**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES AND EXCHANGE ACT OF 1934**

For the quarterly period ended June 30, 2008

Commission File Number: 1-11140

**OPHTHALMIC IMAGING SYSTEMS**

(Exact name of registrant as specified in its charter)

 

| **California**                  |   | **94-3035367**                       |
|---------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |   |                                 |

 

**221 Lathrop Way, Suite I, Sacramento, CA 95815**

(Address of principal executive offices)

**(916) 646-2020**

(Registrant telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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      No  |
|--------------------------------------------|

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

| Large accelerated filer                           | Accelerated filer  |
|-------------------------------------------------------------|-------------------------|

| Non-Accelerated filer   (Do not check if a smaller reporting company) | Smaller reporting company |
|--------------------------------------------------------------------------------------|---------------------------|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):

| Yes    No  |
|-------------------------------------|

As of August 13, 2008, 16,866,831 shares of common stock, no par value, were outstanding.

 

 

 

 

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OPHTHALMIC IMAGING SYSTEMS

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2008

 

| **PART I**  | **FINANCIAL INFORMATION**                                                                   | **Page** |
|-------------|---------------------------------------------------------------------------------------------|----------|
|        |                                                                                             |          |
| Item 1.     | Financial Statements (unaudited)                                                            | 1        |
|        |                                                                                             |          |
|        | Condensed Balance Sheet as of June 30, 2008                                                 | 2        |
|        |                                                                                             |          |
|        | Condensed Statements of Income for the Three and Six Months ended June 30, 2008 and 2007    | 3        |
|        |                                                                                             |          |
|        | Condensed Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007          | 4        |
|        |                                                                                             |          |
|        | Notes to Condensed Financial Statements                                                     | 5        |
|        |                                                                                             |          |
| Item 2.     | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14       |
|        |                                                                                             |          |
| Item 4T.    | Controls and Procedures                                                                     | 24       |
|        |                                                                                             |          |
| **PART II** | **OTHER INFORMATION**                                                                       | 25       |
|        |                                                                                             |          |
| Item 1.     | Legal Proceedings                                                                           | 25       |
|        |                                                                                             |          |
| Item 6.     | Exhibits and Reports                                                                        | 26       |
|        |                                                                                             |          |
|        | Signatures                                                                                  | 27       |
|        |                                                                                        |     |

 

 

 

 

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**PART I**     **FINANCIAL INFORMATION**

 

| **ITEM** **1.** | **FINANCIAL STATEMENTS** |
|----------------------|--------------------------|

 

 

 

 

 

 

----

| Ophthalmic Imaging Systems |
|----------------------------|
| Condensed Balance Sheet    |

 

 

| **Assets**                                                         |   | **June 30,2008** |       |   | **December 31, 2007** |   |
|--------------------------------------------------------------------|--------|------------------|------------|--------|-----------------------|--------|
| Current assets:                                                    |   |             |       |   |                  |   |   |   |
| Cash and cash equivalents                                          |   | $                | 4,179,337  |   |                  | $      | 7,630,284 |   |
| Accounts receivable, net                                           |   |             | 2,216,741  |   |                  |   | 2,535,843 |   |
| Accounts receivable from related party                             |   |             | 493,929    |   |                  |   | 397,307 |   |
| Note receivable from related party                                 |   |             | 2,246,513  |   |                  |   | 1,146,872 |   |
| Inventories, net                                                   |   |             | 919,777    |   |                  |   | 746,342 |   |
| Prepaid expenses and other current assets                          |   |             | 667,695    |   |                  |   | 507,732 |   |
| Deferred tax asset                                                 |   |             | 1,134,000  |   |                  |   | 1,342,000 |   |
| Total current assets                                               |   |             | 11,857,992 |   |                  |   | 14,306,380 |   |
| Furniture and equipment, net of accumulated                        |   |             |       |   |                  |   |   |   |
| depreciation of $675,901 and $577,558 respectively

 

  |   |             | 405,184    |   |                  |   | 416,838 |   |
| Restricted cash                                                    |   |             | 170,411    |   |                  |   | 168,218 |   |
| Licensing agreement                                                |   |             | 273,808    |   |                  |   | 273,808 |   |
| Prepaid financing                                                  |   |             | 122,072    |   |                  |   | 148,365 |   |
| AcerMed software purchase                                          |   |             | 570,077    |   |                  |   | 90,815 |   |
| Imaging software                                                   |   |             | 205,066    |   |                  |   | 0 |   |
| Capitalized software development                                   |   |             | 518,583    |   |                  |   | 0 |   |
| Prepaid products                                                   |   |             | 460,000    |   |                  |   | 460,000 |   |
| Capitalized merger costs                                           |   |             | 728,666    |   |                  |   | 527,327 |   |
| Other assets                                                       |   |             | 317,078    |   |                  |   | 295,144 |   |
| Total assets                                                       |   | $                | 15,628,937 |   |                  | $      | 16,686,895 |   |
|                                                               |   |             |       |   |                  |   |   |   |
| **Liabilities and Stockholders’ Equity**                     |   |             |       |   |                  |   |   |   |
| Current liabilities:                                               |   |             |       |   |                  |   |   |   |
| Accounts payable                                                   |   | $                | 371,621    |   |                  | $      | 726,573 |   |
| Accrued liabilities                                                |   |             | 1,283,647  |   |                  |   | 1,437,313 |   |
| Deferred extended warranty revenue                                 |   |             | 1,565,412  |   |                  |   | 1,604,315 |   |
| Customer deposits                                                  |   |             | 78,809     |   |                  |   | 55,435 |   |
| Note payable- current portion                                      |   |             | 1,096,244  |   |                  |   | 1,029,643 |   |
| Total current liabilities                                          |   |             | 4,395,733  |   |                  |   | 4,853,279 |   |
|                                                               |   |             |       |   |                  |   |   |   |
| Noncurrent liabilities:                                            |   |             |       |   |                  |   |   |   |
| Line of credit                                                     |   |             | 150,000    |   |                  |   | 150,000 |   |
| Lease payable, less current portion                                |   |             | 1,656,508  |   |                  |   | 1,564,226 |   |
| Total liabilities                                                  |   |             | 6,202,241  |   |                  |   | 6,567,505 |   |
|                                                               |   |             |       |   |                  |   |   |   |
| Stockholders’ equity:                                        |   |             |       |   |                  |   |   |   |
| Common stock, no par value, 35,000,000 shares authorized;          |   |             |       |   |                  |   |   |   |
| 16,866,831 issued and outstanding                                  |   |             | 16,489,857 |   |                  |   | 16,474,720 |   |
| Additional paid in capital                                         |   |             | 9,730      |   |                  |   | 191,104 |   |
| Accumulated deficit                                                |   |             | (7,072,891 | )      |                  |   | (6,546,434 | ) |
| Total stockholders’ equity                                   |   |             | 9,426,696  |   |                  |   | 10,119,390 |   |
| Total liabilities and stockholders’ equity                   |   | $                | 15,628,937 |   |                  | $      | 16,686,895 |   |

 

 

| *The accompanying notes are an integral part of these unaudited condensed financial statements.* |
|--------------------------------------------------------------------------------------------------|

 

2

 

 

 

----

 

 

| Ophthalmic Imaging Systems     |
|--------------------------------|
| Condensed Statements of Income |
| (Unaudited)                    |

 

 

|                                              |   | **Three months ended June 30,** |       |   |   | **Six months ended June, 30** |   |
|---------------------------------------------------|--------|---------------------------------|------------|--------|--------|-------------------------------|--------|
|                                              |   | **2008**                        |       |   |   | **2007**                      |   |   |   | **2008** |   |   |   | **2007** |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                         |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales - products                                  |   | $                               | 2,061,217  |   |   |                          | $      | 2,614,817 |   |   |   | $ | 4,203,995 |   |   |   | $ | 5,900,743 |   |
| Cost of sales - products                          |   |                            | 968,364    |   |   |                          |   | 1,175,214 |   |   |   |   | 2,001,548 |   |   |   |   | 2,454,413 |   |
| Gross profit - products                           |   |                            | 1,092,853  |   |   |                          |   | 1,439,603 |   |   |   |   | 2,222,947 |   |   |   |   | 3,446,330 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales – products to related parties         |   | $                               | 181,158    |   |   |                          | $      | 269,083 |   |   |   | $ | 342,957 |   |   |   | $ | 455,938 |   |
| Cost of sales – products to related parties |   |                            | 104,311    |   |   |                          |   | 158,972 |   |   |   |   | 206,782 |   |   |   |   | 261,748 |   |
| Gross profit – products to related parties  |   |                            | 76,847     |   |   |                          |   | 110,111 |   |   |   |   | 136,175 |   |   |   |   | 194,190 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales – service                             |   | $                               | 920,623    |   |   |                          | $      | 733,733 |   |   |   | $ | 1,763,737 |   |   |   | $ | 1,421,332 |   |
| Cost of sales – service                     |   |                            | 408,301    |   |   |                          |   | 251,287 |   |   |   |   | 816,478 |   |   |   |   | 597,858 |   |
| Gross profit – service                      |   |                            | 512,322    |   |   |                          |   | 482,446 |   |   |   |   | 947,259 |   |   |   |   | 823,474 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenues                                      |   | $                               | 3,162,998  |   |   |                          | $      | 3,617,633 |   |   |   | $ | 6,310,689 |   |   |   | $ | 7,778,013 |   |
| Cost of sales                                     |   |                            | 1,480,976  |   |   |                          |   | 1,585,473 |   |   |   |   | 3,024,808 |   |   |   |   | 3,314,019 |   |
| Gross profit                                      |   |                            | 1,682,022  |   |   |                          |   | 2,032,160 |   |   |   |   | 3,285,881 |   |   |   |   | 4,463,994 |   |
| Operating expenses:                               |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                               |   |                            | 1,000,534  |   |   |                          |   | 788,670 |   |   |   |   | 1,944,543 |   |   |   |   | 1,676,004 |   |
| General and administrative                        |   |                            | 417,511    |   |   |                          |   | 434,434 |   |   |   |   | 883,676 |   |   |   |   | 955,462 |   |
| Research and development                          |   |                            | 83,235     |   |   |                          |   | 56,847 |   |   |   |   | 79,567 |   |   |   |   | 138,933 |   |
| Research and development-related parties          |   |                            | 454,143    |   |   |                          |   | 335,445 |   |   |   |   | 894,788 |   |   |   |   | 661,887 |   |
| Total operating expenses                          |   |                            | 1,955,423  |   |   |                          |   | 1,615,396 |   |   |   |   | 3,802,574 |   |   |   |   | 3,432,286 |   |
| (Loss) income from operations                     |   |                            | (273,401   | )      |   |                          |   | 416,764 |   |   |   |   | (516,693 | ) |   |   |   | 1,031,708 |   |
| Interest and other income (expense), net          |   |                            | 22,322     |   |   |                          |   | 64,686 |   |   |   |   | (10,901 | ) |   |   |   | 107,324 |   |
| Net (loss) before income taxes                    |   |                            | (251,079   | )      |   |                          |   | 481,450 |   |   |   |   | (527,594 | ) |   |   |   | 1,139,032 |   |
| Income taxes                                      |   |                            | 2,423      |   |   |                          |   | (23,743 | ) |   |   |   | 1,137 |   |   |   |   | (28,182 | ) |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                 |   | $                               | (248,656   | )      |   |                          | $      | 457,707 |   |   |   | $ | (526,457 | ) |   |   | $ | 1,110,850 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in the calculation of basic           |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income per share                       |   |                            | 16,866,831 |   |   |                          |   | 16,547,664 |   |   |   |   | 16,866,831 |   |   |   |   | 16,528,171 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic net (loss) income per share                 |   | $                               | (0.01      | )      |   |                          | $      | 0.03 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.07 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in the calculation of diluted         |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income per share                       |   |                            | 16,881,311 |   |   |                          |   | 17,995,485 |   |   |   |   | 16,992,348 |   |   |   |   | 18,176,171 |   |
|                                              |   |                            |       |   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted net (loss) income per share               |   | $                               | (0.01      | )      |   |                          | $      | 0.03 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.06 |   |

 

 

 

 

| *The accompanying notes are an integral part of these unaudited condensed financial statements.* |
|--------------------------------------------------------------------------------------------------|

 

 

3

 

 

 

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| Ophthalmic Imaging Systems         |
|------------------------------------|
| Condensed Statements of Cash Flows |
| (Unaudited)                        |

 

 

|                                                             |   | **Six months ended June 30,** |       |
|------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                             |   | **2008**                      |       |   |   | **2007** |   |
|                                                             |   |                          |       |   |   |   |   |   |   |
| **Operating activities:**                                        |   |                          |       |   |   |   |   |   |   |
| Net (loss) income                                                |   | $                             | (526,457   | ) |   |   | $ | 1,110,850 |   |
| Adjustments to reconcile net (loss) income to net cash (used in) |   |                          |       |   |   |   |   |   |   |
| provided by operating activities                                 |   |                          |       |   |   |   |   |   |   |
| Depreciation and amortization                                    |   |                          | 98,343     |   |   |   |   | 86,665 |   |
| Share based compensation                                         |   |                          | 15,138     |   |   |   |   | 15,424 |   |
| Interest on note payable                                         |   |                          | (16,406    | ) |   |   |   | — |   |
| Loss on disposal of equipment                                    |   |                          | —    |   |   |   |   | (1,070 | ) |
| Accounts receivable – related parties                      |   |                          | (96,622    | ) |   |   |   | (196,689 | ) |
| Net increase (decrease) in current assets other                  |   |                          |       |   |   |   |   |   |   |
| than cash and cash equivalents                                   |   |                          | 193,705    |   |   |   |   | (250,544 | ) |
| Net decrease in other assets                                     |   |                          | (2,193     | ) |   |   |   | (235,966 | ) |
| Net decrease in current liabilities other                        |   |                          |       |   |   |   |   |   |   |
| than short-term borrowings                                       |   |                          | (530,234   | ) |   |   |   | (309,494 | ) |
| Net cash (used in) provided by operating activities              |   |                          | (864,726   | ) |   |   |   | 219,176 |   |
| **Investing activities:**                                        |   |                          |       |   |   |   |   |   |   |
| Acquisition of furniture and equipment                           |   |                          | (86,689    | ) |   |   |   | (132,812 | ) |
| Acquisition of patents                                           |   |                          | (848       | ) |   |   |   | — |   |
| Acquisition of AcerMed software license                          |   |                          | (479,262   | ) |   |   |   | — |   |
| Development of imaging software                                  |   |                          | (205,066   | ) |   |   |   | — |   |
| Software development capitalization                              |   |                          | (518,584   | ) |   |   |   | — |   |
| Merger capitalization                                            |   |                          | (201,339   | ) |   |   |   | — |   |
| Other capitalized software investments                           |   |                          | (21,085    | ) |   |   |   | — |   |
|                                                             |   |                          |       |   |   |   |   |   |   |
| Net cash used in investing activities                            |   |                          | (1,512,873 | ) |   |   |   | (132,812 | ) |
| **Financing activities:**                                        |   |                          |       |   |   |   |   |   |   |
| Principal payments on notes payable                              |   |                          | —    |   |   |   |   | (6,664 | ) |
| Advance to related parties                                       |   |                          | (1,099,640 | ) |   |   |   | (497,260 | ) |
| Amortization of prepaid financing related to note payable        |   |                          | 26,292     |   |   |   |   | — |   |
| Proceeds from exercise of options                                |   |                          | —    |   |   |   |   | 155,524 |   |
| Net cash used in financing activities                            |   |                          | (1,073,348 | ) |   |   |   | (348,400 | ) |
| Net decrease in cash and equivalents                             |   |                          | (3,450,947 | ) |   |   |   | (262,036 | ) |
| Cash and equivalents, beginning of the period                    |   |                          | 7,630,284  |   |   |   |   | 6,163,857 |   |
| Cash and equivalents, end of the period                          |   | $                             | 4,179,337  |   |   |   | $ | 5,901,821 |   |
|                                                             |   |                          |       |   |   |   |   |   |   |
| **Supplemental schedule of noncash financing activities:**       |   |                          |       |   |   |   |   |   |   |
| Addition to receivable from                                      |   |                          |       |   |   |   |   |   |   |
| related party in exchange for inventory and                      |   |                          |       |   |   |   |   |   |   |
| other noncash transactions, net                                  |   | $                             | 145,113    |   |   |   | $ | 208,799 |   |

 

 

 

| *The accompanying notes are an integral part of these unaudited condensed financial statements.* |
|--------------------------------------------------------------------------------------------------|

 

 

4

 

 

 

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Notes to Condensed Financial Statements

Three and Six Month Period ended June 30, 2008 and 2007

(Unaudited)

| Note 1. | Basis of Presentation |
|---------|-----------------------|

 

The accompanying unaudited condensed balance sheet as of June 30, 2008, condensed statements of operation for the three and six month period ended June 30, 2008 and 2007 and the condensed statements of cash flows for the six month period ended June 30, 2008 and 2007 have been prepared in accordance with generally accepted accounting principles in the United            States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in Ophthalmic Imaging Systems’ (the            “Company’s”) Annual Report for the year ended December 31, 2007 on Form 10-KSB. In the opinion of management, the accompanying condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations for the periods presented. The results of operations for the period ended June 30, 2008 are not necessarily indicative of the operating            results expected for the full year.

 

| Note 2. | Net (loss) Income Per Share |
|---------|-----------------------------|

 

Basic (loss) earnings per share (“EPS”), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options,            result in the issuance of common stock, which shares in the earnings of the Company. The treasury stock method is applied to determine the dilutive effect of stock options in computing diluted EPS.

 

 

5

 

 

 

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|                                                        | Unaudited

Three Months Ended

June 30, | Unaudited

Six Months Ended

June 30, |
|-------------------------------------------------------------|-----------------------------------------|---------------------------------------|
|                                                        | 2008                                    | 2007                                  | 2008 | 2007 |
| Numerator for basic and diluted net (loss) income per share | $ (248,656)                             | $ 457,707                             | $ (526,457) | $ 1,110,850 |
|                                                        |                                    |                                  |   |   |
| Denominator for basic net (loss) income per share:          |                                    |                                  |   |   |
| Weighted average shares                                     | 16,866,831                              | 16,547,664                            | 16,866,831 | 16,528,171 |
|                                                        |                                    |                                  |   |   |
| Effect of dilutive:                                         |                                    |                                  |   |   |
| Employee/director stock options                             | 14,480                                  | 1,447,821                             | 125,517 | 1,648,000 |
| Dilutive potential common shares                            | 14,480                                  | 1,447,821                             | 125,517 | 1,648,000 |
|                                                        |                                    |                                  |   |   |
| Denominator for diluted net (loss) income per share         | 16,881,311                              | 17,995,485                            | 16,992,348 | 18,176,171 |
| Basic net (loss) income per share                           | $ (0.01)                                | $ 0.03                                | $ (0.03) | $ 0.07 |
|                                                        |                                    |                                  |   |   |
| Diluted net (loss) income per share                         | N/A                                     | $ 0.03                                | N/A | $ 0.06 |

 

As of June 30, 2008 and June 30, 2007 there were 3,188,691 and 8,000 options and warrants whose exercise price exceeded the average market price of the stock and have been excluded from this computation.

 

| Note 3. | Related Party Transactions – |
|---------|------------------------------------|

 

MediVision

 

In June 2003, pursuant to Amendment No. 1 to a Working Capital Funding Agreement between the Company and, MediVision Medical Imaging Ltd. (“MediVision”), an Israeli corporation, converted $1,150,000 of outstanding principal and accrued interest under a promissory note held by it into 6,216,216 shares of our common stock at a conversion price of            $0.185 per share. As of June 30, 2008, MediVision owns approximately 56% of our outstanding common stock.

 

On June 28, 2006, we and MediVision entered into a License and Distribution Agreement whereby MediVision appointed us to be its exclusive distributor of a new digital imaging system in the Americas and the Pacific Rim (excluding China and India), for a term of ten years. In return, we paid $273,808, consisting of a cash payment of $200,000, and recognition            of $73,808 of research and development advances made in previous periods. Additionally, we are obligated to pay advances totaling $460,000 based on the completion of certain phases of development of the new digital imaging system and the completion of certain documents, and granted MediVision a license to use our OIS WinStation software and any other applicable OIS system and the accompanying intellectual property rights therein. On September 21, 2006, we paid $160,000 based on the            completion of the first milestone in the agreement. On June 20, 2007, we paid $150,000 based on the completion of the second milestone in the agreement.

 

6

 

 

 

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The advanced funds will be recovered as we purchase new digital imaging systems in accordance with the specified quotas. The quota mandates that we purchase a minimum amount of the new digital imaging systems each year. If we fail to satisfy our quota obligation, then we may pay MediVision the gross profit on the shortfall units to maintain exclusivity in            the agreed upon territory. If no such shortfall payment is made, such failure to meet the quota will constitute a material breach and MediVision may terminate the exclusivity provision or the entire agreement. The quotas for 2007, 2008, 2009, and 2010 are 50, 70, 80, and 90 units, respectively, and will be at least 95 units for each year thereafter. The initial term of the agreement is for ten years, which will be automatically renewed in one year periods. Either party may terminate            the agreement with at least 6 months prior written notice, provided that, we meet the purchase quota. Cash payments made under this agreement for exclusive distribution rights have been capitalized and will be amortized over the term of the agreement upon sale of the first product.

 

From April 9, 2007 through June 30, 2008, OIS and MediVision entered into a series of addendums to the License and Distribution Agreement, whereby OIS agreed to loan MediVision funds for the engineering of the Electro-Optical Unit. As of the current date, OIS has agreed to loan MediVision up to $1,600,000. The loan incurs interest of 8% per annum and            repayment will commence on May 1, 2009. Repayments will be made in 36 equal payments, payable on the first of each month. The monthly amount will be calculated based on the amount of principal outstanding on April 30, 2009. Upon a default under License and Distribution Agreement, as amended, or the related promissory note or security agreement issued with the License and Distribution Agreement and its addendums, the principal and interest outstanding on the loan will become            immediately due and payable. The loan is secured by shares of OIS common stock, owned by MediVision. The amount of shares pledged under the loan was calculated using the amount of the loan, $1,453,460 divided by $0.28, the average closing price of OIS common stock for the ten business days prior to June 30, 2008, less a 25% discount. If MediVision defaults on its repayment obligation as specified in the License and Distribution Agreement, as amended, OIS may seek repayment by            foreclosing on the shares pledged as collateral or, alternatively, OIS has the option to receive a portion of MediVision’s ownership interest in patent rights relating to the Electro-Optical Unit, calculated based on the amount of principal and interest outstanding on the loan, which is in default at the time OIS exercises this option, divided by 1,453,460, multiplied by 42.1875%.

 

MediVision has pledged as collateral for this note, and the security agreement described below, an aggregate 7,036,343 shares of our common stock. As of June 30, 2008, MediVision’s principal outstanding under this Loan and Security Agreement is $1,637,145.

 

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On January 30, 2008, OIS also entered into a Loan and Security Agreement with MediVision whereby OIS agreed to lend to MediVision up to $200,000 upon their request for working capital. Interest will accrue on this note at 8% per annum. The loan is secured by MediVision’s shares in OIS common stock. The number of shares was calculated using the amount            of loan given to MediVision divided by $0.43, the average closing price of OIS common stock for the ten business days prior to January 30, 2008, less a 25% discount.

 

On March 31, 2008, OIS also entered into an addendum to the Loan and Security Agreement with MediVision in order to provide additional financing for working capital. This addendum amends the working capital agreement entered into on January 30, 2008. Under this addendum, OIS agreed to increase the working capital amount from up to $200,000 to an aggregate            amount of up to $550,000. Interest will accrue on this note at 8% per annum. The loan is secured by MediVision’s shares in OIS common stock. The number of shares will be calculated using the amount of loan given to MediVision divided by $0.27, the average closing price of OIS common stock for the ten business days prior to March 31, 2008, less a 25% discount.

 

On June 30, 2008, OIS entered into another addendum to the Loan and Security Agreement with MediVision in order to provide additional financing for working capital. This addendum amends the working capital agreement entered into on March 31, 2008. Under this addendum, OIS agreed to increase the working capital amount from up to $550,000 to an aggregate            amount of up to $700,000. Interest will accrue on this note at 8% per annum. The loan is secured by MediVision’s shares in OIS common stock. The number of shares will be calculated using the amount of loan given to MediVision divided by $0.28, the average closing price of OIS common stock for the ten business days prior to June 30, 2008, less a 25% discount.

 

On March 20, 2008, we entered into a definitive merger agreement (the “Merger Agreement”) with MV Acquisitions Ltd., an Israeli company and a wholly-owned subsidiary (“Merger Sub”), and MediVision, pursuant to which Merger Sub will merge with and into MediVision (the “Merger”), with MediVision as the surviving entity.. At            the effective time of the Merger (the “Effective Time”) (1) each ordinary share, par value NIS 0.1 per share, of MediVision (“MediVision Shares”) issued and outstanding immediately before the Effective Time, will be automatically converted into 1.66 shares of our common stock and each outstanding option to purchase MediVision Shares under certain of MediVision’s stock option plans, warrants or other rights to purchase MediVision Shares will be assumed            by us such that it is converted into an option to purchase our common stock.

 

Consummation of the Merger is subject to certain conditions, including among others, (i) the approval of the holders of our common stock and MediVision Shares, (ii) the declaration by the SEC that the S-4 Registration Statement, registering shares of our common stock to be issued to MediVision’s shareholders pursuant to the Merger Agreement, has            become effective under the Securities Act of 1933, as amended, (iii) the receipt of a permit of the “Israeli Prospectus,” a prospectus containing the Prospectus/Proxy Statement and any additional disclosures and that complies in form and substance with applicable Israeli Law and regulations in connection with the issuance of shares of our common stock in the Merger, from the Israeli Securities Authority, (iv) the approval of the applicable Belgian, Israeli, and U.S.            governmental entities required for the consummation of the Merger and other transactions contemplated by the Merger Agreement, and (v) the elapse of certain Israeli statutory waiting periods.

 

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We have capitalized the direct costs associated with the merger. As of June 30, 2008, these costs have accumulated to $728,666.

 

At June 30, 2008, we recorded a net amount due from MediVision of $450,000 for products.

 

Sales to MediVision during the three and six months ended June 30, 2008 totaled approximately $136,000 and $240,000. Sales to MediVision during the three and six months ended June 30, 2007 totaled approximately $208,000 and $310,000. Sales derived from product shipments to MediVision are made at transfer pricing which is based on volume discounts similar to            those available to other resellers and distributors of the Company’s products.

 

During the three and six month periods ended June 30, 2008, we paid approximately $454,000 and $895,000 to MediVision for research and development performed by MediVision on our behalf, respectively. During the three and six month periods ended June 30, 2007, we paid approximately $335,000 and $662,000 to MediVision for research and development performed by            MediVision on our behalf, respectively.

 

CCS Pawlowski

 

At June 30, 2008, we recorded a net amount due from CCS Pawlowski, a subsidiary of MediVision, of approximately $44,000 for products and services. Sales to CCS Pawlowski during the three and six months ended June 30, 2008 totaled approximately $45,000 and $103,000, respectively. Sales to CCS Pawlowski during the three and six months ended June 30, 2007            totaled approximately $61,000 and $146,000, respectively.

 

Abraxas

 

In January 2008, we, through our wholly-owned subsidiary, Abraxas Medical Solutions, Inc., a Delaware corporation (“Abraxas”), acquired substantially all the assets of AcerMed, Inc., a leading developer of Electronic Medical Records (“EMR”) and Practice Management (“PM”) software. AcerMed has been providing comprehensive            and advanced EMR and Practice Management software solutions for medical practices, from solo practitioners to multi-site practices nationwide. Through the acquisition, we gained the rights to software applications that automate the clinical, administrative, and financial operations of a medical office. This means that paper charting can be virtually eliminated and clinical charting would be done using, for example, a wireless computer pen tablet at the point of care. Due to the            formation of Abraxas, NextGen Healthcare Information Systems, Inc. chose recently to discontinue its relationship with OIS. OIS was marketing and selling their EMR and PM software products to the ophthalmic market.

 

MediStrategy Ltd.

 

We have a service agreement with MediStrategy Ltd. (“MS”), an Israeli company owned by Noam Allon, a former Director of the Company, serving on the Board until December 2004. Under the terms of the agreement, MS provides services to us primarily in the business development field in ophthalmology, including business cooperation, mergers and            acquisitions, identifying and analyzing new lines of business and defining new product lines or business opportunities to be developed. All services provided by MS are performed solely by Noam Allon.

 

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In consideration for the services provided, we agreed to pay MS a monthly sum of $4,000. In addition, MS is to be paid a yearly performance bonus of up to $10,000 upon achievement of goals under the terms of the agreement determined by MS, Noam Allon, and the Company’s Chairman of the Board. During the year ended December 31, 2006, MS earned fees of            $48,000. This amount was paid as of June 30, 2008. During the year ended December 31, 2007, MS earned fees of $48,000. This amount remains accrued, but not paid as of June 30, 2008. During the first six months of 2008, MS earned fees of $24,000. This amount remains accrued, but not paid as of June 30, 2008.

 

| Note 4. | Share Based Compensation |
|---------|--------------------------|

 

At June 30, 2008, we had four active stock-based compensation plans (the “Plans”). Options granted under these plans generally have a term of ten years from the date of grant unless otherwise specified in the option agreement. The plans generally expire ten years from the inception of the plans. The majority of options granted under these            agreements have a vesting period of three to four years. Incentive stock options under these plans are granted at fair market value on the date of grant and non-qualified stock options granted can not be less than 85% of the fair market value on the date of grant.

 

There were no new stock option plans approved during the three and six months ended June 30, 2008.

 

A summary of the changes in stock options outstanding under our equity-based compensation plans during the six months ended June 30, 2008 is presented below:

 

|                           | Shares    | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value |
|--------------------------------|-----------|---------------------------------|-----------------------------------------------------|---------------------------|
| Outstanding at January 1, 2008 | 2,358,686 | $0.73                           | 6.59                                                | --                        |
| Granted                        | --        | --                              | --                                                  | --                        |
| Exercised                      | --        | --                              | --                                                  | --                        |
| Forfeited/Expired              | (79,666)  | $0.97                           | --                                                  | --                        |
| Outstanding at June 30, 2008   | 2,279,020 | $0.72                           | 6.05                                                | --                        |
| Exercisable at June 30, 2008   | 1,658,228 | $0.60                           | 5.37                                                | --                        |

 

We use the Black-Scholes-Merton option valuation model to determine the fair value of stock-based compensation under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123. The Black-Scholes-Merton model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates            of return and dividend yield. The expected term of an award is generally no less than the option vesting period and is based on the Company’s historical experience. Expected volatility is based upon the historical volatility of the Company’s stock price. The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term equal to the option’s expected life. The Company uses a dividend yield of zero in the            Black-Scholes-Merton option valuation model as it does not anticipate paying cash dividends in the foreseeable future.

 

The Company recorded an incremental $8,000 and $15,000 of stock-based compensation expense during the three and six months ended June 30, 2008.

 

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As of June 30, 2008, the Company had $51,018 of total unrecognized expense related to non-vested stock-based compensation, which is expected to be recognized through 2010. The total fair value of options vested during the three and six month period ended June 30, 2008 was $7,569 and $15,138. No options were granted or exercised for the three and six month            period ended June 30, 2008.

 

| Note 5. | Warranty Obligations |
|---------|----------------------|

 

We generally offer a one-year warranty to our customers. Our warranty requires us to repair or replace defective products during the warranty period. At the time product revenue is recognized, we record a liability for estimated costs that may be incurred under our warranties. The costs are estimated based on historical experience and any specific warranty            issues that have been identified. The amount of warranty liability accrued reflects our best estimate of the expected future cost of honoring our obligations under the warranty plans. We periodically assess the adequacy of our recorded warranty liability and adjust the balance as necessary.

 

The following provides a reconciliation of changes in our warranty reserve:

 

|                                      | Unaudited

Three Months Ended

June 30, | Unaudited

Six Months Ended

June 30, |
|-------------------------------------------|-----------------------------------------|---------------------------------------|
|                                      | 2008                                    | 2007                                  | 2008 | 2007 |
| Warranty balance at beginning of period   | $109,187                                | $446,638                              | $128,250 | $395,575 |
| Reductions for warranty services provided | (43,063)                                | (56,688)                              | (82,126) | (105,625) |
| Changes for accruals in current period    | 40,000                                  | (49,675)                              | 60,000 | 50,325 |
|                                      |                                    |                                  |   |   |
| Warranty balance at end of period         | $106,124                                | $340,275                              | $106,124 | $340,275 |

 

 

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| Note 6. | Segment Reporting |
|---------|-------------------|

 

Our business consists of two operating segments: (i) OIS and (ii) Abraxas, our wholly-owned subsidiary.

 

In January 2008, we, through our wholly-owned subsidiary, Abraxas Medical Solutions, Inc., a Delaware corporation (“Abraxas”), acquired substantially all the assets of AcerMed, Inc., a leading developer of Electronic Medical Records (EMR) and Practice Management software. AcerMed has been providing comprehensive and advanced EMR and Practice            Management software solutions for medical practices, from solo practitioners to multi-site practices nationwide. Through the acquisition, we gained the rights to software applications that automate the clinical, administrative, and financial operations of a medical office.

 

Our management reviews Abraxas’ results of operation separately. Our operating results for Abraxas excludes income taxes. The provision for income taxes is centrally managed at our corporate office on a consolidated basis, and accordingly, is not presented by segment since they are excluded from the measure of segment profitability reviewed by our            management.

 

We evaluate our reporting segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Our Chief Financial Officer (“CFO”) has been determined as the Chief Operating Decision Maker as defined by SFAS No. 131. The CFO allocates resources to Abraxas based on its business prospects, competitive            factors, net sales and operating results.

 

The following presents our financial information by segment for the three and six months ended June 30, 2008.

 

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**Results of Operations**

 

*Selected Financial Data*

 

|                        | Three months ended                            June 30,2008 | Six months endedJune 30,2008 |
|-----------------------------|------------------------------------------------------------|------------------------------|
| **Statement of Income:**    |                                                       |                         |
| Net revenues:               |                                                       |                         |
| OIS                         | 3,095,735                                                  | 6,201,290                    |
| Abraxas                     | 67,263                                                     | 109,400                      |
|                        |                                                       |                         |
| Gross Profit:               |                                                       |                         |
| OIS                         | 1,720,434                                                  | 3,381,761                    |
| Abraxas                     | (38,412)                                                   | (95,879)                     |
|                        |                                                       |                         |
| Operating loss:             |                                                       |                         |
| OIS                         | (94,474)                                                   | (150,362)                    |
| Abraxas                     | (178,927)                                                  | (366,330)                    |
| Net loss (Consolidated)     | (248,656)                                                  | (526,457)                    |
|                        |                                                       |                         |
| **Balance Sheet**:          | The period endedJune 30,2008                               |                         |
| Assets:                     |                                                       |                         |
| OIS                         | 14,359,796                                                 |                         |
| Abraxas                     | 1,269,141                                                  |                         |
|                        |                                                       |                         |
| Liabilities:                |                                                       |                         |
| OIS                         | 5,997,652                                                  |                         |
| Abraxas                     | 204,589                                                    |                         |
|                        |                                                       |                         |
| Stockholders’ Equity: |                                                       |                         |
| OIS                         | 9,813,659                                                  |                         |
| Abraxas                     | (386,963)                                                  |                         |

 

 

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| **ITEM 2.** |   | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|--------|-------------------------------------------------------------------------------------------------|

 

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the “SEC”) or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media, and others. Statements concerning our            future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding our future plans, strategies, and expectations are forward-looking statements. In some cases            these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions            contained in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by            these forward-looking statements. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the medical instruments market specifically, legislative or regulatory changes that affect us, including changes in healthcare regulation, the availability of working            capital, and the introduction of competing products. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those            projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

 

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Overview

 

To date, we have designed, developed, manufactured and marketed ophthalmic digital imaging systems and informatics solutions and have derived substantially all of our revenues from the sale of such products. The primary target market for our digital angiography systems and informatics solutions has been retinal specialists and general ophthalmologists.            Recently we have purchased EMR and PM software to be sold to the following ambulatory-care specialties: ophthalmology, OBGYN, orthopedics and primary care.

At June 30, 2008, we had stockholders’ equity of $9,426,696 and our current assets exceeded our current liabilities by $7,462,259.

 

The following discussion should be read in conjunction with the unaudited interim financial statements and the notes thereto which are set forth in Item 1, “Financial Statements (unaudited).” In the opinion of management, the unaudited interim period financial statements include all adjustments, which are of a normal recurring nature, that are            necessary for a fair presentation of the results of the periods. There can be no assurance that we will be able to achieve or sustain significant positive cash flows, revenues, or profitability in the future.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained in the financial statements is, to a significant extent, financial information based on effects of transactions and events that have already occurred. A variety of factors            could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability.

 

Management is also required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates. In addition, GAAP itself may change            from one previously acceptable method to another. Although the economics of our transactions would not change, the timing of the recognition of such events for accounting purposes may change.

 

*Revenue Recognition*

Our revenue recognition policies are in compliance with applicable accounting rules and regulations, including Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements,” American Institute of Certified Public accountants (“AICPA”), Statement of Position (“SOP”) 97-2,            “Software Revenue Recognition,” SOP 98-9, “Modification of SOP 97-2”, with Respect to Certain Transactions and Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables.”

 

Under EITF 00-21, the multiple components of our revenue are considered separate units of accounting in that revenue recognition occurs at different points of time for product shipment, installation and training services, and service contracts based on performance or contract period.

 

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Revenue for the product shipment is recognized when title passes to the customer, which is upon shipment, provided there are no conditions to acceptance, including specific acceptance rights. If we make an arrangement that includes specific acceptance rights, revenue is recognized when the specific acceptance rights are met. Upon review, we concluded that            consideration received from our customer agreements are reliably measurable because the amount of the consideration is fixed and no specific refund rights are included in the arrangement. We defer 100% of the revenue from sales shipped during the period that we believe may be uncollectible.

 

Installation revenue is recognized when the installation is complete. Separate amounts are charged and assigned in the customer quote, sales order and invoice, for installation and training services. These amounts are determined based on fair value, which is calculated in accordance with industry and competitor pricing of similar services and adjustments            according to what the market will bear. There is no price reduction in the product price if the customer chooses to not have us complete the installation.

 

Extended product service contracts are offered to our customers and are generally entered into prior to the expiration of our one year product warranty. The revenue generated from these transactions are recognized over the contract period, normally one to four years.

 

In general, our arrangements with customers, resellers, and distributors do not provide any special rights or privileges with respect to refund or return rights, and in most cases, we do not have arrangements that include acceptance rights. If we make such arrangements for acceptance rights, revenue is recognized when the specific acceptance rights are            met.

 

*Tax Provision*

We calculate a tax provision quarterly and assess how much of our deferred tax asset is more likely than not to be used in the future. We use the following analysis to assess whether we will more likely than not realize the deferred tax asset. In the analysis, we assume that we will be able to use all of our unlimited NOL amounts. We then assess the amount            of our future capped net operating losses we will more likely than not be able to use.

 

In order to realize our tax asset in 2008 and 2007, we needed to evaluate whether we will more likely than not be able to realize our deferred tax asset for 11 and 12 years ahead, respectively. We were not profitable for seventeen consecutive years between 1984 and 2000, and have not been profitable for the first six months of 2008. We became profitable in            2001 and were profitable for the last seven years through 2007. There is significant uncertainty in projecting future profitability due to the history of our business, and the rapidly changing medical technology market that we are in.

 

We used the following analysis to determine whether we needed to recognize a valuation allowance for our deferred tax asset, and if so, how much. In our analysis, we assumed, based on management’s determination, that we will be able to use all of our unlimited NOL amounts. In 2008, we did not have any unlimited NOL amounts left. We then assessed the            amount of future capped net operating losses we will more likely than not be able to use. In Q2 2008, we made an assessment that we will be able to use the current years capped net operating loss amount and six years of capped net operating losses in the future. This amount calculates to $2,723,000 out of the $4,099,134 possible net operating losses. In 2007, we made an assessment that we will be able to use six years of capped net operating losses in the future, and projected            taxable income in 2008. In the second quarter of 2008 and fiscal year 2007, we did not have enough available information to look beyond six years of future net operating loss amounts, or $2,723,000, when assessing the amount of deferred tax assets that are more likely than not to be used. Forming a conclusion that a valuation allowance is not needed is difficult if there is a history of losses in the company, especially if the losses were not due to an extraordinary item.

 

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We re-evaluate our estimates and assumptions we use in our financials on an ongoing and quarterly basis. We adjust these estimates and assumptions as needed and as circumstances change. If circumstances change in the future, we will adjust our estimates and assumptions accordingly. At the present time, we cannot surmise whether our assumptions and estimates            will change in the future. Based on historical knowledge, however, it is reasonably likely that there will be some changes in some of our estimates and assumptions.

 

*Warranty Reserve*

We have two types of warranty reserves. A general product reserve on a per product basis and specific reserves created as we become aware of system performance issues. The product reserve is calculated based on a fixed dollar amount per system shipped each quarter. These specific reserves usually arise from the introduction of new products. When a new            product is introduced, we reserve for specific problems arising from potential issues, if any. As issues are resolved, we reduce the specific reserve. These types of issues can cause our warranty reserve to fluctuate outside of sales fluctuations.

 

Historically, we estimated the cost of the various warranty services by taking into account the estimated cost of servicing routine warranty claims in the first year, including parts, labor and travel costs for service technicians. We analyze the margin of our total service department, the price of our extended warranty contracts, factor in the hardware            costs of the various systems, and use a percentage for the first year warranty to calculate the cost per various systems for the first year manufacturer’s warranty. Based on this analysis, we did not need to change our estimated cost per product in our general reserve for products shipped in the current year.

 

In 2008, the warranty reserve decreased from $128,250 to $106,124 due to the decrease in product shipments versus the amount of replacements, repairs or upgrades performed.

 

In 2007, the warranty reserve decreased from $395,575 to $128,250 substantially due to the decrease of our specific reserves related to possible replacements, repairs or upgrades of our products. At the end of 2006, we had specific reserves for new products in the amount of $249,825. During 2007, many of the possible replacements, repairs or upgrades that            were reserved for at the end of 2006 were determined unnecessary, leaving no specific reserve balance within our warranty reserve at December 31, 2007.

 

*Software Capitalization*

We capitalize software development costs in accordance with applicable accounting rules and regulations, including Financial Accounting Standard No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”

 

In 2008, we capitalized software that we purchased from the courts from a company that was going through bankruptcy (“AcerMed”). FAS 86 specified that purchased computer software to be sold, leased, or otherwise marketed shall be capitalized when the software is acquired. This software was purchased and will be sold, leased, or marketed once it            has been modified by our research and development team to be ready for sale to our customers. The amount that we capitalized for this software is $570,077. In accordance with FAS 86, we have also capitalized the research and development costs incurred to prepare this software for sale. According to FAS 86, research and development costs are to be capitalized once technological feasibility is established. We believe this software is technologically feasible because we            started with a working model/prototype that had been in the market before. The amount of research and development we have capitalized as of June 30, 2008 is $518,583.

 

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In 2008, we also capitalized the costs associated with the development of a web-based software. According to FAS 86, technological feasibility is established upon completion of a detailed program design of the finished product or, in its absence, upon completion of a working model. We currently have both a working prototype and a program design of the            finished product. As of June 30, 2008, we have capitalized $205,066 of costs incurred in connection with the development of this software.

 

New Accounting Pronouncements

 

*Financial Accounting Pronouncement FAS 157*

 

In December 2006, the Financial Accounting Standards Board (“FASB”) released Statement of Financial Accounting Standards No. 157 – Fair Value Measurements. This statement defines fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This standard applies under            other accounting pronouncements that require or permit fair value measurements and is intended to increase consistency and comparability. This statement was adopted as of January 1, 2008. The adoption of FASB 157 did not have a material impact on our financial position, results of operations or cash flows.

 

*Financial Accounting Pronouncement FAS 159*

 

In February 2007, the FASB issued Statement No. 159 (SFAS 159) The Fair Value Option for Financial Assets and Financial Liabilities. SAFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This Statement permits all entities to choose, at            specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not            deferred. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements.  The adoption of FASB 159 did not have a material impact on our financial position, results of operations or cash flows.

 

*Financial Accounting Pronouncement FAS 141R*

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in it’s financial statements the identifiable assets            acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We are required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or            after January 1, 2009. Earlier adoption is prohibited. This standard will change the accounting treatment for business combinations on a prospective basis. We do not believe that the adoption of FASB 141 (R) will have a material impact on our financial position, results of operations or cash flows.

 

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Results of Operations 

 

*Revenues*

 

Our revenues for the three months ended June 30, 2008 were $3,162,998, representing a 13% decrease from revenues of $3,617,633 for the three months ended June 30, 2007. The decrease in revenues between the quarters is due to a decrease of product sales in the three months ended June 30, 2008 of approximately $642,000, offset by an increase in service revenue            of approximately $187,000. Our revenues for the six months ended June 30, 2008 were $6,310,689, representing a 19% decrease from revenues of $7,778,013 for the six months ended June 30, 2007. The decrease in revenues between the years is due to a decrease of product sales in the six months ended June 30, 2008 of approximately $1,810,000, offset by an increase in service revenue of approximately $342,000. The decrease in product sales for the quarters and six months ended June 30,            2008 and June 30, 2007, is due to a change in market conditions.

 

Product sales accounted for approximately 71% and 80% of our revenue for the second quarters of 2008 and 2007, respectively. Service revenues for these products accounted for approximately 29% and 20% of our revenue for the second quarters of 2008 and 2007, respectively. Product sales accounted for approximately 72% and 82% of our revenue for the six months            ended June 30, 2008 and 2007, respectively. Service revenues for these products accounted for approximately 28% and 18% of our revenue for the six months ended June 30, 2008 and 2007, respectively. The increase in service revenue is mainly derived from increases in our extended service contract revenue. The volume of extended service contracts sold continues to increase relative to total sales as we continue to educate our customers about the benefits of the contracts. This            education process has been ongoing for the last five years and our service revenue increases as more customers buy extended service contracts. The other components of service revenue have stayed relatively constant. Total service revenue during the three months ended June 30, 2008 was comprised mostly of service contract revenue and the rest consists of non-warranty repairs and parts, and technical support phone billings for customers not under warranty.

 

Revenues from sales of our products to related parties was approximately $343,000 and $456,000 during the six month periods ended June 30, 2008 and June 30, 2007, respectively.

 

*Gross Margins*

 

Gross margins were approximately 53% and 56% during the three month period ended June 30, 2008 and June 30, 2007, respectively. Gross margins were approximately 52% and 57% during the sex month period ended June 30, 2008 and June 30, 2007, respectively. Gross margins decreased between the quarters and for the six month periods due to the decrease in sales            with fixed overhead costs.

 

*Sales and Marketing Expenses*

 

Sales and marketing expenses accounted for approximately 32% of total revenues during the second quarter of fiscal 2008 as compared to approximately 22% during the second quarter of fiscal 2007. Expenses increased to $1,000,534 during the second quarter of 2008 versus $788,670 during the second quarter of 2007, representing an increase of $211,864 or 27%.            This increase was mainly due to the sales and marketing expenses from Abraxas of $100,000 and the addition of two new positions within sales and marketing at OIS of $67,000.

 

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Sales and marketing expenses accounted for approximately 31% of total revenues during the first six months of fiscal 2008 as compared to approximately 22% during the first six months of fiscal 2007. Expenses increased to $1,944,543 during the first six months of 2008 versus $1,676,004 during the first six months of 2007, representing an increase of $268,539            or 16%. This increase was mainly due to the sales and marketing expenses from Abraxas of $187,000 and the addition of two new positions within sales and marketing at OIS of $67,000.

 

*General and Administrative Expenses*

 

General and administrative expenses were $417,511 in the second quarter of fiscal 2008 and $434,434 in the second quarter of fiscal 2007, representing a decrease of $16,923 or 4%. Such expenses accounted for approximately 13% and 12% of revenues during the second quarters of 2008 and 2007, respectively.

 

General and administrative expenses were $883,676 in the first six months of fiscal 2008 and $955,462 in the first six months of fiscal 2007, representing a decrease of $71,786 or 8%. Such expenses accounted for approximately 14% and 12% of revenues during the first six months of 2008 and 2007, respectfully. The decrease was primarily due to lower legal            expenses.

 

*Research and Development Expenses*

 

Research and development expenses were $537,378 in the second quarter of fiscal 2008 and $392,292 in the second quarter of fiscal 2007, representing an increase of $145,086 or 37%. Such expenses accounted for approximately 17% of revenues during the second quarter of 2008 and 11% of revenues during the second quarter of 2007. The increase in the second            quarter of fiscal 2008 resulted from an increase in research and development done by MediVision of approximately $118,000 and consulting fees of approximately $21,000.

 

Research and development expenses were $974,355 in the first six months of fiscal 2008 and $800,820 in the first six months of fiscal 2007, representing an increase of $173,535 or 22%. Such expenses accounted for approximately 15% of revenues during the first six months of 2008 and 10% of revenues during the first six months of 2007. The increase in the            first six months of fiscal 2008 versus 2007 resulted primarily from an increase in research and development done by MediVision of approximately $233,000 and consulting fees of approximately $17,000, offset by the capitalization of new imaging software of approximately $80,000.

 

Our research and development expenses are derived primarily from our continued research and development efforts on new digital image capture products. Outside consultants and MediVision currently conduct most of our research and development activities.

 

Abraxas capitalized research and development efforts in the first and second quarter of fiscal 2008 in the amount of $518,583 related to the development of its software to get it ready to sell to the market.

 

*Interest and other income (expense), net*

 

Interest and other income (expense) was $22,322 during the second quarter of fiscal 2008 versus $64,686 during the second quarter of fiscal 2007. The decrease is primarily due to the interest expense related to our new financing agreement with the Tail Wind Fund.

 

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Interest and other income (expense) was ($10,901) during the first six months of fiscal 2008 versus $107,324 during the first six months of fiscal 2007. The decrease is primarily due to the interest expense related to our new financing agreement with the Tail Wind Fund.

 

*Income Taxes*

 

Income tax benefit (expense) was $2,423 during the second quarter of fiscal 2008 versus ($23,743) during the second quarter of fiscal 2007. Income tax expense was $1,137 during the first six months of fiscal 2008 versus ($28,182) during the first six months of fiscal 2007.

 

We calculate a tax provision quarterly and assess how much deferred tax asset is more likely than not to be used in the future. In determining whether we will more likely than not realize the deferred tax asset, we assess the amount of our future capped net operating losses we will more likely than not be able to use.

 

*Net Income*

 

We recorded a net loss of ($248,656) or ($0.01) per share basic and diluted earnings, for the second quarter ended June 30, 2008 as compared to net income of $457,707 or $0.03 per share basic and diluted earnings for the second quarter ended June 30, 2007. We recorded net loss of ($526,457) or ($0.03) per share basic and diluted earnings, for the first six            months of June 30, 2008 as compared to net income of $1,110,850 or $0.07 and $0.06 per share basic and diluted earnings for the first six months of June 30, 2007. The decrease in net income is primarily due to a decrease in sales revenue.

 

*Balance Sheet*

 

Our assets decreased by $1,057,958 as of June 30, 2008 as compared to December 31, 2007. This decrease was primarily due to a decrease in cash of ($3,450,947), a decrease of our deferred tax asset of ($208,000), a decrease in accounts receivable of ($319,102), offset by an increase in the note receivable from MediVision of $1,099,641, the capitalization of            new software of $205,066, and an increase in the AcerMed software by Abraxas of $479,262 and the capitalization of the related development done on this product to get it ready for the market of $518,583.

 

Our liabilities decreased by $365,264 as of June 30, 2008 as compared to December 31, 2007 primarily due to decrease of liabilities to vendors.

 

Our stockholders’ equity decreased by $692,694 as of June 30, 2008 as compared to December 31, 2007 primarily due to a decrease in retained earnings for the quarter.

 

Our assets increased by $1,996,464 as of June 30, 2008 as compared to June 30, 2007. This increase was primarily due to advances to MediVision of $1,652,571, an increase in inventory of $107,619, accounts receivable to related parties of $233,265, prepaid financing costs related to the Tail Wind financing agreement of $122,072, expenses related to the            proposed merger with MediVision of $728,666, prepaid products to MediVision of $250,000, the capitalization of a new software of $275,066, and the purchase of AcerMed software by Abraxas of $570,077 and the capitalization of the related development done on this product to get it ready for the market of $518,584, offset by a decrease in cash of ($1,722,484) and accounts receivable of ($799,336).

 

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Our liabilities increased by $2,007,594 as of June 30, 2008 as compared to June 30, 2007 primarily due to a new convertible loan described below to qualified institutional buyers of $2,744,379, offset by a decrease of our purchasing accrual of $265,458, and a decrease of warranty reserve of $234,151.

 

Our stockholders’ equity decreased by $11,130 as of June 30, 2008 as compared to June 30, 2007 primarily due to net losses for the previous 12 months of ($84,691), offset by an increase in capital stock of $63,831 and additional paid in capital related to the financing agreement with the qualified institutional buyers described above of            $9,730.

 

*Liquidity and Capital Resources*

 

Our operating activities used cash of $864,725 during the six months ended June 30, 2008 as compared to cash generated of $219,176 for the six months ended June 30, 2007. The cash used in operations during the first six months of 2008 was principally from a net loss of $526,457, a decrease in our warranty reserve of $234,151, and a decrease of            purchasing accrual of $265,458.

 

Cash used in investing activities was $1,512,873 during the first six months of 2008 as compared to $132,812 during the first six months of 2007. Our investing activities consisted primarily of purchases of AcerMed software of $479,262, the related development to get the AcerMed software ready to sell of $518,584, and new imaging software of $205,066, costs            related to the proposed merger with MediVision of $201,339 and the purchase of furniture and miscellaneous software of $86,689. We anticipate continued research and development in connection with the AcerMed software to get it ready to sell to the market. We also anticipate that related expenditures, if any, will be financed from our cash flow from operations or other financing arrangements available to us, if any.

 

We used cash in financing activities of $1,073,348 during the first six months of fiscal 2008 as compared to $348,400 during the first six months of fiscal 2007. The cash used in financing activities during the first six months of 2008 was principally from advances to related parties.

 

On June 30, 2008 our cash and cash equivalents were $4,179,337. Management anticipates that additional sources of capital beyond those currently available to us may be required to continue funding for research and development of new products and the continuation of the investment in Abraxas.

 

On October 29, 2007, we entered into a Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein, pursuant to which we issued to such purchasers (i) an aggregate of $2,750,000 in principal amount of its 6.5% Convertible Notes Due April 30, 2010 (the “Notes”), which Notes are convertible into 1,676,829 shares of            our common stock, no par value, and (ii) warrants to purchase an aggregate of 616,671 shares of our common stock at an exercise price of $1.87 per share. We will use the proceeds from the issuance of the Notes for working capital and the continued funding of Abraxas. We anticipate that these notes will be repaid from our cash flow from operations over time or alternative future financing arrangements.

 

We will continue to evaluate alternative sources of capital to meet our growth requirements, including other asset or debt financing, issuing equity securities and entering into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be            obtained on terms favorable to us.

 

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Off-Balance Sheet Arrangement

 

We have a Secured Debenture in favor of United Mizrahi Bank Ltd., in an amount of up to $2,000,000 (plus interest, commissions and all expenses). Under the Debenture, we guaranteed the payment of all the debts and liabilities of MediVision to United Mizrahi Bank. The Debenture is secured by a first lien on all of our assets. MediVision pledged 2,345,500            shares of our common stock it owns to us in order to secure the Debenture. The amount owed to the financial institution by MediVision and secured by us as of June 30, 2008 is approximately $2,000,000.

 

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| **ITEM 4T.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

As of June 30, 2008, management of the Company, with the participation of the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act. Disclosure            controls and procedures are defined as the controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information            required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, these officers concluded that, as of June 30, 2008, our disclosure controls and procedures were            effective.

 

Changes in Internal Control Over Financial Reporting

 

During the fiscal quarter ended June 30, 2008, there were no changes in our internal control over financial reporting that hasmateriallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting.     

 

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**PART II**      **OTHER INFORMATION**

 

| **ITEM 1.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

On May 11, 2007, we filed a civil action in the Superior Court of California for the County of Sacramento against our former president Steven Verdooner. The complaint alleges against Mr. Verdooner claims of breach of fiduciary duty, intentional interference with contract, and intentional interference with prospective economic advantage. The complaint            requests total damages against Mr. Verdooner in excess of $7,000,000. Discovery has begun and no trial date has been set yet.

 

On April 23, 2008, OIS filed an amended complaint adding Opko Health, Inc. and the Frost Group, LLC as defendants to the lawsuit.

 

 

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| **ITEM 6.** | **EXHIBITS AND REPORTS** |
|-------------|--------------------------|

 

| 31.1 – Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002 | *      |
|-------------------------------------------------------------------------------------|--------|
|                                                                                |   |
| 31.2 – Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002 | *      |
|                                                                                |   |
| 32 – Certification Required Under Section 906 of Sarbanes-Oxley Act of 2002   | *      |

 

| * | Filed herewith. |
|---|-----------------|

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

|                  | OPHTHALMIC IMAGING SYSTEMS |                                            |
|-----------------------|----------------------------|-------------------------------------------------|
| Date: August 13, 2008 |                       |                                            |
|                  |                       |                                            |
|                  |                       |                                            |
|                  | By:                        | /s/ Gil Allon                                   |
|                  | Name:

Title:              | Gil Allon,

Chief Executive Officer

      |
|                  |                       |                                            |
|                  |                       |                                            |
|                  | By:                        | /s/ Ariel Shenhar                               |
|                  | Name:

Title:              | Ariel Shenhar,

Chief Financial Officer

  |
|                  |                       |                                            |
|                       |                            |                                                 |  |

                

 

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