**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 March 31, 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 May        14, 2008, 16,866,831 shares of common stock, no par value, were outstanding.

 

 

----

OPHTHALMIC IMAGING SYSTEMS

FORM        10-Q

FOR THE        QUARTER ENDED March 31, 2008

 

| **PART I**               | **FINANCIAL INFORMATION**                                                                                                 | **Page**                               |
|--------------------------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------|
| Item 1.                  | Financial Statements (unaudited)                                                                                          | 1                                      |
|                     | Condensed Balance Sheet as of March 31, 2008                                                                              | 3                                      |
|                     |  

Condensed Statements of Operations for the Three Months                        ended March 31, 2008 and 2007 | 4                                      |
|                     |  

Condensed Statements of Cash Flows for the Three Months                        ended March 31, 2008 and 2007      | 5                                      |
|                     | Notes to Condensed Financial Statements                                                                                   | 6                                      |
| Item 2.                  | Management’s Discussion and Analysis of Financial                        Condition and Results of Operations        | 15                                     |
| Item 4T.                 | Controls and Procedures                                                                                                   | 23                                     |
| **PART II**              | **OTHER INFORMATION**                                                                                                     | 24                                     |
|  

Item 1.

Item 6. | Legal Proceedings

                         

Exhibits                                                               | 24

                         

25 |

 

 

 

 

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PART        I      FINANCIAL INFORMATION

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

 

 

|   | 2 |
|--------|---|

 

----

| Ophthalmic Imaging Systems                                                                                                      |                                                                             |                                             |
|---------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|--------------------------------------------------|
| Condensed Balance Sheet                                                                                                         |                                                                             |                                             |
|                                                                                                                            |                                                                             |                                             |
| **Assets**                                                                                                                      |                                                                             |                                             | March 31, 2008 |   | December 31, 2007 |
| Current assets:                                                                                                                 |                                                                             |                                             |   |   |
|                                                                                                                            | Cash and cash equivalents                                                        | $5,559,490                                       |   | $7,630,284 |
|                                                                                                                            | Accounts receivable, net                                                         | 2,409,107                                        |   | 2,535,843 |
|                                                                                                                            | Accounts receivable from related party                                           | 496,817                                          |   | 397,307 |
|                                                                                                                            | Note receivable from related party                                               | 1,765,404                                        |   | 1,146,872 |
|                                                                                                                            | Inventories, net                                                                 | 1,094,508                                        |   | 746,342 |
|                                                                                                                            | Prepaid expenses and other current assets                                        | 593,306                                          |   | 507,732 |
|                                                                                                                            | Deferred tax asset                                                               | 1,238,000                                        |   | 1,342,000 |
|                                                                                                                            |                                                                             | Total current assets                             | 13,156,632 |   | 14,306,380 |
| Furniture and equipment, net of accumulated                                                                                     |                                                                             |                                             |   |
|                                                                                                                            | depreciation of $625,505 and $577,558                        respectively        | 424,911                                          |   | 416,838 |
| Restricted cash                                                                                                                 | 169,555                                                                          |                                             | 168,218 |
| Licensing agreement                                                                                                             | 273,808                                                                          |                                             | 273,808 |
| Prepaid financing                                                                                                               | 132,468                                                                          |                                             | 148,365 |
| AcerMed software purchase                                                                                                       | 553,830                                                                          |                                             | 90,815 |
| Imaging software                                                                                                                | 157,836                                                                          |                                             | 0 |
| Capitalized software development                                                                                                | 225,892                                                                          |                                             | 0 |
| Prepaid products                                                                                                                | 460,000                                                                          |                                             | 460,000 |
| Capitalized merger costs                                                                                                        | 584,178                                                                          |                                             | 527,327 |
| Other assets                                                                                                                    | 302,430                                                                          |                                             | 295,144 |
|                                                                                                                            |                                                                             | Total assets                                     | $16,441,540 |   | $16,686,895 |
|                                                                                                                            |                                                                             |                                             |   |   |
| **Liabilities and Stockholders’                        Equity**                                                           |                                                                             |                                             |   |
| Current liabilities:                                                                                                            |                                                                             |                                             |   |   |
|                                                                                                                            | Accounts payable                                                                 | $853,328                                         |   | $726,573 |
|                                                                                                                            | Accrued liabilities                                                              | 1,122,082                                        |   | 1,437,313 |
|                                                                                                                            | Deferred extended warranty revenue                                               | 1,702,492                                        |   | 1,604,315 |
|                                                                                                                            | Customer deposits                                                                | 146,973                                          |   | 55,435 |
|                                                                                                                            | Note payable- current portion                                                    | 1,023,558                                        |   | 1,029,643 |
|                                                                                                                            |                                                                             | Total current liabilities                        | 4,848,433 |   | 4,853,279 |
|                                                                                                                            |                                                                             |                                             |   |
| Noncurrent liabilities:                                                                                                         |                                                                             |                                             |   |   |
|                                                                                                                            | Line of credit                                                                   | 150,000                                          |   | 150,000 |
|                                                                                                                            | Lease payable, less current portion                                              | 1,593,948                                        |   | 1,564,226 |
|                                                                                                                            |                                                                             | Total liabilities                                | 6,592,381 |   | 6,567,505 |
|                                                                                                                            |                                                                             |                                             |   |
| Stockholders’ equity:                                                                                                     |                                                                             |                                             |   |   |
|                                                                                                                            | Common stock, no par value, 35,000,000 shares                        authorized; |                                             |   |   |
|                                                                                                                            |                                                                             | 16,866,831 issued and outstanding                | 16,482,288 |   | 16,474,720 |
|                                                                                                                            | Additional paid in capital                                                       | 191,104                                          |   | 191,104 |
|                                                                                                                            | Accumulated deficit                                                              | (6,824,233)                                      |   | -6,546,434 |
|                                                                                                                            |                                                                             | Total stockholders’ equity                 | 9,849,159 |   | 10,119,390 |
|                                                                                                                            |                                                                             | Total liabilities and stockholders’ equity | $16,441,540 |   | $16,686,895 |
|  

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

 

 

|   | 3 |
|--------|---|

 

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| Ophthalmic Imaging Systems                |
|-------------------------------------------|
| Condensed Statement of Operations         |
| (Unaudited)                               |
|                                      | Three months ended March 31, |
|                                      | 2008 |   | 2007 |
|                                      |   |   |   |
| Net revenues                              | $ | 3,147,692 |   | $ | 4,160,380 |
| Cost of sales                             | 1,543,832 |   | 1,728,546 |
| Gross profit                              | 1,603,860 |   | 2,431,834 |
| Operating expenses:                       |   |   |   |
|                                      | Sales and marketing | 944,009 |   | 887,334 |
|                                      | General and administrative | 466,165 |   | 521,029 |
|                                      | Research and development | 436,978 |   | 408,527 |
|                                      |   | Total operating expenses | 1,847,151 |   | 1,816,890 |
| Income from operations                    | (243,291) |   | 614,944 |
| Interest and other income (expense), net  | (33,223) |   | 42,638 |
| Net income before income taxes            | (276,514) |   | 657,582 |
| Income taxes (expense) benefit            | (1,286) |   | (4,439) |
|                                      |   |   |   |
| Net (loss) income                         | $ |  (277,800) |   | $ | 653,143 |
|                                      |   |   |   |
| Shares used in the calculation of basic   |   |   |   |
|                                      | Net (loss) income per share | 16,866,831 |   | 16,508,677 |
|                                      |   |   |   |
| Basic net (loss) income per share         | $ | (0.02) |   | $ |  0.04 |
|                                      |   |   |   |
| Shares used in the calculation of diluted |   |   |   |
|                                      | Net (loss) income per share | 17,103,385 |   | 18,356,856 |
|                                      |   |   |   |
| Diluted net (loss) income per share       | $ |  (0.02) |   | $ | 0.04 |
|                                           |  |  |  |  |  |

 

 

|   | 4 |
|--------|---|

 

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| Ophthalmic Imaging Systems                                                                                                      |
|---------------------------------------------------------------------------------------------------------------------------------|
| Condensed Statements of Cash Flows                                                                                              |
| (Unaudited)                                                                                                                     |
|                                                                                                                            | Three months ended March 31, |
|                                                                                                                            | 2008 |   | 2007 |
|                                                                                                                                 |   |   |   |
| **Operating activities:**                                                                                                       |   |   |   |   |
| Net (loss) income                                                                                                               |   | $ |   (277,800) |   | $ |  653,143 |
| Adjustments to reconcile net (loss) income to net cash (used                        in)                                         |   |   |   |
|                                                                                                                            | provided by operating activities |   |   |   |
|                                                                                                                            |   | Depreciation and amortization | 47,947 |   | 44,994 |
|                                                                                                                            |   | Compensation Expense | 7,569 |   | 7,712 |
|                                                                                                                            |   | Net increase in current assets other |   |   |   |
|                                                                                                                            |   |   | than cash and cash equivalents | (302,514) |   | (168,199) |
|                                                                                                                            |   | Net increase in other assets | (8,337) |   | -- |
|                                                                                                                            |   | Net decrease in current liabilities other |   |   |   |
|                                                                                                                            |   |   | than short-term borrowings | (4,846) |   | (54,104) |
| Net cash (used in) provided by operating                        activities                                                      | (537,981) |   | 483,546 |
| **Investing activities:**                                                                                                       |   |   |   |   |
| Acquisition of furniture and equipment                                                                                          | (56,020) |   | (112,569) |
| Acquisition of patents                                                                                                          | (285) |   |   |
| Acquisition of AcerMed software license                                                                                         | (463,015) |   |   |
| Development of Imaging software                                                                                                 | (157,836) |   |   |
| R&D Capitalization                                                                                                          | (225,892) |   |   |
| Merger capitalization                                                                                                           | (56,851) |   |   |
|                                                                                                                            |   |   |   |
| Net cash used in investing activities                                                                                           | (959,899) |   | (112,569) |
| **Financing activities:**                                                                                                       |   |   |   |   |
| Principal payments on notes payable                                                                                             | -- |   | (176) |
| Advance to related parties                                                                                                      | (618,532) |   | -- |
| Amortization of prepaid financing related to note                        payable                                                | 15,896 |   |   |
| Amortization of discount related to note payable                                                                                | 29,722 |   |   |
| Proceeds from exercise of options                                                                                               | -- |   | 908 |
| Net cash (used in) provided by financing                        activities                                                      | (572,914) |   | 732 |
| Net (decrease) increase in cash and equivalents                                                                                 | (2,070,794) |   | 371,709 |
| Cash and equivalents, beginning of the period                                                                                   | 7,630,284 |   | 6,163,857 |
| Cash and equivalents, end of the period                                                                                         | $ | 5,559,490 |   | $ |   6,535,566 |
|                                                                                                                            |   |   |   |
| **Supplemental schedule of noncash financing                        activities:**                                               |   |   |
|                                                                                                                            |   | Addition (Reduction) to receivable from |   |   |
|                                                                                                                            |   | Related party in exchange for inventory and |   |   |
|                                                                                                                            |   | other noncash transactions, net | $ |  234,015 |   | $ | 248,092 |
|                                                                                                                            |   |   |   |
|  

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

 

 

|   | 5 |
|--------|---|

 

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Notes to        Condensed Financial Statements

 

Three        Month Period ended March 31, 2008 and 2007

 

(Unaudited)

 

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

 

 

|   | The accompanying unaudited condensed balance sheet as of                        March 31, 2008, condensed statements of operation for the three month                        period ended March 31, 2008 and 2007 and the condensed statements of cash                        flows for the three month period ended March 31, 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 March 31,                        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. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

|   | 6 |
|--------|---|

 

----

 

 

|                                                                               |   | UnauditedThree Months EndedMarch 31, |       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                               |   | 2008                                 |       | 2007 |   |
| Numerator for basic and diluted net (loss) income per                        share |   | $                                    | (277,800   | ) | $ | 653,143 |   |
|                                                                               |   |                                 |       |   |   |   |   |
| Denominator for basic net income per share:                                        |   |                                 |       |   |   |   |   |
| Weighted average shares                                                            |   |                                 | 16,866,831 |   |   | 16,508,677 |   |
| Basic net income per share                                                         |   | $                                    | (0.02      | ) | $ | 0.04 |   |
|                                                                               |   |                                 |       |   |   |   |   |
| Diluted net income per share                                                       |   | $                                    | N/A        |   | $ | 0.04 |   |

 

 

|    | As of March 31, 2007 there were 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 March 31, 2008, MediVision owns                        approximately 56% of our outstanding common stock.

                         

On January 30, 2008, we and MediVision entered into the                        Third Addendum to a License and Distribution Agreement, in order to provide                        additional financing for the engineering of the Electro-Optical Unit. Under                        this third addendum, we agreed to increase the loan amount from an                        aggregate amount of $1,100,000 to an aggregate amount of up to $1,350,000.                        This addendum also contains the following provisions in connection with the                        revised loan, (1) the number of MediVision’s shares of our stock                        acting as collateral for the revised loan will be recalculated as set forth                        in the Third Addendum, and (2) the formula to calculate our right to                        exercise an option in the MV Patent Rights will be changed in accordance                        with the revised loan amount and as set forth in the third addendum. The                        amount of shares pledged under the loan was calculated using the amount of                        loan given to MediVision divided by $0.43, the average closing price of our                        common stock for the ten business days prior to January 30, 2008, less a                        25% discount. MediVision has pledged as collateral for this note, and the                        $200,000 loan and security agreement described below, an aggregate                        5,420,221 shares of our common stock. |   |

 

 

|   | 7 |
|--------|---|

 

----

On March 31, 2008, we and MediVision entered into a fourth        addendum to the License and Distribution agreement to provide additional financing for the        engineering of the Electro-Optical Unit. Under this fourth addendum, we agreed to increase        the loan amount from an aggregate amount of $1,350,000 to an aggregate amount of up to        $1,600,000. This loan will incur interest of 8% per annum and repayment will commence on        May 1, 2009. Repayments will be made 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. This addendum also contains the following provisions in connection with the        revised loan, (1) the number of MediVision’s shares of our stock acting as collateral        for the revised loan will be recalculated as set forth in the fourth addendum, and (2) the        formula to calculate our right to receive a portion of MediVision’s ownership        interest in patent rights relating to the Electro-Optical Unit will be changed in        accordance with the revised loan amount and as set forth in the fourth addendum. The amount        of shares pledged under the revised loan was calculated using the amount of loan given to        MediVision divided by $0.27, the average closing price of our common stock for the ten        business days prior to March 31, 2008, less a 25% discount. MediVision has pledged as        collateral for this note, and the security agreement described below, an aggregate        5,420,221 shares of our common stock. As of March 31, 2008, MediVision’s principal        outstanding under this Loan and Security Agreement is $1,263,460.

         

On January 30, 2008, we also entered into a Loan and Security        Agreement with MediVision whereby we 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 our stock. The number of shares will be calculated        using the amount of loan given to MediVision divided by $0.43, the average closing price of        our common stock for the ten business days prior to January 30, 2008, less a 25%        discount.

         

On March 31, 2008, we 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, we 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 our 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 our common stock for the ten business days prior to March 31,        2008, less a 25% discount. As of March 31, 2008, MediVision’s principal outstanding        under this Loan and Security Agreement is $343,098.

 

|   | 8 |
|--------|---|

 

----

As of March 31, 2008, we had paid MediVision $1,606,558 for        the loans under the License and Distribution Agreement, as amended, and the Loan and        Security Agreement, as amended, and MediVision pledged as collateral 5,420,221 shares of        our stock based on the calculated fixed share price of $0.27.

 

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.

 

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 ima``ging 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.

 

On April 9, 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.

 

|   | 9 |
|--------|---|

 

----

On September 25, 2007, we and MediVision entered into an        addendum to the license and distribution agreement in order to provide additional financing        for the engineering of the Electro-Optical Unit, and to revise terms related to the        agreement. 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 and in default at the time we exercise this option, divided by        1,100,000, multiplied by 34.375%.

 

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.

 

We have capitalized the direct costs associated with the        merger. As of March 31, 2008, these costs have accumulated to $584,178.

 

At March 31, 2008, we recorded a net amount due from        MediVision of approximately $450,000 for products.

 

|   | 10 |
|--------|----|

 

----

 

|  

                          | Sales to MediVision during the three months ended March 31,                        2008 totaled approximately $104,000. Sales to MediVision during the three                        months ended March 31, 2007 totaled approximately $102,000. 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 month period ended March 31, 2008 and March                        31, 2007, we paid approximately $440,000 and $326,000 to MediVision for                        research and development performed by MediVision on our behalf,                        respectively.

                         

CCS Pawlowski

                         

At March 31, 2008, we recorded a net amount due from CCS                        Pawlowski, a subsidiary of MediVision, of approximately $47,000 for                        products and services. Sales to CCS Pawlowski during the three months ended                        March 31, 2008 and March 31, 2007 totaled approximately $58,000 and                        $85,000, 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.

                         

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 remains accrued, but not paid as of March 31,                        2008. During the year ended December 31, 2007, MS earned fees of $48,000.                        This amount remains accrued, but not paid as of March 31, 2008. During the                        first three months of 2008, MS earned fees of $12,000. This amount remains                        accrued, but not paid as of March 31, 2008. |   |
|----------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

 

|   | 11 |
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|  

Note 4. |  

 Share Based Compensation

                     

At March 31, 2008, 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. 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 months ended March 31, 2008.

                     

A summary of the changes in stock options                    outstanding under our equity-based compensation plans during the three months                    ended March 31, 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              | (17,000)  | $1.43  | --     | --     |
| Outstanding at March 31, 2008  | 2,341,686 | $0.72  | 6.36   | --     |
| Exercisable at March 31, 2008  | 1,522,478 | $0.56  | 5.60   | --     |

 

|  

                      |  

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 of                    stock-based compensation expense during the three months ended March 31,                    2008.

                     

As of March 31, 2008, the Company had $58,588 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 month period ended March 31, 2008 was $7,569.                    No options were granted or exercised for the three month period ended March 31,                    2008. |   |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                    |
|                                    |

 

 

|   | 12 |
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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                        March 31, |    |
|-------------------------------------------|--------|--------------------------------------------------------------------------------------|---------|
|                                      |   |                                                                                 | 2008    |   |   | 2007 |   |
| Warranty balance at beginning of period   |   | $                                                                                    | 128,250 |   | $ | 395,575 |   |
|                                      |   |                                                                                 |    |   |   |   |   |
| Reductions for warranty services provided |   |                                                                                 | (39,063 | ) |   | (48,938 | ) |
| Changes for accruals in current period    |   |                                                                                 | 20,000  |   |   | 100,000 |   |
|                                      |   |                                                                                 |    |   |   |   |   |
| Warranty balance at end of period         |   | $                                                                                    | 109,187 |   | $ | 446,638 |   |

 

 

 

|   | 13 |
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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 months ended March 31, 2008.

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

**Results of Operations**

         

*Selected Financial Data*

|                        | Three months ended |
|-----------------------------|--------------------|
|                        | March 31,          |
|                        | 2008               |
| **Statement of Income:**    |               |
| Net revenues:               |               |
| OIS                         | $ 3,105,555        |
| Abraxas                     | 42,137             |
|                        |               |
| Gross Profit:               |               |
| OIS                         | 1,661,327          |
| Abraxas                     | (57,467)           |
|                        |               |
| Operating Income:           |               |
| OIS                         | (55,888)           |
| Abraxas                     | (187,403)          |
| Net Income (Consolidated)   | (277,800)          |
|                        |               |
| **Balance Sheet**:          |               |
| Assets:                     |               |
| OIS                         | 15,357,510         |
| Abraxas                     | 1,084,030          |
|                        |               |
| Liabilities:                |               |
| OIS                         | 6,382,793          |
| Abraxas                     | 209,588            |
|                        |               |
| Stockholders’ Equity: |               |
| OIS                         | 10,043,063         |
| Abraxas                     | (193,904)          |

 

|   | 14 |
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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.

 

|   | 15 |
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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 March 31, 2008, we had stockholders’ equity of $9,849,158 and our        current assets exceeded our current liabilities by $8,308,199.

         

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.

         

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.

         

|   | 16 |
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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. We became profitable in 2001 and have been profitable for the last        seven years. 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. We then assessed the amount of future capped net operating losses we        will more likely than not be able to use. In Q1 2008, we made an assessment that we will be        able to use six years of capped net operating losses in the future. 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 Q1 2008 and fiscal year end 2007, we did        not have enough available information to look beyond the year 2014 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.

         

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.

 

|   | 17 |
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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 2007, the warranty reserve decreased from $395,575 to $122,249        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.

         

In 2008, the warranty reserve decreased from $122, 249 to $109,187 due to        the decrease in product shipments versus the amount of replacements, repairs or upgrades        performed.

         

New        Accounting Pronouncements

*Financial Accounting Pronouncement FIN 48*

         

In June 2006, the FASB issued FASB interpretation No. 48 (FIN48), Accounting        for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. FIN 48        clarifies the accounting for uncertainty in income taxes recognized in a company’s        financial statements in accordance with FASB Statement No. 109, Accounting for Income        Taxes. FIN 48 also prescribes a recognition threshold and measurement standard for the        financial statement recognition and measurement of an income tax position taken or expected        to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition,        classification, interest and penalties, accounting in interim periods, disclosure and        transition.

         

The provisions of FIN 48 were adopted on January 1, 2007 and were applied to        all tax positions. Only tax positions that meet the more-likely-than-not recognition        threshold on January 1, 2007 were recognized or continue to be recognized upon adoption. We        previously recognized income tax positions based on management’s estimate of whether        it was reasonably possible that a liability had been incurred for unrecognized income tax        benefits by applying FASB Statement No. 5,*Accounting for        Contingencies*. The adoption of FIN 48 did not have a material        impact on our financial position, results of operations of cash flow.

         

*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. Management does not expect        the adoption of SFAS 159 to have a material impact to the Company’s financial        position or result of operations. The adoption of FASB 159 did not have a material impact        on our financial position, results of operations or cash flows.

 

|   | 18 |
|--------|----|

 

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*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.

 

Results of Operations 

 

*Revenues*

 

Our revenues for the three months ended March 31, 2008 were $3,147,692,        representing a 24% decrease from revenues of $4,160,380 for the three months ended March        31, 2007. The decrease in revenues between the quarters is due to a decrease of product        sales in the three months ended March 31, 2008 of approximately $1,169,000, offset by an        increase in service revenue of approximately $156,000.

 

Product sales accounted for approximately 73% and 84% of our revenue for the        first quarters of 2008 and 2007, respectively. Service revenues for these products        accounted for approximately 27% and 16% of our revenue for the first quarters of 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 March 31, 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        $162,000 and $187,000 during the three month periods ended March 31, 2008 and March 31,        2007, respectively.

 

*Gross        Margins*

 

Gross margins were approximately 51% and 58% during the three month period        ended March 31, 2008 and March 31, 2007, respectively. Gross margins decreased due to the        decrease in sales with fixed overhead costs.

 

*Sales        and Marketing Expenses*

 

|   | 19 |
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----

Sales and marketing expenses accounted for approximately 30% of total        revenues during the first quarter of fiscal 2008 as compared to approximately 21% during        the first quarter of fiscal 2007. Expenses increased to $944,009 during the first quarter        of 2008 versus $887,334 during the first quarter of 2007, representing an increase of        $56,675 or 6%. This increase was mainly due to the sales and marketing expenses from        Abraxas.

 

*General and Administrative Expenses*

 

General and administrative expenses were $466,165 in the first quarter of        fiscal 2008 and $521,029 in the first quarter of fiscal 2007, representing a decrease of        $54,864 or 11%. Such expenses accounted for approximately 15% and 13% of revenues during        the first quarters of 2008 and 2007, respectfully. The decrease was primarily due to lower        legal expenses.

 

*Research and Development Expenses*

 

Research and development expenses were $436,978 in the first quarter of        fiscal 2008 and $408,527 in the first quarter of fiscal 2007, representing an increase of        $28,451 or 7%. Such expenses accounted for approximately 14% of revenues during the first        quarter of 2008 and 10% of revenues during the first quarter of 2007. The increase in the        first quarter of fiscal 2008 resulted from an increase in research and development done by        MediVision of approximately $114,000, 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 quarter of        fiscal 2008 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) were ($33,223) during the first quarter        of fiscal 2008 versus $42,638 during the first quarter 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 expense was $1,286 during the first quarter of fiscal 2008 versus        $4,439 during the first quarter 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 net loss of ($277,800) or ($0.02) per share basic and diluted        earnings, for the first quarter ended March 31, 2008 as compared to net income of $653,143        or $0.04 per share basic and diluted earnings for the first quarter ended March 31,        2007.

 

*Balance Sheet*

 

Our assets decreased by $245,355 as of March 31, 2008 as compared to        December 31, 2007. This decrease was primarily due to a decrease in cash of ($2,070,794),        offset by an increase in the note receivable from MediVision of $618,532, an increase in        inventory of $348,166, the capitalization of a new software of $157,836, and the purchase        of AcerMed software by Abraxas of $463,015 and the capitalization of the related        development done on this product to get it ready for the market of $225,892.

 

|   | 20 |
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Our liabilities increased by $24,876 as of March 31, 2008 as compared to        December 31, 2007 primarily due to the amortization of the discount related to a        convertible loan described above to qualified institutional buyers.

 

Our stockholders’ equity decreased by $270,231 as of March 31, 2008 as        compared to December 31, 2007 primarily due to a decrease in retained earnings for the        quarter.

 

Our assets increased by $3,167,221 as of March 31, 2008 as compared to March        31, 2007. This increase was primarily due to advances to MediVision of $1,622,306, expenses        related to the possible merger with MediVision of $584,178, an increase in inventory of        $393,600, prepaid financing costs related to the Tail Wind financing agreement of $132,469,        prepaid products to MediVision of $400,000, the capitalization of a new software of        $232,836, and the purchase of AcerMed software by Abraxas of $553,830 and the        capitalization of the related development done on this product to get it ready for the        market of $225,892, offset by a decrease in cash of ($976,077).

         

Our liabilities increased by $2,135,854 as of March 31, 2008 as compared to        March 31, 2007 primarily due to a new convertible loan described above to qualified        institutional buyers of $2,617,507, offset by a decrease of customer deposits of $177,680,        and a decrease of warranty reserve of $337,450.

 

Our stockholders’ equity increased by $1,031,368 as of March 31, 2008        as compared to March 31, 2007 primarily due to net income from the previous 12 months of        $621,673, exercise of employee stock options of $218,591 and additional paid in capital        related to the financing agreement with the qualified institutional buyers described above        of $191,104.

 

*Liquidity and Capital Resources*

 

Our operating activities used cash of $537,981 during the three months ended        March 31, 2008 as compared to cash generated of $483,546 in the three months ended March        31, 2007. The cash used in operations during the first three months of 2008 was principally        from an increase in inventory of ($348,166) and net income of ($277,800).

 

Cash used in investing activities was $959,899 during the first three months        of 2008 as compared to $112,569 during the first three months of 2007. Our investing        activities consisted primarily of purchases of AcerMed software of $463,015, the related        development to get the AcerMed software ready to sell of $225,892, and new imaging software        of $157,836, costs related to possible merger with MediVision of $56,851 and furniture and        miscellaneous software of $56,020. 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 $572,914 during the first three        months of fiscal 2008 as compared to cash generated of $732 during the first three months        of fiscal 2007. The cash used in financing activities during the first three months of 2008        was principally from advances to related parties of $618,532, offset by amortization of        discount and prepaid financing related to the note payable to the Tail Wind Fund of $29,722        and $15,896, respectively.

 

On March 31, 2008 our cash and cash equivalents were $5,559,490. 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.

 

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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.

 

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 March 31, 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 March 31, 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 March 31, 2008, our disclosure controls        and procedures were effective.

 

Changes        in Internal Control Over Financial Reporting

 

Other than as described below, there have been 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.

 

During the quarter ended December 31, 2007, management of the Company,        including the Company’s principal executive officer and principal financial officer,        identified a material weakness and significant deficiency in the Company’s internal        control over financial reporting.

 

It was discovered that the Company’s 2007 revenues included        approximately $200,000 due to a change in estimate related to our rebate program. When a        customer purchases an upgrade of our system, we generally quote a discount if the old        system is returned to us. The customer receives an invoice in full and is expected to pay        that full amount if the old system is not returned. When a customer pays the full amount,        we keep the rebate portion in a deposit liability account assuming the customer is        returning the system to us. We analyzed our deposit account this year and changed our        estimate of how many systems will be returned and resulting in an increase to revenue. The        significant deficiency related to the fact that when we analyzed our deposit account this        year and changed our estimate of how many systems will be returned, we did not have        adequate documentation gathered at the time we recorded the outcomes of the change in        estimate.

         

The material weakness related to the fact that the Company recorded sales at        or near an end of a reporting period under a bill and hold revenue recognition procedure        defined by the SEC in Staff Accounting Bulletin no. 104 without completing all of the        necessary documentation to support this treatment. This issue was identified and therefore,        the revenue was not recognized at year-end.

         

Solely as a result of this significant deficiency and material weakness,        management of the Company, including the Company’s principal executive officer and        principal financial officer concluded that the Company’s disclosure controls and        procedures were not effective as of December 31, 2007.

 

During the quarter ended March 31, 2008, management of the Company,        including the Company’s principal executive officer and principal financial officer,        has developed and implemented remedial measures which include not recognizing revenue when        shipping under bill and hold terms and gathering the necessary paperwork in order to change        estimates with our deposit liability account to address this significant deficiency and        material weakness. With the implementation of these newly implemented procedures, the        Company believes it has developed procedures in order to ensure adequate documentation is        gathered at the time we record outcomes related to changes in estimates.

 

 

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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: May 14, 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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