# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

# FORM 10-QSB

# QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Commission File Number: 1-11140

OPHTHALMIC IMAGING SYSTEMS

|California                      |  | 94-3035367                       
|------------------------------- |  | ---------------------------------
|(State or other jurisdiction of |  | (IRS Employer Identification No.)
|incorporation or organization)  |  |                                  

(916) 646-2020(Issuers telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 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 shell company (as defined in Rule 12b-2 of the Exchange Act.):  Yes 
No

As of August 7, 2007, 16,813,496 shares of common stock,
no par value, were outstanding.

Transitional Small Business
Disclosure Format:  Yes     No

---

OPHTHALMIC IMAGING
SYSTEMS

FORM 10-QSB

FOR THE QUARTER ENDED
June 30, 2007

|        |                                                                                          |     
|------- | ---------------------------------------------------------------------------------------- | ----
|PART I  | FINANCIAL INFORMATION                                                                    | Page
|        |                                                                                         
|Item 1. | Financial Statements (unaudited)                                                         | 1   
|        |                                                                                         
|        | Condensed Balance Sheet as of June 30, 2007                                              | 2   
|        |                                                                                         
|        | Condensed Statements of Income for the Three and Six Months ended June 30, 2007 and 2006 | 3   
|        |                                                                                         
|        | Condensed Statements of Cash Flows for the Six Months ended June 30, 2007and 2006        | 4   
|        |                                                                                         
|        | Notes to Condensed Financial Statements                                                  | 5   
|        |                                                                                         
|Item 2. | Management's Discussion and Analysis or Plan of Operation                                | 13  
|        |                                                                                         
|Item 3. | Controls and Procedures                                                                  | 23  
|        |                                                                                         
|PART II | OTHER INFORMATION                                                                        | 24  
|Item 1. | Legal Proceedings                                                                        | 24  
|        |                                                                                         
|Item 6. | Exhibits                                                                                 | 25  

i



---

PART
I     FINANCIAL INFORMATION

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

1



---

Ophthalmic Imaging
Systems                                                              Condensed Balance
Sheet June 30, 2007(Unaudited)

|                                                          | 
|--------------------------------------------------------- | 
|Assets                                                    | 
|Current assets:                                           | 
|Cash and cash equivalents                                 | 
|Accounts receivable, net                                  | 
|Accounts receivable from related party                    | 
|Note receivable from related party                        | 
|Inventories, net                                          | 
|Prepaid expenses and other current assets                 | 
|Deferred tax asset                                        | 
|                                                          | 
|Total current assets                                      | 
|                                                          | 
|Furniture and equipment, net of accumulated               | 
|depreciation and amortization of $489,160                 | 
|Restricted cash                                           | 
|Licensing agreement                                       | 
|Prepaid products                                          | 
|Other assets                                              | 
|                                                          | 
|Total assets                                              | 
|                                                          | 
|Liabilities and Stockholders' Equity                      | 
|Current liabilities:                                      | 
|Accounts payable                                          | 
|Accrued liabilities                                       | 
|Deferred extended warranty revenue                        | 
|Customer deposits                                         | 
|Lease payable- current portion                            | 
|                                                          | 
|Total current liabilities                                 | 
|                                                          | 
|Noncurrent liabilities:                                   | 
|Line of credit                                            | 
|                                                          | 
|Total liabilities                                         | 
|                                                          | 
|Stockholders' equity:                                     | 
|Common stock, no par value, 35,000,000 shares authorized; | 
|16,547,664 issued and outstanding                         | 
|Accumulated deficit                                       | 
|                                                          | 
|Total stockholders' equity                                | 
|                                                          | 
|Total liabilities and stockholders' equity                | 
|                                                          | 

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, |           
|----------------------------------------- | --------------------------- |  | ------------------------- | ----------
|
|Net revenues                              |                             |  | $                         | 3,617,633 
|Cost of sales                             |                             |  |                           | 1,585,473 
|                                          |                             |  |                           |           
|Gross profit                              |                             |  |                           | 2,032,160 
|Operating expenses:                       |                             | 
|Sales and marketing                       |                             |  |                           | 788,670   
|General and administrative                |                             |  |                           | 434,434   
|Research and development                  |                             |  |                           | 392,292   
|                                          |                             |  |                           |           
|Total operating expenses                  |                             |  |                           | 1,615,396 
|                                          |                             |  |                           |           
|Income from operations                    |                             |  |                           | 416,764   
|Interest and other income (expense), net  |                             |  |                           | 64,686    
|                                          |                             |  |                           |           
|Net income before income taxes            |                             |  |                           | 481,450   
|Income taxes                              |                             |  |                           | (23,743   
|                                          |                             |  |                           |           
|Net income                                |                             |  | $                         | 457,707   
|                                          |                             |  |                           |           
|Shares used in the calculation of basic   |                             | 
|net income per share                      |                             |  |                           | 16,547,664
|Basic net income per share                |                             |  | $                         | 0.03      
|                                          |                             |  |                           |           
|Shares used in the calculation of diluted |                             | 
|net income per share                      |                             |  |                           | 17,995,485
|Diluted net income per share              |                             |  | $                         | 0.03      
|                                          |                             |  |                           |           

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

3



---

Ophthalmic Imaging
Systems
                                                              Condensed Statements
of Cash Flows (Unaudited)

|                                                       | Six months ended June 30, | 
|------------------------------------------------------ | ------------------------- | 
|
|Operating activities:                                  |                           | 
|Net income                                             |                           | 
|Adjustments to reconcile net income to net cash        |                           | 
|provided by operating activities                       |                           | 
|Depreciation and amortization                          |                           | 
|Compensation Expense                                   |                           | 
|Loss on disposal of equipment                          |                           | 
|Non-cash interest charge                               |                           | 
|Net  (increase) decrease in current assets other       |                           | 
|than cash and cash equivalents                         |                           | 
|Net decrease in other assets                           |                           | 
|Net (decrease) increase in current liabilities other   |                           | 
|than short-term borrowings                             |                           | 
|                                                       |                           | 
|Net cash provided by operating activities              |                           | 
|                                                       |                           | 
|Investing activities:                                  |                           | 
|Acquisition of furniture and equipment                 |                           | 
|                                                       |                           | 
|Financing activities:                                  |                           | 
|Principal payments on notes payable                    |                           | 
|Advance to related parties                             |                           | 
|Proceeds from note receivable from related parties     |                           | 
|Proceeds from exercise of options                      |                           | 
|                                                       |                           | 
|Net cash (used in) provided by financing activities    |                           | 
|                                                       |                           | 
|Net (decrease) increase in cash and equivalents        |                           | 
|Cash and equivalents, beginning of the period          |                           | 
|                                                       |                           | 
|Cash and equivalents, end of  the period               |                           | 
|                                                       |                           | 
|                                                       |                           | 
|Supplemental schedule of noncash financing activities: |                           | 
|Conversion of notes payable to common stock            |                           | 
|Conversion of interest to common stock                 |                           | 
|Addition to receivable from                            |                           | 
|Related party in exchange for inventory and            |                           | 
|other noncash transactions, net                        |                           | 
|                                                       |                           | 
|Supplemental schedule of cash flow information:        |                           | 
|Cash paid for interest                                 |                           | 
|Cash paid for taxes                                    |                           | 
|                                                       |                           | 

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

4



---

Notes to Condensed
Financial Statements

Three and Six Month
Periods ended June 30, 2007 and 2006

(Unaudited)

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

| | The
accompanying unaudited condensed balance sheet as of June 30, 2007, condensed statements
of income for the three and six month periods ended June 30, 2007 and 2006 and the
condensed statements of cash flows for the six month period ended June 30, 2007 and 2006
have been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and footnote
disclosures required by generally accepted accounting principles 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, 2006 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, 2007 are not necessarily indicative of the
operating results for the full year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 2. |  | Net
Income Per Share
|------- |  | --------------------

| | Basic
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



---

|                                              | Unaudited
Three Months Ended
June 30, |  | Unaudited
Six Months Ended
June 30, |           
|--------------------------------------------- | ------------------------------------- |  | ----------------------------------- | ----------
|
|Numerator for basic and diluted net income    |                                       |  |                                     |           
|per share                                     |                                       |  | $                                   | 457,707   
|                                              |                                       |  |                                     |           
|Denominator for basic net income per share:   |                                       | 
|Weighted average shares                       |                                       |  |                                     | 16,547,664
|Effect of dilutive:                           |                                       | 
|Employee/director stock options               |                                       |  |                                     | 1,447,821 
|                                              |                                       |  |                                     |           
|Dilutive potential common shares              |                                       |  |                                     | 1,447,821 
|                                              |                                       |  |                                     |           
|Denominator for diluted net income  per share |                                       |  |                                     | 17,995,485
|                                              |                                       |  |                                     |           
|Basic net income per share                    |                                       |  | $                                   | 0.03      
|                                              |                                       |  |                                     |           
|Diluted net income per share                  |                                       |  | $                                   | 0.03      
|                                              |                                       |  |                                     |           

| | As
of June 30, 2007 and June 30, 2006 there were 8,000 and 21,500 options and warrants,
respectively whose exercise price exceeded the average market price of the stock and have
been excluded from this computation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | MediVision
| | ----------

| | On
July 20, 2005 our Board of Directors authorized us to guarantee and/or provide security
interests in our assets for certain of MediVisions loans with United Mizrahi Bank
Ltd. We entered into a Secured Debenture (the 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 terms of the Debenture, we guarantee the payment of all of 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 United Mizrahi Bank by MediVision and secured by us as of June 30, 2007
was approximately $2,000,000.
| | ------------------------------------------------------------------------------------------------------------------------

| | On
April 19, 2007, we and MediVision entered into a promissory note, security agreement, and
addendum to the license and distribution agreement as described below, in order to
provide additional financing for the engineering of the Electro-Optical Unit. We shall
loan to MediVision up to the sum of $800,000. Funds
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6



---

| | will
be distributed in various monthly sums as needed in accordance with the budget and
schedule attached to the Addendum, beginning in April 2007 for amounts budgeted from
January 2007 through December 2007. The loan will incur interest of 8% per annum and
repayment will commence on May 1, 2009. Repayments will be made in 24 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 the addendum or
the related Promissory Note or Security Agreement, the principal and interest outstanding
on the loan will become immediately due and payable. The loan is secured by shares of our
common stock, owned by MediVision.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount of shares pledged under the loan is calculated using the amount of loan given to
MediVision divided by $1.83, the average closing price of our common stock for the ten
business days prior to April 19, 2007, less a 25% discount. If MediVision defaults on its
repayment obligation as specified in the addendum, we may seek repayment by foreclosing
on the shares pledged as collateral or, alternatively, we have the option to receive a
portion of MediVisions ownership interest in patent rights relating the
Electro-Optical Unit, calculated based on the amount of principal and interest
outstanding on the loan, which is in default at the time we exercise this option,
multiplied by 25%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of June 30, 2007, we had paid MediVision $493,580 and MediVision pledged as collateral
269,716 shares of our stock based on the calculated fixed share price of $1.83.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of June 30, 2007, MediVision owns approximately 56% of our outstanding common stock.
| | ---------------------------------------------------------------------------------------

| | On
June 28, 2006, we and MediVision entered 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



---

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 19, 2007, we and MediVision entered into an addendum to the license and
distribution agreement in order to extend various dates and deadlines as specified in the
original agreement. As long as we continue to make loan payments to MediVision as
described above, MediVision shall provide to us monthly reports regarding the progress of
performance of the tasks and the use of the loan proceeds. We also have rights, upon
reasonable notice, to visit and inspect all facilities at which any tasks relating to the
products are performed by MediVision and/or third parties and to test prototypes of the
Electro-Optical Unit. We also have the right to make decisions regarding the performance
of the engineering of the Electro-Optical Unit pursuant to the budget and schedule,
including decisions concerning changes to personnel involved in the engineering, changes
in the subcontractors used, and the use of the proceeds from the loan for the engineering
and manufacture of the Electro-Optical Unit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
June 30, 2007, we had recorded a net amount due from MediVision of approximately $211,000
for products.
| | ----------------------------------------------------------------------------------------------------------

| | Sales
to MediVision during the three and six months ended June 30, 2007 totaled approximately
$208,000 and $310,000, respectively. Sales to MediVision during the three and six months
ended June 30, 2006 totaled approximately $57,000 and $147,000, respectively. 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 period ended June 30, 2007, we paid approximately $342,000 and
$669,000, respectively, to MediVision for research and development performed by
MediVision on our behalf. During the three and six month period ended June 30, 2006, we
paid approximately $238,000 and $476,000, respectively, to MediVision for research and
development performed by MediVision on our behalf.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



---

| | CCS
Pawlowski
| | -------------

| | At
June 30, 2007, we recorded a net amount due from CCS Pawlowski, a subsidiary of
MediVision, of approximately $50,000 for products and services. Sales to CCS Pawlowski
during the three and six months ended June 30, 2007 totaled approximately $61,000 and
$146,000, respectively. Sales to CCS Pawlowski during the three and six months ended June
30, 2006 totaled approximately $158,000 and $212,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for the services provided, we agreed to pay MS a monthly sum of $3,300. In
addition, MS is to be paid a yearly performance bonus of up to $20,000 upon achievement
of goals under the terms of the agreement determined by MS, Noam Allon and the Companys
Chairman of the Board. As of September 1, 2005, the monthly sum changed from $3,300 to
$4,000, and the yearly performance bonus changed from $20,000 to $10,000. During the year
ended December 31, 2005, MS earned fees of $42,400. MS paid out $30,400 out of the
$42,400 and the remainder remains accrued in other accrued liabilities, and not yet paid,
as of June 30, 2007. During the year ended December 31, 2006, MS earned fees of $48,000.
This amount remains accrued, but not paid as of June 30, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jonathan
Adereth
| | ----------------

| | Starting
January 2005, Jonathan Adereth, a former director, serves as a consultant to management.
We agreed to the following in connection with his service as a consultant. (i) to pay to
Mr. Adereth, a monthly retainer of $2,000, (ii) to pay to Mr. Adereth a daily fee of $500
for physical attendance in meetings, and (iii) to reimburse Mr. Adereth for reasonable
expenses incurred in connection with his services as a consultant to management.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



---

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

| | At
June 30, 2007, we have 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. 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,
2007.
| | --------------------------------------------------------------------------------------------------

| | A
 summary of the changes in stock options outstanding under our equity-based
compensation plans during the six months ended June 30, 2007 is presented below:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Shares |           | Weighted Average Exercise
Price |       | Weighted Average
Remaining Contractual
Term (Years) |      | Aggregate Intrinsic Value |           
|------------------------------ | ------ | --------- | ------------------------------- | ----- | --------------------------------------------------- | ---- | ------------------------- | ----------
|Outstanding at January 1, 2007 |        | 2,222,699 |                                 | $0.65 |                                                     | 7.03 |                           | $5,890,152
|Granted                        |        | 8,000     |                                 | $2.83 |                                                     | 9.69 |                           | --        
|Exercised                      |        | (305,500  | )                               | $0.51 |                                                     | --   |                           | --        
|Forfeited/Expired              |        | (51,333   | )                               | $1.17 |                                                     | --   |                           | --        
|Outstanding at June 30, 2007   |        | 1,873,866 |                                 | $0.67 |                                                     | 6.6  |                           | $2,492,242
|Exercisable at June 30, 2007   |        | 1,611,241 |                                 | $0.55 |                                                     | 6.35 |                           | $2,336,299

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



---

| | In
calculating compensation related to stock option grants, the fair value of each stock
option is estimated on the date of grant using the Black  Scholes-Merton option
pricing model and the following weighted average assumptions:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | Three Months Ended
June 30, 2007 |        | Six Months Ended
June 30, 2007 |       
|----------------------- | -------------------------------- | ------ | ------------------------------ | ------
|Dividend Yield          |                                  | None   |                                | None  
|Expected volatility     |                                  | 60.01% |                                | 60.01%
|Risk-free interest rate |                                  | 5.21   |                                | 5.21  
|Expected term (years)   |                                  | 9.21   |                                | 9.21  

| | The
Company recorded an incremental $8,000 and $15,000 of stock-based compensation expense
during the three and six months ended June 30, 2007, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of June 30, 2007, the Company had $28,848 of total unrecognized expense related to
non-vested stock-based compensation, which is expected to be recognized through 2009. The
total fair value of options vested during the three and six month periods ended June 30,
2007 was $7,712 and $15,424, respectively. Cash received from stock option exercises for
the three and six month periods ended June 30, 2007 was $154,617 and $155,524,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
were 0 and 8,000 options granted for the three and six month periods ended June 30, 2007.
The total intrinsic value of options exercised during the three and six month periods
ended June 30, 2007 was $479,509 and $482,362, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



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|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, |        
|------------------------------------------------ | ------------------------------------- |  | ----------------------------------- | -------
|
|Warranty balance at beginning of period          |                                       |  | $                                   | 446,638
|                                                 |                                       | 
|Reductions for warranty services provided        |                                       |  |                                     | (56,688
|Changes for accruals in current period           |                                       |  |                                     | (49,675
|                                                 |                                       |  |                                     |        
|Changes for accruals for pre-existing warranties |                                       |  |                                     | --     
|                                                 |                                       |  |                                     |        
|                                                 |                                       | 
|Warranty balance at end of period                |                                       |  | $                                   | 340,275
|                                                 |                                       |  |                                     |        

12



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ITEM 2.    MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION

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 or Plan of Operation,
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 SEC 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.

At
June 30, 2007, we had stockholders equity of $9,437,826 and our current assets
exceeded our current liabilities by $8,227,737.

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 (GAAP). The financial information contained in
the financial statements is, to a significant extent, financial information based on
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 deferred tax asset is more likely
than not to be used in the future. According to IRS rule 382, our net operating losses
prior to August of 2000 are capped at $389,000 per year as of fiscal year 2000 for 20
years. We use the following analysis to assess whether we will more likely than not
realize the deferred tax asset. 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.

To
realize our tax asset, we must evaluate whether we will more likely than not be able to
realize the deferred tax asset for a certain number of years in the future. We were not
profitable for seventeen consecutive years between 1984 and 2000. We turned a profit in
2001 and have been profitable for the last five years. There is significant uncertainty
projecting future profitability due to the history of our business, and the volatility of
the market that we are in. We calculate our tax provision quarterly and assess how much
deferred tax asset is more likely than not to be used in the future.

In
the fourth quarter of every fiscal year, we participate in the industrys largest
tradeshow of the year, which contributes approximately 25% of our revenue generated in the
last month of the fiscal year. This tradeshow substantially influences the outcome of our
profitability for that year, as well as gives us an indication of the years to come.
Significant expenses, resources, and risk are put into the tradeshow every year in hopes
of generating revenue. We can also see how the market responds to our new products, as
well as our competitors products. With this tradeshow behind us

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in the fourth quarter of every fiscal
year, we are in a better position to assess how we are doing, will be doing in the years
to come, and determine whether it is more likely than not that we will be able to realize
our deferred tax assets.

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 issues. The product reserve is calculated
based on a fixed dollar amount per system shipped each quarter. The unanticipated reserves
usually arise from the introduction of new products at our largest tradeshow of the year
in October/November of every year. When a new product is introduced, we reserve for
specific problems arising from potential issues during the implementation phase. As time
passes, and the 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.

New Accounting
Pronouncements

In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 48 Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement 109". FIN 48 establishes a single model to address accounting for
uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on derecognition, measurement
classification, interest and penalties, accounting in interim periods, disclosure and
transition. We adopted FIN 48 as of January 1, 2007. The provisions of FIN 48 have been
applied to all tax positions of the Company as of January 1, 2007.  There was no
cumulative effect of applying the provisions of FIN 48 and there was no significant effect
on our provision for income taxes for the three and six months ended June 30, 2007. 
Upon adoption as of January 1, 2007, we had no derecognition adjustments to our existing
reserves for uncertain tax positions.

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
shall be effective for financial statements issued for fiscal years beginning after
November 15, 2007. The adoption of FASB 157 is not expected to 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, 2007 were $3,617,633, representing a 5%
decrease from revenues of $3,817,196 for the three months ended June 30, 2006. The
decrease in revenues between the quarters is due to a decrease of product sales in the
three months ended June 30, 2007 compared to the three months ended June 30, 2006. The
decrease in product sales was due to the impact of a large contract in the three months
ended June 30, 2006. Our revenues for the six months ended June 30, 2007 were $7,778,013,
representing a 4% increase from revenues of $7,467,890 for the six months ended June 30,
2006. The increase in revenues for the six months ended June 30, 2007 is due to higher
revenues generated from service sales.

Products
accounted for approximately 80% and 84% of our revenue for the second quarters of 2007 and
2006, respectively. Products accounted for approximately 82% and 86% of our revenue for
the six months ended June 30, 2007 and 2006, respectively. Service revenues for these
products accounted for approximately 20% and 16% of our revenue for the second quarters of
2007 and 2006, respectively. Service revenues for these products accounted for
approximately 18% and 14% of our revenue for the six months ended June 30 2007 and 2006,
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 the 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 and six months ended June 30, 2007 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 were approximately $269,000 and $215,000
during the three month periods ended June 30, 2007 and June 30, 2006, respectively.
Revenues from sales of our products to related parties were approximately $456,000 and
$359,000during the six month periods ended June 30, 2007 and June 30, 2006,
respectively.

Gross Margins

Gross
margins were approximately 56% during the three month period ended June 30, 2007 and June
30, 2006. Gross margins were approximately 57% during the six month period ended June 30,
2007 as compared to 56% for the six month period ended June 30, 2006. Gross margins
increased slightly due to product mix.

Sales and Marketing
Expenses

Sales
and marketing expenses accounted for approximately 22% of total revenues during the second
quarter of fiscal 2007 as compared to approximately 21% during the second quarter of
fiscal 2006. Actual expenses decreased to $788,670 during the second quarter of 2007
versus $806,754

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during the second  quarter of 2006, representing a decrease of $18,084 or
2%. Sales and marketing expenses accounted for approximately 22% of total revenues during
the first six months of fiscal 2007 and fiscal 2006. Actual expenses increased to
$1,676,004 during the first six months of 2007 versus $1,651,173 during the first six
months of 2006, representing an increase of $24,831 or 2%.

General and
Administrative Expenses

General
and administrative expenses were $434,434 in the second quarter of fiscal 2007 and
$401,866 in the second quarter of fiscal 2006, representing an increase of $32,568 or 8%.
Such expenses accounted for approximately 12% and 11% of revenues during the second
quarters of 2007 and 2006, respectively. General and administrative expenses were $955,462
in the first six months of fiscal 2007 and $768,900 in the first six months of fiscal
2006, representing an increase of $186,562 or 24%. Such expenses accounted for
approximately 12% and 10% of revenues during the first six months of 2007 and 2006,
respectively. The increase was primarily due to a steady amount of legal expenses during
the second quarter of 2007 compared to an abnormally low amount of legal expenses
accounted for during the second quarter of 2006 due to the reimbursement of legal fees we
received related to the JDI lawsuit.

Research and Development
Expenses

Research
and development expenses were $392,292 in the second quarter of fiscal 2007 and $396,341
in the second quarter of fiscal 2006, representing a decrease of $4,049 or 1%. Such
expenses accounted for approximately 11% of revenues during the second quarter of 2007 and
10% of revenues during the second quarter of 2006. Research and development expenses were
$800,820 in the first six months of fiscal 2007 and $762,248 in the first six months of
fiscal 2006, representing an increase of $38,572 or 5%. Such expenses accounted for
approximately 10% of revenues during the first six months of 2007 and 2006. The increase
resulted 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.

Interest and other income
(expense), net

Interest
and other income (expense) were $64,686 during the second quarter of fiscal 2007 versus
$14,136 during the second quarter of fiscal 2006. For the six months ended June 30, 2007
and 2006, interest and other income (expense) were $107,324 and ($10,165), respectively.
The increase is primarily due to an increase in our interest income resulting from our
increased cash balance.

Income Taxes

Income
tax expense was $23,743 during the second quarter of fiscal 2007 versus $0 during the
second quarter of fiscal 2006. Income tax expense was $28,182 and $0 during the first six
months of 2007 and 2006, respectively.

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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 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.

Net Income

We
recorded net income of $457,707, or $0.03 per share basic and diluted earnings, for the
second quarter ended June 30, 2007 as compared to net income of $535,294 or $0.03 per
share basic and diluted earnings for the second quarter ended June 30, 2006. We recorded
net income of $1,110,850, or $0.07 and $0.06 per share basic and diluted earnings,
respectively, for the six months ended June 30, 2007 as compared to net income of
$1,020,170 or $0.06 per share basic and diluted earnings for the six months ended June 30,
2006.

Balance Sheet

Our
assets increased by $2,993,510 as of June 30, 2007 as compared to June 30, 2006. This
increase was primarily due to an increase in accounts receivable of $1,334,940, note
receivable to MediVision of $593,941, inventory of $90,842, prepayments to vendors of
$102,123, capital equipment of $296,479, deferred tax asset of $216,500, and prepaid
products related to the new digital imaging system that MediVision is working on of
$310,000.

Our
liabilities decreased by $94,841 mainly because we repaid the note payable to MediVision
of $212,265, a decrease of customer deposits of $493,006, offset by an increase in
accounts payable of $169,932 and deferred warranty revenue of $517,774.

Our
stockholders equity increased by $3,088,351 primarily due to net income from the
previous 12 months of $2,341,439, and the increase in common stock of $746,911 due to the
exercise of employee stock options, primarily one employee that resigned in the
quarter.

Liquidity and Capital
Resources

Our
operating activities generated cash of $219,176 during the six months ended June 30, 2007
as compared to cash generated of $1,642,918 in the six months ended June 30, 2006. The
cash generated from operations during the first six months of 2007 was principally from
our profitable operations from the period of $1,110,850, an increase in deferred warranty
revenue of $306,104, offset by an increase in deferred tax asset of $168,500, an increase
in prepaid expenses of $166,479, an increase in accounts receivable from related parties
of $196,689, a decrease in accrued liabilities of $288,013, a decrease in accounts payable
of $162,115, and an increase in other assets of $235,966 primarily consisting of an
increase in prepaid products.

Cash
used in investing activities was $132,812 during the first six months of 2007 as compared
to $66,489 during the first six months of 2006. Our investing activities consisted of

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purchases of software and equipment.
We anticipate continued capital expenditures in connection with our ongoing efforts to
upgrade our existing management information and corporate communication systems. 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 $348,400 during the first six months of fiscal 2007
as compared to cash generated of $436,023 during the first six months of fiscal 2006. The
cash used in financing activities during the first six months of 2007 was principally from
the repayments made to MediVision for a note payable in the amount of ($497,260), offset
by proceeds from the exercise of stock options by employees of $155,524. The cash
generated in financing activities during the first six months of 2006 was principally from
proceeds on the note receivable from MediVision of $583,484, offset by repayments of the
debt to Laurus of $147,094.

On
June 30, 2007 our cash and cash equivalents were $5,901,821. 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 selling and marketing
related expenses for existing products.

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.

Material Agreement

On
June 28, 2006, we and MediVision entered 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. Payments made under
this agreement for exclusive distribution rights have been capitalized and will be
amortized over the term of the agreement. 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. We also granted MediVision
a license to use our OIS WinStation software and any other applicable OIS system and the
accompanying intellectual property rights therein and a license to use our patents to
develop the new digital imaging system and fulfill its obligations under this Agreement.
Our foregoing appointment as an exclusive distributor is conditional upon the payment of
the advance and MediVisions successful completion of the engineering, mass
manufacture, and supply of the new digital imaging system, which has specifically
dedicated features for the retinal market, in accordance with the technical specifications
contained in the agreement. 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.

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The
advanced funds will be recovered as we purchase new digital imaging systems in accordance
with the specified quotas. The quotas mandate 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 quotas.

Under
this Agreement, we may not deal in the new digital imaging system outside the agreed upon
territory. Moreover, excluding our current products or products derived from our current
products, we may not deal in products that compete directly with the new digital imaging
system or represent or provide services to a company which has a product or products that
competes with the new digital imaging system. We also agreed to, among other things, as
confined to the agreed upon territory, (1) use commercially reasonable efforts in
promoting, marketing and selling the new digital imaging system, (2) service customers who
purchased the new digital imaging system in the agreed upon territory, (3) diligently
advertise the new digital imaging system in the agreed upon territory in relevant journals
and by direct mail, (4) cooperate with MediVision in dealing with customer complaints
concerning the new digital imaging system, and (5) provide MediVision with a 12 month
forecast of our intended purchases during such year, including, at least 30 days prior to
the beginning of each quota year, providing MediVision with an annual purchase order that
includes a breakdown of our purchases by quarter; at least 70% of the applicable annual
quota must be ordered in this annual purchase order.

Under
this Agreement, excluding intellectual property rights, neither party is entitled to
damages as a result of loss of use, sales or profits, or any special, indirect,
incidental, or consequential loss or damage. Moreover, MediVision will not be liable to us
in connection with any patent infringement claim in certain instances whereby (1) the new
digital imaging system is combined with another device not manufactured by MediVision, (2)
the new digital imaging system is used in way other than for which it was designed, and
(3) the new digital imaging system is modified by OIS or a third party.

On
April 19, 2007, we entered into an addendum to the License and Distribution Agreement
with MediVision whereby we agreed to extend certain deadlines as specified in the
original Agreement and provide additional financing for the engineering of the
Electro-Optical Unit in the form of a loan to MediVision in an aggregate amount of up to
$800,000, represented by a promissory note. We will provide portions of the loan in
various monthly sums as needed in accordance with the budget and schedule beginning in
April 2007 for amounts budgeted from January 2007 through December 2007.

The
Loan will incur interest of 8% per annum and repayment will commence on May 1, 2009.
Repayments will be made 24 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

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default  under the Addendum or the related  Promissory
Note or Security Agreement, the
principal and interest outstanding on the Loan will become immediately due and payable.

On
April 19, 2007, we and MediVision entered into a promissory note, security agreement, and
addendum to the license and distribution agreement as described below, in order to provide
additional financing for the engineering of the Electro-Optical Unit. We shall loan to
MediVision up to the sum of $800,000. Payments will be made in various monthly sums as
needed in accordance with the budget and schedule attached to the Addendum, beginning in
April 2007 for amounts budgeted from January 2007 through December 2007. The loan will
incur interest of 8% per annum and repayment will commence on May 1, 2009. Repayments will
be made in 24 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 the addendum or the related Promissory Note or Security Agreement, the
principal and interest outstanding on the loan will become immediately due and payable.
The loan is secured by shares of our common stock, owned by MediVision.

The
amount of shares pledged under the loan is calculated using the amount of loan given to
MediVision divided by the average closing price of our shares of stock in the ten business
days prior to April 19, 2007, less a 25% discount. This was calculated to be $1.83. If
MediVision defaults on its repayment obligation as specified in the addendum, we may
seek repayment by foreclosing on the shares pledged as collateral or alternatively, we
have the option to receive a portion of MediVisions ownership interest in patent
rights relating the Electro-Optical Unit, calculated based on the amount of principal and
interest outstanding on the loan, which is in default at the time we exercise this option,
multiplied by 25%.

If
MediVision defaults on its repayment obligation as specified in the Addendum, we may seek
repayment by foreclosing on the shares pledged as collateral or alternatively, we have the
option to receive a portion of MediVisions ownership interest in patent rights
relating the Electro-Optical Unit, calculated based on the amount of principal and
interest outstanding on the Loan, which is in default at the time we exercise this option,
multiplied by 25%.

During
the period in which we provide this loan, we will be entitled to certain additional
rights, including monthly progress reports, inspection of the facilities where the work is
conducted on the Electro-Optical Units upon reasonable notice, testing prototypes of the
Electro-Optical Units, and various decision-making powers such as changes to personnel and
subcontractors.

On
April 19, 2007, we and MediVision entered into an addendum to the license and distribution
agreement in order to extend various dates and deadlines as specified in the original
agreement. As long as we continue to make loan payments to MediVision as described above,
MediVision shall provide to us monthly reports regarding the progress of performance of
the tasks and the use of the loan proceeds. We also have rights, upon reasonable notice,
to visit and inspect all facilities at which any tasks relating to the products are
performed by MediVision and/or third parties and to test prototypes of the Electro-Optical
Unit. We also have the right to make decisions regarding the performance of the
engineering of the Electro-Optical Unit pursuant to the budget and schedule, including
decisions concerning changes to personnel involved in the engineering, changes in the
subcontractors used, and the use of the proceeds from the loan for the engineering and
manufacture of the Electro-Optical Unit.

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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,
2007 is approximately $2,000,000.

# ITEM 3.    CONTROLS AND
PROCEDURES

As
of the end of the period covered by this Report, our management, with the participation of
our Chief Executive Officer (principal executive officer) and our 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. Based
on that evaluation, these officers concluded that, as of June 30, 2007, our disclosure
controls and procedures were effective.

During
the quarter ended June 30, 2007, there were no changes in our internal control over
financial reporting that have materially affected, or are 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 Verdooner claims of breach of fiduciary duty, intentional interference with
contract, and intentional interference with prospective economic advantage. The complaint
requests total damages against Verdooner in excess of $7,000,000.  Discovery has
begun and no trial date has been set yet.

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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 7, 2007
|                      | By:                        | /s/ Gil Allon          
|                      |                            |                        
|                      | Name:                      | Gil Allon,             
|                      | Title:                     | Chief Executive Officer
|                      |                            |                        
|                      | By:                        | /s/ Ariel Shenhar      
|                      |                            |                        
|                      | Name:                      | Ariel Shenhar,         
|                      | Title:                     | Chief Financial Officer