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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-KSB [X] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2004
    
    Commission File Number 0-27106
 VISEON, INC.  Nevada
(State or other jurisdiction of incorporation or organization) 41-1767211
(I.R.S. Employer Identification No.) 8445 Freeport Parkway, Suite 245
Irving, Texas 75063
(972) 906-6300 (Address, including zip code,
and
telephone number, including area code, of
registrants principal executive offices) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Each Class
Common Stock, $.01 Par Value Indicate by check mark whether registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO  [  ] Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [  ] The issuers revenues for the fiscal year ended June 30, 2004 were $286,215. At September 23, 2004, the total aggregate market value of the shares of voting
stock held by non-affiliates of the registrant was $22,894,060 based upon the
average of the closing bid and asked prices of the registrants Common Stock as
reported by the Over The Counter Bulletin Board on that date of $1.44 and $1.45
per share, respectively. The term affiliates is deemed, for this purpose
only, to refer to directors, officers and holders of 5% or more of the Common
Stock of the registrant. The number of shares outstanding of the registrants
Common Stock, $0.01 par value, as of September 23, 2004 was 26,523,528. Transitional Small Business
Disclosure format (Check one): YES [  ] NO  [X]




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VISEON, INC.
    
    FORM 10-KSB
  
 INDEX Page NumberPART I.Item 1.
    
    Description of Business
    
    
    4Item 2.
    
    Description of Property
    
    
    19Item 3.
    
    Legal Proceedings
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19PART II.Item 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    20Item 6.
    
    Managements
Discussion and Analysis or Plan of Operation
    
    
    20Item 7.
    
    Financial Statements
    
    
    23Item 8.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    23Item 8A.
    
    Controls and Procedures
    
    
    23PART III.Item 9.
    
    Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
    
    
    24Item 10.
    
    Executive Compensation
    
    
    25Item 11.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    26Item 12.
    
    Certain Relationships and Related Transactions
    
    
    28Item 13.
    
    Exhibits
    
    
    30Item 14.
    
    Principal Accountant Fees and Services
    
    
    33SubsidiariesConsent of Virchow, Krause & Company, LLPCertification from John Harris, President and CEOCertification from Robert A. Wolf, CFOCertification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  - 2 -




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VISEON, INC.
    
    FORM 10-KSB
 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934.
These statements appear in a number of places including BUSINESS and
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. These statements
regard:  *
    
    Our belief that sales of our products may be disproportionately high
during the holiday shopping
season when compared to other times of the year.*
    
    Our belief that our product offerings will be designed to assimilate
future technical advances.*
    
    Our belief that we have all rights necessary to market and sell our
system without infringement of
intellectual property rights held by others.*
    
    Our belief that, given the right business opportunities, we may expand
our operations rapidly
and significantly.*
    
    Our belief that we can maintain key personnel and consultants in all
functional areas necessary to
successfully execute our business strategy for fiscal year 2005.*
    
    Our belief that we are well positioned to establish new consumer
electronics products, thereby
increasing future revenues and profitability.*
    
    Our belief as to the reasonableness of the estimates and assumptions
we make that form the basis of
our judgments regarding the carrying values of assets and liabilities that
are not readily apparent from
other sources.*
    
    Our belief that we should not encounter any meaningful difficulty in
procuring all requisite
certifications and approvals.*
    
    Our belief as to the principal competitive factors we will face in our
markets.*
    
    Our belief as to the amounts ultimately payable, if any, in connection
with certain litigation and claims
arising in the ordinary course of business.*
    
    Our expectations regarding the marketing expenses associated with
creating and promoting a brand image.*
    
    Our expectations regarding the marketing expenses associated with
developing and promoting new products.*
    
    Our expectations regarding the basis upon which we will compete in our
markets.*
    
    Our expectations regarding by whom and where our broadband videophone
products will be manufactured,
assembled and tested.*
    
    Our expectations regarding the compatibility of our personal
videophones with other products.*
    
    Our expectations regarding the establishment of a formal manufacturing
quality process for our products.*
    
    Our expectations regarding order fulfillment and customer support.*
    
    Our expectations regarding our sales and distribution strategies.*
    
    Our plan to develop our products and services jointly with one or more
suitable, established
developers and manufacturers.*
    
    Our plan to continue forming new relationships with other companies to
distribute their products alongside
our own products.*
    
    Our intent to focus on licensing our intellectual property to third
parties and developing proprietary consumer broadband
videophone products and services.*
    
    Our intent to rely on an outside sales force.*
    
    Our intent to use a variety of marketing programs to build awareness
of our products.*
    
    Our intent to compete in the consumer videophone market vigorously in
all aspects.*
    
    Our intent to take additional steps to protect our patents from
infringement by others. Such statements can be identified by the use of forward-looking terminology
such as believes, expects, may, estimates, will, should, plans or
anticipates including the negatives thereof, other variations thereon,
comparable terminology or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of future
performance, involve significant risks and uncertainties and that actual
results may materially differ from any projections contained in the
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed under RISK
FACTORS. As a result, these forward-looking statements represent only the
Companys judgment as of the date of this Annual Report. The Company does not
express any intent or obligation to update any such forward-looking statements.
You should review any additional disclosures we make in our press releases and
Forms 10-KSB, 10-QSB, and 8-K filed with the Securities and Exchange
Commission. - 3 -




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VISEON, INC.
    
    FORM 10-KSB
 
 ITEM 1 . DESCRIPTION OF BUSINESS. INTRODUCTION Viseon, Inc. (the Company), a Nevada corporation formerly known as RSI
Systems, Inc. historically has been a developer of group videoconferencing
systems primarily sold to corporate and government-related end users and OEM
customers. In May 2001, the former RSI Systems, Inc. was merged into its
wholly owned subsidiary, Viseon, Inc., in order to change the domicile of the
Company from Minnesota to Nevada and to effect a simultaneous name change to
Viseon, Inc. The shareholders of RSI Systems, Inc. approved the Plan of Merger
between RSI Systems, Inc. and Viseon, Inc. on May 23, 2001. RSI Systems, Inc.
was incorporated under the laws of the state of Minnesota on December 21, 1993.
On July 25, 1995, it completed the initial public offering of its common
stock, par value $0.01 per share (the Common Stock). Beginning with the third quarter of the Companys fiscal 2002, the
Companys profit margins were eroded by intense competition from other group
videoconferencing product manufacturers and resellers. The Company recognized
the need to modify its business model to achieve higher margins and benefit
from its portfolio of U.S. patents and pending European patents. The fifth U.S.
patent was issued in November 2003. In January 2003, we changed our focus from
being a group videoconferencing manufacturer and reseller to a desktop and
consumer video communications manufacturer and reseller. This was accomplished
by the transfer of our group videoconferencing services contract portfolio and
the associated liabilities to Comlink Technologies, LLC and the liquidation of
our remaining group videoconferencing assets. The only measurable revenues we
currently receive result from sales of the VisiFone, a personal broadband
video communication device marketed to businesses and consumers. The VisiFone is a low-cost broadband videophone. It is a self-contained
system that does not require a PC or any external equipment. The VisiFone
operates on any broadband connection including high-speed Internet connections
via Digital Subscribert Lines (DSL) or cable modem and is compatible with both
home and office networks. The VisiFone is compliant with the communications
industry standards of H.323 and SIP and it is compatible with most corporate
videoconferencing systems. The VisiFone has been designed to be used by
business entities and residential consumers. The Company has licensed certain parts of its patents to other companies within
the visual communications industry. The Company intends to enter into
additional agreements whereby it may grant a license of its intellectual
property to third parties in furtherance of developing proprietary consumer
broadband videophone products and services, some of which may be based on its
existing intellectual property. The Company plans to undertake the development
of these products and services jointly with one or more suitable, established
manufacturers, which the Company is currently in the process of identifying and
selecting. To date the Company has retained independent business enterprises
to assist in the design of the general appearance and functionality of our next
generation broadband videophone as well as the design and development of the
software, electronics and acoustics that will be integrated therein which is
the genesis of the next generation VisiFone. The design and development
assistance provided by each of these companies is a cooperative effort with our
technical support personnel, under the supervision of our technical advisors
and senior management to insure strict adherence to the specifications outlined
to them by the Company. Additionally, the Company established a relationship
with Leadtek, an Asian partner, as a distributor in the U.S. of a broadband
videophone manufactured by Leadtek. The Company may also continue forming new
relationships with other companies to distribute their products alongside its
own products. The Companys marketing strategy targets primarily residential consumers who
have historically not purchased video communication devices and, to a limited
degree, business and government entities with widespread operations across
regional, national and international boundaries. Management identified the
challenges associated with marketing the Companys products to such a diverse
market segment prior to its decision to modify the Companys business model and
has been evaluating various marketing strategies for more than two years.
Management recognized the advantages of developing a marketing strategy that
included a plan of sales and distribution of its products in tandem with one or
more major broadband providers and VoIP marketers. In this regard, the Company
has been actively discussing videotelephony and the merits of offering the
VisiFone to their subscribers, with cable television system operators,
telephone companies and independent VoIP marketers in search of potential
partners with which such a relationship can be developed. The Company has
secured one such relationship with a regional division of TimeWarner Cable,
which will offer its current generation VisiFone to both commercial and
residential consumers in conjunction with the broadband services it offers.
The Company intends to continue to search for additional broadband providers
and VoIP marketers with which it can enter into similar agreements regarding
the VisiFone and its future videotelephony products and services. All of these
developments have affected and will continue to affect the Companys financial
model in terms of margins, cash flow requirements and other areas. The Company
has a limited operational history with respect to the current direction of its
business. There can be no assurance that the Company will be able to succeed
in implementing its strategy, or that the Company will be able to achieve
positive cash flows or profitable operations as a result of such changes in its
business. - 4 -




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VISEON, INC.
    
    FORM 10-KSB
 Industry Background Traditional telecommunication networks use a fixed electrical path that
travels through a series of switches across the network. These networks were
designed solely to carry low-fidelity audio signals with a high level of
reliability. Although these networks are indeed reliable for their initially
intended use, they are not well suited to service the explosive growth of
digital communications applications. Traditional networks transmit data at very low rates and resolutions,
making them poorly suited for delivering high-fidelity audio,
entertainment-quality video or other rich multimedia content. Traditional
networks are also expensive to build because each subscribers telephone must
be individually connected to the central office switch, which are usually
several miles away from a typical subscribers location. The digital component
of the traditional telecommunications infrastructure is also less efficient
than modern networks because it allots fixed bandwidth throughout the duration
of each call, whether or not voice is actually being transmitted. Further, it
is difficult for telecommunication service providers to provide new or
differentiated services or functions, like video communications, that the
network was not designed to accommodate. In contrast to the traditional telecommunications infrastructure or public
switched telephone network (PSTN), data networks  such as the Internet or a
corporate LAN  utilize a packet-switched system in which information
between two communicating terminals (for example, a PC downloading a page from
a web server) is transmitted in the form of small data packets that travel
through a series of switches, routers, and hubs across the network.
Packet-switched networks have been built mainly for carrying non-real-time
data. The advantages of such networks are their efficiency, flexibility and
scalability. Bandwidth is only consumed when needed. Networks can be built in
a variety of configurations to suit the number of users, client/server
application requirements and desired availability of bandwidth. Furthermore,
many terminals can share the same connection to the network. The exponential
growth of the Internet in recent years has proven the scalability of these
underlying packet networks. The most common protocol used for communicating on
these packet networks is Internet Protocol, or IP. As broadband connectivity has become more available and less expensive, it
is now possible for service providers to offer voice and video services that
run over these IP networks to businesses and consumers. Providing such
services has the potential to both substantially lower the cost of telephone
service and equipment costs to these customers and to increase the breadth of
features available to the end-user. Services like full-motion, two-way video
are now supported by the bandwidth spectrum commonly available to broadband
customers, whether business or residential. To enable such new products to
take hold, service and equipment suppliers need semiconductor products and
software to connect input and output devices to the networks and the software
that runs on the network that enables these input/output devices to be easily
installed, operated, and managed, as well as to replace common functionalities
of the legacy switched network, such as billing and operator/directory
assistance. Management of the company believes that the network infrastructure
at the consumer level is now in place to enable broad acceptance and deployment
of consumer video telephony. It also believes that the projected growth of
consumer adoption of voice services over Internet Protocol (VOIP) will help
drive adoption of consumer video phone devices such as those distributed and
developed by the company. There are three basic categories of personal video communication devices
in the consumer market. The most popular have been the PC-based systems that
operate over dial-up or broadband connections using open standards such as
H.323 or proprietary systems using a variety of protocols. PC-Based Systems; Software Coder/Decoders (Codecs). Low cost PC
add-on systems utilizing Complimentary Metal Oxide Semiconductor (CMOS)
cameras and Windows-based software compressor/de-compressors (codec) have
gained reasonably broad acceptance. Commonly known as Web cams, these
types of systems offer low-quality video with generally less than 10
frames per second (fps), rendering the video and audio choppy, blurry and
delayed. PC-based systems using software codecs are available at prices
under $100 from companies including Logitech, and many others. The
Companys personal videophones are expected to be fully compatible with
most of this installed base when using Microsoft NetMeeting and a
broadband connection. PC-based systems using software codecs lack an
intuitive, familiar interface that resembles a telephone. PC-Based Systems; Hardware Codecs. Certain systems available from
VCON, Polycom, Scotty and others utilize an independent, dedicated
microchip(s) for the codec function. It is housed either in an external
module, which may include the camera, or on a card installed in a PC.
Depending on the available bandwidth, these systems can offer corporate
quality audio and video over either IP and/or traditional Integrated
Switched Digital Networks (ISDN). They are, - 5 -




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VISEON, INC.
    
    FORM 10-KSB
 however, still limited in the size of the image on the PC display device,
have a complicated user interface and instability issues due to the
underlying PC platform. These systems are available at prices from $500
to $1,200. They also lack an intuitive, familiar interface that resembles
a telephone. The Personal Videophone. There are three types of personal
videophones. The first of these is POTS (Plain Old Telephone Service)
videophones, which operate over analog phone lines typically using
or ITU (International Telecommunications Standard)  H.324 and have been
marketed for years with little success. The lack of consumer acceptance
is primarily due to their very poor video quality. Due to the limited
bandwidth of POTS, these systems generally deliver video at less than five
frames per second (fps). Examples include systems from AT&T, Panasonic
and C-Phone, all of which failed to achieve reasonable sales volumes and
have now been discontinued. Two models of POTS videophones currently
being sold in the US market include a Korean made model retailing for
approximately $300 and a recent entry into this category, the Beamer from
Vialta. The second type of personal videophone utilizes the ISDN
telephone network. Various manufacturers have been producing this type of
personal videophone for more than ten years, most of which focused their
sales efforts primarily on the corporate market for desktop use or to news
organizations for the purpose of relaying information via satellite from
remote locations. Several manufacturers produce videophones that operate
on ISDN networks, including Tandberg of Norway, Motion Media of the UK and
Aethra of Italy. The cost of ISDN is approximately $50 per month per 128k
circuit for a basic line plus approximately $10 to $100 per hour for
domestic transport at speeds ranging between 128k and 384k. ISDN-based
videophones retail at prices between $1,000 and $9,000 depending on the
manufacturer, features and screen size. The third type of personal
videophone uses the IP technology. The Company is a distributor of IP
videophones manufactured by Leadtek, a Taiwan stock exchange listed
company based in Taiwan. We are currently evaluating several other
manufacturers that can build and/or provide a Company-branded IP
videophone that implements several new enhancements, many of which are
proprietary to the Company. IP-based videophones were generally
introduced in 2000 and currently retail at prices between $299 and $1,295.
Recently several foreign manufacturers have introduced their brand of IP
videophones to the U.S. market, but few are being delivered for a variety
of reasons. Products and Services The personal broadband videophones currently sold by the Company are
available in two models, a desktop version with an integrated screen and a
set-top version without an integrated screen that requires a separate display
device such as a television. The Company does not manufacture either model,
both of which are manufactured under contract for the Company by Leadtek.
These products meet specifications that are functionally equivalent to the
Companys patented intellectual property, which formed the basis for the
Companys rationale in distributing these products. The Company has begun the
design process for the next generation of personal videophones, which will
include a number of new and improved features. New product features in future
generations of the personal videophone will enhance the consumer experience and
allow broadband providers and consumer VOIP service marketers to more easily
provision and manage a network to support personal videophones. Provisions for
new standards such as H.264 and protocols such as Session Initiation Protocol
(SIP) are also planned. Manufacturing, Order Fulfillment and Customer Support The Company expects that its broadband videophone products will be
manufactured, assembled and tested by independent third parties in the Far East
(possibly in Taiwan, China or South Korea) pursuant to long-term manufacturing
agreements or on a purchase order basis. The Company is currently in the
process of identifying and selecting one or more manufacturers, but has not yet
made a final decision on this selection. The Company expects that the selected
manufacturers will procure components and other supplies, manufacture, assemble
and test the Companys products. By outsourcing the entire manufacturing
process, the Company will be able to focus on development and design, minimize
capital expenditures, rely on third parties possessing greater manufacturing
expertise and avoid the need to procure and maintain facilities for
manufacturing operations. However, if the selected manufacturer were to stop
manufacturing the Companys products, the Company would need a considerable
period of time to qualify, select and enter into a suitable agreement with an
alternative manufacturer, and the Companys results of operations could be
harmed. The Company expects that the components of the Companys products will
be purchased from various vendors. Single source suppliers may supply some of
such components, and alternative sources may not be readily available in
sufficient quantities or at an attractive cost. The Company expects to
establish a formal manufacturing quality process that includes qualification of
material supplier sources, product-specific process definition and
qualification, measurement of key manufacturing processes and test metrics, a
closed-loop corrective action process and an outgoing sampling audit of
finished product. There can be no assurance, however, that this process will
result in products of the requisite quality. The Company expects that final
products will be delivered to the Company or a logistics partner for order
fulfillment. The Company expects to provide comprehensive customer support
after the sale to help ensure that its customers have reliable, experiences. - 6 -




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VISEON, INC.
    
    FORM 10-KSB
 Market and Marketing Corporate Market Although it may be expected that broad adoption of personal videophones
could be achieved in Fortune 1000 size companies, sales of our products in this
market are not likely to generate substantial volume as compared to the
consumer market. Larger corporations already have the option of utilizing
PC-based 384k IP systems that can be managed by existing network management
infrastructures. The corporate market is currently dominated by a duoply of
suppliers, Polycom and TANDBERG The technical support infrastructure for
PC-based videoconferencing systems already exists within most major companies.
We also expect that non-PC based desktop IP video telephony will be available
for the corporate users in the next year as corporate IP phone system
manufacturers enter this market including Cisco, Lucent and Nortel. The primary corporate prospects for personal videophones will most likely
be in the sub-Fortune 1000 size companies as well as in the 33 million
telecommuters that work for companies of all sizes. The decline in prices of
group videoconferencing systems has produced unit growth, yet the cost is still
generally above $5,000 for an entry level system. Personal videophones can
create a new price point for videoconferencing at less than $600 per endpoint. Consumer Market The consumer personal broadband videophone market is by far the largest
and most intriguing prospect base. Because it requires a minimum of 128k for
transmission of quality video and audio, use of personal videophones will most
likely be limited to those individuals with access to a broadband Internet
connection, typically via Digital Subscriber Line (DSL) or Cable Modem (CM).
As of the summer of 2004, over 50% of consumers accessing the Internet were
doing so via a broadband connection according to various industry analysts.
In March 2004, PEW Research Institute estimated the total number of adult
Americans with residential broadband access at home to be forty-eight million
of which twenty million were DSL; 1.6 million were satellite and the remainder
via CM. Initially, it is expected that the sales of personal broadband videophones
in the consumer market will be made to existing broadband IP users. The early
adopters have the income necessary to purchase a personal videophone outright,
without financing, if necessary. We expect this would be followed by sales to
those broadband customers who are attracted by broadband provider-based
financing programs and eventually to those individuals who will see the
availability of personal videophones as a reason to install broadband IP
connectivity whether they have a home PC or not. We also expect that the
VisiFone will become a part of the marketing efforts of various Voice Over
Internet Protocol (VoIP) providers to consumers. The Company perceives this anticipated level of expansion in consumer
availability of VoIP enabling technology and customer base to be an attractive
target market for its products. In order to take advantage of the sales
opportunities created by such expansion and in an effort to expedite the
adoption of the Companys products by VoIP providers, the Company has
established a program for the sale of its products that may not require any
significant upfront cash expenditures which it will offer to VoIP providers, enabling them
to offer the companys products to their subscribers without any additional
financial risk or investment in their infrastructure. The Company has
presented and is preparing to present such an agreement to several major broadband
providers, including Vonage, AT&T, Comcast, and Cablevision. The Company
intends to continue to structure future offers to broadband providers in a
manner that will enable contracting providers to have the VisiFone available
for sale or lease to their consumers in conjunction with the VoIP services and
other products which they offer without exposure to significant financial risk. Business Development, Sales and Marketing The current goals of our business development and sales departments are to
build relationships that fall into four basic categories: broadband provider
relations, product sales, consumer electronics manufacturing and patent
licensing. Broadband provider relations is focused on engaging cable television
system operators, telephone companies and independent VoIP marketers on the
merits of offering video telephony products and services to their subscribers
and introducing them to the VisiFone. The Company has secured one such
relationship with a regional division of TimeWarner Cable, which will offer its
current generation VisiFone to both commercial and residential consumers in
conjunction with the broadband services it offers. The Company intends to
continue to search for additional broadband providers and VoIP marketers with
which it can enter into similar agreements for sales of the VisiFone and its
future videotelephony products and services. Product sales are focused on engaging corporate, education and government
related customers to purchase our products to communicate internally and externally
between key departments, executives, locations and customers. - 7 -




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VISEON, INC.
    
    FORM 10-KSB
 Consumer electronics manufacturing is focused on engaging major
electronics manufacturers to participate with the Company in the future
development and widespread distribution of our products and their products
containing our intellectual property in the U.S. Patent licensing involves both the business development area as well as
our outside legal advisors who have been engaged to help the Company monetize
its U.S. patents. Working with our legal advisors, the business development
team is focused on identifying potentially infringing products and their
manufacturers. Independent consultants and the Companys CEO and CFO are currently
performing all of the functions of the business development and sales
departments. By outsourcing parts of the sales process, the Company is able to minimize
overhead costs by avoiding the need to pay salaries and to maintain facilities
for a sales force. Approvals, Certifications and Regulation Government and telecommunications carrier approvals, safety certifications
and Electromagnetic Compliance (EMC) certifications are a key requirement for
electronic systems that use the telephone network. The Company is required to
obtain certain Safety, EMI and Telephone certifications for its family of
consumer broadband videophone products as prerequisite to sale into the United
States and other countries. The Company currently relies on its manufacturing
supplier to provide a product with the requisite approvals and certifications.
While the Company believes that it should not encounter any meaningful
difficulty in procuring the requisite certifications and approvals, there can
be no assurance of the Companys ability to procure them. Moreover, the
Company cannot predict whether it will obtain necessary approvals and
certifications for the systems and similar products or for future products in
additional countries. Also, the Company cannot predict whether any change in
applicable law or regulations might adversely affect the Companys ability to
sell its products in a particular country. Competition The Company intends to compete primarily in the consumer videophone market
and to a lesser degree within the corporate and government videophone segment.
The Company expects the consumer market will evolve rapidly and be intensely
competitive. Competitive pressures created by any current or future
competitors could materially adversely affect the Companys business,
prospects, financial condition and results of operations. The Company believes
that the principal competitive factors in its markets will be brand
recognition, price, product performance, reliability, range of functions, ease
of use, and customer service. The Company intends to compete vigorously in all
of these aspects. There are several existing competitors in the broadband
communications market, including 8x8, Aethra, D-Link, Innomedia, Leadtek,
Motion Media, Polycom, Sony, Tandberg asa, VCON, VTEL Products Group and
Worldgate. The Company believes that all of the manufacturers and distributors
of these competing products have (and most future competitors will have)
substantially greater brand recognition, market presence, distribution
channels, advertising and marketing budgets, and promotional and other
strategic partners than the Company has. In addition, videophones face
competition from PC-based Internet video, offerings from mobile phone
manufacturers and potentially current telephone manufacturers. Increased
competition may result in reduced operating margins, loss of market share and a
diminished brand franchise. The Company believes one of the keys to
establishing long-term success in this marketplace will be for the Company to
favorably distinguish itself from its existing and future competition and to
successfully enforce its patent rights. Another key will be the introduction
of the Companys videophones at competitive prices. There can be no assurance
that the Company will be successful in favorably distinguishing its products,
introducing its videophones at competitive prices (if at all), or successfully
competing in this market. Competitive pressures faced by the Company may
materially adversely affect the Companys business, prospects, financial
condition and results of operations. Further, as a strategic response to
changes in the competitive environment, the Company may from time to time make
certain pricing, service or marketing decisions or acquisitions that could
materially adversely affect its business, prospects, financial condition and
results of operations. New technologies and the expansion of existing
technologies may increase the competitive pressures on the Company, if not
render the Companys products obsolete. Intellectual Property and Proprietary Rights The Companys success depends in part on its proprietary information,
technology and expertise. The Company relies on a combination of patents,
trademarks, trade secrets, copyrights and confidentiality agreements to
establish and protect its proprietary rights. In fiscal year 1998, the Company
amended its U.S. utility patent application for its peripheral
videoconferencing - 8 -




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VISEON, INC.
    
    FORM 10-KSB
 system, originally filed in September 1994, to narrow and refocus the Companys
claims. The Company received this amended patent on its system on September 1,
1998, a second patent on June 6, 2000, a third patent on May 28 2002, a fourth
patent on February 25, 2003, and a fifth patent on November 25, 2003. Each
Patent will expire 14 years after the date of grant, unless the term is
extended. The Company has received confirmation of issuance of European
patents in seventeen European countries. The Company has also applied for
numerous additional United States patents relating to its videoconferencing
technology and methods of use of a videphone device, which have not been
granted to date. In the future, the Company intends to take additional steps to protect its
patents from infringement by others, including demanding that suspected
infringers cease their infringement and the filing of lawsuits seeking
injunctions and monetary damages. The Company has no assurance that these
actions will prove successful or serve to protect the Companys patents. The
Company has applied for a trademark on the VisiFone name and has obtained
a registered trademark on the Viseon name. With respect to its technical employees and consultants, the Company
requires these employees to sign an agreement which obligates them to keep
confidential certain trade secrets and information of the Company and to assign
to the Company any inventions arising from their work for the Company, as
permitted by law. Depending on the responsibilities of a particular employee,
the Company may also consider having such an employee sign a non-compete
agreement. Acquisitions The Company does not now intend to conduct an active acquisition program,
but may consider select acquisitions on a case-by-case basis. The Company does
not now have any possible acquisitions under consideration. The Company has
not developed, nor does it currently intend to develop, a valuation model or a
standardized transaction structure it will use. Instead, the Company
anticipates considering each acquisition on a case-by-case basis. However, the
Company expects that the purchase price for an acquisition candidate, if any,
will be based on quantitative factors, including historical revenues,
profitability, financial condition and contract backlog, and the Companys
qualitative evaluation of the candidates management team, operational
compatibility, future prospects and customer base. Any acquisition is expected to be accounted for using the purchase method
of accounting. Under this method of accounting, for each acquisition, a
portion of the purchase price would be allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their
respective fair values on the acquisition date. This portion would include
both (i) amounts allocated to in-process technology and immediately charged to
operations and (ii) amounts may be allocated to completed technology and
amortized on a straight-line basis over the estimated useful life of the
technology of six months. The portion of the purchase price in excess of
tangible and identifiable intangible assets and liabilities assumed would be
allocated to goodwill and evaluated for impairment at least annually. The
results of operations of the acquired entity would be consolidated with those
of the Company as of the date the Company acquires effective control of the
acquired entity, which generally would occur prior to the formal legal closing
of the transaction and the physical exchange of acquisition consideration. In
addition, the Company may grant stock options to employees of an acquired
company to provide them with an incentive to contribute to the success of the
Companys overall organization. As a result of both the purchase accounting
adjustments and charges for the stock options just described, the Company may
incur significant non-cash expenses related to such acquisitions. Acquisitions also involve a number of risks, including adverse effects on
the Companys reported operating results from increases in acquired in-process
technology, stock compensation expense and increased compensation expenses
resulting from newly hired employees, the diversion of management attention,
risks associated with the subsequent integration of acquired businesses,
potential disputes with the sellers of one or more acquired entities and the
failure to retain key acquired personnel. Customer satisfaction or performance
problems with an acquired firm also materially and adversely affect the
reputation of the Company as a whole, and any acquired company could
significantly fail to meet the Companys expectations. Due to all of the
foregoing, any individual future acquisition may materially and adversely
affect the Companys business, results of operations, financial condition and
cash flows. If the Company issues Common Stock in full or partial
consideration of any future acquisitions, there will be ownership dilution to
existing shareholders. In addition, to the extent the Company chooses to pay
cash consideration in such acquisitions, the Company may be required to obtain
additional financing and there can be no assurance that such financing will be
available on favorable terms, if at all. Research and Development The Company incurred research and development expenses of $169,982 and
$71,992 for the years ended June 30, 2004 and 2003, respectively. Our current
development efforts focus principally on our videophone product marketed under
our - 9 -




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VISEON, INC.
    
    FORM 10-KSB
 VisiFone trademark. The design and development of the next generation VisiFone
videophone is a cooperative effort between our technical support personnel and
select third party businesses we have retained to assist in the design of the
general appearance and functionality of our next generation VisiFone as well as
the design and development of the software, electronics and acoustics that will
be integrated therein. All such design and development is performed in strict
adherence to the specifications outlined by the Company under the supervision
of our technical advisors and senior management. The Company maintains all
rights to existing and new technologies and intellectual property designed or
developed in this process pursuant to the terms of the arrangements reached
with such third parties. The Company anticipates incurring design and
development costs of approximately $3.5 million dollars in fiscal year 2005. Employees On June 30, 2004, the Company had seven full-time employees and one
part-time employee; one in customer support, three in administration and
accounting, two in research and development and two executives. None of the
Companys employees is represented by a labor union. The Company believes its
employee relations are good. The Company outsources a variety of sales, marketing, technical and
operational functions to third parties on an as-needed basis. Risk Factors In addition to the other information in this Annual Report, the following
risk factors, among others, should be considered carefully in evaluating the
Company and its business. Unless the context requires otherwise, the terms
we, us and ours (as used in these Risk Factors) refers to the Company. WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES. We have a history of operating losses since our inception and have not
achieved profitability. As of June 30, 2004, we had an accumulated deficit of
$33,249,932. We expect losses to continue for the foreseeable future. The
amount of any such loss will depend in part on any future product launch, the
growth in sales of our products and services and the rate of increase in our
expenses. Several factors, including consumer acceptance, retailer
arrangements, competitive factors and our ability to successfully develop and
market our products, make it impossible to predict when or whether we will
generate significant revenues or attain profitability. Consequently, we may
never generate revenues sufficient to achieve profitability and, even if we do,
we may not sustain or increase profitability on a quarterly or annual basis at
any time thereafter. Our ability to continue in business could be jeopardized
if we are not able to realize a positive cash flow, achieve profitability or if
we are not able to obtain financing on satisfactory terms as may be necessary
in the future. THE RECENT CHANGE IN OUR BUSINESS FOCUS PRESENTS A NUMBER OF CHALLENGES
AND MAY NOT PROVE TO BE SUCCESSFUL OR CAUSE US TO BECOME PROFITABLE. Historically, we had been a developer of our own videoconferencing
systems, which were primarily sold directly to corporate end users or through
OEM relationships. Beginning in the third quarter of our fiscal 2002, our
profit margins were eroded by intense competition from other group
videoconferencing product manufacturers and resellers. In January 2003, we
changed our focus from being a manufacturer and reseller of group
videoconferencing equipment to a desktop and consumer video communications
manufacturer and reseller. The only measurable revenues we are now receiving
result from sales of the VisiFone. We are now focused on licensing our
intellectual property to third parties and developing proprietary consumer
broadband videophone products and services, some of which may be based on our
existing intellectual property. We plan to undertake the development of these
products and services jointly with one or more suitable, established developers
and manufacturers, which we are currently in the process of identifying and
selecting. We intend to continue forming new relationships with other
companies to distribute their products alongside our own products. Our primary marketing strategy targets residential broadband providers
and VOIP marketers and to a lesser degree government and business entities with
widespread operations across regional, national and international boundaries .
Residential broadband consumers, historically have not purchased video
communication products. All of these developments have affected and will
continue to affect our financial model in terms of margins, cash flow
requirements and in other areas. We have a limited operational history with
respect to the current direction of our business. There can be no assurance
that we will be able to succeed in implementing our strategy, or that we will
be able to achieve positive cash flows or profitable operations as a result of
these changes in our business. - 10 -




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VISEON, INC.
    
    FORM 10-KSB
 SALES OF LARGE QUANTITIES OF OUR COMMON STOCK, INCLUDING THOSE SHARES
ISSUABLE IN CONNECTION WITH PRIVATE PLACEMENT TRANSACTIONS RECENTLY COMPLETED
BY THE COMPANY, COULD REDUCE THE PRICE OF OUR COMMON STOCK. We recently sold securities in unrelated private placement transactions
resulting in the issuance of 4,182,422 shares of our Common Stock, 338 shares
of our Series A Convertible Preferred Stock currently convertible into 25,000
shares of our Common Stock per share and certain warrants to purchase 9,717,500
shares of our Common Stock. The issuance of the 4,182,422 shares of our Common
Stock in March 2004 was in consideration and satisfaction of $1,254,726 in
secured indebtedness, constituting all of the outstanding secured indebtedness
owed by the Company at that time, which was converted into equity and thereby
satisfied in full. The sales of the shares of our Series A Convertible
Preferred Stock and warrants resulted in gross proceeds to the Company of
$8,450,000, prior to offering expenses. The resale of the 4,182,422 shares of
our Common Stock, all of the shares of our Common Stock issuable upon the
conversion of our Series A Convertible Preferred Stock , the dividends payable
in common stock upon that preferred and the exercise of the warrants described
immediately above in this risk factor are, as of September 23, 2004 subject to
a currently effective registration statement filed by the Company on Form SB-2.
Our Common Stock trades in the United States only in the over-the-counter
market on the OTC Electronic Bulletin Board, which is a reporting service and
not a securities exchange. We cannot assure investors that the Common Stock
will ever qualify for inclusion on the NASDAQ National Market, American Stock
Exchange or other national exchange or that more than a limited market will
ever develop for our Common Stock. Notwithstanding a recent increase in the
number of shares of our Common Stock that have traded, volume remains fairly
limited, particularly in view of the additional shares recently issued and
subject to the currently effective registration statement filed on Form SB-2.
Moreover, thus far the prices at which our Common Stock has traded have
fluctuated fairly widely on a percentage basis. There can be no assurance as to
the prices at which our Common Stock will trade in the future, although they
may continue to fluctuate significantly. Prices for our Common Stock will be
determined in the marketplace and may be influenced by many factors, including
the following:  *
    
    The depth and liquidity of the markets for our Common Stock*
    
    Investor perception of the Company and the industry in which we
participate*
    
    General economic and market conditions Any sales of large quantities of our Common Stock could reduce the price of our
Common Stock. While the Form SB-2 registration statement is effective, the
holders of the shares covered thereby may sell such shares at any price and at
any time, as determined by such holders in their sole discretion without
limitation. If any such holders sell such shares in large quantities, our
Common Stock price may decrease and the public market for our Common Stock may
otherwise be adversely affected because of the additional shares available in
the market. - 11 -




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VISEON, INC.
    
    FORM 10-KSB
 WE MAY BE OBLIGATED, UNDER CERTAIN CIRCUMSTANCES, TO PAY LIQUIDATED
DAMAGES TO HOLDERS OF OUR SERIES A CONVERTIBLE PREFERRED STOCK We have entered into an agreement with the holders of our Series A
Convertible Preferred Stock that requires us to continuously maintain as
effective, a registration statement covering the underlying shares of Common
Stock issuable upon conversion of our Series A Convertible Preferred Stock and
the exercise of our Series A-1 and A-2 Warrants. Such a registration statement
was declared effective on August 16, 2004, which must continuously remain
effective for a specified term. If we fail to continuously maintain such a
registration statement as effective throughout the specified term, we may be
subject to liability to pay liquidated damages to the holders of our Series A
Convertible Preferred Stock as a group in an amount of as much as $253,500 per
month. QUARTERLY, SEASONAL AND OTHER FLUCTUATIONS IN OUR BUSINESS AND OPERATING
RESULTS MAY DEPRESS THE TRADING PRICE OF OUR COMMON STOCK. Our operating results have fluctuated widely in the past and we expect
that our operating results will fluctuate in the future due to a number of
factors. We do not control many of these factors. These factors include the
following (as well as other factors some of which are described in other Risk
Factors):  *
    
    Changes in general economic conditions.*
    
    Changes in specific economic conditions prevailing in the
communications industry and other technology industries.*
    
    The timing and size of the orders for our products.*
    
    The level and mix of inventory that our distribution channels
hold.*
    
    The level and mix of inventory that we hold to meet future
demand.*
    
    The mix of products we sell.*
    
    The cost and availability of product components.*
    
    Manufacturing costs.*
    
    Changes in our distribution network.*
    
    The impact of disruptions at the sites of our primary
manufacturing partners due to any reason.*
    
    The impact of seasonality on our various product lines and
geographic regions.*
    
    The level of royalties we must pay to third parties.*
    
    The impact of variable stock option accounting. As a result of all of the factors discussed herein, as well as others, we
believe that period-to-period comparisons of our historical results of
operations are not good predictors or indications of our future performance.
If our future operating results are below the expectations of investors or any
stock market securities analysts that may follow our stock, our stock price may
decline. THE UNCERTAINTY CREATED BY CURRENT ECONOMIC CONDITIONS AND POSSIBLE
TERRORIST ATTACKS AND MILITARY RESPONSES THERETO COULD MATERIALLY ADVERSELY
AFFECT OUR ABILITY TO SELL OUR PRODUCT AND PROCURE NEEDED FINANCING. Current conditions in the domestic and global economies are extremely
difficult and uncertain. As a result, we expect to experience an even greater
than usual challenge in developing and launching our proposed personal
videophone products. We expect that the future direction of the overall
domestic and global economies will have a significant impact on our overall
performance. The success of ongoing changes in fiscal, monetary and regulatory
policies worldwide will continue to influence the business climate in which we
operate. If these actions are not successful in spurring overall economic
recovery and growth, we expect that our business will be negatively impacted,
as customers will be less likely to buy our products. Moreover, the terrorist
attacks in 2001 and military responses thereto have created many economic and
political uncertainties that have severely impacted the global economy, the
long-term effects of which and the resulting consequences to our business
remain unknown. In addition, the potential for future terrorist attacks or war
as a result thereof has created worldwide uncertainties that make it very
difficult to estimate how quickly the economy will recover. THE ABSENCE OF ENHANCEMENT AND EXPANSION OF THE PRESENT COMMUNICATION
INFRASTRUCTURE, CONTINUED DEVELOPMENT OF NEW TECHNOLOGIES OR A LACK IN
ACCEPTANCE THEREOF COULD HARM THE SALE OF OUR PRODUCTS. Management believes that the success of the personal videophone products
we intend to develop is dependent upon the continued deployment of broadband
services such as Digital Subscriber Line (DSL) and cable modem internet access
by service - 12 -




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VISEON, INC.
    
    FORM 10-KSB
 providers. Beginning in the second half of 2000, the market for telecom
services experienced a severe downturn from which it has yet to recover,
resulting in financial trouble for many telecommunications service providers
and delays in delivering broadband services. Additionally, management believes
that the success of the personal videophone products we currently sell and the
products we intend to develop and sell is also dependent upon the roll out of
voice-over-IP, or VoIP, technologies and consumer acceptance of video
communications. If use of the new technologies on which our current and future
products are based is not widely accepted, or if such acceptance occurs more
slowly than expected, we may not be able to sell certain of our products in
significant volumes and our business may be adversely affected. SALES OF OUR PRODUCTS MAY BE SEVERELY LIMITED DUE TO THEIR FAILURE TO GAIN
BROAD MARKET ACCEPTANCE. Our success highly depends upon our achieving broad market acceptance of
the products we currently sell and those planned for future development, which
have yet to produce significant revenues. Market acceptance requires, among
other things, that we  *
    
    educate consumers on the benefits of our products.*
    
    commit a substantial amount of human and financial resources to
secure strategic partnerships and otherwise support the retail and/or
carrier distribution of our products.*
    
    develop our own sales, marketing and support activities to
consumers, broadband providers and retailers.*
    
    establish a sufficient number and locations of retailers
carrying our products. There can be no assurance that we will be able to achieve any or all of
these objectives or whether the achievement of such objectives will result in
sufficient acceptance of our products to achieve profitable operations.
Consumers may perceive little or no benefit from our products. As a result,
consumers may not value and may be unwilling to pay for our products. We also
do not have an established brand image, nor do we expect to spend significant
marketing expenses to build and promote a brand image. If our products do not
achieve broad market acceptance, we may not be able to continue operating our
business. OUR FAILURE TO DEVELOP AND MARKET INITIAL AND FUTURE VERSIONS OF OUR
PROPOSED PRODUCTS MAY PREVENT US FROM GENERATING SUFFICIENT REVENUES TO SUSTAIN
OUR BUSINESS. Our success highly depends on sales of our current VisiFone product, the
successful development and introduction of future versions of our proposed
proprietary consumer broadband videophone products and services and the
continued development and timely introduction of new products and new models
containing additional features at attractive price points thereafter. The
success of our initial and future videophone products and services depends on a
number of factors, including, but not limited to, strategic allocation of our
limited financial and technical resources, accurate forecasting of consumer
demand, timely completion of product development and introduction to market and
market and industry acceptance of our products. Most of the new products and
additional features we plan to introduce are still in the early stages of
development and will require substantial engineering and technical resources to
bring to market. We have relied on and intend to continue to rely on third
parties, many of which we have yet to identify, to assist in the design and
development of our future products. To date the design and development of our
next generation VisiFone has been a cooperative effort between our technical
support personnel and select third parties that assisted in the design and
development of the software, electronics and acoustics that will be integrated
into our next generation VisiFone and the design of its general appearance and
functionality. There is no assurance that such design and development efforts
will yield any new or technologically advanced products or that if successfully
designed and developed these products will be made commercially available as
expected or otherwise on a timely and cost-effective basis or that, if
introduced, these products will achieve market acceptance. Furthermore, we
cannot assure you that these products will not be rendered obsolete by changing
technology or new product announcements by other companies. The success of
some of our planned products may also require industry acceptance of our
proprietary technologies, which may be hampered by any incompatibility of our
products and proprietary technologies with existing products and technologies
or the inability to adapt our products and technologies to accommodate the use
of existing industry-accepted technologies. If we fail to develop and market
our initial and future products and features, we may not be able to sustain our
business. - 13 -




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VISEON, INC.
    
    FORM 10-KSB
 RAPID TECHNOLOGICAL CHANGES IN THE INDUSTRY IN WHICH WE OPERATE OUR
BUSINESS OR THE MARKET IN WHICH WE SELL OUR PRODUCTS MAY RENDER OUR PRODUCTS
OBSOLETE OR OTHERWISE HARM US COMPETITIVELY. We operate in a highly technological industry segment that is subject to
rapid and frequent changes in technology and market demand. Frequently such
changes can immediately and unexpectedly render existing technologies obsolete.
Management expects that technology developed in the future will be superior to
the technology that we (and others) now have. Our success depends on our
ability to assimilate new technologies in our products and to properly train
sales staff, distributors and resellers in the use of such products. The
success of our future products depends on several factors, including proper new
product definition, product cost, timely completion and market introduction of
such products, differentiation of our future products from those of our
competitors and market acceptance of these products. Additionally, we must
properly address the complexities associated with DSL and cable modem
compatibility, determine the adequate level of and provide necessary training
for our sales force, resellers, and technical, sales and field support
personnel, each of which, among other factors, may directly affect our success
in this market. Further, the shift of communications from circuit-switched to
IP-based technologies over time may require us to add new sales staff,
distributors and resellers and gain new core technological competencies. We
are attempting to address these needs and the need to develop future products
through our outsourced development efforts. Although we believe our product
offerings will be designed to assimilate emergent technical advances, there can
be no assurance that future technological advances available to or new or
competitive products developed by others will not render our products less
competitive or obsolete. Furthermore, we may not identify successful new
product opportunities, develop new products or bring new products to market in
a timely manner. Additionally, there is no assurance that competing
technologies developed by others will not render our current or future
developed products or technologies obsolete or noncompetitive. The failure of
our new product development efforts and any inability to service or maintain
the necessary third-party interoperability requirements we may face would have
a detrimental effect on our business and results of operations. Moreover, obsolescence can require write-downs in inventory value when the
recorded value of existing inventory is determined to be greater than its fair
market value. For example, this situation occurred in 2001 and again in 2002,
when we recorded material excess and obsolescence charges associated with our
then current inventory of Mediapro products. In the future, the level of our
then current product inventory may be deemed excessive or obsolete and we may
have to write down much or all of such inventory, which could adversely affect
our profitability. OUR RELIANCE ON VARIOUS THIRD PARTIES GENERATES VARIOUS RISKS. Our current and future operations will be dependent on a number of third
parties over which we have very limited or no control. For example, we intend
to rely on our existing outside sales force. Although this sales force has
significant experience in marketing new products and services in our industry,
it has only limited experience in marketing the products we intend to develop
to consumers. There can be no assurance that our outside sales force will be
successful in implementing our new marketing and distribution strategy.
Moreover, we intend to rely on one or more third party designers, developers
and manufacturers to assist in the development of our proposed personal
videophone products, and thereafter we will also completely depend on the same
or another third party manufacturer to produce such products. We have not yet
entered into any definitive agreement with a third party manufacturer nor have
we even definitively determined who this manufacturer will be. There is no
assurance that we will be able to locate or retain qualified third parties as
may be necessary to assist in all aspects of design and development, or that
any such third party retained will possess the knowledge and skills necessary
to complete the design and development of any of our intended future products.
In addition, there is no assurance that any third party contractors will
perform their obligations as expected or that any revenue, cost savings or
other benefits will be derived from the efforts of these parties. If any of
our third party contractors breaches or terminates its agreement with us or
otherwise fails to perform its obligations in a timely manner, we may be
delayed or prevented from launching or marketing our products and services. If
our relationships with these parties are non-exclusive, they may also support
products or services that compete directly against ours, or offer similar or
greater support to our competitors. Any of these events could require us to
undertake unforeseen additional responsibilities or devote additional resources
to commercialize our products and services. Any such scenario would negatively
affect our ability to achieve market acceptance and brand recognition and
otherwise compete effectively. PRODUCT DEFECTS OR ERRORS MAY HAVE A NEGATIVE IMPACT ON OUR REVENUES,
DAMAGE OUR REPUTATION AND DECREASE OUR ABILITY TO ATTRACT NEW CUSTOMERS. Products as complex as those we are currently developing and intend to
develop in the future often contain errors or defects, particularly when first
introduced and when new versions or enhancements are released. Although we
will strive to assure that our products have no errors or defects, there can be
no assurance that (despite testing) our products will be devoid of defects and
errors upon commencement of commercial shipments. Any defects or errors could
result in damage to our reputation, the loss - 14 -




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VISEON, INC.
    
    FORM 10-KSB
 of sales, a diversion of our product development resources, or a delay in
market acceptance and thereby materially adversely affect our business,
operating results and financial condition. Furthermore, there can be no
assurance that our products will meet all of the expectations and demands of
our customers. The failure of our products to perform to customer expectations
could also give rise to warranty claims. Any of these claims, even if not
meritorious, could result in costly litigation or divert managements attention
and Company resources. Any general liability insurance that we may carry could
be insufficient to protect us from all liability that may be imposed under any
asserted claims. OUR INABILITY TO RETAIN AND ATTRACT QUALIFIED PERSONNEL AS NEEDED COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS. We highly depend on our key management, technical and marketing personnel,
particularly, John Harris, our chief executive officer, Rob Wolf, our chief
financial officer and our independent consultants. The loss of key personnel
or consultants, or the inability of any of them to devote sufficient attention
to our operations, could materially, adversely affect our results of operation
and the future development of our business. No member of management has
entered into an employment agreement or covenant not to compete agreement with
us. The Company has reached an agreement in principle with Messrs. Harris and
Wolf regarding their continued employment with the Company, effective as of
January 1, 2004 and March 15, 2004, respectively, though neither agreement has
been finalized. Nevertheless, the terms of these agreements do not prohibit
either employee from voluntarily terminating his employment with the Company.
Consequently, any member of management could terminate his employment
relationship with us at any time for any reason. Moreover, we do not maintain
key man life insurance on any member of management. In addition, there can be
no assurance that the current level of management is sufficient to perform all
responsibilities necessary or beneficial for management to perform, or that we
would be able to hire additional, qualified management personnel to perform
such responsibilities. Our success may depend, in large part, on our ability
to retain and attract highly qualified, management-level personnel. Our
success in attracting these persons will depend on many factors, including the
ability to provide them with competitive compensation arrangements, equity
participation and other benefits. There is no assurance that we will be
successful in attracting or retaining highly qualified individuals in key
management positions. LIMITATIONS ON CLAIMS AGAINST OUR OFFICERS AND DIRECTORS, AND OUR
OBLIGATION TO INDEMNIFY THEM, COULD PREVENT OUR RECOVERY FOR LOSSES CAUSED BY
THEM. The laws of the State of Nevada applicable to corporations organized
thereunder provide that a corporation may limit the liability of its directors
to the corporation and its shareholders. Our Certificate of Incorporation has
limited our directors liability to the fullest extent permitted by applicable
law. Moreover, our bylaws provide that we may indemnify each director,
officer, agent and/or employee to the extent required or permitted by the laws
of the State of Nevada, if the individual is eligible as provided thereby.
Further, we may purchase and maintain insurance on behalf of any such
individuals whether or not we have the obligation or ability to indemnify them
against the type of liability for which such insurance may be acquired.
Consequently, we could bear substantial losses as a result of the actions of
our officers, directors, agents and employees and we could be prevented from
recovering such losses from such persons. The Commission maintains that
indemnification for liabilities arising under the Securities Exchange Act of
1933 (the Act) is against the public policy expressed in the Act and is
therefore unenforceable. OUR FAILURE TO PROPERLY PROTECT OUR PROPRIETARY INFORMATION, TECHNOLOGY
AND EXPERTISE COULD SERIOUSLY HARM OUR BUSINESS. We rely on a combination of patents,
trade secrets, trademarks, copyrights and
confidentiality agreements to establish and protect our proprietary rights.
There can be no assurance that our measures to protect our intellectual
property will be successful, that we will be granted any patents in the future,
or that any patents that have been or may be granted will be of value to us.
In the absence of meaningful intellectual property protection, we may be
vulnerable to competitors who could lawfully attempt to develop similar
products or duplicate our products. Moreover, there can be no assurance that
other competitors may not independently develop the same or similar technology
or gain access to our intellectual property rights, disclose such technology in
their patent application or design around our patents. In addition, we cannot
assure you that any patent or registered trademark owned by us will not be
invalidated, circumvented or challenged in the U.S. or foreign countries or
that the rights granted thereunder will provide competitive advantages to us or
that any of our pending or future patent applications will be issued with the
scope of the claims sought by us, if at all. While we believe that we have all
rights necessary to market and sell our system without infringement of
intellectual property rights held by others, there can be no assurance that
such conflicting rights do not exist. Litigation may be necessary to enforce
our patents and other intellectual property rights, to protect our trade
secrets, to determine the validity of and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. We have from time to time received, and may in the future receive,
communications from third parties alleging the ability to initiate litigation
asserting patent or other intellectual property rights covering our products.
We cannot assure you that we will - 15 -




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VISEON, INC.
    
    FORM 10-KSB
 prevail in any such litigation, that intellectual property claims will not be
made against us in the future or that we will not be prohibited from using the
technologies subject to any such claims or be required to obtain licenses and
make corresponding royalty payments. Any intellectual property litigation in which we become involved, either
as a claimant or a defendant, could result in substantial costs and diversion
of resources that could adversely affect our business. There can be no
assurance that we will have sufficient funds to enforce or defend our
intellectual property rights or that we would ultimately prevail in any such
litigation. INTENSE COMPETITION COULD SERIOUSLY HARM OUR BUSINESS. We face significant competition in the markets in which we intend to offer
our products from competitors that also offer high quality products. In
addition, management expects that new competitors will attempt to enter the
market and that existing competitors will improve the performance of their
current products or introduce new products or new technologies that provide
improved characteristics and performance. New product introductions by our
competitors could cause a significant decline in sales or loss of market
acceptance of our existing products and any products we develop in the future.
We expect that most of our competitors will be well established, better known
and significantly larger than we are with substantially greater technical,
manufacturing, marketing and financial resources. The greater resources of
many of our competitors may permit them to respond more rapidly to changes in
technology than we can. Our ability to compete in the market will depend upon
a number of factors including the success of our marketing efforts and our
continued ability to secure and maintain ongoing relationships with other
companies in the industry that provide or support products we offer. We expect
to compete based upon the quality, reliability, flexibility and the ease of use
of our products. We also expect to compete on value relative to the features
our products offer. However, we have reduced prices in the past in order to
expand the market for our products, and in the future, we may further reduce
prices or introduce new products that carry lower margins in order to expand
the market or stimulate demand for our products. While we cannot assure you
that these actions would have the desired result, any of these actions could
have an adverse impact on our product margins and profitability. OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND
OTHER RISKS ASSOCIATED WITH FUTURE RELIANCE ON INTERNATIONAL OPERATIONS. We expect that our broadband videophone products will be manufactured,
assembled and tested by independent third parties in the Far East, possibly in
China, Taiwan or South Korea. Because of our expected international operations
and relationships and our expected reliance on foreign third-party
manufacturing, assembly and testing operations, we are subject to the risks of
conducting business outside of the United States, including:  *
    
    changes in political and strategic relations between the U.S.
and the countries in which we do business.*
    
    changes in foreign currency exchange rates.*
    
    changes in a specific country or regions political or economic
conditions, particularly in the current difficult situation in the
Korean peninsula.*
    
    trade protection measures and import or export licensing
requirements.*
    
    potentially negative consequences from changes in tax laws.*
    
    difficulty in managing widespread sales and manufacturing
operations.*
    
    less effective protection of intellectual property. Any adverse change in any of the matters described above or any other
adverse international developments could materially adversely affect our
business, results of operations and financial condition. LAWS OR REGULATIONS COULD EXPOSE US TO LEGAL ACTION IF WE FAIL TO COMPLY
OR COULD REQUIRE US TO CHANGE OUR BUSINESS. Because our products and services are expected to provide our customers
with methods of electronic communication, it is difficult to predict the laws
or regulations that will be applicable to our business. Therefore, it is
difficult to anticipate the impact of current or future laws and regulations on
our business. Among the many regulations that may be applicable to our
business are the following:  *
    
    Federal Communications Commission regulations relating to the
electronic emissions of consumer products*
    
    Federal Communications Commission regulations relating to
consumer products that connect to the public telephone network*
    
    Federal Communications Commission regulations relating to
consumer products that connect to the Internet*
    
    copyright laws relating to the use of copyrighted audio and
video media - 16 -




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VISEON, INC.
    
    FORM 10-KSB
   Changes in the regulatory climate or the enforcement or interpretation of
existing laws could expose us to legal action if we fail to comply. In
addition, any of these regulatory bodies could promulgate new regulations or
interpret existing regulations in a manner that would cause us to incur
significant compliance costs or force us to alter the features or functionality
of our products and services. OUR INABILITY TO MANAGE THE FUTURE GROWTH THAT WE ARE ATTEMPTING TO
ACHIEVE COULD SEVERELY HARM OUR BUSINESS. We believe that, given the right business opportunities, we may expand our
operations rapidly and significantly. If rapid growth were to occur, it could
place a significant strain on our management, operational and financial
resources. To manage any significant growth of our operations, we will be
required to undertake the following successfully:  *
    
    We will need to improve our operational and financial systems,
procedures and controls to support our expected growth and any
inability to do so will adversely impact our ability to grow our
business. Our current and planned systems, procedures and controls
may not be adequate to support our future operations and expected
growth. Delays or problems associated with any improvement or
expansion of our operational systems and controls could adversely
impact our relationships with customers and harm our reputation and
brand.*
    
    We will need to attract and retain qualified personnel, and any
failure to do so may impair our ability to offer new products or grow
our business. Our success will depend on our ability to attract,
retain and motivate managerial, technical, marketing, administrative
and customer support personnel. Competition for such employees is
intense, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. If we are unable to hire,
train, retain or manage the necessary personnel, we may be unable to
successfully introduce new products or otherwise implement our
business strategy.*
    
    We will need to provide acceptable customer support and any
inability to do so will impair our ability to develop consumer
acceptance of our products. We expect that some of our customers
will require significant support when evaluating and using our
products. We do not have experience with widespread deployment of
our products and services to a diverse customer base and in the
future we may not have adequate personnel to provide the levels of
support that our customers will require. Our failure to provide
adequate customer support for our products or services will damage
our reputation in the marketplace and strain our relationships with
customers and strategic partners. This could prevent us from gaining
new or retaining existing customers and could harm our reputation and
brand. If we are unable to manage growth effectively, our business, results of
operations and financial condition could be materially adversely affected. OUR AUTHORIZED PREFERRED STOCK EXPOSES SHAREHOLDERS TO CERTAIN RISKS. Our Articles of Incorporation, as amended, authorize the issuance of up to
5,000,000 shares of preferred stock, par value $0.01 per share. The authorized
but unissued preferred stock constitutes what is commonly referred to as blank
check preferred stock. This type of preferred stock may be issued by the
Board of Directors from time to time on any number of occasions, without
shareholder approval, as one or more separate series of shares comprised of any
number of the authorized but unissued shares of preferred stock, designated by
resolution of the Board of Directors stating the name and number of shares of
each series and setting forth separately for such series the relative rights,
privileges and preferences thereof, including, if any, the: (i) rate of
dividends payable thereon; (ii) price, terms and conditions of redemption;
(iii) voluntary and involuntary liquidation preferences; (iv) provisions of a
sinking fund for redemption or repurchase; (v) terms of conversion to Common
Stock, including conversion price and (vi) voting rights. Such preferred stock
may provide our Board of Directors the ability to hinder or discourage any
attempt to gain control of us by a merger, tender offer at a control premium
price, proxy contest or otherwise. Consequently, the preferred stock could
entrench our management. The market price of our Common Stock could be
depressed to some extent by the existence of the preferred stock. As of June
30, 2004, 338 shares of preferred stock, designated as Series A Convertible
Preferred Stock, were issued and outstanding and 4,999,662 shares of preferred
stock were authorized but not issued. No other series of preferred stock has
been designated by the Board of Directors. - 17 -




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VISEON, INC.
    
    FORM 10-KSB
 WE HAVE CERTAIN OBLIGATIONS AND THE GENERAL ABILITY TO ISSUE ADDITIONAL
SHARES OF COMMON STOCK IN THE FUTURE, AND SUCH FUTURE ISSUANCES MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. We have various obligations and the ability to issue additional shares of
Common Stock in the future. These obligations and abilities include the
following at June 30, 2004:  *
    
    2,281,245 shares of our Common Stock are available for issuance
to outside consultants to compensate them for services provided.*
    
    Options to purchase approximately 1,525,250 registered shares
are outstanding.*
    
    Warrants to purchase approximately 19,295,159 shares of Common
Stock are outstanding.*
    
    Dividends payable on our Series A Convertible Preferred Stock
may be paid in shares of Common Stock at the option of the Company.
The amount of dividends payable on the outstanding shares of
Series A Convertible Preferred Stock is $845,000 per year, payable
quarterly. The options and warrants described above permit the holders to purchase
shares of Common Stock at specified prices. These purchase prices may be less
than the then current market price of our Common Stock. Any shares of Common
Stock issued pursuant to these options or warrants would further dilute the
percentage ownership of existing shareholders. The terms on which we could
obtain additional capital during the life of these options and warrants may be
adversely affected because of such potential dilution. Finally, we may issue
additional shares in the future other than as listed above. There are no
preemptive rights in connection with our Common Stock. Thus, the percentage
ownership of existing shareholders may be diluted if we issue additional shares
in the future. For issuances of shares and grants of options to consultants,
our Board of Directors will determine the timing and size of the issuances and
grants and the consideration or services required therefore. Our Board of
Directors intends to use its reasonable business judgment to fulfill its
fiduciary obligations to our then existing shareholders in connection with any
such issuance or grant. Nonetheless, future issuances of additional shares
could cause immediate and substantial dilution to the net tangible book value
of shares of Common Stock issued and outstanding immediately before such
transaction. Any future decrease in the net tangible book value of such issued
and outstanding shares could materially and adversely affect the market value
of the shares. THE TRADING PRICE OF OUR COMMON STOCK ENTAILS ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE. The trading price of our Common Stock is currently below $5.00 per share.
As a result of this price level, trading in our Common Stock is subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934 that are inapplicable to securities trading at higher prices. These rules
require additional disclosure by broker-dealers in connection with any trades
generally involving any non-NASDAQ equity security that has a market price of
less than $5.00 per share (a penny stock), subject to certain exceptions.
Such rules require the delivery, before any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must determine the suitability of the penny stock for the
purchaser and receive the purchasers written consent to the transaction before
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in our Common Stock
at this level. As a consequence, the market liquidity of our Common Stock
could be severely limited by these regulatory requirements. RANDOM FLUCTUATIONS IN THE PRICE OF OUR STOCK, POSSIBLY BASED ON FACTORS
BEYOND OUR CONTROL, COULD CAUSE A STOCKHOLDER TO SELL HIS SHARES AT A TIME WHEN
OUR STOCK PRICE IS DEPRESSED. The market price of our Common Stock has experienced significant
fluctuations and may continue to fluctuate significantly. The market price of
our Common Stock may be significantly affected by a variety of factors,
including:  *
    
    statements or changes in opinions, ratings or earnings
estimates made by brokerage firms or industry analysts relating to
the market in which we do business or relating to us specifically, as
has occurred in the past.*
    
    the announcement of new products or product enhancements by our
competitors or us.*
    
    technological innovations by our competitors or us.*
    
    quarterly variations in our results of operations.*
    
    general market conditions or market conditions specific to
technology industries.*
    
    domestic and international macroeconomic factors. In addition, the stock market has recently experienced extreme price and
volume fluctuations. These fluctuations have had a substantial effect on the
market prices for many high technology companies similar to us. These
fluctuations are often unrelated to the operating performance of the specific
companies. As a result of the factors identified above, a shareholder (due to - 18 -




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VISEON, INC.
    
    FORM 10-KSB
 personal circumstances) may be required to sell his shares of our Common Stock
at a time when our stock price is depressed due to random fluctuations,
possibly based on factors beyond our control. BECAUSE OUR BOARD OF DIRECTORS DOES NOT INTEND TO PAY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE, SHAREHOLDERS MAY HAVE TO SELL THEIR
SHARES OF OUR COMMON STOCK TO REALIZE A RETURN ON THEIR INVESTMENT IN THE
COMPANY. The holders of our Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore. To date, we have paid no cash dividends. The Board of Directors
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in our business operations.
Accordingly, a return on an investment in our shares of Common Stock may be
realized only through a sale of such shares, if at all. 
 ITEM 2. DESCRIPTION OF PROPERTY The Company now subleases 1,599 square feet of office space for its
headquarters in Irving, Texas under a lease agreement that expires on June 30,
2006 and approximately 600 square feet adjacent to its headquarters on a
month-to-month basis. The Company believes its current space is sufficient for
its current needs and anticipates acquiring additional space if necessary.
Previously, the Company subleased 4,229 square feet of space for its
headquarters in Irving, Texas under a lease agreement, which expires in April
2005. The remaining commitment related to the previous headquarters is
approximately $59,911 at June 30, 2004. The Company also owns a limited amount of tangible property and the
intellectual property rights associated with its patents that have been granted
and its patents pending. 
 ITEM 3. LEGAL PROCEEDINGS On June 22, 2001, the Company initiated a suit in the United States
District Court for the District of Minnesota, Hennepin County, Minnesota
against Forgent Networks, Inc., seeking damages for reasonable royalties and
lost profits associated with the alleged infringement of the Companys first
two U.S. patents numbered 6,073,192 and 5,802,281. The United States District
Court granted a partial summary judgment in favor of Forgent, which resolved
certain claims advanced. Forgent and the Company thereafter submitted briefs
on the remaining issues, which included the payment of attorneys fees and the
dismissal of the litigation. On November 24, 2003, the Court dismissed the
action finding that said Court lacked subject matter jurisdiction over the
action and ruled that each party bear its own attorneys fees and costs.
Subsequent to such ruling, on December 23, 2003, Forgent filed a brief in
support of its motion for reimbursement of legal fees and costs. The Company
timely filed a reply brief in response thereto in support of its position that
the motion was moot as the issue raised therein had been previously ruled on
and resolved by November 24, 2003 order. The United States District Court has
yet to render a decision on this matter and the Company intends to continue to
vigorously defend against the claims asserted. On or about February 25, 2004, Sprint North Supply Company instituted suit
against the Company in the County Court at Law No. 2 of Dallas County, Texas,
(Cause No. CC 03-15339 B), styled Sprint North Supply Company vs. Viseon, Inc.
d/b/a Viseon Video asserting a claim for $31,033 allegedly owed by the Company
on a past due account receivable for goods and services purportedly sold by the
Plaintiff as well as an additional $10,344 for attorneys fees associated with
such litigation. The Company did not receive service of process in or notice
of this pending matter for several months following the date it was initiated.
When requisite service of process was served through the office of the
Secretary of State of the State of Texas, the Company filed an Answer, denying
all of the material allegations advanced by the Plaintiff. Since the filing of
the Companys Answer, there has been no activity in this matter. Within the
past month, the attorneys for both parties engaged in settlement discussions
resulting in the extension of a settlement offer, to which the Plaintiff has
yet to respond. The Company believes this matter will be settled within the
fiscal quarter ending December 31, 2004; however, there is no guarantee that
this matter will be settled. The Company is subject to certain other litigation and claims arising in
the ordinary course of business. We do not expect costs related to these
claims to have a material adverse effect on our consolidated financial position
or our results of operations. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On March 31, 2004, the Company submitted to its shareholders for approval
by written consent at a special meeting, a proposal to approve the amendment of
the Companys Articles of Incorporation to increase the number of authorized
shares of Common Stock from fifty million to one hundred million shares. The
Company was required to obtain the written consent of stockholders holding a
majority of the Companys outstanding Common Stock before the amendment could
become effective. The Company received written consents approving the proposed
amendment from stockholders owning an aggregate - 19 -




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VISEON, INC.
    
    FORM 10-KSB
 10,440,664 shares of the 20,168,639 outstanding shares of Common Stock,
representing a majority of the outstanding shares of Common Stock. The Company
received abstentions from stockholders owning 334 shares. 
 PART II. 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES Since December 20, 1999, the Companys stock has been quoted on the OTC
Bulletin Board System. The following table sets forth, for the fiscal quarters
indicated, the high and low closing bid prices for the Companys Common Stock
as reported by the OTC Bulletin Board System. Such quotations represent
interdealer prices, without adjustments for retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions. HIGH
    
    LOW2003First Quarter
    
    $
    1.02
    
    
    $
    .49Second Quarter
    
    
    .97
    
    
    
    .15Third Quarter
    
    
    .48
    
    
    
    .22Fourth Quarter
    
    
    .54
    
    
    
    .232004First Quarter
    
    
    1.25
    
    
    
    .38Second Quarter
    
    
    1.50
    
    
    
    .82Third Quarter
    
    
    1.68
    
    
    
    .75Fourth Quarter
    
    
    1.73
    
    
    
    .86
 As of September 23, 2004 there were 26,523,258 shares of Common Stock
outstanding, held of record by approximately 146 persons (although the Company
has been informed that there are approximately 1,700 beneficial owners). Dividends The Company has not declared or paid any cash dividends on its Common
Stock since its inception. The Company does not intend to pay any dividends
for the foreseeable future and intends to continue its present policy of
retaining earnings for reinvestment in our operations. 
 ITEM 6. MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Overview Viseon, Inc., a Nevada corporation, (the Company) was founded in 1993,
and changed its name from RSI Systems, Inc. to Viseon, Inc. on May 23, 2001.
Historically, the Company had been a developer of its own group
videoconferencing systems primarily sold to corporate end users and OEM
customers. Beginning with the third quarter of the Companys fiscal 2002, the
Companys profit margins were eroded by intense competition from other group
videoconferencing manufacturers and resellers. The Company recognized the need
to modify its business model to achieve higher margins and benefit from its
portfolio of U.S. patents, the fifth of which was issued in
November 2003. In
January 2003, we completed our change in focus from being a group
videoconferencing manufacturer and reseller to a desktop and consumer video
communications manufacturer and reseller. This has been accomplished by
transferring our group
videoconferencing services contract portfolio with its associated liabilities
and obligations to Comlink Video and liquidating our remaining group
videoconferencing assets. The only measurable revenues we are now receiving
result from the sales of videophones to corporations and consumers. In the event sales do not materialize at the expected rates or we do not
achieve planned gross margins, management would seek additional financing or
would conserve cash by further reducing expenses. There can be no assurance
that we will be successful in achieving these objectives and becoming
profitable. The Companys current marketing strategies target two diverse market
segments: (i) corporations and government entities which have widespread
operations across regional, national and international boundaries and (ii)
residential consumers who have historically not purchased video communication
products in the past. Distribution may include the utilization of arrangements
with providers of broadband Internet access, such as cable Multi System
Operators (MSOs), - 20 -




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VISEON, INC.
    
    FORM 10-KSB
 telephone companies that provide Digital Subscriber Line (DSL) services and
independent marketers of consumer VOIP services. All of these developments have
affected and will continue to affect our financial model in terms of margins,
cash flow requirements, and other areas. The Company has a limited history with
respect to the direction its business is now taking. There can be no assurance
that the Company will be able to succeed in implementing its strategy or that
the Company will be able to achieve positive cash flow or profitable operations
as a result of these changes in its business. In January 2003, we decided to exit the group videoconferencing business.
The group videoconferencing business qualified for accounting treatment as
discontinued operations. As a result, all historical financial information of
this business (sales, costs and expenses, assets and liabilities, and cash
flows) has been reported separately as discontinued operations. Prior to
January 2003, the group videoconferencing business was the source for
substantially all revenue. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. In addition to
historical information, the discussion in this report contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
materially from those anticipated by these forward-looking statements due to
factors including, but not limited to, those factors set forth under Risk
Factors and elsewhere in this report. Results of Operations Year Ended June 30, 2004 Compared to Year Ended June 30, 2003. Net Sales.In fiscal year 2004, net sales were $286,215 compared to net
sales of $21,306 for fiscal year 2003. The increase in net sales was due to
the Companys increased sales volumes of the VisiFone. In fiscal 2003, sales
levels were low as the Company changed its focus from sales of group
videoconferencing equipment to sales of the VisiFone in the middle of the
fiscal year (January 2003). The Company anticipates sales volumes in fiscal
year 2005 at similar levels to those of fiscal year 2004. Gross Profit (Loss).The Company generated a gross profit of $93,958
(32.8% of net sales) compared to $448 (2.1% of net sales) for fiscal year 2003.
The increase in gross profit between years was attributable to volume
increases, allowing the amortization of intangibles, which are reflected in
cost of sales, to be spread among a larger number of units resulting in a
higher gross margin per unit. Management expects gross margin percentages in
fiscal year 2005 to decline from the gross margin percentages in fiscal year
2004 as management may sell the VisiFone at or near cost in order to promote
the adoption of videophones by business entities and residential consumers as a
customary mode of communication. Research and Development Expenses.Research and development expenses were
$169,982 (59.4% of net sales) for fiscal year 2004 compared to $71,992 (337.9%
of net sales) in fiscal 2003. The increase in expenditures in fiscal year 2004
was due to continuing expenditures on its new generation of personal
videophone. Management expects research and development expenses to increase
substantially in fiscal year 2005 as development efforts on its new generation
of personal videophone continue at an accelerated pace to meet a targeted
product introduction late in the fiscal year. The Company anticipates
incurring design and development costs of approximately $3.5 million dollars in
fiscal year 2005. Selling, General and Administrative Expenses.Selling, general and
administrative expenses were $2,873,169 (1,003.9% of net sales) compared to
$2,660,155 (12,485.5% of net sales) for fiscal year 2003. The increase in
expenditures is attributable to an increase in personnel and related costs.
Management expects selling general and administrative expenses in fiscal year
2005 to increase moderately over levels incurred in fiscal year 2004. Other Income and Expense.Other income and expense was $(1,027,479) in
fiscal year 2004 compared to ($451,589) in fiscal year 2003. The increase was
due to the accelerated amortization of original issue discount related to
secured debt because the Company converted its secured debt to equity in March
2004 and, accordingly, amortized the remaining unamortized original issue
discount. The amortization of the original issue discount was a non-cash
charge. Preferred Stock Dividends.The Company recorded preferred stock dividends
of $3,358,380 in fiscal 2004, comprised of dividends at the designated rate of
10% per annum ($223,119) and amortization of the beneficial conversion option
($3,135,261). The amortization of the beneficial conversion option resulted
from a favorable conversion price of the Companys preferred stock. The
conversion price was lower than the market price of the Companys common stock
on the issuance date of the preferred stock which is treated for financial
reporting purposes as a direct charge to accumulated deficit (similar to a
dividend) and a corresponding increase in additional paid-in capital. - 21 -




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VISEON, INC.
    
    FORM 10-KSB
 Liquidity and Capital Resources The Company recently raised $8,450,000 (prior to offering expenses) from
the sale of its Series A Convertible Preferred Stock with warrants in a series
of private placement transactions in March and April 2004. Management believes
that the funds generated from its recent private placement financing activities
will be sufficient to cover the cash needs of the Company for at least the next
twelve months, although there can be no assurance in this regard. Historically, the Company has generated losses from operations and
negative cash flows. Management plans to try to increase sales and improve
operating results through (i) increased marketing and direct sales activities
to corporate and government customers, (ii) continued initiatives to gain
acceptance of our product by consumer broadband providers and VOIP marketers
for sale to their subscribers and (iv) initiatives to monetize our intellectual
property rights. There can be no assurance that we will be successful in
achieving these objectives and becoming profitable. Year Ended June 30, 2004 Compared to Year Ended June 30, 2003 Cash and Cash Equivalents.Cash and cash equivalents totaled $5,339,393 on
June 30, 2004 compared to $7,784 on June 30, 2003. Net Cash Used in Operating Activities.The amount of cash used in
operating activities was $2,134,827 during fiscal year 2004 compared to
$3,029,560 during fiscal year 2003. The reduction in cash used in operating
activities was attributable to increased sales and a decrease in the cash
portion of selling, general and administrative expenses. Net Cash Used in Investing Activities.Cash used in investing activities
during fiscal year 2004 was $146,399 compared to $61,621 during fiscal year
2003. The increase was due to the Companys investment in its intellectual
property portfolio. Net Cash Provided by Financing Activities.Cash provided by financing
activities during fiscal year 2004 was $7,787,535 compared to $41,330 in fiscal
year 2003. The increase was due to the net proceeds from the private placement
of the Companys Series A Convertible Preferred Stock with warrants in March
and April 2004 ($7,234,141). In addition, the Company received proceeds from
the exercise of common stock warrants and options ($565,680). In fiscal year
2003, the Company received net proceeds of $610,000 from the private common
stock and warrant placements, $686,706 from the issuance of a subordinated note
payable which included the issuance of warrants and $1,295,897 was used to
repay the Companys secured credit facility. The Company had the following contractual obligations or commercial commitments
at June 30, 2004: Total
    
    1 year or less
    
    1-3 years
    
    3-5 years
    
    Over 5 yearsOperating Leases
    
    $
    98,287
    
    
    $
    79,099
    
    
    $
    19,188
    
    
    $
    0
    
    
    $
    0
 Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
net revenues and expenses during the reporting period. We regularly evaluate
our estimates and assumptions related to net revenues, allowances for doubtful
accounts, sales returns and allowances and accounting for income taxes. We base
our estimates and assumptions on historical experience and on various other
factors that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. To the
extent there are material differences between our estimates and the actual
results, our future results of operations will be affected. We believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our consolidated
financial statements: Revenue Recognition.The Company records sales revenue at the time
merchandise is delivered. In November 1999, the SEC issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition, SAB No. 101, as amended, which
sets forth the SEC staffs position regarding the point at which it is
appropriate for a registrant to recognize revenue. The staff believes that
revenue is realizable and earned when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or service
has been rendered, the sellers price to the buyer is fixed or determinable and
collectibility is reasonably assured. The Company uses the above criteria to
determine whether revenue can be recognized. When product sales revenue is recognized, we establish an estimated
allowance for future product returns based on historical returns experience;
when price reductions are approved, we establish an estimated liability for
price protection payable on inventories owned by product resellers. Should
actual product returns or pricing adjustments exceed our estimates, additional
reductions to revenues would result. Revenue from the licensing of patents is
recognized at the time of a patent - 22 -




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VISEON, INC.
    
    FORM 10-KSB
 agreement is executed and the goods, services and/or cash consideration due the
Company is received. Revenue from post-contract customer support and any other
future deliverables is deferred and recognized over the support period or as
contract elements are delivered. Our products typically carry a ninety-day to
five-year warranty. Although we engage in extensive product quality programs
and processes, our warranty obligation is affected by product failure rates,
use of materials or service delivery costs that differ from our estimates. As a
result, additional warranty reserves could be required, which could reduce
gross margins. Allowance for Doubtful Accounts.We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Our allowance for doubtful accounts is based on our
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, our history of bad debts and the general condition of the
industry. If a major customers credit worthiness deteriorates, or our
customers actual defaults exceed our historical experience, our estimates
could change and impact our reported results. Accounting for Income Taxes.The Company accounts for income taxes using
the asset and liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized at the enacted rates for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing tax assets and liabilities and their respective
tax basis. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. If our sales forecast is less than the inventory we have on hand at the
end of an accounting period, we may be required to take excess and obsolete
inventory charges that will decrease gross margin and net operating results for
that period. 
 ITEM 7. FINANCIAL STATEMENTS. The following Consolidated Financial Statements and Report of Independent
Registered Public Accounting Firm thereon are included herein. Report of Independent Registered Public Accounting Firm
    
    
    1Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    2Consolidated Statements of Operations for the years ended
June 30, 2004 and 2003
    
    
    3Consolidated Statements of Stockholders Equity (Deficit) for the years
ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6
 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. Not applicable. 
 ITEM 8A. CONTROLS AND PROCEDURES. We carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15 and 15d-15 as of the end of June 30, 2004, the end of our fourth
fiscal quarter, which is the last period presented in this report. The
evaluation was carried out under the supervision of our Chief Executive
Officer and Chief Financial Officer and with the participation of our
management group and our audit committee. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that information
that is required to be included in our filings with the Commission is
recorded, processed, summarized and reported within the time periods
specified by the Commission, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal
controls, nor were any corrective actions required with regard to significant
deficiencies and material weaknesses. - 23 -




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##### Table of Contents



VISEON, INC.
    
    FORM 10-KSB
 
 PART III. 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Management The authorized number of directors of the Company is presently fixed at
five. Each director serves for a term of one year that expires at the following
annual shareholders meeting. Executive officers are appointed by the Board of
Directors and serve until their successors are appointed. The directors and
executive officers of the Company are as follows: Name
    
    Age
    
    PositionsJohn C. Harris
    
    
    43
    
    
    Chairman of the Board, Chief Executive
Officer and PresidentRobert A. Wolf
    
    
    45
    
    
    Chief Financial OfficerBrian Day
    
    
    41
    
    
    DirectorGerard Dube
    
    
    50
    
    
    DirectorJohn ODonnell
    
    
    50
    
    
    DirectorCharles Rey
    
    
    57
    
    
    Director
 John Harris has been a director, Chief Executive Officer and President of
the Company since February 2001. From May until December 2000, Mr. Harris
served as Chief Executive Officer of Diversified Technologies Group, Inc., a
company that provides enhanced fax services. From October 1999 until May 2000,
Mr. Harris was Chief Executive Officer of CBQ, Inc., an e-business solutions
provider. From March 1999 until joining CBQ, Inc., Mr. Harris served as
President of Paragon Innovations, Inc., an embedded device design firm. From
1986 until 1998, Mr. Harris was President and CEO of CompuNet Support Systems,
Inc. CompuNet provided networking, systems integration and business building
applications. Rob Wolf has been Chief Financial Officer of the Company since March 2004.
Mr. Wolf served as Chief Financial Officer of HR First Contact, LLC, an
operator and franchisor of pre-employment screening service centers, since
February 2001 and Chief Financial Officer of BTi Employee Screening Services,
Inc., from June 2000 until its sale in January 2001. Mr. Wolf was Chief
Financial Officer of NuVision Technologies, Inc., a company involved in the
sales and leasing of videoconferencing equipment and network services and a
wholly owned subsidiary of TANDBERG, asa from November 1998 until May 2000.
Mr. Wolf began his career in the audit division of Arthur Andersen & Co. (March
1982 to May 1989). Brian Day has been a director of the Company since October 2001. Mr. Day
joined Gomez, Inc. as Chief Financial Officer in September 2004. Mr. Day was
the Chief Financial Officer of LifeHarbor, Inc. from June 2003 until December
2003 and its President from December 2003 until the sale of the company in July
2004. Mr. Day was Chief Financial Officer of Octave Communications, Inc., an
audio communications technology company, from June 1999 until its sale in
January 2003. From September 1998 to June 1999, Mr. Day was Chief Financial
Officer of Healthtrax Inc. and prior to that, Chief Financial Officer of Span
Instruments, Inc. Gerard Dube has been a director of the Company since November 2001. From
September 2001 to the present, Mr. Dube has served as President of XDS, Inc. a
network services company that Mr. Dube founded. From December 1999 until
September 2001, Mr. Dube served as Executive Vice President of Zefer, an
Internet consulting firm which he co-founded. From 1994 to 1999, he served in
senior executive level positions with Computer Sciences Corp, including
President of the Integrated Business Services unit. John ODonnell has been a director of the Company since his appointment in
September 2004. Mr. ODonnell has been Chief Executive Officer of Avteq, Inc.
(formerly known as Comlink Technologies, LLC) since 2001. Prior to forming
Avteq, Inc., Mr. ODonnell was President of NuVision Technologies, Inc., a
wholly owned subsidiary of TANDBERG, asa from 1995 to 1999. Charles Rey has been a director of the Company since October 2001 and has
been Chief Executive Officer of Lifetime Marketing, Inc. since 1991. Mr. Rey
is also Chairman of the Board of POPS Direct, a consumer Internet marketing
company. No director currently serves as a director of any other reporting company.
There are no family relationships among any of the directors and executive
officers of the Company. The Board of Directors has established an Audit Committee. The Audit
Committee supervises the financial affairs of the Company and generally reviews
the results and scope of the audit and other services provided by the Companys
independent accountants and reports the results of their review to the Board
and to the Companys management. In fiscal year 2004, Messrs Brian Day and
Gerald Dube were members of the Audit Committee. The Board of Directors has
determined that Mr. Day is both independent and an audit committee financial
expert, as determined by SEC guidelines. Section 16(a) Beneficial Ownership Reporting Compliance - 24 -




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VISEON, INC.
    
    FORM 10-KSB
 Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys executive officers and directors, and persons who beneficially own
more than ten percent of the Common Stock, to file reports of ownership with
the SEC. Based upon a review of the copies of such reports furnished to the
Company, the Company believes that all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than ten percent
beneficial owners were met during the fiscal year ended June 30, 2004, except
for the following transactions, which were reported late: (1) Form 4 filed by
Richard Craven, a 10% owner, on May 14, 2004 with respect to transactions
occurring in October and November of 2004; (2) Form 4 filed by Henry Harris, a
10% owner, on July 8, 2004 with respect to transactions occurring on April 12
and 14, 2004; and (3) Charles Rey, our director, has represented to the Company that he intends to file a Form 4 with respect to transactions occurring on June 9, 2004 . Code of Ethics Our Board of Directors is currently in the process of reviewing a code of
ethics that applies to our Chief Executive Officer (our principal executive
officer) and our Chief Financial Officer (our principal financial officer and
principal accounting officer), as required by applicable securities
regulations. The code of ethics will be adopted in fiscal year 2005. 
 ITEM 10. EXECUTIVE COMPENSATION. Summary Compensation Table The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and Chief Financial Officer as of June 30, 2004 for
services in all capacities to the Company during fiscal years ended June 30,
2004, 2003 and 2002 (for purposes hereof, the Chief Executive Officer and Chief
Financial Officer of the Company are referred to herein as the Named Executive
Officers). Other than for the individuals listed below, no employee of the
company received cash compensation of more than $100,000 in the fiscal year
ended June 30, 2004. SUMMARY COMPENSATION TABLE Long Term CompensationAnnual Compensation
    
    Awards
    
    Payouts(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)Other
    
    Restricted
    
    Securities
    
    
    
    
    
    AllAnnual
    
    Stock
    
    Underlying
    
    LTIP
    
    OtherName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation
    
    Awards
    
    Options/
    
    Payouts
    
    CompensationPrincipal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    ($)
    
    ($)
    
    SARs (#)
    
    ($)
    
    ($)John C. Harris
    
    
    2002
    
    
    
    130,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Chief Executive
    
    
    2003
    
    
    
    130,000Officer and President
    
    
    2004
    
    
    
    151,667
    
    
    
    310,000
    (2)
    
    
    
    
    
    
    
    
    
    
    300,000
    (3)Robert A. Wolf (1)
    
    
    2002Chief Financial
    
    
    2003Officer
    
    
    2004
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    (4)
  (1)
    
    Mr. Wolf became Chief Financial Officer in March 2004.  (2)
    
    In January 2004, the compensation committee approved a cash payment in
the amount of fifty thousand dollars and the grant of 200,000 shares of
the Companys common stock to Mr. Harris in consideration of his past
performance and his oral agreement to continue his employment with the
Company. The shares were valued at $1.05 per share, the closing bid per
share on the date of issuance (June 24, 2004). Mr. Harris had previously
earned a performance bonus in the amount of fifty thousand dollars.  (3)
    
    The compensation committee also approved the grant to Mr. Harris,
pursuant to the Companys 1994 Employee Stock Option Plan, of options to
purchase 300,000 shares of the Companys common stock in connection with
his agreement to continue to serve as the Companys CEO for an additional
two years.  (4)
    
    In February 2004, the compensation committee also approved the grant to
Rob Wolf, pursuant to the Companys 1994 Employee Stock Option Plan, of
options to purchase 300,000 shares of the Companys common stock in
connection with his agreement to serve as the Companys CFO for two years.
The options were granted in September 2004. - 25 -




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##### Table of Contents



VISEON, INC.
    
    FORM 10-KSB
   Option/SAR Grants Table Option Grants in Last Fiscal Year (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)Number of
    
    % of TotalSecurities Underlying
    
    Options/SARsOptions/SARs
    
    Granted to Employees
    
    Exercise or Base
    
    ExpirationName
    
    Granted (#)
    
    in Fiscal Year
    
    Price ($/Sh)
    
    DateJohn C. Harris
    
    
    300,000
    
    
    
    65.3
    %
    
    $
    1.00
    
    
    June 2014Chief Executive
Officer and President
  (1)
    
    The Company has never granted any SARS.(2)
    
    The aggregate number of options granted in fiscal year 2004 was 459,500.(3)
    
    The options vest according to the following schedule: 75,000 immediately,
37,500 per quarter beginning September 24, 2004. Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table The named executive officers did not exercise any stock options during the
fiscal year ended June 30, 2004. The Company has not granted any SARs of any
kind. The following table sets forth the number of securities underlying
options exercisable at June 30, 2004, and the value at June 30, 2004 of
exercisable in-the-money options remaining outstanding as to the named
executive officers. (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)Number of
    
    Value ofSecurities Underlying
    
    UnexercisedUnexercised
    
    In-the-MoneyOptions / SARs at
    
    Options / SARs atShares Acquired
    
    
    
    
    
    June 30, 2004 (#)
    
    June 30, 2004 ($)Name
    
    on Exercise (#)
    
    Value Realized ($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJohn C. Harris
    
    
    
    
    
    
    
    
    
    
    325,500
    
    
    
    225,000
    
    
    $
    133,750
    
    
    $
    33,750
  (1)
    
    Based upon the closing bid price of the Common Stock quoted on the
OTC Bulletin Board on June 30, 2004, which was $1.15 per share, and the
exercise price of the options (between $0.66 and $1.00 per share). Director Compensation The Board of Directors of the Company has established the following
compensation policies for non-employee directors of the Company. Under the
Companys 1994 Stock Plan, each non-employee director is granted, upon election
to the Board, an option to purchase 20,000 shares of Common Stock, exercisable
at market value on the date of grant, vesting in equal increments of 25% every
three months and expiring ten years from the date of grant. After the year of
election, each non-employee director will also receive annually an option to
purchase 5,000 shares of Common Stock exercisable at market value on the date
of grant, vesting in equal increments of 25% every three months and expiring
ten years from the date of grant. During fiscal year 2004, no such options were
granted to non-employee directors. Directors who are employees of the Company
receive no additional compensation for serving as directors. Compensation Agreements with Key Personnel The Company has reached agreement in principle on the terms of two-year
employment agreements with John C. Harris and Robert A. Wolf and is finalizing
the agreements for execution. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth as of September 23, 2004, the number of
shares of the Companys Common Stock beneficially owned by (i) each director of
the Company; (ii) each of the Named Executive Officers; (iii) each person known
by the Company to beneficially own more than 5% of the outstanding shares of
Common Stock; and (iv) all executive officers and directors as a group. Unless
otherwise indicated, each person has sole voting, investment and dispositive
power over such shares. Shares not outstanding but deemed beneficially owned by
virtue of the right of a person or member of a group to - 26 -




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VISEON, INC.
    
    FORM 10-KSB
 acquire them within 60 days are treated as outstanding only when determining
the amount and percent owned by such group or person. The address for all
directors and officers of the Company is Viseon, Inc., 8445 Freeport Parkway,
Suite 245, Irving, TX 75063. Beneficial OwnershipName and Address ofBeneficial Owner
    
    Number
    
    PercentBrian Day
    
    
    50,000
    (1)
    
    
    *Gerard Dube
    
    
    62,500
    (2)
    
    
    *John Harris
    
    
    562,500
    (3)
    
    
    2.1
    %John ODonnell
    
    
    270,869
    (4)
    
    
    1.0
    %Charles Rey
    
    
    152,888
    (5)
    
    
    *Robert A. Wolf
    
    
    112,500
    (6)
    
    
    *All Current Executive Officers and Directors as a Group (6 persons)
    
    
    1,218,369
    
    
    
    4.8
    %Digital Investors, LLC
    
    
    1,909,024
    (7)
    
    
    6.8
    %1 6901 N. Dallas Parkway,
Suite 230
Addison, TX 75001Richard Craven
    
    
    2,483,152
    (8)
    
    
    8.7
    %5200 Wilson Road #200
Edina, MN 55424Henry F. Harris, Sr.
    
    
    4,500,000
    (9)
    
    
    14.6
    %575 E. Evergreen Avenue
Wyndmoor, Pennsylvania 19038Henry C.S. Mellon
    
    
    2,725,641
    (10)
    
    
    9.3
    %4 Driftwood Landing
Gulf Stream, Florida 33483Schottenfeld Qualified Associates, LP
    
    
    2,907,318
    (11)
    
    
    9.9
    %399 Park Avenue
New York, NY 10022Tejas Securities Group Inc. 401K
   Plan & Trust FBO John J. Gorman
    
    
    2,000,000
    (12)
    
    
    7.1
    %2700 Via Fortuna Drive
Suite 400
Austin, TX 78746Jeffrey J. Puglisi
    
    
    1,401,017
    (13)
    
    
    5.1
    %399 Park Ave., 37th Floor
New York, NY 10022Pequot Capital Management, Inc.
    
    
    2,000,000
    (14)
    
    
    7.1
    %500 Nyala Farm Road
Westport, CT 06880
   *
    
    Indicates ownership of less than 1%.(1)
    
    Includes 20,000 shares owned outright and 30,000 shares that may be acquired within 60 days upon the exercise of stock options.(2)
    
    Includes 32,500 shares owned outright and 30,000 shares that may be acquired within 60 days upon the exercise of stock options.(3)
    
    Includes 200,000 shares owned outright and 362,500 shares that may be acquired within 60 days upon the exercise of stock options.(4)
    
    Includes 20,869 shares owned indirectly through Avteq, Inc. and 250,000 shares owned indirectly through JOD Enterprises, LLC that may
be purchased pursuant to warrants currently exercisable. - 27 -




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##### Table of Contents



VISEON, INC.
    
    FORM 10-KSB
  (5)
    
    Includes 122,888 shares owned outright and 30,000 shares that may be acquired within 60 days upon the exercise of stock options.(6)
    
    Includes 112,500 shares that may be acquired within 60 days upon the exercise of stock options.(7)
    
    Includes 1,057,360 shares owned outright and 851,664 shares that may be acquired within 60 days upon the exercise of stock warrants.(8)
    
    Includes 2,428,152 shares owned outright and 55,000 shares that may be acquired within 60 days upon the exercise of stock options.(9)
    
    Includes 2,500,000 shares owned outright or through trusts, 1,000,000 shares that may be acquired upon the conversion of the Companys
Series A Convertible Preferred Stock, which is currently convertible and 1,000,000 shares that may be purchased pursuant to warrants
currently exercisable.(10)
    
    Includes 1,052,131 shares owned outright, 350,000 shares that may be purchased pursuant to warrants currently exercisable and 1,354,510
shares that may be purchased pursuant to warrants exercisable after a 90 day notice period; also includes 142,857 shares held directly
by Mellon Group, Inc., a corporation of which Mr. Mellon is the President and 38,100 shares that may be acquired by the Mellon Group,
Inc., pursuant to warrants currently exercisable.(11)
    
    Includes 333,332 shares owned outright, 850,000 shares that may be acquired upon the conversion of the Companys Series A Convertible
Preferred Stock, which is currently convertible and 1,016,666 shares that may be purchased pursuant to warrants currently exercisable;
also includes 150,000 shares that may be acquired by Richard Schottenfeld, Managing Member of Schottenfeld Qualified Associates, LP,
upon the conversion of the Companys Series A Convertible Preferred Stock, which is currently convertible, 381,320 shares that may be
purchased by Mr. Schottenfeld pursuant to warrants currently exercisable and 176,000 shares owned by Roadrunner Capital Partners LLC
(of which Mr. Schottenfeld is the Managing Member of the general partner).(12)
    
    Includes 1,000,000 shares that may be acquired upon the conversion of the Companys Series A Convertible Preferred Stock, which is
currently convertible and 1,000,000 shares that may be purchased pursuant to warrants currently exercisable.(13)
    
    Includes 500,000 shares owned outright and 500,000 shares that may be purchased by Puglisi Capital Partners, LP pursuant to warrants
currently exercisable; also includes 401,017 shares that may be acquired by Jeffrey Puglisi, Managing Member of the General Partner of
Puglisi Capital Partners, LP, pursuant to warrants currently exercisable.(14)
    
    Includes holdings of Pequot Scout Fund, LP of 800,000 shares that may be acquired upon the conversion of the Companys Series A
Convertible Preferred Stock, which is currently convertible and 800,000 shares that may be purchased pursuant to warrants currently
exercisable; also includes holdings of Pequot Scout Fund, LP of 200,000 shares that may be acquired upon the conversion of the
Companys Series A Convertible Preferred Stock, which is currently convertible and 200,000 shares that may be purchased pursuant to
warrants currently exercisable. Beneficial ownership is claimed by Pequot Capital Management, Inc., the investment manager of these
funds. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On June 30, 2003, Henry Mellon and Exim Corporation acquired the debt
obligation of the Company under our line of credit (secured by virtually all of
our assets) existing pursuant to the loan agreement entered into by the Company
and Silicon Valley Bank. This credit facility had matured on December 5, 2002
and the outstanding balance owed by the Company on this loan was approximately
$386,200 as of June 30, 2003. Mr. Mellon is a beneficial owner of approximately
5.92% of our common stock as computed in accordance with SEC requirements. At
the time of Mr. Mellons and Exims acquisition of this loan, the terms of the
loan were modified so that the Company was only required to pay interest on the
loan for 18 months at a rate of 12% per annum until December 31, 2004, at which
time the loan was to mature. Additionally the loan was divided into two equal
notes, which granted the holders the option to convert the loan into common
stock at $0.30 per share. Both note holders exercised their conversion rights
in March 2004 converting the entire outstanding balance of the loan, inclusive
of interest, totaling $210,039 and $210,039 into 700,131 and 700,131 shares of
common stock, respectively, thereby extinguishing the debt and releasing all
collateral securing the repayment thereof. In February 2004, Carbone Holdings, LLC, a Nevada limited liability
company, acquired a warrant to purchase 150,000 shares of common stock at an
exercise price of $1.17 per share. Carbone acquired the warrants in exchange
for its agreement to loan the Company approximately $150,000. - 28 -




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VISEON, INC.
    
    FORM 10-KSB
 In April 2004, the Company issued a warrant, exercisable at varying
intervals over a two-year period, for the purchase of 200,000 shares of the
Companys common stock at $1.26 per share to David Sandmann in a private
transaction. Mr. Sandmann is a sales and business development consultant to the
Company who is responsible for the Companys relationship with broadband
providers. In March 2004, the holders of certain convertible promissory notes
executed by the Company at various dates in 2002 and 2003 converted at total of
$1,254,726, including principal and accrued interest, into 4,182,422 shares of
common stock at the conversion price of $0.30 per share and released all
collateral securing the repayment of such note. Exim Corporation, the holder of
a promissory note executed by the Company, dated June 30, 2003, converted all
indebtedness owed by Viseon pursuant to the note, inclusive of interest,
totaling $210,039 into 700,131 shares of common stock. Henry Mellon, the holder
of a promissory note executed by the Company, dated June 30, 2003, converted
all indebtedness owed by Viseon pursuant to the note, inclusive of interest,
totaling $210,039. into 700,131 shares of common stock. Judas, Inc, a Nevada
corporation, the holder of a promissory note executed by the Company, dated
July 1, 2002, converted all indebtedness owed by Viseon pursuant to the note,
inclusive of interest, totaling $242,755 into 809,183 shares of common stock.
E. M. Norwood, the holder of a promissory note executed by the Company, dated
June 30, 2002, as amended by that certain Amended Loan Agreement dated June 30,
2003, converted all indebtedness owed by Viseon pursuant to the note, inclusive
of interest, totaling $121,377 into 404,591 shares of common stock. Active
Management, LLC, a Nevada limited liability company, the holder of a promissory
note executed by the Company, dated May 31, 2003, converted all indebtedness
owed by Viseon pursuant to the note, inclusive of interest, totaling $138,171
into 460,570 shares of common stock. Carbone Holdings, LLC, a Nevada limited
liability company, the holder of a promissory note executed by the Company,
dated May 31, 2003, converted all indebtedness owed by Viseon pursuant to the
note, inclusive of interest, totaling $332,345 into 1,107,816 shares of common
stock. In connection with the private placement agreements governing the sale of
our Series A Convertible Stock, all officers, all directors, certain
convertible note holders and certain holders of 5% or more of the shares of
Common Stock of the Company executed an agreement in favor of the Purchasers
whereby the sale of specified shares of Common Stock that are subject to
registration pursuant to the same registration statement filed by the Company
in respect of the Common Stock underlying the Series A Convertible Preferred
Stock, Series A-1 Warrants and Series A-2 Warrants is restricted for the period
commencing on the date that the Securities and Exchange Commission declared
effective the first such registration statement (August 16, 2004) and ending
ninety (90) days thereafter. The Company is not a party to any such agreement
and no such agreement creates, suggests or imposes any duty on the Company with
respect to the subject matter thereof. Mr. ODonnell is the majority owner and controlling member of Comlink
Technologies, LLC. From September 1, 2001 through June 30, 2003, Viseon
purchased an aggregate of approximately $1.7 million in inventory from Comlink,
consisting primarily of group videoconferencing equipment and related
peripherals. The purchases were made in the ordinary course of Viseons
business. From September 1, 2002 through June 30, 2003, Viseon purchased
approximately $366,000 in equipment and peripherals from Comlink. No purchases
have been made since June 30, 2003. In December 2003, Viseon issued 20,869
shares of its Common Stock to Comlink in settlement of accounts payable of
$23,997 related to the purchases. Comlinks 20,869 shares of Viseon Common
Stock were registered for resale under Viseons registration statement on Form
SB-2/A, which was declared effective by the Securities and Exchange Commission
on August 13, 2004. In December 2002, Viseon sold its existing service contracts and service
business to Comlink for a sales price of $1 plus the assumption by Comlink of
all liabilities under the service contracts. In conjunction with this
transaction, the Company recognized a gain in the amount of $314,712 which was
the unamortized deferred revenue associated with the service contracts. In January 2003, JOD Enterprises, LLC, an entity controlled and
majority-owned by Mr. ODonnell, acquired warrants to acquire 250,000 shares of
Viseon Common Stock at $.70 per share from King Research, LLC in a private
transaction. Equity Compensation Plan Information Number of securities to be
    
    Weighted average
    
    Number of securitiesissued upon exercise of
    
    exercise price of
    
    remaining available foroutstanding options,
    
    outstanding options,
    
    future issuance underPlan category
    
    warrants and rights
    
    warrants and rights
    
    equity compensation plansEquity compensation
plans approved by security holders
    
    
    1,184,250
    
    
    $
    1.23
    
    
    
    1,615,750Equity compensation
plans not approved
by security holders
    
    
    341,000
    
    
    $
    4.49
    
    
    
    N/ATotal
    
    
    1,525,250
 The options under the equity compensation plan that was not approved by our
shareholders was originally granted between 1997 and 1998. All of such options
were issued with exercise prices ranging from $2.81 to $3.00, expire 10 years
from the date of issuance and are fully vested. PART IV. - 29 -




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VISEON, INC.
    
    FORM 10-KSB
 
 ITEM 13. EXHIBITS (a) Documents filed as part of this report:(i) Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    1Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    2Consolidated Statements of Operations for the years ended
June 30, 2004 and 2003
    
    
    3Consolidated Statements of Stockholders Equity (Deficit) for the years
ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6
 (ii) Exhibits: The following exhibits are filed with this Annual Report or are
incorporated herein by reference: 
 EXHIBIT INDEX ExhibitNumber
    
    Description2.1
    
    Plan of Merger
between RSI
Systems, Inc. and
Viseon, Inc. (filed
as Exhibit 10.40 to
the Companys March
2001 10-QSB and
incorporated herein
by reference).3.1
    
    Articles of
Incorporation of
Viseon, Inc. (filed
as Exhibit 3.1 to
the Companys S-2/A
Registration
Statement dated
July 25, 2001 and
incorporated herein
by reference).3.2
    
    Certificate of
Amendment of
Articles of
Incorporation
(filed as Exhibit
3.1 to the
Companys S-2
Registration
Statement dated
July 25, 2001 and
incorporated herein
by reference).
  3.3
    
    Bylaws of Viseon, Inc. (filed as Exhibit 3.1 to the Companys S-2/ A Registration Statement dated July
25, 2001 and incorporated herein by reference).3.4
    
    Certificate of Amendment of Articles of Incorporation (filed as Exhibit 3.4 to the Companys SB-2
Registration Statement filed on May 6, 2004 and incorporated herein by reference).4.1
    
    Form of Warrant granted to RSI Marketing, LLC. (Filed as Exhibit A to Exhibit 10.36 to the Companys
March 31, 2001 10-QSB and incorporated herein by reference).4.2
    
    Form of Warrant granted to Active Management, LLC. (filed as Exhibit A to Exhibit 10.38 to the
Companys March 31, 2001 10-QSB and incorporated herein by reference).4.3
    
    Certificate of Designation Establishing the Series A Preferred Stock of Viseon, Inc. (filed as Exhibit
4.1 to the Companys Form 8-K dated March 18, 2004 and incorporated herein by reference).4.4
    
    Form of Series A-1 Common Stock Purchase Warrant (filed as Exhibit 4.2 to the Companys Form 8-K dated
March 18, 2004 and incorporated herein by reference). - 30 -




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##### Table of Contents



VISEON, INC.
    
    FORM 10-KSB
  4.5
    
    Form of Series A-2 Common Stock Purchase Warrant (filed as Exhibit 4.3 to the Companys Form 8-K dated
March 18, 2004 and incorporated herein by reference).10.1
    
    1994 Stock Plan. (filed as Exhibit 4.1 to the Companys Registration Statement on Form S-8 (SEC File
No. 33-62573) dated August 31, 1998 and incorporated herein by reference).10.2
    
    Manufacturing Agreement with Altron, Inc. dated August 10, 1996 (filed as Exhibit 10.21 to the Form
10-KSB Annual Report of the Company for 1996, File No. 000-27106 (the Companys 1996 10-KSB) and
incorporated herein by reference).10.3
    
    Registration Rights Agreement by and between Company and Digital Investors, LLC, dated as of February
23, 2001 (filed as Exhibit 10.35 to Companys March 2001 10-QSB the Form 10-QSB Report of the Company
for Period ended March 31, 2001, File No. 000-27106 (the Companys March 2001 10-QSB and
incorporated herein by reference).10.4
    
    Registration Rights Agreement by and between Company and RSI Marketing, LLC, dated as of February 23,
2001 (filed as Exhibit 10.37 to Companys March 2001 10-QSB and incorporated herein by reference).10.5
    
    Registration Rights Agreement by and between Company and Active Management, LLC, dated as of February
23, 2001 (filed as Exhibit 10.39 to Companys March 2001 10-QSB and incorporated herein by reference).10.6
    
    Exclusive Distribution Agreement (filed as Exhibit 10.61 to the Companys 2002 10-KSB and incorporated
herein by reference).10.7
    
    Promissory Note between the Company and EXIM Corporation (filed as Exhibit 23.3 to the Companys SB-2/
A Registration Statement dated August 1, 2003 and incorporated herein by reference).10.8
    
    Promissory Note between the Company and Henry Mellon dated (filed as Exhibit 23.4 to the Companys
SB-2/ A Registration Statement dated August 1, 2003 and incorporated herein by reference).10.9
    
    Assignment of Note and Liens (filed as Exhibit 10.24 to the Form 10-KSB Annual Report of the Company
for 2003 File No. 000-27106 (the Companys 2003 10-KSB) and incorporated herein by reference).10.10
    
    Third Amendment to Loan Agreement (filed as Exhibit 10.25 to the Companys 2003 10-KSB and
incorporated herein by reference).10.11
    
    Warrant in favor of Henry Mellon (filed as Exhibit 10.26 to the Companys 2003 10-KSB and incorporated
herein by reference).10.12
    
    Warrant in favor of EXIM Corporation (filed as Exhibit 10.27 to the Companys 2003 10-KSB and
incorporated herein by reference).10.13
    
    Warrant in favor of EXIM Corporation (filed as Exhibit 10.28 to the Companys 2003 10-KSB and
incorporated herein by reference).10.14
    
    Registration Rights Agreement in favor of
Henry Mellon (filed as Exhibit 10.29 to the
Companys 2003 10-KSB and incorporated
herein by reference).10.15
    
    Registration Rights Agreement in favor of
EXIM Corporation (filed as Exhibit 10.30 to
the Companys 2003 10-KSB and incorporated
herein by reference).10.16
    
    Piggyback Registration Rights Agreement in
favor of Henry Mellon (filed as Exhibit
10.31 to the Companys 2003 10-KSB and
incorporated herein by reference).10.17
    
    Piggyback Registration Rights Agreement in
favor of EXIM Corporation (filed as Exhibit
10.32 to the Companys 2003 10-KSB and
incorporated herein by reference).10.18
    
    Agreement with Comlink Video regarding
purchase of group videoconferencing assets
(filed as Exhibit 10.61 to the Companys
2003 10-KSB and incorporated herein by
reference). - 31 -




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##### Table of Contents



VISEON, INC.
    
    FORM 10-KSB
  10.19
    
    Warrant in favor of Henry Mellon (filed as
Exhibit 10.33 to the Companys 2003 10-KSB
and incorporated herein by reference).10.20
    
    Promissory Note between the Company and
Judas, Inc. dated June 30, 2002 (filed as
Exhibit 10.34 to the Companys 2003 10-KSB
and incorporated herein by reference).10.21
    
    Agreement Amending Promissory Note between
the Company and Judas, Inc. (filed as
Exhibit 10.35 to the Companys 2003 10-KSB
and incorporated herein by reference).10.22
    
    Warrant in favor of Judas, Inc. (filed as
Exhibit 10.36 to the Companys 2003 10-KSB
and incorporated herein by reference).10.23
    
    Warrant in favor of Judas, Inc. (filed as
Exhibit 10.37 to the Companys 2003 10-KSB
and incorporated herein by reference).10.24
    
    Piggyback Registration Rights Agreement in
favor of Judas, Inc. (filed as Exhibit 10.39
to the Companys 2003 10-KSB and
incorporated herein by reference).10.25
    
    Promissory Note between the Company and
Michelle Norwood dated June 30, 2002 (filed
as Exhibit 10.40 to the Companys 2003
10-KSB and incorporated herein by
reference).10.26
    
    Agreement Amending Promissory Note between
the Company and Michelle Norwood (filed as
Exhibit 10.41 to the Companys 2003 10-KSB
and incorporated herein by reference).10.27
    
    Warrant in favor of Michelle Norwood (filed
as Exhibit 10.42 to the Companys 2003
10-KSB and incorporated herein by
reference).10.28
    
    Warrant in favor of Michelle Norwood (filed
as Exhibit 10.43 to the Companys 2003
10-KSB and incorporated herein by
reference).10.29
    
    Piggyback Registration Rights Agreement in
favor of Michelle Norwood (filed as Exhibit
10.44 to the Companys 2003 10-KSB and
incorporated herein by reference).10.30
    
    Agreement to Convert Short-Term Debt to
Long-Term Note between the Company and
Carbone Holdings, L.L.C. dated May 31, 2003
(filed as Exhibit 10.45 to the Companys
2003 10-KSB and incorporated herein by
reference).10.31
    
    Promissory Note between the Company and
Carbone Holdings, L.L.C. dated May 31, 2003
(filed as Exhibit 10.46 to the Companys
2003 10-KSB and incorporated herein by
reference).10.32
    
    Agreement to Convert Short-Term Debt to
Long-Term Note between the Company and
Active Management, L.L.C. dated May 31, 2003
(filed as Exhibit 10.47 to the Companys
2003 10-KSB and incorporated herein by
reference).10.33
    
    Promissory Note between the Company and
Active Management, L.L.C. dated May 31, 2003
(filed as Exhibit 10.48 to the Companys
2003 10-KSB and incorporated herein by
reference).10.34
    
    Form of Series A Convertible Preferred Stock
and Warrants Purchase Agreement (filed as
Exhibit 4.1 to the Companys Form 8-K dated
April 19, 2004 and incorporated herein by
reference).10.35
    
    Form of Registration Rights Agreement (filed
as Exhibit 4.2 to the Companys Form 8-K
dated April 19, 2004 and incorporated herein
by reference).21.1
    
    List of Subsidiaries (filed herewith).23.1
    
    Consent of Virchow, Krause & Company, LLP (filed herewith).  31(a)
    
    Certification from John Harris, President and Chief Executive Officer of the Registrant, pursuant to 1 CFR
240.13a-14(a) or 17 CFR 240.15d-14(a) (filed herewith). - 32 -




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##### Table of Contents



VISEON, INC.
    
    FORM 10-KSB
  31(b)
    
    Certification from Robert A. Wolf, Chief Financial Officer of the Registrant, pursuant to 1 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a) (filed herewith).32(a)
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).32(b)
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).99.1
    
    The Companys Year 2003 Consultant Compensation Plan (filed as Exhibit 4.1 to the Companys Registration
Statement on Form S-8 (SEC File No. 333-102551) filed January 16, 2003. (b) Reports on Form 8-K During the year ended June 30, 2004, the Company filed five Current
Reports on Form 8-K. On September 24, 2003, the Company reported on a proposed
letter to shareholders. On March 18, 2004, March 22, 2004, March 25, 2004 and
April 19, 2004, the Company reported on the private placements of the Companys
equity securities and filed the instruments creating the securities. 
 Item 14. Principal Accountant Fees and Services. Virchow, Krause & Company, LLP, Certified Public Accountants, are the
Companys independent auditors to examine the financial statements of the
Company for the fiscal year ended June 30, 2004 and 2003. Virchow, Krause &
Company, LLP has performed the following services and has been paid the
following fees for these fiscal years. Audit Fees Virchow, Krause & Company, LLP was paid aggregate fees of $49,983 and
$70,145 for the fiscal years ended June 30, 2004 and 2003, respectively for
professional services rendered for the audit of the Companys annual financial
statements and for the reviews of the consolidated financial statements
included in Companys quarterly reports on Form 10-QSB during these fiscal
years. Audit-Related Fees Virchow, Krause & Company, LLP was paid aggregate fees of $4,160 and $0
for the fiscal years ended June 30, 2004 and June 30, 2003, respectively for
services related to Form SB-2. Tax Fees Virchow, Krause & Company, LLP was paid aggregate fees of $7,350 and
$3,600 for the fiscal years ended June 30, 2004 and 2003, respectively for
professional services rendered for tax compliance, tax advice and tax planning. Other Fees Virchow, Krause & Company, LLP was paid aggregate fees of $0 and $7,985
for the fiscal years ended June 30, 2004 and 2003, respectively for other
professional services. The policy of the Companys audit committee is to review and pre-approve
both audit and non-audit services to be provided by the independent auditors
(other than with de minimis exceptions permitted by the Sarbanes-Oxley Act of
2002). This duty may be delegated to one or more designated members of the
audit committee with any such approval reported to the committee at its next
regularly scheduled meeting. Approval of non-audit services shall be disclosed
to investors in periodic reports required by section 13(a) of the Securities
Exchange Act of 1934. Approximately 58% of the fees paid to Virchow Krause were
pre-approved by the audit committee. No services in connection with appraisal or valuation services, fairness
opinions or contribution-in-kind reports were rendered by Virchow Krause.
Furthermore, no work of Virchow Krause with respect to its services rendered to
the Company was performed by anyone other than Virchow Krause. - 33 -




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm
    
    
    1Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    2Consolidated Statements of Operations
    
    
    3Consolidated Statements of Stockholders Equity (Deficit)
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-19




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES Irving, Texas June 30, 2004 and 2003 CONSOLIDATED FINANCIAL STATEMENTS Including Report of Independent Registered Public Accounting Firm




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders, Audit Committee and Board of Directors
Viseon, Inc. We have audited the accompanying consolidated balance sheets of Viseon,
Inc. and subsidiaries as of June 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Viseon, Inc. and subsidiaries as of June 30, 2004 and 2003, and the results
of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles. /s/ VIRCHOW, KRAUSE & COMPANY, LLP Minneapolis, Minnesota
September 8, 2004 Page 1




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
June 30, 2004 and 2003 2004
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    5,339,393
    
    
    $
    7,784Accounts receivable, net of
allowance for doubtful
accounts of $3,739 and $0 at
2004 and 2003
    
    
    43,389
    
    
    
    4,109Inventories
    
    
    14,600
    
    
    
    7,079Prepaid expenses
    
    
    469,789
    
    
    
    46,573Total Current Assets
    
    
    5,867,171
    
    
    
    65,545PROPERTY AND EQUIPMENT, NET
    
    
    35,659
    
    
    
    71,882INTANGIBLE ASSETS, NET
    
    
    210,157
    
    
    
    110,898TOTAL ASSETS
    
    $
    6,112,987
    
    
    $
    248,325LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES
    
    
    
    
    
    $Subordinated notes payable
    
    $
    0
    
    
    
    228,296Accounts payable
    
    
    413,674
    
    
    
    553,299Accrued expenses
    
    
    226,269
    
    
    
    104,692Liabilities of discontinued operations
    
    
    743,582
    
    
    
    1,244,452Total Current Liabilities
    
    
    1,383,525
    
    
    
    2,130,739LONG-TERM LIABILITIESSubordinated notes payable
    
    
    0
    
    
    
    23,333Total Liabilities
    
    
    1,383,525
    
    
    
    2,154,072COMMITMENTS AND CONTINGENCIES(note 8)STOCKHOLDERS EQUITY (DEFICIT)(note 10)Series A convertible preferred stock, $.01 par value per share
5,000,000 shares authorized, 338 and 0
shares issued and outstanding
(liquidation preference of $8,450,000)
    
    
    3
    
    
    
    0Common stock, $.01 par value per share
100,000,000 shares authorized
24,682,907 and 17,829,829 shares issued and outstanding
    
    
    246,829
    
    
    
    178,298Additional paid-in capital
    
    
    37,732,562
    
    
    
    24,179,469Accumulated deficit
    
    
    (33,249,932
    )
    
    
    (26,263,514
    )Total Stockholders Equity (Deficit)
    
    
    4,729,462
    
    
    
    (1,905,747
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    6,112,987
    
    
    $
    248,325
 See accompanying notes to consolidated financial statements. Page 2




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2004 and 2003 2004
    
    2003NET SALES
    
    $
    286,215
    
    
    $
    21,306COST OF GOODS SOLD
    
    
    259,087
    
    
    
    20,858RESERVE FOR INVENTORIES
    
    
    (66,830
    )
    
    
    0Gross Profit
    
    
    93,958
    
    
    
    448RESEARCH AND DEVELOPMENT
    
    
    169,982
    
    
    
    71,992SELLING, GENERAL AND ADMINISTRATIVE
    
    
    2,873,163
    
    
    
    2,660,155Operating Loss
    
    
    (2,949,187
    )
    
    
    (2,731,699
    )OTHER INCOME (EXPENSE)Other income
    
    
    3,719
    
    
    
    5,149Interest income
    
    
    12,547
    
    
    
    0Amortization of original issue discount
    
    
    (916,666
    )
    
    
    (349,892
    )Interest expense
    
    
    (127,079
    )
    
    
    (106,846
    )Other Expense, Net
    
    
    (1,027,479
    )
    
    
    (451,589
    )LOSS FROM CONTINUING OPERATIONS
    
    
    (3,976,666
    )
    
    
    (3,183,288
    )GAIN (LOSS) FROM DISCONTINUED OPERATIONS
    
    
    348,628
    
    
    
    (1,283,102
    )NET LOSS
    
    
    (3,628,038
    )
    
    
    (4,466,390
    )Preferred Stock Dividends
    
    
    (3,358,380
    )
    
    
    0NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
    
    $
    (6,986,418
    )
    
    $
    (4,466,390
    )Basic and diluted earnings (loss) per share:Loss from continuing operations
    
    $
    (0.19
    )
    
    $
    (0.21
    )Gain (loss) from discontinued operations
    
    $
    0.01
    
    
    $
    (0.08
    )Net loss
    
    $
    (0.18
    )
    
    $
    (0.29
    )Net loss attributable to common stockholders
    
    $
    (0.34
    )
    
    $
    (0.29
    )Weighted average common shares outstanding:Basic and diluted
    
    
    20,585,143
    
    
    
    15,453,091
 See accompanying notes to consolidated financial statements. Page 3




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years Ended June 30, 2004 and 2003 Preferred Stock
    
    Common Stock
    
    AdditionalPaid-In
    
    AccumulatedShare
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    TotalBALANCES, June 30, 2002
    
    
    0
    
    
    $
    0
    
    
    
    14,172,066
    
    
    $
    141,720
    
    
    $
    21,713,645
    
    
    $
    (21,797,124
    )
    
    $
    58,241Common stock issued for services rendered
    
    
    
    
    
    
    
    
    
    
    1,728,498
    
    
    
    17,285
    
    
    
    585,171
    
    
    
    
    
    
    
    602,456Common stock issued for cash
    
    
    
    
    
    
    
    
    
    
    1,623,332
    
    
    
    16,234
    
    
    
    593,766
    
    
    
    
    
    
    
    610,000Exercise of common stock options
    
    
    
    
    
    
    
    
    
    
    94,500
    
    
    
    945
    
    
    
    39,576
    
    
    
    
    
    
    
    40,521Common stock issued for accounts payable
    
    
    
    
    
    
    
    
    
    
    211,433
    
    
    
    2,114
    
    
    
    71,887
    
    
    
    
    
    
    
    74,001Common stock warrants issued in connections with
subordinated notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    878,409
    
    
    
    
    
    
    
    878,409Common stock warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    292,581
    
    
    
    
    
    
    
    292,581Compensation related to common stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,434
    
    
    
    
    
    
    
    4,434Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,466,390
    )
    
    
    (4,466,390
    )BALANCES, June 30, 2003
    
    
    0
    
    
    
    0
    
    
    
    17,829,829
    
    
    
    178,298
    
    
    
    24,179,469
    
    
    
    (26,263,514
    )
    
    
    (1,905,747
    )Convertible preferred stock and common stock
warrants issued for cash
    
    
    338
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    8,449,997
    
    
    
    
    
    
    
    8,450,000Convertible preferred stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,215,859
    )
    
    
    
    
    
    
    (1,215,859
    )Accretion of beneficial conversion option for
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,135,261
    
    
    
    (3,135,261
    )
    
    
    0Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (223,119
    )
    
    
    (223,119
    )Common stock issued for services rendered
    
    
    
    
    
    
    
    
    
    
    990,257
    
    
    
    9,903
    
    
    
    971,541
    
    
    
    
    
    
    
    981,444Exercise of common stock options
    
    
    
    
    
    
    
    
    
    
    410,500
    
    
    
    4,105
    
    
    
    211,575
    
    
    
    
    
    
    
    215,680Exercise of common stock warrants
    
    
    
    
    
    
    
    
    
    
    1,166,666
    
    
    
    11,667
    
    
    
    338,333
    
    
    
    
    
    
    
    350,000Conversion of accounts payable into common stock
    
    
    
    
    
    
    
    
    
    
    103,233
    
    
    
    1,032
    
    
    
    129,214
    
    
    
    
    
    
    
    130,246Conversion of subordinated notes and accrued
interest into common stock
    
    
    
    
    
    
    
    
    
    
    4,182,422
    
    
    
    41,824
    
    
    
    1,212,902
    
    
    
    
    
    
    
    1,254,726Common stock warrants issued for services rendered
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,673
    
    
    
    
    
    
    
    124,673Common stock warrants issued for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    5,000Common stock warrants issued in connection with
subordinated notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,590
    
    
    
    
    
    
    
    126,590Compensation related to common stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,866
    
    
    
    
    
    
    
    63,866Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,628,038
    )
    
    
    (3,628,038
    )BALANCES, June 30, 2004
    
    
    338
    
    
    $
    3
    
    
    
    24,682,907
    
    
    $
    246,829
    
    
    $
    37,732,562
    
    
    $
    (33,249,932
    )
    
    $
    4,729,462
 See accompanying notes to consolidated financial statements. Page 4




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (3,628,038
    )
    
    $
    (4,466,390
    )Adjustments to reconcile net loss to net cash flows from
operating activities:Depreciation and amortization
    
    
    71,996
    
    
    
    68,761Amortization of original issue discount
    
    
    916,666
    
    
    
    349,892Compensation related to stock options
    
    
    40,660
    
    
    
    (26,510
    )Compensation related to common stock warrants
    
    
    23,206
    
    
    
    30,944Common stock issued for services rendered
    
    
    981,444
    
    
    
    602,456Common stock warrants issued for services rendered
    
    
    124,673
    
    
    
    292,581Loss on retirement of equipment
    
    
    11,367
    
    
    
    0Gain from discontinued operations
    
    
    (348,628
    )
    
    
    0Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (39,280
    )
    
    
    (4,955
    )Inventories
    
    
    (7,521
    )
    
    
    (7,079
    )Prepaid expenses
    
    
    (423,216
    )
    
    
    (6,590
    )Checks written in excess of cash in bank
    
    
    0
    
    
    
    (51,919
    )Accounts payable
    
    
    (5,880
    )
    
    
    173,732Accrued expenses
    
    
    147,724
    
    
    
    15,517Net Cash Flows used in Operating Activities
    
    
    (2,134,827
    )
    
    
    (3,029,560
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (27,931
    )
    
    
    (57,411
    )Payments for intangible assets
    
    
    (118,468
    )
    
    
    (4,210
    )Net Cash Flows from Investing Activities
    
    
    (146,399
    )
    
    
    (61,621
    )CASH FLOWS FROM FINANCING ACTIVITIESNet advances (repayments) on revolving credit facility
    
    
    0
    
    
    
    (1,295,897
    )Payments on short-term notes payable
    
    
    (135,000
    )
    
    
    0Proceeds from subordinated notes payable and warrants issued
with notes payable
    
    
    0
    
    
    
    686,706Proceeds from short-term notes payable and warrants issued
with notes payable
    
    
    200,000
    
    
    
    0Proceeds from issuance of common stock, net of expenses
    
    
    0
    
    
    
    610,000Proceeds from exercise of common stock options
    
    
    215,680
    
    
    
    40,521Proceeds from exercise of common stock warrants
    
    
    350,000
    
    
    
    0Proceeds from sales of common stock warrants
    
    
    5,000
    
    
    
    0Proceeds from issuance of convertible preferred stock and
warrants
    
    
    8,450,000
    
    
    
    0Payments of convertible preferred stock and warrants issuance
costs
    
    
    (1,215,859
    )
    
    
    0Dividends on convertible preferred stock
    
    
    (82,286
    )
    
    
    0Net Cash Flows from Financing Activities
    
    
    7,787,535
    
    
    
    41,330Change in cash and cash equivalents from discontinued operations
    
    
    (174,700
    )
    
    
    3,057,635Increase in cash and cash equivalents
    
    
    5,331,609
    
    
    
    7,784CASH AND
CASH EQUIVALENTS - Beginning of Year
    
    
    7,784
    
    
    
    0CASH AND
CASH EQUIVALENTS - End of Year
    
    $
    5,339,393
    
    
    $
    7,784
 See accompanying notes to consolidated financial statements. Page 5




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VISEON, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 -  Description of Business Founded in 1993, Viseon, Inc. (the Company) changed its name from RSI Systems,
Inc. to Viseon, Inc. on May 23, 2001. Historically, the Company had been a
developer of its own videoconferencing systems sold primarily to corporate end
users. In 2003, the Company shifted its focus to selling
Internet Protocol (IP) broadband videophones.
The Company signed a non-exclusive distribution agreement with a company to
sell their videophones. The Companys customer base still consists of the
corporate end users but their focus will be shifted to the residential users.
The Company extends unsecured credit to customers in the normal course of
business. The Company has two wholly-owned subsidiaries, RSI Systems, Ltd. and Viseon
PVT. RSI Systems, Ltd. had customers located primarily in the United
Kingdom/Europe and ceased operations in August 2002. The Company has incurred losses from operations and negative cash flows from
operations for the years ended June 30, 2004 and 2003. Management plans to try
to increase sales and improve operating results through 1) increased marketing
and direct sales activities to corporate customers, 2) continued initiatives to
gain acceptance of our product by broadband carriers for sale to their
subscribers, 3) continued measures to minimize overhead and 4) initiatives to
monetize our intellectual property rights. Management believes that current
cash funds and funds generated from operations will be sufficient to cover cash
needs for the next fiscal year, although there can be no assurance in this
regard. In the event sales do not materialize at the expected rates or the
Company does not achieve planned gross margins, management would seek
additional financing or would conserve cash by further reducing expenses. There
can be no assurance that the Company will be successful in achieving these
objectives or becoming profitable. NOTE 2 -  Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Viseon, Inc. and
its wholly-owned subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation. Cash and Cash Equivalents The Company considers investments in highly liquid debt securities having an
initial maturity of three months or less to be cash equivalents. The Company
maintains its cash in high quality financial institutions. The balances, at
times, may exceed federally insured limits. Accounts Receivable The Company reviews customers credit history before extending unsecured credit
and establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers and other information.
Invoices are due 30 days after presentation. Accounts receivable over 30 days
are considered past due. The Company does not accrue interest on past due
accounts receivable. Receivables are written off only after all collection
attempts have failed and are based on individual credit evaluation and specific
circumstances of the customer. Accounts receivable are shown net of an
allowance for uncollectible accounts of $3,739 and $0 at June 30, 2004 and
2003. Inventories Inventories at June 30, 2004 and 2003 were $14,600 and $7,079 of finished goods
consisting principally of videophones and related peripherals. Inventories
are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are recorded at cost. Depreciation is provided for
using the straight-line method over their estimated useful lives, which range
from two to three years. Leasehold improvements are amortized over the shorter Page 6




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  of their estimated useful life or the term of the lease. Maintenance, repairs
and minor renewals are expensed when incurred. Intangible Assets The Company amortizes patents over their estimated useful lives of ten years
using the straight-line method. Revenue Recognition The Company records sales revenue at the time merchandise is shipped. In
November 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition. SAB No. 101, as amended, sets forth the SEC staffs position
regarding the point at which it is appropriate for a registrant to recognize
revenue. The staff believes that revenue is realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or service has been rendered, the sellers price to the
buyer is fixed or determinable and collectibility is reasonably assured. The Company believes it meets all of the requirements for revenue recognition
under SFAS 48 and SAB 101. The Company recognizes revenue on shipment and
records a reserve for potential returns based upon historical experience rates. The Company offers an unconditional 30-day right of return on the sale of its
VisiFone products. The Company recognizes revenue on shipment and records a
reserve for potential returns. The Companys warranty policy during the first
year after the sale includes an obligation to replace during the first 30 days
and to repair during the next 11 months. The Company has a one-year warranty
with the manufacturer, so there is little, if any, cost to the Company for
warranty claims. No warranty reserve has been recorded to date, although the
Company will record a reserve if warranty activity increases and there are
unrecoverable costs to the Company. In May 2003, the Company entered into an agreement with a supplier pursuant to
which the VisiFone is manufactured under private label for the Company. In most
instances, the Company assumes the risks and rewards of ownership of the
inventory purchased from the supplier and, accordingly, records revenue on a
gross basis. In some cases, the Company does not purchase the inventory from
the supplier and does not assume the risks and rewards of ownership and records
revenue on a net basis. Substantially all revenues in fiscal 2004 were from
sales of the VisiFone purchased from this supplier. Shipping and Handling Costs In accordance with Emerging Issues Task Force (EITF) Issue 00-10, Accounting
for Shipping and Handling Fees and Costs, the Company is including shipping
and handling revenues in sales and shipping and handling costs in cost of goods
sold. Research and Development Costs Research and development costs are charged to operations when incurred. Advertising Costs All costs related to advertising the Companys products are expensed in the
period incurred. Advertising expense for the years ended June 30, 2004 and 2003
was $38,488 and $0. Net Loss Per Share Basic and diluted loss per share is computed by dividing net loss attributable
to common stockholders by the weighted average number of common shares
outstanding during each period. Dilutive common equivalent shares have not
been included in the computation of diluted loss per share because their
inclusion would be antidilutive. Antidilutive common equivalent shares
issuable based on future exercise of stock options or warrants could
potentially dilute basic and diluted loss per share in subsequent years. All
outstanding options and warrants totaling 20,820,409 and 11,072,909 at June
30, 2004 and 2003, respectively were antidilutive. Page 7




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Stock-Based Compensation In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for
measuring stock-based compensation cost which measures compensation cost as the
excess, if any, of quoted market price of the Companys common stock at the
grant date over the amount the employees must pay for the stock. The Companys
general policy is to grant stock options at fair value at the date of grant.
Options and warrants issued to non-employees are recorded at fair value, as
required by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, using the Black Scholes pricing
method. The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation. Had compensation cost been recognized based on the fair values
of options at the grant dates consistent with the provisions of SFAS No. 123,
the Companys net loss and basic diluted net loss per common share would have
been changed to the following pro forma amounts: 2004
    
    2003Loss attributable to common stockholdersAs reported
    
    $
    (6,986,418
    )
    
    $
    (4,466,390
    )Pro forma
    
    $
    (7,212,896
    )
    
    $
    (4,592,260
    )Basic and diluted loss per share:As reported
    
    $
    (0.34
    )
    
    $
    (0.29
    )Pro forma
    
    $
    (0.35
    )
    
    $
    (0.30
    )Stock based compensation:As reported
    
    $
    40,660
    
    
    $
    (26,510
    )Pro forma
    
    $
    226,478
    
    
    $
    125,870
 The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2004 and 2003: risk-free interest rates of 3.5%
and 2.5%, expected option lives of 10 years and 10 years, expected volatility
of 30.29% and 73.96% and expected dividend yield of 0% and 0%. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Fair Value of Financial Instruments The carrying amount for all financial instruments approximates fair value. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximates fair value because of the short
maturity of these instruments. Segment Reporting The Company was an international seller of videoconferencing systems in the
United States and the United Kingdom/Europe. The Company discontinued selling
in the United Kingdom/Europe in August 2002. Management believes the Company
meets the criteria for aggregating its operating segments into a single
reporting segment. Page 8




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 3 -  Property and Equipment, Net Property and equipment consisted of the following at June 30: 2004
    
    2003Furniture, equipment and software
    
    $
    43,326
    
    
    $
    942,169Leasehold improvements
    
    
    0
    
    
    
    5,421Total Property and Equipment
    
    
    43,326
    
    
    
    947,590Less: accumulated depreciation and amortization
    
    
    (7,667
    )
    
    
    (875,708
    )Property and Equipment, net
    
    $
    35,659
    
    
    $
    71,882
 Depreciation and amortization expense was $52,787 and $54,054 for the years
ended June 30, 2004 and 2003. NOTE 4 -  Software In April 2001, the Company purchased from King Research the intellectual
property and rights related to software products for $200,000, plus issuance up
to a maximum of 1,000,000 warrants. At the signing of the agreement, the
Company issued a warrant for the purchase of 750,000 shares of its common stock
at an exercise price of $0.70. These warrants were valued at $326,325 using
the Black-Scholes pricing model. In December 2001, the Company issued warrants
for 250,000 shares of its common stock at an exercise price of $0.70 per share.
These warrants were valued at $182,900 using the Black-Scholes pricing model.
The warrants expire in April 2006. This software was considered impaired as of
June 30, 2003 and the remaining $421,999 was written off and is included in
loss from discontinued operations (see Note 14). As part of the agreement, the Company entered into three covenants not to
compete by paying $25,000 for each agreement. These covenants were considered
impaired as of June 30, 2003 and the remaining $19,791 was written off and is
included in loss from discontinued operations (see Note 14). NOTE 5 - Intangible Assets, net Intangible assets consisted of the following at June 30: 2004
    
    2003Patents
    
    $
    259,600
    
    
    $
    141,132Less: accumulated amortization
    
    
    (49,443
    )
    
    
    (30,234
    )Intangible assets, net
    
    $
    210,157
    
    
    $
    110,898
 Amortization expense of intangible assets was $19,209 and $14,716 for the years
ended June 30, 2004 and 2003. Amortization expense is estimated to approximate
$27,000 for each of the years ending 2005, 2006, 2007, 2008 and 2009. Page 9




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 6  Accrued Expenses Accrued expenses consisted of the following at June 30: 2004
    
    2003Accrued preferred dividends
    
    $
    140,833
    
    
    $
    0Deferred revenue
    
    
    25,800
    
    
    
    0Accrued compensation
    
    
    20,167
    
    
    
    40,439Accrued interest
    
    
    0
    
    
    
    36,000Other accrued liabilities
    
    
    39,469
    
    
    
    28,253Accrued Expenses
    
    $
    226,269
    
    
    $
    104,692
 NOTE 7   Debt In several transactions in fiscal 2002 and 2003, the Company issued convertible
promissory notes with warrants to six different lenders in exchange for cash
and, in some cases, the assumption of debt. The aggregate principal amount of
the notes was $1,106,706. Proceeds were allocated between the notes and
warrants, which were valued using the Black-Scholes pricing model. The warrants
allow for the purchase of an aggregate of 3,689,019 common shares at $0.30 per
share and expire between June 2007 and June 2008. The resulting aggregate
original issue discount of $1,106,706 (the fair value of the warrants) was
being amortized over the life of the notes using the straight-line method,
which approximated the interest method. The Company had been unable to repay
interest and principal on the notes when due. As of December 31, 2003, the Company obtained a waiver from each of its
convertible note holders for its failure to make quarterly interest payments
when due, and where applicable, to repay the notes on maturity. The terms of
the
waiver required the Company to repay all accrued interest and past-due
principal balances no later than March 31, 2004. The waiver also clarified the
Companys obligation to include all of the underlying common shares for both
the
convertible note and warrants associated with the indebtedness in the Companys
next registration statement filing. In conjunction with the sale of the Series
A Convertible Preferred Stock (see Note 10), the holders of the convertible
promissory notes entered into agreements dated March 15, 2004 to convert such
notes (totaling $1,254,726, including principal and accrued interest) into
4,182,422 shares of common stock and to release all collateral securing the
repayment of such notes. The remaining original issue discount of $432,308 was
amortized to interest expense during the year ended June 30, 2004. In December 2001, the Company entered into a $2,500,000 revolving credit
facility agreement with a bank and issued warrants to the lender to purchase up
to 200,000 common shares at $1.58 per share through December 2006. The
proceeds were allocated between the notes and the warrants, which
were valued using the Black-Scholes pricing model. The resulting original
issue discount was amortized over the life of
the note using the straight-line method, which approximates the interest
method. The credit facility was due on demand, expired in December 2002 and
was collateralized by substantially all assets of the Company. During 2003,
the Company assigned their accounts receivable to the bank to reduce the line
of credit. In June 2003, the Company had two outside investors payoff the line
of credit in exchange for notes payable of $193,353 each. Along with these
notes, the Company issued a 5-year warrant to these lenders to purchase
1,289,020 common shares at $0.30 per share. The notes mature in December 2004
with quarterly interest only payments at 12% and are collateralized by
substantially all assets of the Company. The notes payable are also
convertible into common stock of the Company at a conversion rate of $0.30 per
share through December 2004 per the terms of the agreement. The proceeds of
$386,706 were allocated between the notes and warrants, which were valued using
the Black-Scholes pricing model. The resulting original issue discount of
$386,706 (the fair value of the warrants and the beneficial conversion of the
notes payable into common stock as defined in Emerging Issues Task Force (EITF)
00-27 Application of Issue No. 98-5 to Certain Convertible Instruments), is
being amortized over the life of the notes using the straight-line method,
which approximates the interest method. At June 30, 2003, the face amount on
these notes was $386,706. As noted above, this facility was converted into
common stock during the year ended June 30, 2004. In December 2003, the Company exchanged two five year warrants to purchase
250,000 shares (each) of common stock at $1.10 per share in satisfaction of
short-term notes payable of $65,000. In February 2004, the Company issued
five-year warrants to acquire 150,000 shares of common stock for $1.17 per
share to one of its lenders in exchange for their agreement to loan
the Company $135,000. Page 10




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 NOTE 8  Commitments and Contingencies Operating Leases The Company leases office space under noncancelable operating leases with
original terms of monthly to three years expiring in April 2006. One of the
leases requires the Company to pay its pro rata share of operating expenses. Future minimum rental payments due under noncancelable operating leases are as
follows for the fiscal years ending June 30: 2005
    
    $
    79,0992006
    
    
    19,188Total
    
    $
    98,287
 Total rent expense was $99,745 and $83,330 for the years ended June 30, 2004
and 2003. Manufacturing Agreement On August 28, 1996, the Company entered into a manufacturing agreement with a
third party custom manufacturer (Manufacturer). Pursuant to this agreement,
the Manufacturer agrees to produce the Companys videoconferencing products and
warrants that all products will be free from defects in material and
workmanship for twelve months from the date the Company ships to the customer
or fifteen months from the date the Manufacturer ships to the Company,
whichever comes first. The agreement may be terminated by either party upon failure of the other party
to comply with any material term of the agreement after a 30 day written notice
and cure period. In the event of such termination, the Company would be
obligated to pay for any goods accepted under the terms of the agreement. The
Company may also terminate the agreement upon 30 days written notice. In such
case, the Company would be obligated to pay for material and work in progress
for products ordered. Page 11




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 As of June 30, 2003, the Company and the Manufacturer have agreed that the
Company will no longer place orders for its Mediapro group videoconferencing
product line from the manufacturer. The agreement has not yet been terminated;
however, the Company and the Manufacturer have entered into discussions
regarding the potential obligation that may arise from the termination of said
agreement and the Company has accrued an estimate of the expense associated
with that potential liability of $518,500. Distributor and Dealer Agreements In May 2003, the Company entered into an agreement with a supplier
pursuant to which the supplier manufactures and private labels the VisiFone for
the Company. In most instances, the Company assumes the risks and rewards of
ownership of the inventory purchased from the supplier and, accordingly,
records revenue on a gross basis. Substantially all revenues in fiscal 2004
were from sales of the VisiFone purchased from this supplier. Investor and Recruitment Agreement In February 2001, in connection with an agreement for seeking potential
investors and recruiting and hiring of senior management, the Company issued
the rights to purchase warrants for 500,000 shares of its common stock at an
exercise price of $0.45. 50,000 warrants were issued and vested immediately
and were valued at $10,315 using the Black-Scholes pricing model. Based on the
agreement, 450,000 warrants will vest at a rate of 37,500 quarterly and may
vest earlier based on the achievement of earnings criteria as defined in the
agreement. Based on the agreement, 337,500 warrants vested through the year
ended June 30, 2003 with the remaining 112,500 vesting during the year ended
June 30, 2004 and were valued at $23,206 and $30,944 using the Black-Scholes
pricing model. The warrants expire in February 2006. Based on the terms of the agreement, the Company must pay a consulting fee.
The consulting fee was $500 per month through June 30, 2002, at which time the
fee changed to $20,000 a month for additional services provided.
There were no fees incurred in fiscal year 2004. This agreement
expired in February 2004. Consulting fee expense for the years ended June 30,
2004 and 2003 was $0 and $220,000. Major Customers and Concentration of Credit Risk Sales to one customer represented approximately 43% of net sales for the year
ended June 30, 2004 with no accounts receivable from this customer at June 30,
2004. Sales to a different customer represented approximately 25% of net sales
for the year ended June 30, 2003, with accounts receivable from three customers
representing 100% of total accounts receivable as of June 30, 2003. Legal Proceedings The Company is involved in legal actions in the ordinary course of its
business. During 2001, the Company initiated a suit for reasonable royalties and
lost profits associated with alleged infringement of two of the Companys
patents. The Company was unsuccessful in court and the Company and defendant
have entered briefs regarding the payment of attorneys fees and dismissal of
this litigation. In February 2004, the Company was named as defendant in a lawsuit for
approximately $31,000 allegedly owed for past due accounts payable. The
plaintiff is also seeking recovery of attorneys fees of approximately $10,000.
The Company is currently in settlement negotiations with the plaintiff. The
Company has accrued $25,111 related to its estimated exposure with this
lawsuit. The Company has been named as a defendant in several lawsuits during
fiscal 2003 and 2004 related to amounts allegedly owed for goods and services.
During fiscal year 2004, the Company settled these lawsuits for approximately
$175,000, which amounts had been previously included in cost of goods sold or
selling, general and administrative expenses in the consolidated statement of
operations. Page 12




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 NOTE 9  Income Taxes The Company utilizes the liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement and income tax reporting bases of assets and liabilities. The
Company has incurred cumulative net operating losses for both financial
statement and income tax reporting purposes. At June 30, 2004, the Company had
Federal and State net operating loss carryforwards of approximately $27,000,000
and research and development credit carryforwards of approximately $234,000. If
not used, these carryforwards will begin to expire in 2010. During 1996, a
change in ownership occurred pursuant to Section 382 of the Internal Revenue
Code that limits the use of loss carryforwards in any one year. Subsequent
ownership changes may further limit the use of these net operating loss
carryforwards. 2004
    
    2003Deferred income tax assets:Net operating loss carryforwards
    
    $
    10,995,900
    
    
    $
    9,240,000Asset valuation reserves and other
    
    
    324,100
    
    
    
    896,000Research and development credit carryforwards
    
    
    234,000
    
    
    
    238,00011,554,000
    
    
    
    10,374,000Less: valuation allowance
    
    
    (11,554,000
    )
    
    
    (10,355,200
    )Deferred income tax liabilities:Depreciation and amortization
    
    
    0
    
    
    
    (18,800
    )Net deferred income tax assets
    
    $
    0
    
    
    $
    0
 The Company has recorded a full valuation allowance against its deferred tax
asset due to the uncertainty of realizing the related benefits. The change in
the valuation allowance was $1,198,800 and $1,986,400 for the years ended June
30, 2004 and 2003. Income tax computed at the U.S. federal statutory rate reconciled to the
effective tax rate is as follows for the years ended June 30: 2004
    
    2003Federal statutory tax rate benefits
    
    
    (35.0
    )%
    
    
    (35.0
    )%State tax, net of federal benefit
    
    
    (5.0
    )%
    
    
    (5.0
    )%Change in valuation allowance
    
    
    40.0
    %
    
    
    40.0
    %Effective tax rate
    
    
    0.0
    %
    
    
    0.0
    %
 NOTE 10  Stockholders Equity (Deficit) Series A Convertible Preferred Stock with Warrants In March and April 2004, the Company sold, in private placement transactions, a
total of 338 shares of Series A Convertible Preferred Stock in prepackaged
units which included one Series A-1 Warrant and one Series A-2 Warrant for each
share of Series A Convertible Preferred Stock (collectively referred to as the
Securities). The private placement of the Securities resulted in gross
proceeds to the Company of $8,450,000, prior to offering
expenses. In total, holders of the 338 shares of Series A Convertible Preferred
Stock may acquire 16,900,000 shares of our common stock (8,450,000 shares of
common stock upon conversion and 8,450,000 shares upon exercise of warrants).
The Companys placement agent received an aggregate placement fee of $845,000
and warrants to purchase 1,267,500 shares of common stock. Each share of Series A Convertible Preferred Stock is convertible, at the
initial conversion price of $1.00, into 25,000 shares of common stock, subject
to adjustment under certain conditions. Holders of the Series A Convertible
Preferred Stock are entitled to dividends at the rate of 10% per annum payable
quarterly in either cash or, at the option of the Company, registered shares of
common stock valued at fair market value. Shares of Series A Convertible
Preferred Stock are convertible into shares of common stock at the holders
option at any time and will automatically convert to shares of common stock if
certain trading volume and closing price targets on the Companys common stock
are met at various intervals. In addition, shares of the Series A Convertible
Preferred Stock participate Page 13




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 on an as-if converted basis in any dividends paid on Common Stock. Holders of
shares of Series A Convertible Preferred Stock are entitled to voting rights
together with the Common Stock, on an as-if converted basis. The conversion price of the Series A Convertible Preferred Stock is subject to
appropriate adjustment in the event of stock splits, stock dividends, reverse
stock splits, capital reorganizations, recapitalizations, reclassifications,
and
similar occurrences as well as the issuance of common stock in consideration of
an amount less than the then-effective conversion price. The holder of each Series A-1 Warrant is entitled to purchase 12,500 shares of
common stock at an exercise price of $1.08 per share for a term of five years
from the date of issuance. The holder of each Series A-2 Warrant is entitled to
purchase 12,500 shares of Common Stock at an exercise price of $1.26 per share
for a term of five years from the date of issuance. The exercise price of the
Series A-1 and Series A-2 Warrants is subject to adjustment for the issuance of
common stock in consideration of an amount less than the then effective
exercise price. The shares of common stock underlying the Securities are currently subject to
an effective registration statement on Form SB-2 under the Securities Act of
1933, as amended. The Company has agreed to cause this registration statement
to continuously remain effective until all such common stock may be sold
without regard to an effective registration statement. Failure to maintain a
continuously effective registration statement will subject the Company to
liability to certain holders of shares of Series A Convertible Preferred Stock
in the form of liquidated damages totaling as high as $253,500 per month. In addition to a placement fee paid in cash, the Companys placement agent
received warrants to purchase a total of 1,267,500 shares of common stock at a
purchase price of $1.00 per share for a term of five years from the date of
issuance (the Series A-1-AGENT Warrants). The exercise price of the Series
A-1-AGENT Warrants is subject to adjustment for the issuance of common stock in
consideration of an amount less than the then effective exercise price. Common Stock During fiscal 2003, the Company received $610,000 as a result of private
placements of 1,623,332 shares of common stock to various investors at $0.25
and $0.60 per share. The investors were issued warrants for the purchase of
1,623,332 shares of common stock at an exercise price of $0.25 and $0.60 per
share expiring during 2008. Consultant Compensation Plan During fiscal 2003, the Board of Directors reserved 5,000,000 shares of common
stock for a consultant compensation plan. Consultants may be issued or sold
shares of common stock for services. During fiscal 2004 and 2003, the Company issued 990,257 and 1,728,498 shares of
common stock for consulting services. At June 30, 2004, there were 2,281,245
shares available for issuance. Stock Warrants In January 1998, in connection with the Companys private offering of 1,671,255
shares of its common stock, the Company issued a warrant to the placement agent
for the purchase of 167,126 shares of its common stock at an exercise price of
$1.65. The warrant expires January 2008. During 2003, in connection with the Companys private offering of 1,040,000
shares of its common stock, the Company issued warrants to the placement agent
for the purchase of 260,000 shares of its common stock at an exercise price of
$0.25. The warrants expire during 2008. This placement agent also received
350,000 additional warrants for additional services rendered. During October 2003, the Company sold a five-year warrant to an accredited
investor for the purchase of 166,666 shares of common stock at $1.28 per share
for $5,000. During December 2003, the Company issued a five-year
warrant to an accredited investor for the purchase of
100,000 shares of common stock at $0.84 per share for consulting
services. In April 2004, the Company issued a five-year warrant, vesting over
a two-year period, for the purchase of 200,000 shares of the Companys common
stock at $1.26 per share to a sales and business development consultant to the
Company who is responsible for the Companys relationship with broadband
providers. Page 14




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##### Table of Contents



VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 As of June 30, 2004, warrants to purchase a total of 19,295,159 shares of
common stock were outstanding at exercise prices ranging from $0.30 to $3 per
share and expiring through June 2014. WeightedAverageExercisePrice perWarrants
    
    ShareOutstanding at June 30, 2002
    
    
    4,400,762
    
    
    $
    0.73Granted
    
    
    5,922,351
    
    
    
    0.34Exercised
    
    
    
    
    
    
    Canceled
    
    
    (695,454
    )
    
    
    0.88Outstanding at June 30, 2003
    
    
    9,627,659
    
    
    
    0.48Granted
    
    
    10,834,166
    
    
    
    1.15Exercised
    
    
    (1,166,666
    )
    
    
    0.30Canceled
    
    
    
    
    
    
    Outstanding at June 30, 2004
    
    
    19,295,159
    
    
    $
    0.86
 Stock Options The Company has a stock plan which permits the granting of stock options,
including incentive stock options as defined under Section 422 of the Internal
Revenue Code of 1986, nonqualified stock options and restricted stock. The
exercise price for options granted under the stock plan shall be at a price
determined at the sole discretion of the compensation committee of the
Companys board of directors provided, however, that incentive stock options
granted under the plan shall be granted at exercise prices equal to the fair
market value on the date of grant (110% for a stockholder holding 10% or more
of the outstanding shares of common stock). The Company has reserved 2,800,000 shares of common stock for issuance under
the plan. At June 30, 2004, 1,615,750 shares remained available for grant.
Options issued become exercisable over varying periods as provided in the
individual plan agreements and have a term of five or ten years. Page 15




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 A summary of changes in common stock options during the years ended June 30,
2004 and 2003 is as follows: Weightedaverageexerciseprice perOptions
    
    shareOutstanding at June 30, 2002
    
    
    1,302,750
    
    
    $
    1.06Granted
    
    
    13,000
    
    
    
    0.49Exercised
    
    
    (94,500
    )
    
    
    0.43Canceled
    
    
    (137,000
    )
    
    
    0.90Outstanding at June 30, 2003
    
    
    1,084,250
    
    
    
    1.13Granted
    
    
    459,500
    
    
    
    0.99Exercised
    
    
    (350,500
    )
    
    
    0.55Canceled
    
    
    (9,000
    )
    
    
    1.13Outstanding at June 30, 2004
    
    
    1,184,250
    
    
    $
    1.23Exercisable at June 30, 2004
    
    
    919,250
    
    
    $
    1.30Exercisable at June 30, 2003
    
    
    915,500
    
    
    $
    1.19
 Within the option plan, the weighted average remaining contractual life was 6.9
and 4.3 years for the years ended June 30, 2004 and 2003. As of June 30, 2004, the Company has granted 341,000 options outside the Plan
with a weighted average exercise price of $4.49 and a weighted average
remaining contractual life of 2 years. As of June 30, 2003,
the weighted average remaining contractual life was 3.1 years. During fiscal year 2004, 60,000
options with weighted average exercise price of $0.40 per share were
exercised. There were no options exercised in fiscal year 2003. The following table summarizes information about stock options outstanding as
of June 30, 2004, including those issued outside the Plan: Options Outstanding
    
    Options ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExercisePrices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$0.38-0.52
    
    
    63,000
    
    
    
    5.94
    
    
    $
    0.43
    
    
    
    63,000
    
    
    $
    0.43$0.65-0.93
    
    
    370,000
    
    
    
    7.30
    
    
    $
    0.69
    
    
    
    350,000
    
    
    $
    0.69$1.00-1.50
    
    
    602,500
    
    
    
    4.57
    
    
    $
    1.11
    
    
    
    357,500
    
    
    $
    1.17$1.75-2.19
    
    
    80,000
    
    
    
    4.00
    
    
    $
    2.19
    
    
    
    80,000
    
    
    $
    2.19$2.81-3.00
    
    
    259,750
    
    
    
    3.11
    
    
    $
    2.83
    
    
    
    259,750
    
    
    $
    2.83$6.25-8.00
    
    
    150,000
    
    
    
    0.27
    
    
    $
    7.53
    
    
    
    150,000
    
    
    $
    7.53$0.38-8.00
    
    
    1,525,250
    
    
    
    4.59
    
    
    $
    1.96
    
    
    
    1,260,250
    
    
    $
    2.16
 The weighted average fair values of options granted in 2004 and 2003 were as
follows: Fiscal
2004
grants          $0.29     Fiscal
2003 grants          $0.30 Page 16




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VISEON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003 NOTE 11  Retirement Savings Plan The Company has a pre-tax salary reduction/profit-sharing plan under the
provisions of section 401(K) of the Internal Revenue Code, which covers
employees meeting certain eligibility requirements. Profit sharing
contributions by the Company are completely discretionary. The Company made no
contributions during the years ended June 30, 2004 and 2003. NOTE 12  Related Party Transactions RSI Marketing, LLC In February 2001, in connection with a marketing agreement with a company to
market its products and services, the Company issued the rights to purchase
warrants for 1,000,000 shares of its common stock at an exercise price of
$0.45. These warrants were valued at $206,300 using the Black-Scholes pricing
model. The warrants were issued based on the achievement of gross sales
targets by December 2001. The warrants expire in February 2006. The Company is obligated to pay commissions based on the terms outlined on the
agreement. Commission expense and advertising and marketing for the years
ended June 30, 2004 and 2003 were $0 and $99,359. NOTE 13  Supplemental Disclosure of Cash Flow Information 2004
    
    2003Supplemental disclosures of cash paid for
Interest
    
    $
    14,553
    
    
    $
    78,888Noncash investing and financing activitiesAccounts payable converted to subordinated note payable
    
    $
    0
    
    
    $
    120,000Common stock issued for accounts payable
    
    $
    130,246
    
    
    $
    74,001Subordinated notes and accrued interest converted to common stock
    
    $
    1,254,726
    
    
    $
    0Subordinated notes converted to common stock warrants
    
    $
    65,000
    
    
    $
    0
 NOTE 14  Discontinued Operations In January 2003, the Company decided to change its focus from being a group
videoconferencing manufacturer and reseller to a desktop and consumer video
communications manufacturer and reseller. This has been accomplished by the
transfer to a third party of its group videoconferencing services contract
portfolio and the liquidation of its remaining group videoconferencing assets.
The only measurable revenues the Company is now receiving result from the sales
of the VisiFone. Therefore, the Company has classified the net assets and
operations related to the group videoconferencing business as discontinued
operations in the accompanying consolidated financial statements. For the year ended June 30,2003Net sales
    
    $
    1,011,455Cost of goods sold
    
    
    1,878,053Inventory writedown to lower of cost
or market
    
    
    347,268Gross loss
    
    
    (1,213,866
    )Research and development
    
    
    Selling, general and administrative
    
    
    384,899Operating loss from discontinued operations
    
    
    (1,598,765
    )Other income
    
    
    315,663Net loss from discontinued operations
    
    $
    (1,283,102
    )
 The only significant operating activities of the discontinued operations for
the year ended June 30, 2004 was the settlement of certain litigation in
amounts less than the Company had accrued, resulting in a gain of $348,628.
The only significant assets and liabilities of the discontinued operations at
June 30, 2004 and 2003 consisted of certain accounts payable in the amount of
$743,582 and $1,244,452. Page 17




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irving, State of Texas on September 28, 2004. VISEON, INC.By
    
    /s/ JOHN C. HARRISJohn C. Harris,Chief Executive Officer and President (Principal Executive Officer)By
    
    /s/ ROBERT A. WOLFRobert A. Wolf,Chief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated. Name
    
    Title
    
    Date/s/ JOHN C. HARRIS

John C. Harris
    
    Director; Chief Executive
Officer and President;
(Principal Executive Officer,
    
    September 28,
2004/s/ ROBERT A. WOLF

Robert A. Wolf
    
    Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
    
    September 28,
2004/s/ BRIAN DAY

Brian R. Day
    
    Director
    
    September 28,
2004/s/ GERARD DUBE
Gerard Dube
    
    Director
    
    September 28,
2004/s/ JOHN ODONNELL

John ODonnell
    
    Director
    

    September 28,
2004/s/ CHARLES REY
Charles Rey
    
    Director
    
    September 28,
2004
 Page 18