensed Consolidated Financial Statements                                                                            |   |
|                                           |                                                                                                                            |   |
| Item 2.                                        | Management’s Discussion and Analysis or Plan of Operation                                                                  |   |
|                                           |                                                                                                                            |   |
| Item 3.                                        | Controls and Procedures                                                                                                         |   |
|                                           |                                                                                                                            |   |
| PART II.   OTHER INFORMATION         |                                                                                                                            |
|                                           |                                                                                                                            |   |
| Item  1.                                       | Legal  Proceedings                                                                                                              |   |
|                                           |                                                                                                                            |   |
| Item 2.                                        | Unregistered Sales of Equity Securities and Use of Proceeds                                                                     |   |
|                                           |                                                                                                                            |   |
| Item 3.                                        | Defaults Upon Senior Securities                                                                                                 |   |
|                                           |                                                                                                                            |   |
| Item 4.                                        | Submission of Matters to a Vote of Security Holders                                                                             |   |
|                                           |                                                                                                                            |   |
| Item  5.                                       | Other  Information                                                                                                              |   |
|                                           |                                                                                                                            |   |
| Item 6.                                        | Exhibits                                                                                                                        |   |
|                                           |                                                                                                                            |   |
| SIGNATURES                                     |                                                                                                                            |

 

2

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PART I.     FINANCIALINFORMATION

 

## Item 1.             Financial Statements (Unaudited)

iVOW, Inc. and Subsidiary

Condensed ConsolidatedBalance Sheets

 
| ** **                                                                                                                                     | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **(unaudited)**              | ** ** | ** **                      | ** ** |
| ASSETS                                                                                                                                         |       |                         |       |                            |       |
| Current assets:                                                                                                                                |       |                         |       |                            |       |
| Cash and cash equivalents                                                                                                                      |       | $                            | 742,838    |                            | $          | 851,315 |   |
| Restricted cash                                                                                                                                |       | 362,143                      |       | 358,444                         |       |
| Accounts receivable, net                                                                                                                       |       | 283,172                      |       | 159,115                         |       |
| Inventories                                                                                                                                    |       | 116,283                      |       | 43,493                          |       |
| Prepaid insurance                                                                                                                              |       | 106,717                      |       | 160,170                         |       |
| Other current assets                                                                                                                           |       | 104,366                      |       | 121,210                         |       |
| Total current assets                                                                                                                           |       | 1,715,519                    |       | 1,693,747                       |       |
| Property and equipment, net                                                                                                                    |       | 261,467                      |       | 252,880                         |       |
| Investment in marketable equity securities  of Viking Systems, Inc, available for sale                                                         |       | 744,300                      |       | 661,600                         |       |
| Other assets                                                                                                                                   |       | 39,697                       |       | 31,414                          |       |
| Goodwill                                                                                                                                       |       | 1,064,046                    |       | 915,116                         |       |
| Amortizable intangible assets, net                                                                                                             |       | 176,017                      |       | 193,051                         |       |
| Total assets                                                                                                                                   |       | $                            | 4,001,046  |                            | $          | 3,747,808 |   |
|                                                                                                                                           |       |                         |       |                            |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                      |       |                         |       |                            |       |
| Current liabilities:                                                                                                                           |       |                         |       |                            |       |
| Accounts payable                                                                                                                               |       | $                            | 311,485    |                            | $          | 216,951 |   |
| Current portion of capital lease  obligations                                                                                                  |       | 865                          |       | 5,803                           |       |
| Short-term bank borrowings                                                                                                                     |       | 316,621                      |       | 316,621                         |       |
| Short-term notes                                                                                                                               |       | 44,292                       |       | 103,845                         |       |
| Accrued compensation                                                                                                                           |       | 212,935                      |       | 254,522                         |       |
| Deferred revenue                                                                                                                               |       | 281,425                      |       | 177,325                         |       |
| Current portion of deferred rent                                                                                                               |       | 23,682                       |       | 26,497                          |       |
| Accrued liabilities                                                                                                                            |       | 81,836                       |       | 114,532                         |       |
| Total current liabilities                                                                                                                      |       | 1,273,141                    |       | 1,216,096                       |       |
| Note payable                                                                                                                                   |       | 21,149                       |       | 22,071                          |       |
| Long-term portion of deferred rent                                                                                                             |       | 32,672                       |       | 30,321                          |       |
| Total liabilities                                                                                                                              |       | 1,326,962                    |       | 1,268,488                       |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Commitments and contingencies                                                                                                                  |       |                         |       |                            |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Stockholders’ equity:                                                                                                                     |       |                         |       |                            |       |
| Preferred stock, $.01 par value:                                                                                                               |       |                         |       |                            |       |
| Authorized shares – 5,000,000 issued and  outstanding shares - 0                                                                          |       | —                       |       | —                          |       |
| Common stock, $.01 par value:                                                                                                                  |       |                         |       |                            |       |
| Authorized shares – 70,000,000 issued and  outstanding shares - 2,665,996 at March 31, 2006 and 2,303,469 at December 31,  2005 |       | 26,661                       |       | 23,035                          |       |
| Additional paid-in capital                                                                                                                     |       | 77,247,682                   |       | 76,241,906                      |       |
| Accumulated other comprehensive income                                                                                                         |       | 711,220                      |       | 628,520                         |       |
| Accumulated deficit                                                                                                                            |       | (75,311,479                  | )          | (74,414,141                     | )          |
| Total stockholders’ equity                                                                                                                |       | 2,674,084                    |       | 2,479,320                       |       |
| Total liabilities and stockholders’ equity                                                                                                |       | $                            | 4,001,046  |                            | $          | 3,747,808 |   |

 

Note:The balance sheet at December 31, 2005 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements.

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

3

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iVOW, Inc. and Subsidiary

Condensed Consolidated Statements ofOperations andComprehensive Loss

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenues                                                                           |       | $                                                | 604,072    |   | $ | 239,681 |   |
| Cost and expenses:                                                                 |       |                                             |       |   |   |
| Cost of revenues                                                                   |       | 572,449                                          |       | 285,597 |   |
| Product development                                                                |       | 2,272                                            |       | 77,448 |   |
| Sales and marketing                                                                |       | 283,509                                          |       | 272,718 |   |
| General and administrative                                                         |       | 643,706                                          |       | 571,775 |   |
| Total costs and expenses                                                           |       | 1,501,936                                        |       | 1,207,538 |   |
|                                                                               |       |                                             |       |   |   |
| Loss from operations                                                               |       | (897,864                                         | )          | (967,857 | ) |
| Other income, net                                                                  |       | 526                                              |       | 5,720 |   |
| Loss from continuing operations                                                    |       | (897,338                                         | )          | (962,137 | ) |
| Gain from discontinued operations                                                  |       | —                                           |       | 4,056 |   |
| Net loss                                                                           |       | (897,338                                         | )          | (958,081 | ) |
| Accretion of dividends on preferred stock                                          |       | —                                           |       | (5,875 | ) |
|                                                                               |       |                                             |       |   |   |
| Net loss applicable to common stockholders                                         |       | $                                                | (897,338   | ) | $ | (963,956 | ) |
|                                                                               |       |                                             |       |   |   |
| Other comprehensive loss:                                                          |       |                                             |       |   |   |
| Net loss                                                                           |       | $                                                | (897,338   | ) | $ | (958,081 | ) |
| Unrealized gain (loss) on  available-for-sale securities                           |       | 82,700                                           |       | (148,860 | ) |
| Total comprehensive loss                                                           |       | $                                                | (814,638   | ) | $ | (1,106,941 | ) |
|                                                                               |       |                                             |       |   |   |
| Net loss per common share applicable to  common stockholders                       |       | $                                                | (0.37      | ) | $ | (0.87 | ) |
|                                                                               |       |                                             |       |   |   |
| Weighted average shares used in computing  basic and diluted loss per common share |       | 2,454,981                                        |       | 1,103,571 |   |
|                                                                                    |            |                                                  |            |  |  |  |  |  |  |

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

4

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IVOW, Inc. and Subsidiary

CondensedConsolidated Statement of Stockholders’ Equity

(Unaudited)

 
| ** **                                                           | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **other**       | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **comprehensive** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**       | ** ** | **income**      | ** ** | **deficit** | ** ** | **Total**  | ** ** |
|                                                                 |       |                  |       |        |       |              |       |            |       |        |       |       |       |
| Balance at January 1, 2006                                      |       | 2,303,469             |       | $           | 23,035     |              | $          | 76,241,906      |       | $           | 628,520    |       | $          | (74,414,141 | ) | $ | 2,479,320 |   |
|                                                                 |       |                  |       |        |       |              |       |            |       |        |       |       |       |
| Issuance of stock for purchase of Sound  Health Solutions, Inc. |       | 64,194                |       | 642         |       | 148,288           |       |            |       |        |       | 148,930    |       |
| Employee share-based compensation                                    |       |                  |       |        |       | 35,145            |       |            |       |        |       | 35,145     |       |
| Non-employee share-based compensation                                |       |                  |       |        |       | 5,597             |       |            |       |        |       | 5,597      |       |
| Issuance of stock and warrants through  private placement            |       | 290,000               |       | 2,900       |       | 791,829           |       |            |       |        |       | 794,729    |       |
| Exercise of warrants for cash                                        |       | 8,333                 |       | 84          |       | 24,917            |       |            |       |        |       | 25,001     |       |
| Unrealized gain on available for sale  securities                    |       |                  |       |        |       |              |       | 82,700          |       |        |       | 82,700     |       |
| Net loss                                                             |       |                  |       |        |       |              |       |            |       | (897,338    | )          | (897,338   | )          |
|                                                                 |       |                  |       |        |       |              |       |            |       |        |       |       |       |
| Balance at March 31, 2006                                       |       | 2,665,996             |       | $           | 26,661     |              | $          | 77,247,682      |       | $           | 711,220    |       | $          | (75,311,479 | ) | $ | 2,674,084 |   |

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

5

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iVOW, Inc. and Subsidiary

Condensed Consolidated Statements of CashFlows

(Unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **OPERATING  ACTIVITIES**                                                    |       |                                             |       |   |   |
| Net loss                                                                     |       | $                                                | (897,338   | ) | $ | (958,081 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                |       | 42,201                                           |       | 14,295 |   |
| Loss on sale of property and equipment                                       |       | 1,645                                            |       | — |   |
| Share-based compensation                                                     |       | 40,742                                           |       | 2,874 |   |
| Changes in operating assets and  liabilities:                                |       |                                             |       |   |   |
| Accounts receivable                                                          |       | (124,057                                         | )          | 91,595 |   |
| Inventories                                                                  |       | (72,790                                          | )          | (44,721 | ) |
| Prepaid insurance                                                            |       | 53,453                                           |       | — |   |
| Other assets                                                                 |       | 8,561                                            |       | 98,062 |   |
| Accounts payable                                                             |       | 94,534                                           |       | (49,904 | ) |
| Accrued compensation                                                         |       | (41,587                                          | )          | (79,211 | ) |
| Deferred revenue                                                             |       | 104,100                                          |       | 6,250 |   |
| Other liabilities                                                            |       | (33,160                                          | )          | 15,193 |   |
| Net cash flows used in operating activities                                  |       | (823,696                                         | )          | (903,648 | ) |
|                                                                         |       |                                             |       |   |   |
| **INVESTING  ACTIVITIES**                                                    |       |                                             |       |   |   |
| Purchases of property and equipment                                          |       | (35,674                                          | )          | (9,266 | ) |
| Proceeds from sale of property and  equipment                                |       | 275                                              |       | — |   |
| Restricted cash                                                              |       | (3,699                                           | )          | — |   |
| Proceeds from sale of business                                               |       | —                                           |       | 188,797 |   |
| Net cash flows provided by (used in)  investing activities                   |       | (39,098                                          | )          | 179,531 |   |
|                                                                         |       |                                             |       |   |   |
| **FINANCING  ACTIVITIES**                                                    |       |                                             |       |   |   |
| Issuance of common stock, net                                                |       | 819,730                                          |       | 22,431 |   |
| Payment on short-term notes                                                  |       | (60,475                                          | )          | (70,639 | ) |
| Payments on capital leases                                                   |       | (4,938                                           | )          | (8,184 | ) |
| Net cash flows provided by (used in)  financing activities                   |       | 754,317                                          |       | (56,392 | ) |
|                                                                         |       |                                             |       |   |   |
| Net decrease in cash and cash equivalents                                    |       | (108,477                                         | )          | (780,509 | ) |
| Cash and cash equivalents at beginning of  period                            |       | 851,315                                          |       | 1,969,561 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                | 742,838    |   | $ | 1,189,052 |   |
|                                                                         |       |                                             |       |   |   |
| Non-cash transactions:                                                       |       |                                             |       |   |   |
| Accretion of cumulative dividends on preferred  stock                        |       | $                                                | —     |   | $ | 5,875 |   |
| Preferred shares exchanged for common  shares                                |       | —                                           |       | 84,125 |   |
| Common shares issued for acquistion                                          |       | 148,930                                          |       | — |   |
| Supplementary cash flow information:                                         |       |                                             |       |   |   |
| Interest paid                                                                |       | $                                                | 7,843      |   | $ | 2,255 |   |

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

6

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iVOW, INC. AND SUBSIDIARY

Notes toCondensed Consolidated Financial Statements

March 31, 2006

(UNAUDITED)

 

### 1.                                                   Basis of Presentation

###  

iVOW, Inc., is incorporated under the laws of the State ofDelaware. Collectively, with its subsidiary Sound Health Solutions, Inc.,the terms “we,” “us,” “our,” and the “Company” refer to iVOW, Inc. as acombined entity, except where noted or where the context makes clear thereference is only to iVOW, Inc. or Sound Health Solutions, Inc.

 

The audited financial statements of iVOW, Inc. (the “Company”) andthe notes thereto for the year ended December 31, 2005 included in ourAnnual Report on Form 10-KSB previously filed with the Securities andExchange Commission (“SEC”), contain additional information about us, ouroperations, and our financial statements and accounting practices, and shouldbe read in conjunction with this quarterly report on Form 10-QSB. Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial statements, 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 consolidated financial statements reflectall adjustments of a normal recurring nature, which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position,results of operations and cash flows for all periods presented. The interimfinancial information contained herein is not necessarily indicative of resultsfor any future interim periods or for the full fiscal year ending December 31,2006.

 

In February 2005, our subsidiary, VOW Solutions, Inc. (“VOW”),was merged with Vista Medical Technologies, Inc. as part of the namechange to iVOW, Inc. (“iVOW”). In November 2005, iVOW acquired SoundHealth Solutions, Inc. (“SHS”); a Seattle-based healthcare providerspecializing in the multidisciplinary medical treatment of obesity as awholly-owned subsidiary (see Note 8). The condensed consolidated financialstatements for 2006 include the accounts of our wholly-owned subsidiaries, VOWprior to the merger and SHS. Significant intercompany accounts and transactionshave been eliminated.

 

On July 19, 2005, the stockholders of the Company voted to grantauthority to the Board to file an amendment to the Company’s Second RestatedCertificate of Incorporation to effect, at the discretion of the Board, areverse stock split of the issued and outstanding common stock in a ratio forsuch split that is not less than 1:2 nor greater than 1:10. On October 6,2005, the Board acted on its authority to effect the split of all common stockissued and outstanding at a rate of 1:10. As a result of the split, all shareinformation in the financial statements and these notes have been retroactivelyadjusted.

 

We incurred net losses and negative net cash flows from operatingactivities in 2005 and 2004 and in the first quarter of 2006, and at March 31,2006, had an accumulated deficit of $75.3 million. At March 31, 2006, wehad cash and cash equivalents of $743,000. We believe that our cash and cashequivalents, together with anticipated 2006 net revenues, royalties andinterest income, may not be sufficient to meet our anticipated capitalrequirements through March 31, 2007. These factors raise substantial doubtabout our ability to continue as a going concern. We are currently raising additionalfunds through a warrant exchange offer (see Note 9), but cannot assurethat we will be successful in raising sufficient funds to meet our capitalrequirements through at least March 31, 2007. Should we be unableto raise sufficient funds, we may be required to curtail our operatingplans and possibly relinquish rights to portions of our intellectual propertyor products. In addition, increases in expenses and delays in signing newmanagement 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. Theaccompanying condensed consolidated financial statements have been prepared ona going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. The condensed consolidatedfinancial 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 our Visualization Technology businessunit to Viking Systems, Inc. (“Viking”) under an Asset Purchase Agreement(the “Asset Purchase Agreement”) signed on December 22, 2003. As part ofthe sale, we also entered into a license agreement with Viking that will pay usroyalties over the five year period that began April 15, 2004 

 

7

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based on sales of the acquired products of the Visualization Technologybusiness with minimum royalties during the five year period as follows: firstyear $150,000, years two through four $300,000 and year five $375,000 with amaximum aggregate royalty of $4,500,000 over the five year period. ThroughMarch 31, 2006, we have received the first year minimum royalty of$150,000. Half of the year two minimum royalty is due in May 2006. We willmaintain ownership rights to all intellectual property and product rights underthe license agreement with Viking until at least the minimum royaltyobligations have been satisfied, at which time we will transfer such ownershiprights to Viking. We recognize gain from discontinued operations as royaltypayments are received.

 

3.                                       Investment inequity securities of Viking Systems, Inc.

 

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

 
| ** **                                 | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------|------------|---------------------------------|------------|
| **Corporate Equity Securities:** | ** ** | **Cost**   | ** ** | **Unrealized  Gain**         | ** ** | **Fair Value**                  | ** ** | **Unrealized  Gain** | ** ** | **Fair Value** | ** ** |
| Viking Systems, Inc.                  |       | $          | 33,080     |                         | $          | 711,220                         |       | $ | 744,300 |   | $ | 628,520 |   | $ | 661,600 |   |
|                                            |            |            |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

### The increase in thefair value of the equity securities during the three months ended March 31,2006 of $82,700 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 consist of vitamin finished goods.

 

### 5.                                                   Loss Per Share

###  

Basic net loss per share is calculated based on the weighted averagenumber of common shares outstanding during the period. Diluted net loss pershare incorporates the dilutive effect of potentially dilutive shares of commonstock, including shares attributable to stock options, warrants and otherconvertible securities. Potentially dilutive shares of common stock have beenexcluded from the calculation of weighted average number of diluted commonshares, as their effect would be antidilutive for all periods presented. Forthe purpose of determining basic and diluted net loss per share, dividendsaccreted on previously outstanding preferred stock redemption have been addedto the net loss to arrive at net loss applicable to common stockholders. Forthe three month period ended March 31,2006, potentially dilutive shares of common stock that have been excluded fromthe calculation of the weighted average number of diluted common shares were 1,854,452shares, comprised of 45,607 holdback shares associated with the SHSacquisition, warrants to purchase 1,589,214 shares and options to purchase upto 219,631 shares of common stock. For the three month period ended March 31, 2005, potentiallydilutive shares of common stock that have been excluded from the calculation ofthe weighted average number of diluted common shares were 598,709 shares,comprised of warrants to purchase 375,174 shares, 82,644 shares issuable onconversion of preferred shares and options to purchase up to 140,891 shares ofcommon stock.

 

6.                                       Share-based compensation

###  

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued revisedStatement of Financial Accounting Standards No. 123, “Share-Based Payment,”(“FAS 123R”) which establishes accounting for share-based awards exchanged foremployee services and requires companies to expense the estimated fair value ofthese awards over the requisite employee service period. The accountingprovisions of FAS 123R became effective for the Company at the beginning of thequarter ended March 31, 2006.

 

UnderFAS 123R, share-based compensation cost is measured at the grant date, based onthe estimated fair value of the award, and is recognized as expense over theemployee’s requisite service period. The Company has no awards with market orperformance conditions. The Company adopted the provisions of FAS 123R on January 1,2006, the first day of the Company’s fiscal year 2006, using a modifiedprospective application, which provides for certain changes to the method forvaluing share-based compensation. Prior to the adoption of FAS 123R, we usedthe intrinsic value method to account for stock options granted to employeesand made no charges against earnings with respect to those options at the dateof grant since our employee and director options had exercise prices that were equalto the market price. In accordance with the modified prospective transitionmethod, the Company’s consolidated financial statements for prior periods havenot been restated to reflect, and do not include, the impact of FAS 123R. Instead,new awards and awards that were outstanding on the effective date and are subsequentlymodified or cancelled will be valued under the provisions given by FAS 123R. Estimatedcompensation expense for awards outstanding at the effective 

 

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datewill be recognized over the remaining service period using the compensationcost calculated for pro forma disclosure purposes based on the fair value ofthe awards under FASB Statement No. 123, “Accounting for Stock-BasedCompensation” (“FAS 123”).

 

FAS123R requires us to estimate forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates. We use management expectations to estimate forfeitures and recordshare-based compensation expense only for those awards that are expected tovest. For purposes of calculating pro forma information that was required underFAS 123 for periods prior to fiscal 2006, we accounted for forfeitures as theyoccurred.

 

Weestimate the fair value of options granted using the Black-Scholes optionvaluation model. We estimate the volatility of our common stock at the date ofgrant based on our historical volatility rate, consistent with FAS 123R andSecurities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB107”). We estimate expected term consistent with the simplified methodidentified in SAB 107 for share-based awards granted during the quarter ended March 31,2006. We elected to use the simplified method as we changed the contractuallife for share-based awards from ten to six and one quarter years starting inthe quarter ended March 31, 2006. The simplified method calculates theexpected term as the average of the vesting and contractual terms of the award.Previously, we estimated the expected term based on just the vesting period. Therisk-free interest rate assumption is based on observed interest ratesappropriate for the term of our employee options. We use historical data toestimate pre-vesting option forfeitures and record share-based compensationexpense only for those awards that are expected to vest.  The post-vesting forfeiture rate is based onmanagement expectations from historical information and current marketexpectations. For options granted, we amortize the fair value on astraight-line basis over the vesting period of the options.

 

In February 1997, we adopted the 1997 Stock Option Plan/StockIssuance Plan (the “1997 Plan”). In July 2005, at the annual meeting ofthe stockholders we received approval to increase the aggregate number ofshares of common stock available for issuance under our 1997 Plan from 259,250to 400,000, to extend the life of the plan an additional ten years and providefor the automatic replenishment of shares available for issuance under the 1997Plan. Effective as of each January 1 for life of the 1997 Plan, themaximum number of shares of the Company’s common stock reserved for issuanceunder the Plan shall be cumulatively increased by the lesser of (i) 2% ofthe number of the Company’s shares of common stock issued and outstanding onthe preceding December 31, (ii) 1,500,000 shares or (iii) anumber of shares set by the Company’s board of directors. As a result on January 1,2006, the number of shares of common stock available for issuance under our1997 Plan increased to 446,000 shares. At March 31, 2006, we had optionsfor 226,369 shares available for grant. Options granted by us generally vestover three to five years and are exercisable from the date of grant for aperiod of ten years.

 

Thefollowing are weighted average assumptions (annualized percentages) used inapplying the Black-Scholes valuation model for the three months ended March 31,2006:

 
| Expected dividend yield      |   | None      |   |
|------------------------------|--------|-----------|--------|
| Expected volatility          |   | 112-126%  |   |
| Risk-free interest rate      |   | 1.1%-6.5% |   |
| Expected life (years)        |   | 1-6.25    |   |
| Post-vesting forfeiture rate |   | 57%       |   |

 

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Totalestimated share-based compensation expense, related to the 1997 Plan recognizedfor the three months ended March 31, 2006 was comprised as follows:

 
| ** **                                               | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Cost of revenue                                          |       | $                                                          | 6,595      |   |
| Sales and marketing                                      |       | 2,940                                                      |       |
| General and administrative                               |       | 22,861                                                     |       |
| Total share-based compensation expense                   |       | $                                                          | 32,396     |   |
|                                                     |       |                                                       |       |
| Net share-based compensation expense, per  common share: |       |                                                       |       |
| Basic and diluted                                        |       | $                                                          | 0.01       |   |

 

AtMarch 31, 2006, total unrecognized estimated compensation for future serviceperiods was $426,000 which is expected to be recognized over a weighed averageperiod of 1.9 years.

 

Priorto adopting FAS 123R, we followed the disclosure-only alternative afforded byFAS 123 and recorded estimated compensation expense for employee stock options forpro forma purposes only based on FAS 123.  However, FAS 123 did not change therequirement to account for stock-based compensation to non-employees using thefair value method prescribed by FAS 123. 

 

Priorto adopting FAS 123R, we applied the principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) andrelated interpretations in accounting for its employee stock optioncompensation plans. Under APB No. 25, compensation expense was measured usingthe intrinsic value method as the difference, if any, between the optionexercise price and the fair value of our common stock at the date ofgrant.  We have historically grantedoptions to employees and directors at exercise prices equal to the fair valueof the Company’s common stock. Accordingly, no compensation expense had beenrecognized for our employee stock-based compensation plans in periods prior toJanuary 1, 2006. 

 

Hadcompensation costs for stock options issued to employees and directors beendetermined based on the estimated fair value at the grant dates as calculatedin accordance with FAS 123 using the Black-Scholes option pricing model andamortized over the vesting period, our reported net loss and basic and dilutednet loss per common share for the three months ended March 31, 2005 would havebeen adjusted to the pro forma amounts indicated below:

 
| ** **                                                           | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net loss applicable to common stockholders:                          |       |                                                       |       |
| As reported                                                          |       | $                                                          | (963,956   | ) |
| Pro forma compensation expense using fair  value method              |       | (85,354                                                    | )          |
| Pro forma net loss                                                   |       | $                                                          | (1,049,310 | ) |
|                                                                 |       |                                                       |       |
| Basic and diluted loss per share applicable  to common stockholders: |       |                                                       |       |
| As reported                                                          |       | $                                                          | (0.87      | ) |
| Pro forma                                                            |       | $                                                          | (0.95      | ) |

 

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Thefollowing table summarizes stock option activity under the 1997 Plan during thethree months ended March 31, 2006:

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Exercise Price per  Share** | ** ** | **Weighted  Average  Exercise  Price  per Share** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|
| Options outstanding at December 31,  2005 |       | 174,481                    |       | $2.32 - $575.00                         |       | $                                                      | 11.86      |                            |       |   |
| Granted                                        |       | 45,150                     |       | $4.54 - $5.64                           |       | $                                                      | 4.91       |                            |       |   |
| Exercised                                      |       | —                     |       |                                    |       |                                                   |       |                            |       |
| Canceled                                       |       | —                     |       |                                    |       |                                                   |       |                            |       |
|                                           |       |                       |       |                                    |       |                                                   |       |                            |       |
| Options outstanding at March 31, 2006     |       | 219,631                    |       | $2.32 - $575.00                         |       | $                                                      | 10.43      |                            | $          | 26,329 |   |
| Options exercisable                            |       | 65,949                     |       | $8.00 - $575.00                         |       | $                                                      | 20.27      |                            | $          | 0 |   |

 

1997 Employee Stock Purchase Plan

 

In February 1997, we adopted the 1997 Employee Stock Purchase Plan(the “Purchase Plan”), which permits eligible employees of ours to purchaseshares of common stock, at semi-annual intervals, through periodic payrolldeductions. Payroll deductions may not exceed 10% of the participant’sbase salary, and the purchase price per share will not be less than 85% of thelower of the fair market value of the common stock at either the beginning orthe end of the semi-annual intervals. In July 2005, at the annual meetingof the stockholders we received approval to increase the aggregate number ofshares of common stock available for issuance under our 1997 Employee StockPurchase Plan from 15,000 to 30,000 and to extend the term of the plan anadditional ten years. There were 16,877 shares available for issuance at March 31,2006. Total recognized estimated compensation cost related to thePurchase Plan for the three months ended March 31, 2006 was $2,749.

 

7.                                       Stockholders’ Equity

 

Common Stock

 

On February 13, 2006, we issued 64,194shares valued at $148,930 relating to a portion of the holdbackshares associated with the SHS acquisition (see Note 8).  Upon issuance of the stock, the value ofgoodwill was increased by $148,930.

 

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On February 22, 2006, we completed a private placement of theCompany’s common stock and warrants in which it sold 290,000 units at apurchase price of $3.18 per unit. Each unit consisted of one share of commonstock and a warrant to purchase one-half share of the Company’s common stock.The warrants have an exercise price of $3.18 per share and have a five-yearterm. The private placement resulted in gross proceeds of $922,200. Theplacement agent received a selling commission equal to 8% of the gross proceeds($74,008), along with an expense allotment of $25,000. The placement agent alsoreceived a warrant to purchase 23,200 units. This warrant has an exercise priceof $3.18 per unit and has a five-year term.

 

8.                                       Acquisitionof Sound Health Solutions

 

On November 1, 2005, the Company purchased the business andsubstantially all assets of SHS and, accordingly, the results of operations ofSHS have been included in the accompanying consolidated financial statementsfrom that date. Under the terms of the merger Agreement, iVOW paid the SHSstockholders $125,500 in cash, assumed $317,000 of liabilities of SHS andagreed to issue up to 294,278 shares of common stock (the “Merger Shares”) tothe SHS stockholders, of which 184,477 shares with a fair value of $427,987(based on the closing price of the Company’s stock on November 1, 2005)were issued as of the closing and the remaining 109,801 shares are effectivelybeing held in escrow (the “Holdback Shares”) and are subject to release basedon the resolution of the determination of the actual liabilities of SHS andother contingencies set forth in the Merger Agreement. In February 2006,64,194 Holdback Shares were issued resulting in an increase to goodwill of$148,930.

 

iVOW has a repurchase right for up to 71,128 of the Merger Shares tothe extent that SHS fails to achieve certain revenue and net income targets in2006 and 2007. SHS offers a platform from which to integrate clinical,medical and surgical weight loss programs into a seamless disease managementstrategy for obesity. The Company anticipates that expansion of the SHS modelwill generate market opportunities for the iVOW Surgical Centers and, dependingon how the market opportunity evolves, other affiliated bariatric centers.

 

Assuming the acquisition had taken place on January 1, 2005,unaudited revenue would have been approximately $711,000, while unaudited lossfrom continuing operations would have been $1,003,000 for the three monthperiod ended March 31, 2005. The unaudited basic loss per common sharefrom continuing operations for the three month period ended March 31, 2005would have been ($0.91).

 

9.                                       Subsequent Event

 

In April 2006, the Board of Directors approved a warrant exchangeprogram (the “Offer to Exchange”) applicable to outstanding warrantsexercisable for shares of our common stock subject to stockholder approval. Thepurpose of the Offer to Exchange is to raise funds to support the Company’soperations by providing the holders of the original warrants with theopportunity to obtain an exchanged warrant, and encouraging the participatingholders to exercise the exchanged warrants by significantly reducing theexercise price and the exercise period of the exchanged warrants. If theCompany’s stockholders approve the Offer to Exchange at the 2006 Annual Meetingof Stockholders (currently scheduled for June 2, 2006), the exerciseperiod for the exchanged warrants will be shortened to ten days after the closeof the Offer to Exchange. The close of the Offer to Exchange shall occur ten daysafter stockholders approve the Offer to Exchange at the 2006 Annual Meeting ofStockholders. If the Company’s stockholders do not approve the Offer toExchange at the 2006 Annual Meeting of Stockholders, the exercise price and theexercise period of each exchanged warrant will be the same as the original warranttendered for such exchanged warrant. The funds obtained will be used by theCompany as working capital and for other general corporate purposes.

 

Ifall original warrant holders fully participate in the Offer to Exchange, thegross aggregate consideration we will receive upon exercise of the exchanged warrantsis approximately $2,645,000 and the aggregate number of shares that we willissue upon exercise of the exchanged warrants is 1,577,615 shares. Thesenumbers do not include the additional consideration we will receive or theadditional shares of common stock we will issue upon exercise of the 2005 sellingagent warrants and the 2006 selling agent warrants. If all of the outstanding2005 selling agent warrants and the 2006 selling agent warrants are issued inconnection with the Offer to Exchange, we will receive additional grossaggregate consideration of $223,774 and issue an additional 64,866 shares of commonstock.

 

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**Item 2.  Management’s Discussionand Analysis or Plan of Operation**

** **

THIS QUARTERLY REPORT MAY CONTAINPREDICTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE ANUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT “RISKSAND UNCERTAINTIES.”  WHILE THIS OUTLOOKREPRESENTS OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCHRISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROMANY FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO OBLIGATION TO RELEASEPUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TOREFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE OF THIS QUARTERLY REPORT.THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATEDFINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLYREPORT ON FORM 10-QSB AND OUR 2005ANNUAL REPORT ON FORM 10-KSB ASAMENDED, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

**Overview of our business**

# * *

Our Company, iVOW, Inc., formerly Vista Medical Technologies, Inc.,was founded in 1993 primarily to develop advanced visualization technologiesfor complex minimally invasive surgical procedures. It was through theapplication of this technology in laparoscopic gastric bypass surgery that wesubsequently developed a suite of consulting products and services for theinitiation, operation and management of obesity surgery programs. Starting inearly 2003, our Visualization Technology business, located in Westborough,Massachusetts, and our Obesity Surgery Management Services business unit,located in Carlsbad, California, functioned as individual business units. In April 2004,we sold the Visualization Technology business to concentrate on the obesity surgeryservices market. We changed our name to iVOW, Inc. in February 2005,after merging our wholly-owned subsidiary VOW Solutions, Inc., to alignour corporate name with the brand name of our chronic and morbid obesitydisease management business, which is now our exclusive focus.

 

We originally began offering training and consulting services to theobesity surgery market in 2001. As a result of the disposition of ourVisualization Technology business, we are now a pure play company in thebariatric market. We develop and market products and services for the bariatricsurgery market. Bariatrics is the medical science of weight reduction andnutrition; bariatric surgery, a specialized area of general surgery, is focusedon surgical weight reduction solutions for the very severely or morbidly obese.We are focused on implementing disease management strategies for the control ofchronic and severe obesity. Our vision is to enable healthcare providers andorganizations in the ongoing evolution of the highest standards of treatmentand services to optimize the quality of life for chronic and morbidly obesepatients. Our mission is to deliver the leading management portfolio ofservices and products for the clinical and business development of continuallysuccessful medical and surgical programs for the treatment of chronic andmorbid obesity.

 

# *iVOW acquired Sound HealthSolutions, Inc. (“SHS”), a Seattle-based healthcare provider specializingin the multidisciplinary medical treatment of obesity, as a wholly-ownedsubsidiary. SHS has pioneered the development of multidisciplinary medicallyanchored weight loss programs since 1998. Through a pilot program withMicrosoft Corporation, SHS has produced what we consider to be the bestvalidated, statistically significant data on multidisciplinary medicallyanchored weight loss programs in the country. In the summer of 2005, Microsoftand Premera Blue Cross of Washington received a national award for innovationin obesity management from the National Institute of Health Care Management,which prominently featured the program designed by SHS and its two physicianco-founders, Drs. Francis Gough and Teresa Girolami.*

# * *

# *We anticipate that the additionof SHS to iVOW will improve and expand our business model. Prior to our acquisitionof SHS, our business model focused principally upon working with hospitals andsurgeons to provide consultations on a fee-for-service basis or to operatetheir bariatric surgical programs for a management fee, while the hospitals andsurgeons held the contracts with insurance providers and other third-partypayors and employers. Under that model, even if the volume of patientsincreased, our revenue did not. In contrast, SHS, through its “owner-operator”model, contracts directly with employers, payors and unions to facilitateweight loss programs on a direct per patient basis, thus generating incrementalrevenue as patient volume increases. While we intend to focus on capitalizingupon SHS’s owner-operator model, we also will continue to pursue strategicoutsourced management opportunities. We now have two platforms on which to growour business: the employer/payor medically anchored platform and thehospital/provider surgically anchored platform.*

# * *

# *Insurance providers and otherthird-party payors consistently require medical or other documented weight lossmanagement failure or attempts prior to approving patients for bariatricsurgery. Such requirements are developing into a de facto gating phenomenon forbariatric surgery. As a result, we believe that organizations that offernon-surgical weight loss*

 

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# *programs will not only have the opportunity tosucceed but also could potentially impact, where patients receive bariatricsurgery.*

# * *

# *We believe that SHS offers a platform fromwhich to integrate clinical, medical and surgical weight loss programs into aseamless disease management strategy for obesity. We anticipate that expansionof our SHS model will generate market opportunities for our iVOW SurgicalCenters and, depending on how the market opportunity evolves, other affiliatedbariatric centers.*

# * *

# *Patient demand for an effectiveand proven surgical solution to the chronic health conditions caused by morbidobesity has accelerated the number of surgical procedures performed fromapproximately 16,000 a decade ago to approximately 170,000 in 2005, accordingto the American Society for Bariatric Surgery. The number of patients thatunderwent bariatric surgery in 2005 represents less than one (1) percentof the total population with a body mass index (BMI) that qualifies for theprocedure. An additional 45 million Americans are obese, and many meet BMIqualification criteria for our SHS model. We believe that, by building upon theexpertise, market position and relationships developed in our combined businesslines described above, we now have the foundation to become a leading providerof (i) disease-specific program management in bariatric clinical, medicaland surgical care and (ii) a commensurately expanded suite of relatedconsulting services.*

# * *

# *Our business model is to developa network of bariatric disease management centers that we directly own oroperate based upon our current SHS model as well as to outsource managementthrough both our historical iVOW Surgical Center model and new SHS outsourcedmodel, which are able to provide patients with all necessary clinical, medicaland surgical services. As owner/operator of our current SHS modeled centers wewill have full administrative control and contract directly with insuranceproviders and other third-party payors. As manager of the outsourced program wewill coordinate all the administrative and marketing functions on behalf of ourclients and provide patient services, particularly in assessing whether thereis a suitable clinical alternative to surgery, as well as in assuring thefulfillment of payor mandated pre-surgical weight loss management requirementsand appropriate long-term post operative care and monitoring of patients. Ourrevenue model is based upon a monthly management fee for our outsourced managedprograms, a per-patient fee for our SHS owner-operator program, andfee-for-service for our consulting business.*

# * *

We intend to develop the iVOW brand name with the iVOW Sound Health tagline to provide a national identity for our programs. We believe that thecentralized provision of certain services to our own centers as well as to ourmanaged clients, for example, the processing of medical insurance approval,information technology support and contracting, will benefit our internalexpense management structure and increase our appeal to customers.Additionally, we will continue to develop and expand our consulting services asdescribed above to include SHS products that complement the historical iVOWproducts, targeted at those clients that do not require a complete managementpackage but that need specific assistance with individual components of theirbariatric clinical, medical or surgical programs. We hope that such effortswill encourage our market branding as well as cultivate a pipeline vehicle forour centers.

 

# *Our goal is to become the leadingdisease management and consulting company focused on chronic and morbidobesity. Our initial focus was on the severely obese patient with gastric bypasssurgery as the solution. We have expanded our focus to include the chronicallyobese through our SHS multidisciplinary medically anchored weight managementplatform. It is these singular and combined platforms upon which we hope toexpand service to new obesity therapies as they are developed. We are currentlyaggressively integrating our SHS bariatric medical model into our iVOW surgicalprotocols to fulfill the pre-operative weight management requisites ofemployers and payors, the long term care of post-surgical patients and thetreatment of obese patients who either are not qualified for surgery or prefera non-surgical alternative treatment modality.*

 

**Significant Events**

 

On February 13, 2006, we issued 64,194shares valued at $148,930 relating to a portion of the holdbackshares associated with the SHS acquisition.  Upon issuance of the stock, the value ofgoodwill was increased by $148,930.

 

On February 22, 2006, we completed a private placement ofcommon stock and warrants in which we sold 290,000 units at a purchase price of$3.18 per unit. Each unit consisted of one share of common stock and a warrantto purchase one-half share of the Company’s common stock. The warrants have anexercise price of $3.18 per share and have a five-year term. The privateplacement resulted in gross proceeds of $922,200. The placement agent receiveda selling commission equal to 8% of the gross proceeds ($74,008), along with anexpense allotment of $25,000. The placement agent also received a warrant topurchase 23,200 units. This warrant has an exercise price of $3.18 per unit andhas a five-year term.

 

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On April 21, 2006, we announced awarrant exchange program (the “Offer to Exchange”) applicable to outstandingwarrants exercisable for shares of our common stock subject to stockholderapproval. The purpose of the Offer to Exchange is to raise funds to support theCompany’s operations by providing the holders of the original warrants with theopportunity to obtain an exchanged warrant, and encouraging the participatingholders to exercise the exchanged warrants by significantly reducing theexercise price and the exercise period of the exchanged warrants. If theCompany’s stockholders approve the Offer to Exchange at the 2006 Annual Meetingof Stockholders (currently scheduled for June 2, 2006), the exerciseperiod for the exchanged warrants will be shortened to ten days after the closeof the Offer to Exchange. The close of the Offer to Exchange shall occur ten daysafter stockholders approve the Offer to Exchange at the 2006 Annual Meeting ofStockholders. If the Company’s stockholders do not approve the Offer toExchange at the 2006 Annual Meeting of Stockholders, the exercise price and theexercise period of each exchanged warrant will be the same as the original warranttendered for such exchanged warrant. The funds obtained will be used by theCompany as working capital and for other general corporate purposes.

 

Ifall original warrant holders fully participate in the Offer to Exchange, thegross aggregate consideration we will receive upon exercise of the exchanged warrantsis approximately $2,645,000, and the aggregate number of shares that we willissue upon exercise of the exchanged warrants is 1,577,615 shares. Thesenumbers do not include the additional consideration we will receive or theadditional shares of common stock we will issue upon exercise of the 2005 sellingagent warrants and the 2006 selling agent warrants. If all of the outstanding2005 selling agent warrants and the 2006 selling agent warrants are issued inconnection with the Offer to Exchange, we will receive additional grossaggregate consideration of $223,774 and issue an additional 64,866 shares of commonstock.

 

**Critical Accounting Policies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires management to make judgments, assumptions and estimatesthat affect the amounts reported in our condensed financial statements and theaccompanying notes. The amounts of assets and liabilities reported in ourbalance sheets and the amounts of revenues and expenses reported for each ofour fiscal periods are affected by estimates and assumptions which are usedfor, but not limited to, accounting for product returns, allowance for doubtfulaccounts, inventories and income taxes. Actual results could differ from theseestimates. The following critical accounting policies are significantlyaffected by judgments, assumptions and estimates used in the preparation of thecondensed financial statements.

 

**Reverse Stock Split**

 

On July 19, 2005, at its Annual Meeting ofStockholders, iVOW’s stockholders approved to effect a reverse split of theCompany’s outstanding common stock in a ratio of not less than one-for-two orgreater than one-for-ten (the “Reverse Split”). On October 6, 2005, iVOW’sBoard of Directors set the exact ratio of the Reverse Split at one-for-ten andthe Reverse Split was effective as of October 11, 2005.

 

All references to common share and per-share data for all periodspresented have been adjusted to give effect to the Reverse Split.

 

**Revenue Recognition**

 

Revenue generated from our disease state management of morbid obesitybusiness is recognized (i) with regard to management services, uponcompletion of the service period and (ii) with regard to training servicesor other consulting services, upon completion of the related training orconsulting component, provided that a contract exists, there are nouncertainties regarding customer acceptance, the sales price is fixed ordeterminable and collectibility is reasonably assured. Any payments received inadvance of completion of the service are recorded as deferred revenue. Sales ofvitamins are similarly recognized upon shipment provided that a purchase orderhas been received, there are no uncertainties regarding customer acceptance,the sales price is fixed or determinable and collectibility is reasonablyassured. Revenues from SHS services are recognized based on a straight-lineamortization for the life of the service contract provided that there are nouncertainties regarding customer acceptance, the sale price is fixed ordeterminable and collectibility is reasonably assured.

 

Sales returns are estimated based on our historical experience andmanagement’s expectations and are recorded at the time product revenue isrecognized.

 

**Share-based Payments**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued revisedStatement of Financial Accounting 

 

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StandardsNo. 123, “Share-Based Payment,” (“FAS 123R”) which establishes accountingfor share-based awards exchanged for employee services and requires companiesto expense the estimated fair value of these awards over the requisite employeeservice period. The accounting provisions of FAS 123R became effective for theCompany at the beginning of the quarter ended March 31, 2006.

 

UnderFAS 123R, share-based compensation cost is measured at the grant date, based onthe estimated fair value of the award, and is recognized as expense over theemployee’s requisite service period. The Company has no awards with market orperformance conditions. The Company adopted the provisions of FAS 123R on January 1,2006, the first day of the Company’s fiscal year 2006, using a modifiedprospective application, which provides for certain changes to the method forvaluing share-based compensation. Prior to the adoption of FAS 123R, we usedthe intrinsic value method to account for stock options granted to employeesand made no charges against earnings with respect to those options at the dateof grant since our employee and director options had exercise prices that wereequal to the market price. In accordance with the modified prospectivetransition method, the Company’s consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofFAS 123R. Instead, new awards and awards that were outstanding on theeffective date and are subsequently modified or cancelled will be valued underthe provisions given by FAS 123R. Estimated compensation expense for awardsoutstanding at the effective date will be recognized over the remaining serviceperiod using the compensation cost calculated for pro forma disclosure purposesbased on the fair value of the awards under FASB Statement No. 123, “Accountingfor Stock-Based Compensation” (“FAS 123”).

 

FAS123R requires us to estimate forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates. We use management expectations to estimate forfeitures and recordshare-based compensation expense only for those awards that are expected tovest. For purposes of calculating pro forma information that was required underFAS 123 for periods prior to fiscal 2006, we accounted for forfeitures as theyoccurred.

 

Weestimate the fair value of options granted using the Black-Scholes optionvaluation model. We estimate the volatility of our common stock at the date ofgrant based on our historical volatility rate, consistent with FAS 123R andSecurities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB107”). We estimate expected term consistent with the simplified methodidentified in SAB 107 for share-based awards granted during the quarter ended March 31,2006. We elected to use the simplified method as we changed the contractuallife for share-based awards from ten to six and one quarter years starting inthe quarter ended March 31, 2006. The simplified method calculates theexpected term as the average of the vesting and contractual terms of the award.Previously, we estimated the expected term based on just the vesting period. Therisk-free interest rate assumption is based on observed interest ratesappropriate for the term of our employee options. We use historical data toestimate pre-vesting option forfeitures and record share-based compensationexpense only for those awards that are expected to vest.  The post-vesting forfeiture rate is based onmanagement expectations from historical information and current marketexpectations. For options granted, we amortize the fair value on astraight-line basis over the vesting period of the options.

 

**Our results of operations for three months  ended March 31, 2006 versus three monthsended March 31, 2005**

 

Revenues. Management and consulting services, product sales andcontract revenue for the three ended March  31, 2006 and 2005 were $604,000and $240,000, respectively. $325,000 of the increase in revenue for the periodwas associated with our new subsidiary, SHS, acquired in November 2005. Theremaining increase is primarily a result of management revenue from three iVOWcenters in 2006 compared to two iVOW centers in 2005. We also saw a 12%increase in vitamin sales. While there was no consulting revenue in the firstquarter of 2006, we expect consulting revenue in the second quarter as weanticipate delivering two blueprints to clients.

 

| ** **      | ** ** | **Three months ended March 31,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|
| **Revenue**     | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| SHS             |       | $                                                    | 325,000    |   | $ | — |   |
| Management fees |       | 176,000                                              |       | 91,000 |   |
| Vitamins        |       | 103,000                                              |       | 92,000 |   |
| Consulting      |       | —                                               |       | 57,000 |   |
|            |       | $                                                    | 604,000    |   | $ | 240,000 |   |

 

Cost of revenues. Our cost of revenues includes fully burdened costsassociated with generating management and consulting services revenues alongwith the fully burdened cost of our vitamin sales. Costs of revenues for thethree months ended March 31, 2006 and 2005 were $573,000 and $286,000,respectively. The increase was primarily due to the costs associated with theservices provided by SHS and an increase in vitamin cost of goods sold due tothe growth of vitamin 

 

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revenue. Anticipated increased revenues in future quarters may bringhigher cost of revenues. The level of increase is difficult to project due tovarying costs associated with each revenue type.

 

Product development. Product development expenses were $2,000 and $77,000for the three months ended March 31, 2006 and 2005, respectively. This $75,000decrease was primarily related to a reduction in staff time being invested inthe development of training programs due to staff reductions that took effectat the end of March 2005 and the completion of the training programs thatwere under development.

 

Sales and marketing expenses. Sales and marketing expenses were $284,000and $273,000 for the three months ended March 31, 2006 and 2005,respectively,  The $11,000 increase ismainly due to $10,000 sales and marketing expense incurred by SHS. We expect tosee an increase in our sales and marketing expenses during the coming quartersas we increase our market presence.

 

General and administrative expenses. General and administrativeexpenses were $644,000 and $572,000 for the three months ended March 31,2006 and 2005, respectively. $137,000 of the increase was due to SHS whilethere was a decrease of  $65,000 and$58,000 in staff related fees and consulting fees, respectively. There was a $26,000increase in professional fees and a $12,000 increase in franchise taxes due tothe Company increasing the number of authorized shares for common stock from35,000,000 to 70,000,000 in July 2005.

 

Other income and expense. For the three-months ended March 31,2006 we had other income, net of expense, of $1,000 compared to $6,000 for thesame period last year. This change is mainly due to interest expense associatedwith  a note for short-term bankborrowings.

 

Discontinued operations. For the three-months ended March 31,2005 we recognized $4,000 in income from the gain on the sale of our technologybusiness. The gain on the sale is the result of having recognized and collectedpayments from the buyer, Viking Systems, Inc., greater than the value ofthe assets sold in April 2004. We expect to recognize additionalgains in the future as royalty payments are collected.

 

**Liquidity and capital resources**

 

Net cash used in operating activities for the three months ended March 31,2006 was $824,000 compared to net cash used of $904,000 for the corresponding threemonth period in 2005. The $80,000 decrease in net cash used in operatingactivities during the 2005 period is primarily attributable to $61,000 reductionin net loss due to increased revenue. In addition, stock-based compensation anddepreciation and amortization were $83,000 in 2006 compared to $17,000 in 2005which have no impact on operating cash flow.

 

Net cash used in investing activities was $39,000 for the three monthsended March 31, 2006 compared to net cash provided by investing activitiesof $180,000 in the same period in 2005. The difference was primarilyattributable to proceeds from the sale of the Visualization Technology businessof $189,000 in 2005.

 

Net cash provided by financing activities was $754,000 for the three monthsended March 31, 2006, compared to net cash used in financing activities of56,000 for the same period in 2005. The increase was attributable to a privateplacement financing that resulted in gross proceeds of $922,000 in February 2006.

 

We incurred net losses and negative net cash flows from operatingactivities in 2005, 2004 and in the first quarter of 2006 and at March 31,2006, had an accumulated deficit of $75.3 million. At March 31, 2006, wehad cash and cash equivalents of $743,000. We believe that our cash and cashequivalents, together with anticipated 2006 net revenues and interest income, may notbe sufficient to meet our anticipated capital requirements through at least December 31, 2006.These factors raise substantial doubt about our ability to continue as a goingconcern. We are pursuing several alternatives to address this situation,including raising additional funding (see Note 8). However, there can be noassurance that the requisite fundings will be consummated in the necessary timeframe or on terms acceptable to us. Should we be unable to raise sufficientfunds, we may be required to curtail our operating plans and possiblyrelinquish rights to portions of our technology or products. In addition,increases in expenses or delays in product development may adverselyimpact our cash position and require further cost reductions. No assurance canbe given that we will be able to operate profitably on a consistent basis, orat all, in the future.

 

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**RISKFACTORS**

 

*Investment in our Common Stock involves a substantial degree of riskand should be regarded as speculative. As a result, the purchase of our CommonStock should be considered only by persons who can reasonably afford to lose theirentire investment. Before you elect to participate in the Offer to Exchange,you should carefully consider the risk and uncertainties described below inaddition to the other information in this Offer to Exchange and otherinformation incorporated herein by reference. Additional risks anduncertainties of which we are unaware or which we currently believe areimmaterial could also materially adversely affect our business, financialcondition or results of operations. In any case, the trading price of ourCommon Stock could decline, and you could lose all or part of yourinvestment.*

 

**Risks Related to our Business and Industry**

 

**We need to raise additional funds immediately to support ouroperations. These funds may not be available on acceptable terms, if atall, and we may be forced to cease our operations.**

 

We incurred net losses and negative net cash flows from operatingactivities in 2004 and 2005, and at March 31, 2006, had an accumulateddeficit of $75.3 million. At March 31, 2006, we had cash and cashequivalents of $743,000. In our Annual Report on Form 10-KSB for thefiscal year ended December 31, 2005, filed with the Securities andExchange Commission on March 31, 2006, we stated that we believed that ourcash and cash equivalents, plus monies received in a financing completed in February 2006together with anticipated 2006 product revenues and interest income, might notbe sufficient to meet our anticipated capital requirements through at least December 31,2006. These factors raised substantial doubt about our ability to continue as agoing concern. We have been pursuing several alternatives to address thissituation, including raising additional funding through an Offer to Exchange(see Note 9). The funds, if any, we raise in the Offer to Exchange may beinsufficient to support our capital requirements for a significant period oftime, or at all. Even if the Offer to Exchange is successful, we may needto raise additional funds to support our operations. Any future fundingtransaction 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 sustainoperations through or beyond December 31,2006, and you may lose your entire investment in our company.

 

We expect that the cash flows produced by our 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:

 

•                                          theextent to which the iVOW Surgical Centers and other services gain marketacceptance;

 

•                                          theextent to which our Sound Health Solutions (“SHS”) Centers and other servicescan be effectively and economically replicated;

 

•                                          thespeed with which we can execute our business plan, including our sales andmarketing activities and the costs to establish iVOW Surgical Centers;

 

•                                          thespeed with which we can execute our business plan, including our sales andmarketing activities and the costs to establish Sound Health Solutions modeledcenters;

 

•                                          theper patient revenue available via the SHS model;

 

•                                          thelevels of reimbursement for procedures performed; and

 

•                                          theextent of competition.

 

**Our common stock may be subject to delisting from the NasdaqCapital Market because we fail to maintain compliance with continued listingcriteria.**

 

The quantitative standards for continued listing on the Nasdaq CapitalMarket requires a company to maintain a bid price for its stock of $1.00 pershare and maintain a stockholders’ equity of at least $2,500,000 (or satisfyalternative requirements). Failure to comply with these requirements subjects acompany to delisting proceedings. We have twice over the past 3 years 

 

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been subjected to delisting proceedings from Nasdaq for failure to meetthe minimum stockholders’ equity requirement. Each time we eventually regainedcompliance by raising additional operating capital.

 

As of December 31, 2005, our stockholders’ equity dropped belowthe $2,500,000 threshold to $2,479,320. As a result of the financing wecompleted in February 2006, our stockholders’ equity was greater than$2,500,000 as of March 31, 2006. We cannot assure you that we will be ableto maintain our stockholders’ equity above $2,500,000 or maintain our stockprice above $1.00 per share. In addition, we received 1,654,000 shares ofcommon stock of Viking Systems, Inc. (“Viking”) in connection with thesale of our Visualization Technology business. We currently value those sharesat a total of $744,300, which represents the trading price of Viking commonstock at March 31, 2006. Viking’s common stock is thinly traded and salesof even small numbers of shares can significantly affect the trading price.Because of this, the trading price of Viking’s common stock is likely tofluctuate substantially over time, and this will affect the value we ascribe toour shares. A significant drop in the trading price of Viking’s common stockwould negatively affect our financial position and, specifically, ourstockholders’ equity balance. Any reduction in our stockholders’ equityassociated with a drop in the trading price of Viking common stock couldsubject us to delisting proceedings by Nasdaq.

 

If we are unable to comply with Nasdaq’s continued listingrequirements, our securities will be delisted from the Nasdaq Capital Market.The delisting of our common stock from the Nasdaq Capital Market may materiallyimpair our stockholders’ ability to buy and sell shares of our common stock andcould have an adverse effect on the market price of, and the efficiency of thetrading market for, our common stock. In addition, the delisting of our commonstock could significantly impair our ability to raise capital should we desireto do so in the future.

 

**We have a history of losses and may never become profitable.**

 

Since our formation in July 1993, and as of March 31, 2006,we have incurred cumulative net losses of $75.3 million. Specifically, weincurred net losses of, $3.9 million in 2004 and $2.5 million in 2005 and$897,000 in the first three months of 2006. We expect to incur losses for thenext several quarters as we continue to implement our business plan. However, wemay never achieve or sustain profitability in the future. Even if weachieve profitability, we may not be able to sustain it on an ongoingbasis.

 

**Our future financial results 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 Surgical Centers and SHS Centers.

 

Our future operating expenses are expected to increase in futureperiods as we intend to establish iVOW Surgical Centers and SHS Centers, expandour sales and marketing operations, expand our service capabilities, improveour internal operating and financial systems, and continue to comply with thestringent requirements of the Sarbanes-Oxley Act of 2002. In addition, ouroperating expenses are based on our expectations of future revenues, and arerelatively fixed in the short term. We may be unable to adjust spendingquickly enough to offset any unexpected revenue shortfall. If we have ashortfall in revenues in relation to our expenses, or if our expenses increasebefore our revenues do, then our business for a particular period would bematerially adversely affected.

 

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:

 

•                                          themarket trading price of our common stock may fluctuate, negativelyimpacting the ability of stockholders to buy and sell our shares at consistentprices;

 

•                                          wemay have difficulty raising funds in the future at prices that areacceptable to us and our stockholders; and

 

•                                          investorsmay be less willing to purchase our shares for lack of consistentoperating results.

 

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**The license fees Viking owes us may not exceed the minimum royaltyamounts.**

 

As part of the sale of our Visualization Technology business unitto Viking, we entered a license agreement with Viking under which Viking agreedto pay us royalties over the next five years based on sales from this businessunit, with minimum royalties during the five-year period. Viking paid us theminimum royalty of $150,000 for the first year of the license. Viking is arelatively new company, and there is no assurance that it will be successful inselling a significant number of products based on the Visualization Technologybusiness. As a result, there can be no assurance that Viking will owe us morethan the minimum royalties set forth in the license agreement. Additionally, ifViking’s business does not succeed, it may not have sufficient funds inthe future to pay us the minimum royalty amounts owed to us under the licenseagreement.

 

**Our liquidity and capital requirements will be difficult to predict.**

 

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

 

•                                          theextent to which our products and services gain market acceptance;

 

•                                          costsassociated with establishing marketing, and operating our obesity relatedprograms and disease state management business, including the iVOW Centers;

 

•                                          thetiming and costs of product and services introductions;

 

•                                          theextent of our ongoing product and service development programs; and

 

•                                          thecosts of developing marketing and distribution capabilities for our consumerproducts.

 

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.

 

**As a company, we have limited experience in the management of healthcare services businesses.**

 

Over the past two years we have tested our ability to run outsourcedprograms through the three programs we currently operate. In addition, theco-founders of SHS bring over seven years of experience as owner-operators ofSHS Centers. Nonetheless, we have only a limited direct as well as indirectoperating history upon which an evaluation of our prospects can be based. Inaddition, the bariatric surgical management market is relatively new and isevolving rapidly, which can cause changes in the way clients react to theservices offered. We have yet to prove that our management model is appropriatefor the market we are addressing. To be successful, it is crucial that wedevelop strong affiliations with employers, payors, hospitals and providers,and we have as yet limitedly proven our ability to do so. We have establishedonly three significant operating agreements with hospitals to date and operateonly two SHS Centers. To successfully implement our business plan, we mustestablish many more such relationships.

 

Prior to the favorable ruling by Centers for Medicare &Medicaid Services (“CMS”) in February 2006, we believe our business hadbeen adversely impacted by changes in reimbursement and uncertainty concerningCMS’s decision on whether to provide coverage for gastric bypass surgery.Doctors, hospitals, surgical practices and those companies that support theobesity surgery market will adapt their businesses to the evolvingreimbursement and payor policies. We believe that for many of these parties CMS’saffirmative decision on the coverage of gastric bypass surgery is a criticalstep in their business analysis. However, since CMS only recently announced itsdecision, it is too early to determine what impact this decision will have onour business.

 

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.

 

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**On November 1, 2005, we acquired SHS as a wholly-owned subsidiary.We may not realize the expected benefits of the acquisition because ofintegration and other challenges, which could adversely affect our business.**

 

We have limited experience in acquisition activities and integratingthe operations, technologies, products, services and personnel of iVOW and SHS may bea complex, time consuming and expensive process that could significantlydisrupt the business of the combined company. Employees and management of eachof iVOW and SHS have played a key role in creating each company and theintegration of these two companies will alter prior relationships and may affectproductivity. If we fail to successfully meet the challenges involved inintegration or otherwise fail to realize any of the anticipated benefits of theacquisition, then the results of operations of the combined company could beseriously harmed. Realizing the benefits of the acquisition, if any, willdepend in part on the successful integration of products, services,operations and personnel. We may not successfully integrate the operationsof SHS and iVOW in a timely manner, or at all, and the combined company may notrealize the anticipated benefits of the acquisition to the extent, or in thetimeframe, anticipated. The anticipated benefits of the acquisition are basedon projections and assumptions, including successful integration, not actualexperience. In addition to the integration risks discussed above, the combinedcompany’s ability to realize those benefits could be adversely effected bypractical or legal constraints on its ability to combine operations.

 

**Our revenue model related to the iVOW Surgical Centers relies on theprovision of services and we have no ownership stake in the iVOW SurgicalCenters.**

 

Our business model includes the ownership and operation of our SHSCenters as well as the provision of management services to owners of medicaland surgical programs through our iVOW Surgical Center program. With respect toour iVOW Surgical Center program, we will not have an ownership interest in theiVOW Surgical Centers, which will make it more difficult to sustain revenuesfrom these Centers. We will not enjoy directly increased revenue based on theprofitability or increased value of particular iVOW Surgical Centers and,without an ownership interest in the iVOW Surgical Centers, we are subject toall the risks of any service provider; our services could be terminated at theend of any contract period for such centers.

 

**Roll-out of our iVOW Surgical Centers and our SHS Centers depends onour entering into agreements with employers, payors, hospitals and physicians;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 Surgical Centers and SHS Centers inconjunction with employers, payors, hospitals and surgeons. There can be noassurance that we will be able to negotiate the establishment of these Centersin a timely manner or on terms satisfactory to us, if at all. Our experience todate is limited to three existing management contracts for iVOW Surgical Centersand two SHS Centers. We are in active negotiation for other iVOW SurgicalCenters and SHS Centers; 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 Surgical Centers and SHS Centers will harm our cashposition and increase our need to raise additional capital.

 

**We need to increase market awareness and acceptance of our new businessmodel.**

 

To our company’s knowledge, the comprehensive services offered by ournew iVOW business model have not been available to date on a national level.While we have previously supplied clinical training and consulting services tovarious clients, we have only recently begun to promote our program managementservices and have just started to promote our owner operator model. As aresult, employers, payors and providers of bariatric clinical services are notyet generally aware of the services we offer. In order to accomplish ourstrategic and business plans, we will have to quickly and effectively increasemarket awareness of our management model and the iVOW brand name, and convinceemployers, payors, doctors, hospitals and patients of the benefits of theseservices. Among other things, this will require that we:

 

•                                          increaseawareness of our complete service offering;

 

•                                          strengthenour brand name to increase visibility;

 

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•                                          continueto upgrade and expand our services;

 

•                                          increaseawareness of the availability of surgery as a means of treating morbid obesity;and

 

•                                          increaseawareness of the availability of our multidisciplinary medically anchoredweight management program as a means of treating chronic and morbid obesity.

 

We cannot assure you that we will be able to accomplish theseobjectives with the limited operating capital we currently have available, ifat all.

 

**After establishing iVOW Surgical Centers and SHS Centers, we mustcontinue to prove our value proposition.**

 

In order to successfully negotiate and complete agreements withemployers, payors, doctors and hospitals to establish iVOW Surgical Centers andSHS Centers, we will need to present them with their anticipated return oninvestment (ROI), our projected revenues and operational metrics. We cannotassure you that our projections will prove accurate or that we will be able toprovide the anticipated metrics. Our projections are based on limited input andoperational history and failure to meet such projections will negatively impactour relationships with employers, payors, doctors and hospitals and our abilityto attract additional business.

 

**The provision of health care services is subject to considerableregulation by state and federal agencies, including regulations under HIPAA andStark.**

 

Our iVOW Surgical Centers and SHS Centers will need to comply with manylaws and regulations, both state and federal, which govern the provision ofhealth care services. If they fail to comply with any such laws andregulations, then the penalties involved could be serious, time-consuming formanagement and expensive. Inexperience in health care services could contributeto an inadvertent breach of laws or 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:

 

•                                          protectindividual privacy by limiting the uses and disclosures of patient information;

 

•                                          requirethe implementation of security safeguards to ensure the confidentiality,integrity and availability of individually identifiable health information inelectronic form; and

 

•                                          prescribespecific transaction formats and data code sets for certain electronictransactions.

 

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 abroad range of designated health services with which they have ownership orcertain other financial arrangements. Many states have adopted legislativeproposals to prohibit the payment or receipt of remuneration for the referral ofpatients and physician self-referrals, regardless of the source of the paymentfor the care. These laws and regulations are extremely complex, and littlejudicial or regulatory interpretation exists. If the activities of a client ofours or other entity with which we have a business relationship were found toconstitute a violation of anti-referral laws, and we were found to haveknowingly participated in such activities, we could be subject to sanction orliability under such law.

 

**We operate in a competitive market; new technologies, procedures, orpharmaceuticals could eventually radically change the modality of treatment ofmorbid obesity and negatively impact the economics of our obesity surgerybusiness.**

 

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 tothe market in the next several years. These devices would be 

 

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implanted in a relatively simple endoscopic procedure. Thesealternatives may prove to be more effective, less risky and/or cheaperthan gastric bypass. If this turns out to be the case, our ability to generaterevenues from the surgical model will be negatively affected. Also, manypharmaceutical companies are researching drug therapies for combating obesity.If they prove successful in finding a more effective solution for morbidobesity, then demand for a surgical option is likely to decline substantially.We cannot guarantee that we will compete successfully against our current orpotential competitors, especially any pharmaceutical companies withsignificantly greater financial resources or brand name recognition.

 

**We expect to compete with other companies that have the same objectivesas us.**

 

There are a few 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. This may proveto be an advantage over us in gaining access to potential clients because we donot have bariatric surgeons on our staff. Other companies have only a partialservice offering, which may allow them, because of lower overhead, to operatein their niche at a price advantage to full-service companies such as ours. Inany case, we expect that the market will continue to be attractive and that newentrants are likely.

 

**If we fail to retain our key personnel and hire, train and retain additionalqualified and experienced employees, we may not be able to competeeffectively, or expand our consulting business and the number of Centers asplanned, both of which could result in reduced 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 may reduce our revenues.

 

To be successful, we must strengthen awareness of our services throughour marketing efforts and through establishment of additional iVOW SurgicalCenters and SHS Centers. We have a limited marketing and business developmentforce through which the efforts will be conducted, and we will rely heavily oneach of these individuals. We cannot assure you that we will be able to attractand retain sufficient qualified personnel.

 

Our current key employees are Michael H. Owens, M.D., Chief ExecutiveOfficer and President; Richard M. Gomberg, Vice President of Finance and ChiefFinancial Officer; Joann Harper, Vice President, Program Development and Implementation,;Mary Pat Finn, Vice President of Sales; Mary Lou Walen, Associate VicePresident, Customer Relations; and Aimee Johnston, Associate Vice President,Marketing Management Services. Key employees of our wholly-owned subsidiary SHSare Steve Morton, Ph.D., Assistant Vice President, Behavioral Services;Jeannette Beatty, Manager of Nutrition; and Pamela Adkins, Manager, Exerciseand Testing. We also have entered into long-term consulting engagements withthe co-founders of SHS, Dr. Frances Gough and Dr. Teresa Girolami. Wedo not maintain key personnel life insurance policies on any of theseindividuals. All of our employees and consultants may terminate theirrelationships with us at any time, with or without cause, and with or withoutnotice.

 

**If we are not able to attract and retain key doctors to participate inour advisory board, it may adversely affect our ability to develop ourproducts and services and expand our 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 clinical advisory board may be terminated orbreached.

 

**Our failure to effectively manage our growth could have a materialadverse effect on our business.**

 

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.We will need to continue to improve our operational and financial systems andmanagerial controls and procedures, and we 

 

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will need to continue to expand, train and manage our workforce. We area small company with limited resources, so we lack the ability to increase ourcapacity to provide services prior to assurances that those services will bepaid for by customers. As a result, each new management contract will requiresignificant operational efforts as we hire personnel to staff the new project.We will have to maintain close coordination among our technical, accounting,finance, marketing and sales departments.

 

**Risks Related to the Securities Markets,Ownership of our Common Stock and the Offer**

 

**Future sales of our common stock in the public market could cause ourstock price to fall.**

 

In the private placement financing we completed on February 23,2006, we issued 290,000 shares of common stock and warrants to purchase 144,998shares of common stock. We also issued a warrant to purchase 23,200 shares ofcommon stock and a warrant to purchase 11,600 shares of common stock to our sellingagent, Dawson James Securities. In the private placement financing we completedon July 26, 2005, we issued 833,328 shares of common stock and warrants topurchase 833,328 shares of common stock. We also issued a warrant to purchase41,666 shares of common stock and a warrant to purchase 41,666 shares of commonstock to our selling agent, Dawson James Securities. In connection with theprivate placement, we issued 177,252 shares of common stock and warrants topurchase 124,608 shares of common stock in exchange for the 826,447 outstandingshares of Series A preferred stock (the “Series A exchange”). Intotal, we issued 1,010,580 shares of common stock and warrants to purchase1,041,268 shares of common stock in the July 2005 private placement andthe Series A exchange.

 

As of May 3, 2006 we had 2,669,947 shares of outstanding commonstock. As part of the above transactions, we have filed a registrationstatement for the July 26, 2005 financing and recently filed aregistration statement relating to the February 23, 2006 financing.

 

In addition, any shares of common stock issued upon exercise of theExchange Warrants as part of the Offer to Exchange (See Note 8 ) arefreely tradeable. Sales of these shares of common stock, or the perception thatsuch sales might occur, could cause the market price of our common stock todecline.

 

**There is a limited market for our common stock and therefore investors may notbe able to liquidate their investment 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 190stockholders of record and the average daily trading volume in our stock isapproximately 10,500 shares. The limited trading market for our common stock may causefluctuations in the market value of our common stock to be exaggerated, leadingto price volatility in excess of that which would occur in a more activetrading market. The lack of an active trading market in our stock may alsocause investors to be unable to sell all of their desired shares of common stockon short notice and the sale of a large number of shares at one time couldtemporarily depress the market price. An investment in our company is highlyspeculative, and an investor should be able to withstand a total loss of theinvestment.

 

**Our stock price could continue to be volatile and your investment inour common stock could suffer a decline in value, adversely affecting ourability to raise additional capital.**

 

The market prices and trading volumes for securities of emergingcompanies, like ours, have historically been highly volatile and haveexperienced significant fluctuations unrelated to the operating performance.The market price of our common stock has historically been highly volatile. Forexample, between March 2005 and April 2006, the trading price of ourcommon stock ranged from $2.30 to $13.90. The trading price of our common stockmay continue to be significantly affected by factors such as:

 

•                                          actualor anticipated fluctuations in our operating results,

 

•                                          ourability to remain listed on Nasdaq,

 

•                                          changesin financial estimates by securities analysts,

 

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•                                          announcementsof technological innovations,

 

•                                          newproducts or new contracts by us or our competitors,

 

•                                          regulatoryannouncements,

 

•                                          developmentswith respect to patents or proprietary rights,

 

•                                          conditionsand trends in the medical device and other technology industries,

 

•                                          adoptionof new accounting standards affecting the health services and diseasemanagement industries, and

 

•                                          generalmarket 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. Inthe past, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often beenbrought against that company. Such litigation, if brought against us, couldresult in substantial costs and a diversion of management’s attention andresources.

 

**We intend to issue additional shares of our equity securities in thefuture to raise funds to support our operations.**

 

We intend to seek to raise additional capital through the sale of ourequity or other securities to support our financial needs. Potential investorsshould be aware that any security issuance may result in reduction of thebook value or market price, if any, of the outstanding shares of common stock.If we issue any additional shares of common stock or preferred stock, suchissuance will reduce the proportionate ownership and voting power of each otherstockholder. Further, any new issuance of shares may result in a change ofcontrol of our management or the Company.

 

**Anti-takeover provisions in our organizational documents and Delawarelaw may discourage or prevent a change of control, even if an acquisitionwould be beneficial to our stockholders, which could affect our stock priceadversely and prevent attempts by our stockholders to replace or remove ourcurrent management.**

 

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

 

•                                          authorizethe issuance of preferred stock which can be created and issued by the board ofdirectors without prior stockholder approval, with rights senior to those ofthe common stock;

 

•                                          providefor a classified board of directors, with each director serving a staggeredthree-year term;

 

•                                          prohibitour stockholders from filling board vacancies, calling special stockholdermeetings, or taking action by written consent;

 

•                                          prohibitingour stockholders from making certain changes to our restated certificate ofincorporation or restated bylaws except with 66 2/3% stockholder approval; and

 

•                                          requireadvance written notice of stockholder proposals 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.

 

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**Risks Related to our Intellectual Propertyand Potential Litigation**

 

**We depend on our intellectual property for the establishment andoperation of our iVOW Surgical Centers and SHS Centers.**

 

We rely on a combination of trade secrets, know-how and confidentialityrestrictions for the establishment and operation of our iVOW Surgical Centersand SHS Centers. Despite these precautions, it may be possible forunauthorized parties to copy our intellectual property or otherwise obtain anduse information that we regard as proprietary. We do not have any patentprotection for our business, and existing intellectual property laws provideonly limited protection. We have expended significant efforts devising thetypes of products and services we will offer and the manner in which these willbe delivered. Our ability to maintain the secrecy and confidentiality of ourtrade secrets and internal knowledge is crucial to the success of our business.Any failure to do so may negatively impact our prospects. We also may notbe able to detect unauthorized use and take appropriate steps to enforce ourintellectual property rights.

 

**We may be subject to product liability claims and have limitedinsurance 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 suchproducts. Product liability insurance is expensive and in the future may notbe available to us on acceptable terms, if at all. A successful productliability claim or series of claims brought against us in excess of ourinsurance coverage would negatively impact our business.

 

**If we are unable to protect our intellectual property related to thetechnology transferred to Viking, we may be unable to prevent othercompanies from using such technology in competitive products.**

 

We maintain ownership of the technology transferred to Viking inconnection with the sale of our Visualization Technology business in April 2004.In the event Viking does not make the required royalty payments to us, theirrights in the technology will be terminated. In such case, we will be able tocontinue 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 applicationsowned by or licensed to us. Even if patents do issue, the claims allowed may notbe sufficiently broad to protect our technology. In addition, issued patents ownedby or licensed to us may be challenged, invalidated or circumvented, orthe rights granted thereunder may not provide us with competitiveadvantages. Further, the medical device industry has been characterized byextensive litigation regarding patents and other intellectual property rights.Litigation, which would result in substantial expense, may be necessary toenforce any patents issued or licensed to us and/or to determine the scope andvalidity of proprietary rights of third parties or whether our products,processes or procedures infringe any such third-party proprietary rights. Inaddition to patents, we rely on unpatented trade secrets to protect ourbusiness 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 haveadequate remedies for any breach and our trade secrets may otherwisebecome known or be independently developed by competitors. In addition, ouragreements with employees and consultants require disclosure of ideas,developments, discoveries or inventions conceived during employment orconsulting, as the case may be, and assignment to us of proprietary rightsto such matters related to our business and technology. The extent to whichefforts by others will result in patents and the effect on us of the issuanceof such patents is unknown.

 

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Item 3. Controls and Procedures

 

(a)            Evaluation of disclosure controls andprocedures

 

As required by the Securities and Exchange Commission Rule 13a-15(b),we carried out an evaluation, under the supervision and with participation ofour management, including our chief executive officer and chief financialofficer, of the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this report. Based on the foregoing, ourexecutive officer and chief financial officer concluded that as of the end of March 31,2006, our disclosure controls and procedures were effective.

 

In connection with the audit of our 2005 financial statements,management, together with J. H. Cohn LLP, our independent registered publicaccounting firm, identified the existence of several significant deficienciesrelated to the preparation of our financial statements and notes thereto. Thesesignificant deficiencies collectively amount to a material weakness in ourinternal control over financial reporting.

 

In response to the matters identified, wehave taken steps beginning with the first quarter of 2006 to strengthen ourfinancial reporting capabilities. Specifically, we have expanded, and willcontinue to expand, our financial disclosure and reporting knowledge throughcontinuing education courses so as to minimize our financial reportingdeficiencies in the future.

 

(b)  Changes in internal controls of ourfinancial reporting

 

Other than as set forth above, there has been no change in our internalcontrol over financial reporting during our most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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

# * *

## Item 1.           Legal Proceedings

None.

 

Item 2.           Unregistered Sales of Equity Securities andUse of Proceeds

None.

 

## Item 3.           Defaults upon Senior Securities

None.

 

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

None.

 

## Item 5.           Other Information

None.

 

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

##  

(a)                                  Exhibits

 
| **NUMBER  EXHIBIT** | ** ** | **DESCRIPTION**                                                                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                 |
| 3.1(1)              |       | Second Restated Certificate of Incorporation                                                                                                         |
| 3.2(3)              |       | Certificate of Amendment of Second Restated Certificate of  Incorporation                                                                            |
| 3.3(6)              |       | Certificate of Amendment of Second Restated Certificate of  Incorporation                                                                            |
| 3.4(2)              |       | Restated Bylaws.                                                                                                                                     |
| 4.1(2)              |       | Form of certificate for common stock.                                                                                                           |
| 4.2(7)              |       | Form of Warrant February 2004 Financing                                                                                                    |
| 4.3(4)              |       | Form of Warrant May 2004 Financing                                                                                                         |
| 4.4(4)              |       | Form of Selling Agent’s Warrant May 2004 Financing                                                                                    |
| 4.5(5)              |       | Form of Warrant 2005 Financing                                                                                                                  |
| 4.6(5)              |       | Form of Selling Agent’s Warrant 2005 Financing                                                                                             |
| 4.7(7)              |       | Form of Warrant February 2006 Financing                                                                                                    |
| 4.8(7)              |       | Form of Selling Agent’s Warrant 2006 Financing                                                                                             |
| 10.1(7)             |       | Sublease Agreement, dated January 12, 2006, between us and  Insurance Company of the West                                                       |
| 10.2(7)             |       | Form of Subscription Agreement February 2006 Financing                                                                                     |
| 31.1*               |       | Certification of Principal Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                         |
| 31.2*               |       | Certification of Principal Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                         |
| 32.1*               |       | Certification of Principal Executive Officer pursuant to 18 U.S.C.  1350, as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
| 32.2*               |       | Certification of Principal Financial Officer pursuant to 18 U.S.C.  1350, as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

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(1)                                  Incorporatedby reference to our Form 10-K/A, filed on September 10, 1998.

 

(2)                                  Incorporatedby reference to our Registration Statement on Form S-1, as amended, filedon July 2, 1997.

 

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

 

(4)                                  Incorporatedby reference to our Form 8-K, filed May 26, 2004.

 

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

 

(6)                                  Incorporatedby reference to our Form 10-QSB filed on May 16, 2005.

 

(7)                                  Incorporatedby reference to our Form 10-KSB, filed March 31, 2006.

 

*                                        Filed herewith

 

(b)                                 Reportson Form 8-K

None.

 

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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: May 15, 2006 | /s/ Michael H. Owens                                                                                                                |   |
|                    | Michael H. Owens, M.D.  President, Chief Executive Officer and  Director                                                            |
|                    |                                                                                                                                |
| Date: May 15, 2006 | /s/ Richard M. Gomberg                                                                                                              |   |
|                    | Richard M. Gomberg  Vice President of Finance,  Chief Financial Officer and Secretary  (Principal financial and accounting officer) |
|                         |                                                                                                                                     |  |  |

 

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