10QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

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

For the quarterly period ended September 30, 2007

Commission File Number: 1-11140

OPHTHALMIC IMAGING SYSTEMS

(Exact name of small business issuer as specified in its charter)

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

221 Lathrop Way, Suite I, Sacramento, CA 95815
(Address of principal executive offices)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):  Yes  o  No x

As of November 14, 2007, 16,833,496 shares of common stock, no par value, were outstanding.

Transitional Small Business Disclosure Format:  Yes  o   No   x

OPHTHALMIC IMAGING SYSTEMS

FORM 10-QSB

FOR THE QUARTER ENDED September 30, 2007

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

PART I      FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

1

Ophthalmic Imaging Systems
Condensed Balance Sheet
September 30, 2007
(Unaudited)
Assets
Current assets:
	Cash and cash equivalents	$ 5,082,231
	Accounts receivable, net	3,234,660
	Accounts receivable from related party	314,929
	Note receivable from related party	914,475
	Inventories, net	632,798
	Prepaid expenses and other current assets	298,314
	Deferred tax asset	1,424,750
	Total current assets	11,902,157
Furniture and equipment, net of accumulated
	depreciation and amortization of $533,950	443,308
Restricted cash		166,381
Licensing agreement		273,808
Prepaid products		310,000
Capitalized Merger Costs		321,531
Other assets		88,737
	Total assets	$ 13,505,922
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable	$ 539,558
	Accrued liabilities	1,392,148
	Deferred extended warranty revenue	1,536,102
	Customer deposits	73,449
	Lease payable- current portion	8,969
	Total current liabilities	3,550,226
Noncurrent liabilities:
	Line of credit	150,000
	Lease payable, less current portion	8,413
	Total liabilities	3,708,639
Stockholders' equity:
	Common stock, no par value, 35,000,000 shares authorized;
	16,833,496 issued and outstanding	16,441,858
	Accumulated deficit	(6,644,575)
	Total stockholders' equity	9,797,283
	Total liabilities and stockholders' equity	$ 13,505,922
The accompanying notes are an integral part of these unaudited condensed financial statements.

2

Ophthalmic Imaging Systems

Condensed Statements of Income

(Unaudited)

			Three months ended September 30,		Nine months ended September 30,
			2007	2006	2007	2006
Net revenues			$ 3,156,681	$ 3,927,257	$ 10,934,694	$ 11,395,147
Cost of sales			1,337,237	1,709,611	4,651,256	4,964,845
Gross profit			1,819,444	2,217,646	6,283,438	6,430,302
Operating expenses:
	Sales and marketing		780,249	825,023	2,456,253	2,476,196
	General and administrative		349,729	425,448	1,305,192	1,194,348
	Research and development		368,788	413,302	1,169,607	1,175,550
		Total operating expenses	1,498,766	1,663,773	4,931,052	4,846,094
Income from operations			320,678	553,873	1,352,386	1,584,208
Interest and other income (expense), net			46,304	39,328	153,628	29,163
Net income before income taxes			366,982	593,201	1,506,014	1,613,371
Income taxes (expense) benefit			(23,358)	13,632	(51,540)	13,632
Net income			$ 343,624	$ 606,833	$ 1,454,474	$ 1,627,003
Shares used in the calculation of basic
	net income per share		16,827,122	16,102,997	16,627,821	16,026,730
Basic net income per share			$ 0.02	$ 0.04	$ 0.09	$ 0.10
Shares used in the calculation of diluted
	net income per share		17,925,671	17,862,301	18,092,671	17,701,767
Diluted net income per share			$ 0.02	$ 0.03	$ 0.08	$ 0.09
The accompanying notes are an integral part of these unaudited condensed financial statements.

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Ophthalmic Imaging Systems

Condensed Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
	2007	2006
Operating activities:
Net income	$ 1,454,474	$ 1,627,003
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Depreciation and amortization	131,456	52,212
Compensation Expense	23,136	16,958
Loss on disposal of equipment	(1,070)	--
Net (increase) decrease in current assets other
than cash and cash equivalents	(319,016)	163,035
Capitalized Merger Costs	(321,531)	--
Net (increase) in other assets	(409,617)	(261,072)
Net (decrease) increase in current liabilities other
than short-term borrowings	(795,543)	41,093
Net cash provided by operating activities	(237,711)	1,639,229
Investing activities:
Acquisition of furniture and equipment	(183,141)	(189,533)
Financing activities:
Principal payments on notes payable	(6,625)	(152,262)
Advance to related parties	(817,793)	--
Proceeds from note receivable from related parties	--	486,803
Proceeds from exercise of options	163,644	12,445
Proceeds from line of credit, net	--	150,000
Net cash (used in) provided by financing activities	(660,774)	496,986
Net (decrease) increase in cash and equivalents	(1,081,626)	1,946,682
Cash and equivalents, beginning of the period	6,163,857	3,940,706
Cash and equivalents, end of the period	$ 5,082,231	$ 5,887,388
Supplemental schedule of noncash financing activities:
Conversion of notes payable to common stock	$ --	$ 688,067
Conversion of interest to common stock	$ --	$ 1,994
Addition (Reduction) to receivable from
Related party in exchange for inventory and
other noncash transactions, net	$ 298,248	$ (50,469)
Supplemental schedule of cash flow information:
Cash paid for interest	$ 1,647	$ 6,740
Cash paid for taxes	$ 193,285	$ 117,660
The accompanying notes are an integral part of these unaudited condensed financial statements.

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Notes to Condensed Financial Statements

Three and Nine Month Periods ended September 30, 2007 and 2006
(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed balance sheet as of September 30, 2007, condensed statements of income for the three and nine month periods ended September 30, 2007 and 2006 and the condensed statements of cash flows for the nine month period ended September 30, 2007 and 2006 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in Ophthalmic Imaging Systems’ (the “Company’s”) Annual Report for the year ended December 31, 2006 on Form 10-KSB. In the opinion of management, the accompanying condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations for the periods presented. The results of operations for the period ended September 30, 2007 are not necessarily indicative of the operating results for the full year.

Note 2. Net Income Per Share

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

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	Unaudited Three Months Ended September 30,		Unaudited Nine Months Ended September 30,
	2007	2006	2007	2006
Numerator for basic and diluted net income per share	$ 343,624	$ 606,833	$ 1,454,474	$ 1,627,003
Denominator for basic net income per share:
Weighted average shares	16,827,122	16,102,997	16,627,821	16,026,730
Effect of dilutive:
Employee/director stock options	1,098,548	1,759,304	1,464,850	1,675,037
Dilutive potential common shares	1,098,548	1,759,304	1,464,850	1,675,037
Denominator for diluted net income per share	17,925,671	17,862,301	18,092,671	17,701,767
Basic net income per share	$ 0.02	$ 0.04	$ 0.09	$ 0.10
Diluted net income per share	$ 0.02	$ 0.03	$ 0.08	$ 0.09

	As of September 30, 2007 there were 402,000 options and warrants whose exercise price exceeded the average market price of the stock and have been excluded from this computation. There were no such options and warrants excluded as of September 30, 2006.
Note 3.	Related Party Transactions – MediVision On July 20, 2005 our Board of Directors authorized us to guarantee and/or provide security interests in our assets for certain of MediVision's loans with United Mizrahi Bank Ltd. We entered into a Secured Debenture (the "Debenture") in favor of United Mizrahi Bank Ltd., in an amount of up to $2,000,000 (plus interest, commissions and all expenses).
	Under the terms of the Debenture, we guarantee the payment of all of the debts and liabilities of MediVision to United Mizrahi Bank. The Debenture is secured by a first lien on all of our assets. MediVision pledged 2,345,500 shares of our common stock it owns to us in order to secure the Debenture.
	The amount owed to United Mizrahi Bank by MediVision and secured by us as of September 30, 2007 was approximately $2,000,000.

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On April 9, 2007, we and MediVision entered into a promissory note, security agreement, and addendum to the license and distribution agreement as described below, in order to provide additional financing for the engineering of the Electro-Optical Unit. We loaned MediVision $800,000, distributed in various monthly sums as needed in accordance with the budget and schedule attached to the Addendum, beginning in April 2007 for amounts budgeted from January 2007 through December 2007. The loan incurs interest of 8% per annum and repayment will commence on May 1, 2009. Repayments will be made in 24 equal payments, payable on the first of each month. The monthly amount will be calculated based on the amount of principal outstanding on April 30, 2009. Upon a default under the addendum or the related Promissory Note or Security Agreement, the principal and interest outstanding on the loan will become immediately due and payable. The loan is secured by shares of our common stock, owned by MediVision.

The amount of shares pledged under the loan was calculated using the amount of loan given to MediVision divided by $1.83, the average closing price of our common stock for the ten business days prior to April 9, 2007, less a 25% discount. If MediVision defaults on its repayment obligation as specified in the addendum, we may seek repayment by foreclosing on the shares pledged as collateral or, alternatively, we have the option to receive a portion of MediVision’s ownership interest in patent rights relating to the Electro-Optical Unit, calculated based on the amount of principal and interest outstanding on the loan, which is in default at the time we exercise this option, multiplied by 25%.

On September 25, 2007, we and MediVision entered into a second addendum to the license and distribution agreement as described below, in order to provide additional financing for the engineering of the Electro-Optical Unit. This addendum amends the License and Distribution Agreement entered into on June 28, 2006 (as described below) and amended the First Addendum dated April 9, 2007 (as described below). Under this second addendum, we agreed to increase the loan amount from an aggregate amount of $800,000 to an aggregate amount of up to $1,100,000.

This addendum also contains the following provisions in connection with the Revised Loan, (1) the number of MediVision’s shares of the Company’s stock acting as collateral for the Revised Loan will be recalculated as set forth in the Second Addendum, (2) the formula to calculate the Company’s right to exercise an option in the MV Patent Rights (as described in the License and Distribution Agreement below, as amended) will be changed in accordance with the Revised Loan amount and as set forth in the Second Addendum, and (3) certain increases to the number of advance order units and certain options thereto.

The amount of shares pledged under the loan was calculated using the amount of loan given to MediVision divided by $1.02, the average closing price of our common stock for the ten business days prior to September 25, 2007, less a 25% discount.

As of September 30, 2007, we had paid MediVision $800,000 and MediVision pledged as collateral 784,314 shares of our stock based on the calculated fixed share price of $1.02.

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As of September 30, 2007, MediVision owns approximately 56% of our outstanding common stock.

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

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

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.

8

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%.

During the quarter, we also entered into a non-binding agreement to acquire MediVision. Under the terms of the proposed acquisition, MediVision’s outstanding shares will be converted into shares of OIS common stock at a yet to be determined conversion ratio. Outstanding options and warrants to purchase MediVision shares will be converted into options or warrants to purchase shares of OIS Common Stock. Once the acquisition is completed, MediVision will operate as our wholly owned subsidiary. We have capitalized the direct costs associated with the merger. To date, these costs have accumulated to approximately $322,000.

At September 30, 2007, we recorded a net amount due from MediVision of approximately $300,000 for products.

Sales to MediVision during the three and nine months ended September 30, 2007 totaled approximately $50,000 and $361,000, respectively. Sales to MediVision during the three and nine months ended September 30, 2006 totaled approximately $64,000 and $211,000, respectively. Sales derived from product shipments to MediVision are made at transfer pricing which is based on volume discounts similar to those available to other resellers and distributors of the Company’s products.

During the three and nine month period ended September 30, 2007, we paid approximately $319,000 and $981,000, respectively, to MediVision for research and development performed by MediVision on our behalf. During the three and nine month period ended September 30, 2006, we paid approximately $285,000 and $761,000, respectively, to MediVision for research and development performed by MediVision on our behalf.

CCS Pawlowski

At September 30, 2007, we recorded a net amount due from CCS Pawlowski, a subsidiary of MediVision, of approximately $15,000 for products and services. Sales to CCS Pawlowski during the three and nine months ended September 30, 2007 totaled approximately ($4,000) and $142,000, respectively. Sales to CCS Pawlowski during the three and nine months ended September 30, 2006 totaled approximately $63,000 and $275,000, respectively.

9

	MediStrategy Ltd. We have a service agreement with MediStrategy Ltd. ("MS"), an Israeli company owned by Noam Allon, a former Director of the Company, serving on the Board until December 2004. Under the terms of the agreement, MS provides services to us primarily in the business development field in ophthalmology, including business cooperation, mergers and acquisitions, identifying and analyzing new lines of business and defining new product lines or business opportunities to be developed. All services provided by MS are performed solely by Noam Allon.
	In consideration for the services provided, we agreed to pay MS a monthly sum of $3,300. In addition, MS is to be paid a yearly performance bonus of up to $20,000 upon achievement of goals under the terms of the agreement determined by MS, Noam Allon and the Company's Chairman of the Board. As of September 1, 2005, the monthly sum changed from $3,300 to $4,000, and the yearly performance bonus changed from $20,000 to $10,000. During the year ended December 31, 2006, MS earned fees of $48,000. This amount remains accrued, but not paid as of September 30, 2007. During the first nine months of 2007, MS earned fees of $36,000. This amount remains accrued, but not paid as of September 30, 2007.
	Jonathan Adereth Starting January 2005, Jonathan Adereth, a former director, serves as a consultant to management. We agreed to the following in connection with his service as a consultant. (i) to pay to Mr. Adereth, a monthly retainer of $2,000, (ii) to pay to Mr. Adereth a daily fee of $500 for physical attendance in meetings, and (iii) to reimburse Mr. Adereth for reasonable expenses incurred in connection with his services as a consultant to management.
Note 4.	Share Based Compensation At September 30, 2007, we have four active stock-based compensation plans (the “Plans”). Options granted under these plans generally have a term of ten years from the date of grant unless otherwise specified in the option agreement. The plans generally expire ten years from the inception of the plans. Options granted under these agreements have a vesting period of three to four years. Incentive stock options under these plans are granted at fair market value on the date of grant and non-qualified stock options granted can not be less than 85% of the fair market value on the date of grant.
	There were no new stock option plans approved during the three and nine months ended September 30, 2007.
	A summary of the changes in stock options outstanding under our equity-based compensation plans during the nine months ended September 30, 2007 is presented below:

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	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2007	2,222,699	$0.65	7.03	$5,890,152
Granted	8,000	$2.83	9.44	--
Exercised	(325,500)	$0.50	--	--
Forfeited/Expired	(120,983)	$0.93	--	--
Outstanding at September 30, 2007	1,784,216	$0.67	6.34	$1,480,899
Exercisable at September 30, 2007	1,575,841	$0.58	6.14	$1,449,773

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.

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

	Three Months Ended September 30, 2007	Nine Months Ended September 30, 2007
Dividend Yield	None	None
Expected volatility	60.01 %	60.01 %
Risk-free interest rate	4.27	5.21
Expected term (years)	9.21	9.21

The Company recorded an incremental $8,000 and $23,000 of stock-based compensation expense during the three and nine months ended September 30, 2007, respectfully.

As of September 30, 2007, the Company had $21,135 of total unrecognized expense related to non-vested stock-based compensation, which is expected to be recognized through 2009. The total fair value of options vested during the three and nine month periods ended September 30, 2007 was $7,712 and $23,136, respectively. Cash received from stock option exercises for the three and nine month periods ended September 30, 2007 was $8,120 and $163,644, respectively.

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There were no options granted for the three month period ended September 30, 2007. There were 8,000 options granted for the nine month periods ended September 30, 2007. The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2007 was $25,880 and $508,242, respectively.

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 September 30,		Unaudited Nine Months Ended September 30,
	2007	2006	2007	2006
Warranty balance at beginning of period	$ 340,275	$ 502,100	$ 395,575	$ 614,500
Reductions for warranty services provided	(69,688)	(87,188)	(175,313)	(233,688)
Changes for accruals in current period	(34,550)	7,725	15,775	41,825
Changes for accruals for pre-existing warranties	--	--	--	--
Warranty balance at end of period	$ 236,038	$ 422,637	$ 236,038	$ 422,637

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

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

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Overview

To date, we have designed, developed, manufactured and marketed ophthalmic digital imaging systems and informatics solutions and have derived substantially all of our revenues from the sale of such products. The primary target market for our digital angiography systems and informatics solutions has been retinal specialists and general ophthalmologists.

At September 30, 2007, we had stockholders’ equity of $9,797,283 and our current assets exceeded our current liabilities by $8,351,931.

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

Critical Accounting Policies

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

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

Revenue Recognition

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

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

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

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

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

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

Tax Provision

We calculate a tax provision quarterly and assess how much deferred tax asset is more likely than not to be used in the future. According to IRS rule 382, our net operating losses prior to August of 2000 are capped at $389,000 per year as of fiscal year 2000 for 20 years. We use the following analysis to assess whether we will more likely than not realize the deferred tax asset. We assume that we will be able to use all of our unlimited NOL amounts. We then assess the amount of our future capped net operating losses we will more likely than not be able to use.

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

In the fourth quarter of every fiscal year, we participate in the industry’s largest tradeshow of the year, which contributes approximately 25% of our revenue generated in the last month of the fiscal year. This tradeshow substantially influences the outcome of our profitability for that year, as well as gives us an indication of the years to come. Significant expenses, resources, and risk are put into the tradeshow every year in hopes of generating revenue. We can also see how the market responds to our new products, as well as our competitor’s products. With this tradeshow behind us in the fourth quarter of every fiscal year, we are in a better position to assess how we are doing, will be doing in the years to come, and determine whether it is more likely than not that we will be able to realize our deferred tax assets.

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Warranty Reserve

We have two types of warranty reserves. A general product reserve on a per product basis, and specific reserves created as we become aware of issues. The product reserve is calculated based on a fixed dollar amount per system shipped each quarter. The unanticipated reserves usually arise from the introduction of new products at our largest tradeshow of the year in October/November of every year. When a new product is introduced, we reserve for specific problems arising from potential issues during the implementation phase. As time passes, and the issues are resolved, we reduce the specific reserve. These types of issues can cause our warranty reserve to fluctuate outside of sales fluctuations.

Historically, we estimated the cost of the various warranty services by taking into account the estimated cost of servicing routine warranty claims in the first year, including parts, labor and travel costs for service technicians. In the third quarter of 2007, we reduced the specific reserve accrual for the archiving issues by $79,550. The Company expects no further exposure related to this specific archiving issue.

New Accounting Pronouncements

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

In December 2006, the Financial Accounting Standards Board (“FASB”) released Statement of Financial Accounting Standards No. 157 – Fair Value Measurements. This statement defines fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value measurements and is intended to increase consistency and comparability. This statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of FASB 157 is not expected to have a material impact on our financial position, results of operations or cash flows.

Results of Operations

Revenues

Our revenues for the three months ended September 30, 2007 were $3,156,681, representing a 20% decrease from revenues of $3,927,257 for the three months ended September 30, 2006. The decrease in revenues between the quarters is due to a decrease of product sales in the three months ended September 30, 2007 compared to the three months ended September 30, 2006. The decrease in product sales was due to the impact of a large contract in the third quarter of 2006. Our revenues for the nine months ended September 30, 2007 were $10,934,694, representing a 4% decrease from revenues of $11,395,147 for the nine months ended September 30, 2006. The decrease in revenues for the nine months ended September 30, 2007 is due to the impact of two large contracts over the second and third quarters of 2006.

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Products accounted for approximately 74% and 85% of our revenue for the third quarters of 2007 and 2006, respectively. Products accounted for approximately 79% and 85% of our revenue for the nine months ended September 30, 2007 and 2006, respectively. Service revenues for these products accounted for approximately 26% and 15% of our revenue for the third quarters of 2007 and 2006, respectively. Service revenues for these products accounted for approximately 21% and 15% of our revenue for the nine months ended September 30 2007 and 2006, respectively. The increase in service revenue is mainly derived from increases in our extended service contract revenue. The volume of extended service contracts sold continues to increase relative to total sales as we continue to educate our customers about the benefits of the contracts. This education process has been ongoing for the last five years and the service revenue increases as more customers buy extended service contracts. The other components of service revenue have stayed relatively constant. Total service revenue during the three and nine months ended September 30, 2007 was comprised mostly of service contract revenue and the rest consists of non warranty repairs and parts, and technical support phone billings for customers not under warranty.

Revenues from sales of our products to related parties were approximately $46,000 and $127,000 during the three month periods ended September 30, 2007 and September 30, 2006, respectively. Revenues from sales of our products to related parties were approximately $503,000 and $245,000 during the nine month periods ended September 30, 2007 and September 30, 2006, respectively.

Gross Margins

Gross margins were approximately 58% and 56% during the three month period ended September 30, 2007 and September 30, 2006, respectively. Gross margins were approximately 57% during the nine month period ended September 30, 2007 as compared to 56% for the nine month period ended September 30, 2006. Gross margins increased slightly due to product mix.

Sales and Marketing Expenses

Sales and marketing expenses accounted for approximately 25% of total revenues during the third quarter of fiscal 2007 as compared to approximately 21% during the third quarter of fiscal 2006. Actual expenses decreased to $780,249 during the third quarter of 2007 versus $825,023 during the third quarter of 2006, representing a decrease of $44,774 or 5%. Sales and marketing expenses accounted for approximately 23% and 22% of total revenues during the first nine months of fiscal 2007 and fiscal 2006, respectively. Actual expenses decreased to $2,456,253 during the first nine months of 2007 versus $2,476,196 during the first nine months of 2006, representing a decrease of $19,943 or 1%.

General and Administrative Expenses

General and administrative expenses were $349,729 in the third quarter of fiscal 2007 and $425,448 in the third quarter of fiscal 2006, representing a decrease of $75,719 or 18%. Such expenses accounted for approximately 11% of revenues during the third quarters of 2007 and 2006. The decrease was primarily due to lower legal expenses related to capitalizing direct merger related costs in 2007 versus expensing these costs in 2006. General and administrative expenses were $1,305,192 in the first nine months of fiscal 2007 and $1,194,348 in the first nine months of fiscal 2006, representing an increase of $110,844 or 9%. Such expenses accounted for approximately 12% and 11% of revenues during the first nine months of 2007 and 2006, respectively. The increase was primarily due to a steady amount of legal expenses during the first nine months of 2007 compared to an abnormally low amount of legal expenses accounted for during the first nine months of 2006 due to the reimbursement of legal fees we received related to the JDI lawsuit, offset by capitalizing merger related costs in 2007 versus expensing these costs in 2006.

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Research and Development Expenses

Research and development expenses were $368,788 in the third quarter of fiscal 2007 and $413,302 in the third quarter of fiscal 2006, representing a decrease of $44,514 or 11%. Such expenses accounted for approximately 12% of revenues during the third quarter of 2007 and 11% of revenues during the third quarter of 2006. Research and development expenses were $1,169,607 in the first nine months of fiscal 2007 and $1,175,550 in the first nine months of fiscal 2006, representing a decrease of $5,943 or 1%. Such expenses accounted for approximately 11% and 10% of revenues during the first nine months of 2007 and 2006, respectively. The decrease in the third quarter of fiscal 2007 resulted from a decrease in the purchase of prototype parts. 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.

Interest and other income (expense), net

Interest and other income (expense) were $46,304 during the third quarter of fiscal 2007 versus $39,328 during the third quarter of fiscal 2006. For the nine months ended September 30, 2007 and 2006, interest and other income (expense) were $153,628 and $29,163, respectively. The increase is primarily due to an increase in our interest income resulting from our increased average cash balance and our interest on our note receivable from MediVision.

Income Taxes

Income tax expense (benefit) was $23,358 during the third quarter of fiscal 2007 versus ($13,632) during the third quarter of fiscal 2006.

Income tax expense (benefit) was $51,540 and ($13,632) during the first nine months of 2007 and 2006, respectively.

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

Net Income

We recorded net income of $343,624, or $0.02 per share basic and diluted earnings, for the third quarter ended September 30, 2007 as compared to net income of $606,833 or $0.04 and $0.03 per share basic and diluted earnings for the third quarter ended September 30, 2006. We recorded net income of $1,454,474, or $0.09 and $0.08 per share basic and diluted earnings, respectively, for the nine months ended September 30, 2007 as compared to net income of $1,627,003 or $0.10 and $0.09 per share basic and diluted earnings for the nine months ended September 30, 2006.

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Balance Sheet

Our assets increased by $2,222,949 as of September 30, 2007 as compared to September 30, 2006. This increase was primarily due to an increase in accounts receivable of $1,444,987, note receivable to MediVision of $820,617, deferred tax asset of $286,076, capitalized merger costs of $321,531, and prepaid products related to the new digital imaging system that MediVision is working on of $150,000, offset by a decrease cash of ($805,156).

Our liabilities decreased by $603,862 primarily due to a decrease of customer deposits of $472,011, a decrease in accounts payable of $261,543, a decrease in accrued salary and commissions of $76,257, a decrease of warranty reserve of $186,600, offset by an increase in deferred warranty revenue of ($453,782).

Our stockholders’ equity increased by $2,826,618 primarily due to net income from the previous 12 months of $2,078,231, and the increase in common stock of $748,387 primarily due to the exercise of warrants by Laurus Master Fund.

Liquidity and Capital Resources

Our operating activities used cash of ($237,711) during the nine months ended September 30, 2007 as compared to cash generated of $1,639,229 in the nine months ended September 30, 2006. The cash used from operations during the first nine months of 2007 was principally from an increase in accounts receivable of ($376,886), an increase in deferred tax asset of ($252,750), capitalization of merger related costs of ($321,531), an increase in prepaid products of ($150,000), a decrease in accounts payable of (261,543), a decrease in customer deposits of ($472,011), a decrease in warranty accrual of ($186,600), offset by our profitable operations from the period of $1,454,474, decrease of inventory of $175,440, and increase in depreciation of $131,456.

Cash used in investing activities was $183,141 during the first nine months of 2007 as compared to $189,533 during the first nine months of 2006. Our investing activities consisted of purchases of software and equipment. We anticipate continued capital expenditures in connection with our ongoing efforts to upgrade our existing management information and corporate communication systems. We also anticipate that related expenditures, if any, will be financed from our cash flow from operations or other financing arrangements available to us, if any.

We used cash in financing activities of ($660,774) during the first nine months of fiscal 2007 as compared to cash generated of $496,986 during the first nine months of fiscal 2006. The cash used in financing activities during the first nine months of 2007 was principally from an advance made to MediVision in the amount of ($817,793), offset by proceeds from the exercise of stock options by employees of $163,644. The cash generated in financing activities during the first nine months of 2006 was principally from proceeds on the note receivable from MediVision of $486,803, draw on our line of credit of $150,000, offset by repayments of the debt to Laurus Master Fund of $144,579.

On September 30, 2007 our cash and cash equivalents were $5,082,231. Management anticipates that additional sources of capital beyond those currently available to us may be required to continue funding for research and development of new products and selling and marketing related expenses for existing products.

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

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Material Agreement –

On September 25, 2007, we entered into a Second Addendum to the License and Distribution Agreement (the “Second Addendum”) with MediVision, our parent company, primarily to provide additional financing for the engineering of the Electro-Optical Unit. This Second Addendum amends the License and Distribution Agreement entered into on June 28, 2006 and amended pursuant to a First Addendum to License and Distribution Agreement dated April 9, 2007 (the “License and Distribution Agreement, as amended”). Under the Second Addendum, we agreed to increase the loan amount set forth in the License and Distribution Agreement, as amended, from an aggregate amount of up to $800,000 to an aggregate amount of up to $1,100,000, to be represented by a revised promissory note (the “Revised Loan”). The Second Addendum also contains the following provisions in connection with the Revised Loan, (1) we and MediVision will execute new versions of the previously issued Promissory Note and Security Agreement that were attached as exhibits to the License and Distribution Agreement, as amended, (2) MediVision’s obligation to repay the Revised Loan will be revised to reflect the increased loan amount, (3) the number of MediVision’s shares of our stock acting as collateral for the Revised Loan will be recalculated as set forth in the Second Addendum (described below), (4) the formula to calculate our right to exercise an option in the MV Patent Rights (as defined in the License and Distribution Agreement, as amended) will be changed in accordance with the Revised Loan amount and as set forth in the Second Addendum, and (5) certain increases to the number of advance order units and certain options thereto.

The Revised Loan will incur interest of 8% per annum. As previously set forth under the License and Distribution Agreement, as amended, repayment will commence on May 1, 2009 and will be made 24 equal payments, payable on the first of each month. The monthly amount will be calculated based on the amount of principal outstanding on April 30, 2009. Upon a default under the License and Distribution Agreement, as amended, the Second Addendum, or the related Promissory Note or Security Agreement, the principal and interest outstanding on the Revised Loan will become immediately due and payable.

The Revised Loan is secured by shares of our common stock, owned by MediVision. The amount of shares pledged under the Revised Loan is 784,314 shares, calculated as the amount of the Revised Loan, divided by the average closing price of our common stock for the ten business days prior to September 25, 2007 ($1.36), discounted by 25% ($1.36).

As previously set forth under the License and Distribution Agreement, as amended, if MediVision defaults on its repayment obligation as specified in the License and Distribution Agreement, as amended, or the Second Addendum, we may seek repayment by foreclosing on the shares pledged as collateral or, alternatively, we have the option of receiving a portion of MediVision’s ownership interest in patent rights relating to the Electro-Optical Unit, calculated based on the amount of principal and interest outstanding on the Revised Loan, which is in default at the time we exercise this option, divided by 1,100,000 multiplied by 34.375%.

We entered into a non-binding agreement to acquire MediVision. Under the terms of the proposed acquisition, MediVision’s outstanding shares will be converted into shares of OIS common stock at a yet to be determined conversion ratio. Outstanding options and warrants to purchase MediVision shares will be converted into options or warrants to purchase shares of OIS Common Stock. Once the acquisition is completed, MediVision will operate as our wholly owned subsidiary. The terms of the acquisition are currently in negotiations.

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Subsequent Event

On October 29, 2007, we entered into a Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein (the “Purchasers”), pursuant to which we issued to the 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 (the “Underlying Shares”) of our common stock, no par value, and (ii) warrants (“Warrants”) to purchase an aggregate of 616,671 shares (the “Warrant 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 potential acquisitions.

Description of the Notes

The Notes are convertible at any time, at the option of the Purchasers, into 1,676,829 shares of our common stock, at a conversion price of $1.64 per share. We may not effect any conversion of the Notes and each Purchaser of the Notes is not permitted to convert its Notes into shares of Common Stock if such conversion would give such Purchaser a beneficial ownership of more than 9.99% of the outstanding shares of Common Stock. This 9.99% limitation may be waived by the Purchaser upon not less than 61 days prior notice to us.

We will pay monthly interest on the outstanding principal amount of the Notes at a rate per annum equal to 6.5% (the “Interest Amount”). We will also pay to the Purchasers one twelfth (1/12) of the principal amount of the Notes on the last business day of each other month beginning June 30, 2008 (the “Bi-Monthly Amount”); provided that, prospectively following each conversion of the Notes by any Purchaser, the Bi-Monthly Amount shall be automatically reduced by an amount equal to (a) the principal amount converted in such conversion, divided by (b) the number of remaining Bi-Monthly payment dates scheduled to occur under the Notes. Subject to the Notes, we have the right to satisfy payment of the Interest Amount or Bi-Monthly Amount, as the case may be, in full either in cash or in shares of Common Stock at our option. We are prohibited from exercising its right to pay the Interest Amount or Bi-Monthly Amount in shares of Common Stock (and must deliver cash in respect thereof) on the applicable payment date if (i) there fails to exist Effective Registration (as defined in the Notes) or an Event of Default (as defined in the Notes) shall have occurred and be continuing under the Notes, or (ii) the VWAP (as defined in the Notes) on each of the ten (10) trading days immediately preceding the applicable payment date is not greater than $1.00, unless otherwise waived in writing by the Purchasers in whole or in part at the Purchasers’ option.

If at any time the market price of our Common Stock is equal to or greater than $3.50 (which figure shall be appropriately and equitably adjusted for stock splits, stock dividends, and similar events) for thirty (30) consecutive trading days (a “Pricing Period”), then we will have the right to compel the Purchasers to convert up to 50% of the principal amount of Notes then held by the Purchasers. Additionally, if at any time the market price of our common stock is equal to or greater than $6.00 (which figure shall be appropriately and equitably adjusted for stock splits, stock dividends, and similar events) for a Pricing Period, then we will have the right to compel the Purchasers to convert up to the entire principal amount of Notes then held by the Purchasers. Notwithstanding the foregoing, we are not entitled to exercise any forced conversion right unless at all times during the applicable Pricing Period, among other things, (i) the resale of all Registrable Securities (as defined below) is covered by an effective registration statement in accordance with the terms of the Registration Rights Agreement which registration statement is not subject to any suspension or stop orders; (ii) the resale of such Registrable Securities may be effected pursuant to a current and deliverable prospectus that is not subject at the time to any blackout or similar circumstance; (iii) the VWAP is greater than $1.00; (iv) none of OIS or any direct or indirect subsidiary of OIS will be subject to any bankruptcy, insolvency or similar proceeding; and (vii) we have paid all prior interest and principal payments due under the Notes.

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The conversion price of the Notes will be adjusted and the number of shares of our common stock to be issued upon conversion of the Notes will be adjusted upon the occurrence of, among other things, the payment of stock dividend or a stock split, (as defined in the Notes). In addition, the Notes include certain anti-dilution provisions if we issue or sell any of our common stock or convertible securities, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of our common stock, or directly or indirectly effectively reduces the conversion, exercise or exchange price for any convertible securities that are currently outstanding, at or to an effective per share selling price which is less than the greater of (i) the closing price on the trading day next preceding such issue or sale or, in the case of issuances to holders of our common stock, the date fixed for the determination of stockholders entitled to receive such warrants, rights, or options, or (ii) the then applicable conversion price. Upon the occurrence of an anti-dilution event specified in the immediately preceding sentence the conversion price of the Notes will be adjusted pursuant to a weighted-average formula.

Upon any Change in Control Transaction (as defined in the Notes), the Purchasers have the right thereafter to (A) convert the Notes, in whole or in part, at the lower of the conversion price and the then applicable market price of our common stock into the shares of stock and other securities, cash and/or property receivable upon or deemed to be held by holders of our common stock following such Change in Control Transaction, and the Purchasers are entitled upon such event to receive such amount of securities, cash or property as the shares of our common stock into which the Notes could have been converted immediately prior to such Change in Control Transaction would have been entitled if such conversion were permitted, or (B) require us or our successor to redeem the Notes, in whole or in part, at a redemption price equal to the greater of (i) 130% of the outstanding principal amount of the Notes being redeemed and (ii) the product of (x) the average of the market price of our common stock for the five (5) Trading Days immediately preceding the Purchaser’s election to have its Notes redeemed and (y) the Conversion Ratio (as defined in the Notes).

The Notes contain certain events of default that are customarily included in financings of this nature. If an event of default occurs, the Purchasers may declare all of the then outstanding principal amount of the Notes, including any interest due thereon, to be due and payable immediately. In the event of such acceleration, the amount due and owing to the Purchaser shall be the greater of (1) 130% of the outstanding principal amount of the Notes held by the Purchasers (plus all accrued and unpaid interest, if any) and (2) the product of (A) the highest closing price for the five (5) Trading days immediately preceding the Purchasers acceleration and (B) the Conversion Ratio (as defined in the Note).

Description of the Warrants

The Warrants have an exercise period of five years from the date of issuance. The exercise price of the Warrants is $1.87 and will be adjusted and the number of shares of our common stock to be issued upon exercise of the Warrants will be adjusted upon the occurrence of, among other things, the payment of stock dividend or a stock split. In addition, the Warrants include certain anti-dilution provisions if we issue or sell any Common Stock or convertible securities, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock or directly or indirectly effectively reduces the conversion, exercise or exchange price for any convertible securities that are currently outstanding, at or to an effective per share selling price which is less than the greater of (i) the closing price on the trading day next preceding such issue or sale or, in the case of issuances to holders of our common stock, the date fixed for the determination of stockholders entitled to receive such warrants, rights, or options, or (ii) the then applicable exercise price. Upon the occurrence of an anti-dilution event specified in the immediately preceding sentence the exercise price of the Warrants will be adjusted pursuant to a weighted-average formula.

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We may not effect any exercise of the Warrants and each Purchaser is not permitted to exercise its Warrants into shares of our common stock if such exercise would give such Purchaser a beneficial ownership of more than 9.99% of the outstanding shares of our common stock. This 9.99% limitation may be waived by each Purchaser upon not less than 61 days prior notice to us.

Description of the Registration Rights Agreement

Pursuant to the Registration Rights Agreement, dated October 29, 2007, among us and the Purchasers, we agreed to prepare and file with the SEC within 30 days of October 29, 2007 (the “Filing Date”) a registration statement covering the resale of the Underlying Shares, the Warrant Shares and any other shares of our common stock issued or issuable upon conversion of, or payment of interest or repayment of principal under, the Notes, and upon the exercise of the Warrants (the “Registrable Securities”). If such registration statement is not filed on or prior to the Filing Date, then we will make pro-rata payments to the Purchasers as liquidated damages and not as a penalty, in an amount equal to 1% of the sum of the aggregate principal amount then outstanding under the Notes for each month (or portion thereof) following the Filing Date that such registration statement has not been filed.

If (A) the registration statement covering Registrable Securities is not declared effective by the SEC within nine (9) months following October 29, 2007 (or the fifth day following the date on which we are notified by the SEC that such Registration Statement will not be reviewed or is no longer subject to further review and comments), or the registration statement covering Additional Registrable Securities (as defined in the Registration Rights Agreement) is not declared effective by the SEC within three months following demand of a Purchaser relating to the Additional Registrable Securities to be covered thereby (each of the foregoing deadlines, a “Registration Date”), (B) after a Registration Statement has been declared effective by the SEC, sales cannot be made pursuant to such Registration Statement for any reason, (C) the Registrable Securities (or Additional Registrable Securities after issuance and registration) specifically are not listed or included for quotation on the OTC Bulletin Board, the Nasdaq Stock Market, the New York Stock Exchange or the American Stock Exchange (each an “Approved Market”) or trading of our common stock is suspended or halted thereon, or (D) we fail, refuse or are otherwise unable to timely issue Underlying Shares upon conversion of the Notes or Warrant Shares upon exercise of the Warrants, in accordance with the terms of the Notes and Warrants, or unlegended certificates for the Underlying Shares or Warrant Shares, in each case within ten days following the Purchaser’s written demand for issuance of such Underlying Shares or Warrant Shares or certificates, then we will make pro-rata payments to the Purchaser as liquidated damages and not as a penalty, in an amount equal to 1% of the sum of the aggregate principal amount then outstanding under the Notes for each month (or portion thereof) following the Registration Date during which any of the events described in (A), (B), (C) or (D) above occurs and is continuing, provided that (1) such 1% figure shall increase to 2% if the Registration Statement is not declared effective prior to the first anniversary of October 29, 2007, (2) the total amount of damages payable pursuant to clause (A) above shall be limited to 17.5% of the original principal amount of Notes if at the time of any such determination the Purchasers are permitted to sell the Registrable Securities under Rule 144 promulgated under the Securities Act, and (3) the Registration Date shall be extended one day for each day that we are prevented from complying with its obligations set forth under subsection (A) above solely due to delays caused by the Purchasers. Our obligation to keep the registration statement effective will terminate upon the earlier of (i) the date on which all Registrable Securities or Additional Registrable Securities have been sold, and (ii) the date on which all Registrable Securities or Additional Registrable Securities, as the case may be, may be sold pursuant to Rule 144(k).

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Off-Balance Sheet Arrangement

We have a Secured Debenture in favor of United Mizrahi Bank Ltd., in an amount of up to $2,000,000 (plus interest, commissions and all expenses). Under the Debenture, we guaranteed the payment of all the debts and liabilities of MediVision to United Mizrahi Bank. The Debenture is secured by a first lien on all of our assets. MediVision pledged 2,345,500 shares of our common stock it owns to us in order to secure the Debenture. The amount owed to the financial institution by MediVision and secured by us as of September 30, 2007 is approximately $2,000,000.

ITEM 3.     CONTROLS AND PROCEDURES

As of the end of the period covered by this Report, our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, these officers concluded that, as of September 30, 2007, our disclosure controls and procedures were effective.

During the quarter ended September 30, 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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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: November 14 , 2007
	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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EX-31

Exhibit 31.1

Section 302 Certification

CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-QSB

I, Gil Allon, certify that:

1.   I have reviewed this Form 10-QSB of Ophthalmic Imaging Systems;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.   The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5.   The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: November 14, 2007

/s/ Gil Allon                                    
Gil Allon
Chief Executive Officer

EX-31

Exhibit 31.2

Section 302 Certification

CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-QSB

I, Ariel Shenhar, certify that:

1.   I have reviewed this Form 10-QSB of Ophthalmic Imaging Systems;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.   The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5.   The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: November 14, 2007

/s/ Ariel Shenhar                                    
Ariel Shenhar
Chief Financial Officer

EX-32

Exhibit 32

Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the filing of the financial statements of Ophthalmic Imaging Systems ("Registrant") for the quarter ended September 30, 2007 (the "Report"), each of the undersigned hereby certifies, to such officer's knowledge, that:

1.     The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, ; and

2.     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.

Date: November 14, 2007

/s/ Gil Allon                             
Gil Allon
Chief Executive Officer

/s/ Ariel Shenhar                      
Ariel Shenhar
Chief Financial Officer