10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended March 31, 2007

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File No. 0-20970

Vision-Sciences, Inc.

(Exact name of Registrant as specified in its charter)

DELAWARE	13-3430173
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
40 Ramland Road South	10962
Orangeburg, New York	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:  (845) 365-0600

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o   No x

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 x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o Accelerated filer   o Non-accelerated filer   x

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

Aggregate market value of Common Stock held by non-affiliates of the Registrant as of September 30, 2006 based upon the last sale price of the Common Stock on the NASDAQ Capital Market as reported by NASDAQ: $23,929,606

Number of shares outstanding of the Registrant’s Common Stock as of June 21, 2007:      35,253,031

Documents incorporated by reference: Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

PART I

Item 1.Business

This Annual Report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects”, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the availability of capital resources, the availability of third-party reimbursement, government regulation, the availability of supplies, competition, technological difficulties, the completion of  obligations under our contract with Medtronic Xomed, Inc., general economic conditions and other risks detailed in this Annual Report on Form 10-K and any subsequent periodic filings made with the Securities and Exchange Commission. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.

This Business section should be read in conjunction with our Consolidated Financial Statements attached hereto as Appendix A, including the notes thereto. Our fiscal year-end is on March 31 of each year, and is referred to herein as FY05, FY06, and FY07, respectively. All amounts in the financial notes except for share and per share data are reported in ($000’s), unless otherwise indicated.

We design, develop, manufacture and market products for endoscopy—the science of using an instrument, known as an endoscope—to provide minimally invasive access to areas not readily visible to the human eye. We operate in three reportable segments: medical, industrial and corporate.

The medical segment designs, manufactures and sells our Slide-On® EndoSheath® Systems (“EndoSheath” or “Slide-On EndoSheath” or “Sheath”), which consist of a single-use sterile sheath and a reusable endoscope. The insertion tube, which the sheath covers, is the part of the endoscope that enters the patient’s body. The use of a Sheath gives health-care providers economic advantages, as it allows them to avoid the burdensome cleaning required of endoscopes, reduces repair costs to endoscopes caused by the harsh chemicals used in the cleaning process, and allows health-care providers to avoid investing in multiple endoscopes. The various EndoSheaths enable physicians preferred configuration of the endoscope for specific procedures. For example, specific models of our Ear-Nose-Throat (“ENT”) EndoSheaths have channels, which help to improve the efficiency of healthcare providers by allowing them to perform procedures in their offices. These procedures would otherwise have to be performed in hospitals, using special endoscopes that have channels. Often, the reimbursement rates are higher for physicians when they perform procedures in their offices. In other fields like Urology, our EndoSheaths come with various size channels, which unlike conventional flexible endoscopes, allow the healthcare provider to customize the insertion tube to the procedure (i.e. diagnostic cystoscopy, or therapeutic cystoscopy, which requires a larger channel). In addition, the EndoSheath is a sterile device, providing patients with a contaminant-free insertion tube for each procedure. The EndoSheath reduces the risk of cross-contamination from the reuse of conventional flexible endoscopes, which are difficult to clean and disinfect.

The industrial segment designs, manufactures and markets flexible endoscopes, called borescopes. In addition, the industrial segment manufactures all the flexible endoscopes which are marketed through the medical segment. The industrial segment markets are primarily aircraft maintenance, jet engine manufacturing, defense and other specialized industries.

The corporate segment consists of certain administrative activities applicable to all segments.

2

We were incorporated in Delaware in 1987 under the name Machida Incorporated (“Machida”). Since that time, we have acquired by merger Cyberex Corporation (October 1988), Vascu-Care, Inc. (March 1989), and acquired Opielab, Inc. through a share exchange (September 1990). In December 1990, we changed our name to Vision-Sciences, Inc. (“VSI”) and Machida became a wholly owned subsidiary of VSI. VSI primarily operates in the medical segment, while Machida primarily operates in the industrial segment.

Our principal executive offices are located at 40 Ramland Road South, Orangeburg, New York 10962. Our telephone number is (845) 365-0600.

Endoscopy

Background

Endoscopy is a minimally invasive technique which is being used with increasing frequency in a growing number of medical applications. Endoscopes are used for a variety of screening and diagnostic procedures, and are also used therapeutically as a significantly less invasive alternative to more traditional surgical procedures. Endoscopic therapeutic procedures, unlike more traditional “open” surgical procedures, can be performed without a major incision, in most cases without general anesthesia, and are, therefore, safer and less expensive than traditional surgical procedures. In addition, endoscopic procedures are typically performed on an outpatient basis, generally involving less recovery time and patient discomfort than traditional surgery. The significant patient benefits and cost savings associated with endoscopy have caused many governmental reimbursement programs and private health insurance plans to encourage the use of endoscopic procedures in a number of medical applications. In many instances, the use of endoscopes allow physicians to receive higher compensation for performing procedures in their offices compared to performing them in hospitals, due to the insurance providers not having to reimburse for the hospital cost component.

Flexible endoscopes are tubular instruments that enter the body through a natural orifice, enabling physicians to view the interior of a body organ or cavity remotely, performing various screening, diagnostic and therapeutic procedures. Flexible endoscopes generally utilize fiber optic bundles or video camera technology for image production. The physician can steer the distal portion of a flexible endoscope with control knobs on the endoscope’s operator body. By maneuvering the tip of the endoscope, the physician can access body regions through lengthy and twisted passageways, and perform a variety of procedures. The typical diagnostic ENT endoscope does not contain channels, whereas most conventional flexible endoscopes—for gastroenterology (“GI”), pulmonary, urology procedures and therapeutic ENT endoscopes—do contain one or more channels, which run the length of the endoscope for delivery of air, water, suction and accessory devices, such as biopsy forceps and cutting instruments.

Rigid endoscopes generally utilize a stainless steel tube encasing a series of high resolution lenses to transmit the optical image. Most rigid endoscopes do not contain the channels that are characteristic of flexible endoscopes. Rigid endoscopes are currently utilized for diagnostic and surgical procedures such as arthroscopy, laparoscopy, urological and gynecological procedures. While rigid endoscopes for other medical applications, such as bronchoscopes, sigmoidoscopes and nasopharyngo-laryngoscopes are still marketed, they have largely been supplanted by flexible endoscopes, which offer improved patient comfort and better handling capabilities. We do not currently plan to manufacture rigid endoscopes.

Applications

Flexible endoscopes are widely used in hospitals, clinics and physicians’ offices, primarily on an outpatient basis. Our flexible endoscopes are designed primarily for screening, diagnostic and therapeutic procedures in fields such as otolaryngology (ear-nose-throat medicine, or “ENT”), urology, gastroenterology, pulmonary medicine and primary care. We estimate, based on various industry sources,

3

that in these fields, over 20 million flexible endoscopic procedures are performed in the United States annually.

ENT Endoscopes.   These endoscopes, typically without channels, are used for viewing the ears, nose, throat and larynx for diagnostic purposes, such as testing for throat cancer or sleep apnea. We estimate that based on industry sources, approximately 1 million such procedures are performed in the United States annually, generally by otolaryngologists and allergists in hospitals, clinics and physicians’ offices. In addition, there are ENT endoscopes with a channel, which are typically used in hospitals to perform procedures such as biopsies, removal of polyps in sinus cavities, tests for swallowing disorders and other procedures. These endoscopes require an additional and larger investment to acquire than flexible endoscopes without a channel.

Urology Endoscopes.   These endoscopes, generally referred to as Cystoscopes, allow the urologist to view the inside of the bladder and urethra and are commonly used to diagnose and take biopsies of bladder tumors, identify obstruction of the bladder and to install and remove stents as part of surgical procedures. We estimate that based upon industry sources, over 1 million cystoscopies are performed annually in the United States, of which approximately 80% are done in an outpatient setting. Sterile equipment is highly desired for cystoscopy, but today, flexible cystoscopes are generally disinfected, not sterilized.

Gastrointestinal Endoscopes.   Based on industry sources, we estimate that over 14 million colonoscopies (a procedure which allows a physician to view the entire large intestine), and 3 million sigmoidoscopies (a procedure which allows a physician to view the lower part of the colon) are performed in the United States annually. Continued growth in such procedures is expected to result from an increase in procedures performed for the purpose of detecting cancer of the descending colon, as well as the increased medical needs associated with an aging population. The American Cancer Society has recommended that every adult over the age of 50 (approximately 79 million Americans) undergo a flexible sigmoidoscopy every five years, and a colonoscopy every 10 years. The most common flexible endoscopes used in GI endoscopy are sigmoidoscopes, colonoscopes, gastroscopes and duodenoscopes.

Pulmonary Endoscopes.   Bronchoscopes and intubation endoscopes are flexible endoscopes used for viewing the trachea, bronchi and lungs for diagnostic and therapeutic purposes. They are generally used by pulmonary specialists and anesthesiologists, in a clinic or hospital setting. Based on industry sources, we estimate that approximately 500,000 procedures using flexible bronchoscopes are performed in the United States annually.

Potential Problems with Conventional Flexible Endoscopes

While endoscopy represents a significant advance in the field of clinical medicine, flexible endoscopes without EndoSheaths may present a number of health risks and problems, to both patients and medical personnel. Flexible endoscopes are intended for repeated use in hundreds of procedures, and depending on the area of use, come in contact with the patient’s blood, tissue, mucus, saliva, urine or stool. Therefore, flexible endoscopes without EndoSheaths must be meticulously and manually, cleaned and disinfected after each procedure. However, the design of flexible endoscopes makes it difficult to attain high-level disinfection after cleaning. As a result, the repeated use of flexible endoscopes without EndoSheaths, and the difficulty of thoroughly cleaning and disinfecting them after each use, may create the following problems:

·Patients, and to a lesser degree the physicians using the flexible endoscopes without EndoSheaths, as well as the nurse assistants cleaning them, are exposed to the risk of infection from contaminated endoscopes that results from their repeated use and the complexity of the reprocessing routines.

·The nurses or other medical personnel, who clean endoscopes used without EndoSheaths, face health risks from exposure to toxic disinfecting agents used in the cleaning process.

4

·The proper cleaning of a flexible endoscope used without an EndoSheath is relatively expensive, time-consuming and arduous.

·The repeated cleaning of a flexible endoscope used without an EndoSheath subjects it to wear and tear, reduces its useful life and impairs the quality of its optics; in addition, improper cleaning can cause blocked channels, which require expensive endoscope repairs.

·The time needed to clean a flexible endoscope used without an EndoSheath after each use, results in a long period of “down time” relative to the actual procedure time. During this time the endoscope cannot be used, and as such requires users to buy and maintain multiple endoscopes to compensate for equipment downtime.

Difficulty of Proper Cleaning.   The problems associated with cleaning flexible endoscopes used without EndoSheaths can be better understood by examining the cleaning procedures they require. The cleaning of these endoscopes is generally the responsibility of the nurse or endoscopic assistant. In 1990, The Society of Gastroenterology Nurses and Associates, Inc., published Recommended Guidelines for Infection Control in Gastrointestinal Endoscopy Settings (the “SGNA Guidelines”). Although cleaning procedures for endoscopes vary widely, the following is a summary of the principal steps in the cleaning procedures that are called for by the SGNA Guidelines:

·Inspection—Endoscopes should be tested for leaks and inspected for damage. Even small leaks can lead to costly fiber optic or video component damage or contamination of the endoscope.

·Cleaning—After gross cleaning to remove patient material, endoscopes should be thoroughly rinsed, the detachable parts should be removed and cleaned and exteriors should be sponge-cleaned. All internal channels that are accessible should be scrubbed with brushes, while unreachable air and water channels should be rinsed clear of residual patient organic matter, as the presence of such matter diminishes the effectiveness of the disinfecting agents used. The endoscope should then be washed in a detergent and enzyme solution, with such cleaning agents drawn through internal channels. The endoscope should then be rinsed, with excess water removed, since residual water can dilute disinfectants.

·Disinfection—Endoscopes should be disinfected using recommended chemical agents or an automated cleaner. Disinfectants must also be drawn through internal channels during this process. Although certain sterilization methods are available for flexible endoscopes, conventional heat sterilization will destroy flexible endoscopes.

·Rinsing—To ensure that patients are not exposed to toxic disinfectants, endoscopes should be thoroughly rinsed using either tap water or sterile water, followed by a final rinse in an alcohol solution.

·Drying—Endoscopes and channels should be dried using forced air, flushed with an alcohol solution and dried again, prior to storage.

·Storage—Endoscopes should be hung vertically in well-ventilated cabinets to prevent recontamination or damage between uses.

Proper cleaning of flexible endoscopes used without EndoSheaths, even when done in compliance with the SGNA Guidelines, is difficult to achieve for a number of reasons. First, the design of these flexible endoscopes, which includes channels, joints and crevices, makes it difficult to reach and clean all parts of the endoscope. As the SGNA Guidelines state, an endoscope’s “complex and fragile structure presents problems in cleaning/disinfecting/sterilizing”. Secondly, we believe the most important step in the cleaning process is the manual removal of organic material, and therefore, the opportunity for human error is always present, even if optimal cleaning procedures are followed. Finally, there are questions concerning the efficiency of some disinfecting agents used in the endoscope cleaning process. For example, in 1991 the federal Food & Drug Administration (“FDA”) recommended that the medical profession cease the use of

5

Sporicidin, a widely-used endoscope disinfectant, based upon the FDA’s conclusion that this disinfectant does not work. The FDA has also required that the manufacturers of 2.4% glutaraldehyde-based disinfectants change the recommended soak time on their instructions for use from 20 minutes to 45 minutes, and increase the temperature from 20 degrees Celsius to 25 degrees Celsius. This longer soak time means slower turnaround on conventional scopes, and the increased temperature of the glutaraldehyde is hazardous due to increased caustic vapors released during heating.

Health Risks.   Because flexible endoscopes used without EndoSheaths are difficult to clean properly, sterilization (the complete elimination of microbial life) is virtually impossible to achieve. Therefore, “high-level disinfection” (the elimination of all microbial life other than the most highly resistant spores) is the standard currently recommended by the Centers for Disease Control (“CDC”) for cleaning flexible endoscopes. However, studies indicate that high-level disinfection may not always be attained, and that cross-contamination remains a risk to patients and medical personnel.

Numerous infectious agents, including pseudomonas, tuberculosis and salmonella, have been reported in the medical literature as having been transmitted through the use of contaminated endoscopes. Concern about the risk of endoscopic cross-contamination has also been heightened by the increasing prevalence of the HIV and Hepatitis viruses.

The cleaning procedures required for endoscopes also subject patients and medical personnel to health risks (such as severe eye, nose and throat irritation, nausea, headaches, asthma and skin rashes) from exposure to toxic disinfecting agents. The Occupational Safety and Health Administration has classified glutaraldehyde, a key ingredient in many endoscope disinfecting agents, as a highly toxic material and requires hospitals, clinics and physicians’ offices to reduce the level of emissions to 0.2 parts per million wherever glutaraldehyde is used. In addition, toxic disinfectants must be disposed of in compliance with applicable environmental laws.

Other Problems.   In addition to the health problems posed by the use and cleaning of conventional flexible endoscopes, the required cleaning of these products is relatively expensive, time-consuming and arduous. We estimate, based upon our own experience, that the cleaning and disinfection procedure required following each use of a flexible endoscope without an EndoSheath, if done in compliance with the FDA recommendations, would take approximately 60 minutes. The repeated cleaning in harsh chemical disinfectants also subjects a flexible endoscope to wear and tear, reducing its useful life and impairing the quality of its optics. Moreover, the failure to clean all organic materials from a flexible endoscope’s channels is a common cause of blocked channels, which require expensive endoscope repairs as well as a back-up inventory of endoscopes. In addition, the need to properly clean a flexible endoscope after each use requires that each doctor performing endoscopies must either have access to a number of endoscopes or be forced to wait an estimated 60 minutes between each endoscopic procedure (assuming the endoscope is cleaned in compliance with FDA Guidelines).

Our Company Strategy

Our business strategy is to design, develop, manufacture and market flexible endoscopes with Slide-On EndoSheath systems that provide physicians with the means to increase their practice efficiency, protecting patients and staff by providing a sterile insertion tube for each procedure. To implement this strategy, we developed a variety of flexible endoscopes with Slide-On EndoSheath systems, described below in “Products and Product Development Programs”.

In March of 2007, we completed the sale to Medtronic Xomed, Inc. (“Medtronic”), a wholly-owned subsidiary of Medtronic, Inc. (NYSE:MDT) of certain assets with respect to our ENT sheath business. The closing took place after the transaction was approved by a majority vote of Vision-Sciences’ shareholders during a special shareholders meeting convened on March 20, 2007. As part of the transactions, Vision-Sciences granted Medtronic an exclusive, royalty-free worldwide license to certain Vision-Sciences intellectual property, for use in making and selling sheath products solely within the field of ENT

6

(otorhinolaryngology). Under the terms of the agreement, Medtronic will pay us up to $34 million, of which $27 million was paid at the closing. Up to an additional $4 million will be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to Medtronic, and an additional $3 million will be payable 15 months after closing, assuming Vision-Sciences has complied with its obligations under the agreement, and that Medtronic has not made any indemnification based on the Company’s representations and warranties under the agreements. As part of this transaction, Vision-Sciences is transferring its existing ENT production lines for the EndoSheath ENT products from its Natick, MA facility to the Medtronic facility in Jacksonville, FL.

From December 2004 to May 2006, we marketed our urology products domestically through a separate exclusive agreement (the “MGU Agreement”) with Medtronic USA, Inc. (the Medtronic Gastroenterology/Urology business, or “MGU”). In May, 2006, we and MGU terminated the MGU Agreement, and we currently market and sell our urology products through our own global network of independent sales representatives. We manufacture EndoSheaths in our Natick, MA facility, and endoscopes in our Orangeburg, NY facility.

Products and Product Development Programs

In the medical segment, our primary products include a family of flexible endoscopes with Slide-On EndoSheath models for applications in the ENT, urology, and GI markets. In addition, through our industrial segment we currently manufacture and sell borescopes, which are endoscope devices for industrial applications, and related products. As described above under “Our Company Strategy”, during March 2007 we sold to Medtronic our assets with respect to our EndoSheaths for use in the ENT field.

Medical Segment

ENT EndoSheaths and Endoscopes

1.   EndoSheaths

We have developed a family of Slide-On ENT EndoSheaths for use with our own ENT-2000 endoscope, our ENT-1000 small diameter endoscope, our ENT-3000 portable endoscope with battery-powered LED light source, and with ENT endoscopes manufactured by other companies. Slide-On EndoSheaths are made with materials using our own proprietary process that makes them lubricious, allowing the healthcare provider to easily place the EndoSheath onto the insertion tube of an ENT endoscope. In addition, Slide-On ENT EndoSheaths have an optically clear window that fits securely over the ENT endoscope tip, providing a clear, non-degraded image. After the procedure is completed, the health-care provider slides the EndoSheath off the endoscope and disposes of it.

The Slide-On ENT Channeled EndoSheath contains a 2.0mm channel within the Slide-On EndoSheath, enabling the physicians to perform biopsies or other therapeutic procedures using their conventional (non-channeled) endoscope. The Slide-On ENT Sensory EndoSheath is designed to provide ENT physicians the opportunity to perform Flexible Endoscopic Evaluation of Swallowing with Sensory Testing (“FEESST”) using their conventional endoscopes. FEESST, an alternative emerging procedure to modified barium swallow studies, is performed by the ENT physician using the Slide-On ENT Sensory EndoSheath that contains a channel through which air is pulsed to the larynx to elicit an airway protective reflex. The ENT physician, by observing the reaction to the air pulse, is able to diagnose, treat and manage patients with swallowing disorders with an emphasis on decreasing the risk of choking, coughing and aspirating food and liquids that can lead to aspiration pneumonia. Both of these EndoSheaths enhance the practice efficiency of physicians, as they enable the physicians to use their conventional ENT endoscope to perform tests in their offices, compared to traveling to a hospital to perform them with special ENT endoscopes. Often, by performing the tests in their offices, the ENT physician receives a higher reimbursement, compared to the reimbursement received when the test is performed in a hospital.

7

In general, ENT endoscopes do not contain air, water, suction or accessory channels. Therefore, our basic Slide-On ENT EndoSheaths (“ENT SOS”) do not contain channels, and it is the only component that comes into contact with the patient. As described above, we announced in March 2007 that we closed on a transaction granting Medtronic an exclusive, royalty free license for the worldwide sale of ENT EndoSheaths. As part of the Slide-On family of ENT EndoSheaths, during FY 2007, we manufactured and sold a Slide-On ENT Channeled EndoSheath and a Slide-On ENT Sensory EndoSheath, both for our own flexible ENT endoscope line, and for ENT endoscopes manufactured by other companies.

2.   Endoscopes

We developed our own ENT endoscopes, with state-of-the-art fiber optic bundles, designed to minimize the cost of any necessary repairs and with other features that we believe make them competitive with ENT endoscopes of other major manufacturers.

We manufacture and sell a TNE-2000D flexible diagnostic endoscope with Slide-On EndoSheath (“TNE-D”), which is designed to allow ENT and GI physicians to view the esophagus transnasally (through the nose), compared to viewing it transorally (through the mouth), as with a conventional gastroscope. Conventional gastroscopes require patients to be consciously sedated to counteract the gag reflex encountered when a gastroscope is inserted transorally. Our TNE-D scope with Slide-On EndoSheath System, with its small diameter, allows for transnasal passage, enabling physicians to perform examinations in their office of a patient’s throat and esophagus for manifestations of gastroesophageal reflux disease (“GERD”) and other disorders. Millions of people in the United States suffer from some form of GERD, which can have a debilitating impact to their esophagus, vocal chords, and respiratory system.

The TNE-D endoscope can also be used to evaluate patients with dysphagia, a condition defined as difficulty swallowing, or of coughing or choking while swallowing or eating. A physician performs this test if an oropharyngeal exam has not fully revealed the cause of the patient’s swallowing problem. Currently this procedure is performed in a hospital setting with conscious sedation, and an EGD endoscope which contains a biopsy channel that doubles as an air-administration channel. The TNE-D scope with Slide-On EndoSheath System is designed to allow these tests to be done by ENT and GI physicians in their offices, without conscious sedation, thus improving practice efficiency and lowering overall costs to the health care system. Both the diagnostic and therapeutic procedures have reimbursement codes, allowing physicians to receive payment for the service, and allowing us to offer practice efficiencies by using our products. We completed the development of the TNE- D scope with Slide-On EndoSheath System in our fiscal year ended March 31, 2004 (“FY 04”).

In fiscal year ended March 31, 2005 (“FY 05”), we received clearance from the FDA to market our TNE-2000Bx flexible trans-nasal endoscope with Slide-On EndoSheath System (“TNE-Bx”). The TNE-Bx is designed to allow ENT and GI physicians to view the esophagus transnasally, as well as perform therapeutic procedures, such as biopsies, in an office setting without conscious sedation. These procedures can be performed on non-sedated patients in between five and ten minutes.

Urology Endoscopes and EndoSheaths

We have developed a cystoscope with Slide-On EndoSheath System for use by urologists. In November 2006, we released to the market our new cystoscope, the CST-2000A, which included improvements and enhancements designed to better meet the needs of urologists.

As with all of our flexible endoscopes, the Cystoscope Systems, the CST-2000 and its successor the CST-2000A with Slide-On EndoSheath, consists of two components—a reusable flexible endoscope incorporating our proprietary design, and a proprietary, sterile, disposable EndoSheath—highly functional and cost effective when used together. The EndoSheath slides easily onto the insertion tube of the

8

CST-2000/2000A endoscopes, and contain a 2.1 millimeter channel for irrigation and suction capabilities as well as tool delivery. The EndoSheath is the only component that comes into contact with the patient, and is disposed of after each procedure. This allows the physician to avoid using harsh chemicals to reprocess the endoscope after each use. As with all our systems, avoiding the conventional, lengthy reprocessing steps allows the physician to significantly increase the number of patients who can be examined in a given day. This improves the physician’s practice efficiency, while also ensuring a sterile insertion tube for each patient. Using the EndoSheath System allows the physician to avoid the use of harsh cleaning agents which reduces the wear and tear on the cystoscope, further lowering costs of the physician’s practice.

Additionally, during the last quarter of FY 07, we released our redesigned therapeutic cystoscope sheath, which incorporates improvements designed to simplify product use. Currently, the two EndoSheath systems are marketed for cystoscopy; a diagnostic sheath with 1.5mm channel size, and a therapeutic sheath with a 2.1mm channel size.

Gastrointestinal (“GI”) EndoSheath and Endoscope Systems

We have developed a family of proprietary flexible endoscope systems for GI applications consisting of two main components—a reusable flexible endoscope incorporating our proprietary design, as well as a proprietary, sterile, disposable EndoSheath. The Company has implemented a phase out of its Sigmoidoscopy product line due to limited market performance and the growing trend towards colonoscopy.

Pulmonary EndoSheath and Endoscope Systems

We have developed a family of proprietary flexible endoscope systems for pulmonary applications consisting of two main components—a reusable, flexible endoscope incorporating our proprietary design, and a proprietary, sterile disposable EndoSheath. We have implemented a phase out of our pulmonary product line. We expect to reenter the pulmonary specialty in the future.

More information on Vision-Science’s products can be found at www.VisionSciences.com

Industrial Segment

Under the Machida name, we design, manufacture and market flexible borescopes. Borescopes are endoscopes used for inspection and quality-control in industrial applications, such as the inspection of aircraft engines and nuclear power plants. Machida was the first to offer a flexible borescope with a grinding attachment, allowing users to “blend” or smooth small cracks in turbine blades of jet engines without disassembling the engine, which would involve significant expense and delay.

Machida’s borescopes are constructed in a variety of body types, including a portable model; each specifically designed to cover a multitude of needs and applications:

·Modular (MBS)—For borescopes 0.6mm to 2mm in diameter. This is Machida’s smallest body type.

·Slim lever—these borescopes are from 2mm to 6mm in diameter; it provides angulations in two directions. Machida’s most widely used body type includes high quality optics and illumination.

·Knob—used primarily with 8mm and 11mm insertion tubes, this four way, ambulating scope is particularly suited for longer, up to 20 feet borescopes. It comes in different configurations, such as

1.Standard direct view with polyurethane outer cover

2.With impregnated polyurethane steel mesh cover

3.With detachable side viewing options

9

4.With a Built-In Working Channel

5.With a Permanent 90 Degree Side Viewing Option

·Battery Operated Portable Flexible Borescope—a small battery handle attaches to the scope and makes this borescope ideal for field inspections. The borescope kit includes :

1.Borescope

2.Light guide cable & light guide sleeve

3.Miniature light source

4.Battery handle with battery for borescope

5.All items included in one pelican carrying case

More information on Machida’s products can be found at www.machidascope.com

Sales and Marketing

Medical Segment

The end users of our disposable EndoSheaths, flexible endoscopes and related products are otolaryngologists (ENT doctors), urologists and gastroenterologists in hospitals, medical clinics and physicians’ offices. Since September 2003 we have been distributing all of our products for the ENT markets in the U.S.A. and Canada through MENT, under the MENT Agreement. As part of the sale of the ENT sheath business to Medtronic during March 2007, Medtronic will also now distribute, market and sell our ENT endoscope line worldwide, on a co-branded basis, through MENT’s global sales force.

From December 2004 to May 2006, we distributed all of our urology market products in the U.S.A. and Canada through Medtronic USA, Inc. (the Medtronic Gastroenterology/Urology business, or “MGU”). As of May 2006 we are distributing our urology products through our own global independent network of sales representatives and various distributor organizations. We periodically evaluate the effectiveness of our sales channels, and may change them if we believe a different method will increase our revenues.

Industrial Segment

Our borescopes are sold directly by our Machida subsidiary and through a global network of independent sales representatives.

International Sales and Sales to Major Customers

Sales to unaffiliated customers outside of the United States were approximately $3,370, $4,122 and $3,733 for FY 05, FY 06 and FY 07, respectively. In FY 07, sales to foreign customers accounted for approximately 45% of the annual net sales of our medical segment, and 35% of the annual net sales of our industrial segment. In FY 06, sales to foreign customers accounted for approximately 42% of the annual net sales of our medical segment and 22% of net annual sales of our industrial segment. In FY 05, sales to foreign customers accounted for approximately 38% of the annual net sales of our medical segment and 19% of net annual sales of our industrial segment. Repair services outside of the United States account for 36% of our sales.

During FY 05, Medtronic, Inc. accounted for 35% of net sales. During FY 06, Medtronic, Inc. and Gyrus International, Ltd. accounted for 41% and 12% of net sales, respectively. During FY 07,

10

Medtronic, Inc., Gyrus International, Ltd. and NGC Medical accounted for 35%, 10% and 7% of net sales, respectively.

Backlog

On March 31, 2007, we had an order backlog of approximately $731, compared to a backlog of approximately $228 at March 31, 2006. The backlog in 2007 was comprised of approximately $653 and $78 for the medical and industrial segments, respectively, compared to approximately $136 and $92 for those same segments at March 31, 2006. The increase in the medical segment backlog is primarily due to an increase of orders placed by MENT for our ENT EndoSheaths, prior to our sale of that product line. We expect to fill our order backlog in FY 08.

Manufacturing and Suppliers

EndoSheaths

We produce EndoSheaths at our Natick, MA facility using raw materials, molded parts and components purchased from independent vendors, some of which are manufactured to our specifications. Until the sale to Medtronic, we manufactured our ENT EndoSheaths using proprietary processes, utilizing forming and bonding machines which were manufactured to our specifications. As indicated previously, as part of the sale of the ENT EndoSheath assets to Medtronic, we are transferring the manufacturing of the ENT EndoSheath to Medtronic.

Most purchased components and subassemblies are available from more than one supplier. For most of our purchases, we have no long-term agreements with our vendors or suppliers. We purchase our required components and supplies on a purchase-order basis. We contract with third parties for the sterilization of all of our EndoSheaths.

Endoscopes   Medical

We assemble our flexible endoscopes for the medical and industrial segments at our Orangeburg, NY facility, using purchased components and subassemblies, as well as certain proprietary components produced by us. Most purchased components and subassemblies are available from more than one supplier. For most of our purchases, we have no long-term agreements with our vendors or suppliers, and we purchase our required components and supplies on a purchase-order basis. For certain critical components we have long term supply agreements.

One of these long term agreements is with our key supplier of flexible endoscopes, and the agreement expires in March 2009. This agreement will automatically renew for additional two-year periods, unless it is terminated by either party with six months prior written notice of intent not to renew. This key supplier competes with our medical segment with conventional endoscopes. We believe that while substitute components, which are currently produced by sources other than this key supplier, would be available, such substitute components may be more expensive or of a lower quality, and may require some redesign of our endoscope and possibly additional regulatory clearances. Our inability to obtain sufficient quantities of such critical components on favorable terms could materially adversely affect our business. There can be no assurance that we will not experience difficulties or delays in the future, as we increase our manufacturing capacity. We purchased from that key vendor under the supply agreement approximately $1,069 and $1,828 worth of products for the manufacture of both medical and industrial products in FY 07 and FY 06, respectively.

11

Borescope   Industrial

We assemble our borescopes for our industrial segment at our Orangeburg, NY facility, using purchased components and subassemblies that are purchased from independent vendors, as well as certain proprietary components produced by us. While most components and subassemblies are currently available from more than one supplier, certain critical components are currently purchased only from a single source vendor. Our inability to obtain sufficient quantities of such critical components on favorable terms could materially adversely affect our business. There can be no assurance that we will not experience difficulties or delays in the future, as we increase our manufacturing capacity. In addition, we purchase light sources, cameras, adapters, accessories and imaging systems for industrial applications from a variety of vendors.

Competition

We believe that the primary competitive factors in the medical market for our flexible endoscopes and EndoSheath systems are the safety and effectiveness; the optical quality of the products offered; ease of use; product reliability; price; physician familiarity with the manufacturer and its products, and third-party reimbursement policies.

Our ability to compete in the marketplace is directly affected by several factors, such as our product development and innovation capabilities; our ability to obtain required regulatory clearances; our ability to protect the proprietary technology which our products are based upon; our manufacturing and marketing skills and our ability to attract and retain skilled employees.

The flexible endoscopes and related products currently sold and under development by us, face global competition primarily from companies such as Olympus, Pentax, Karl Storz GmbH & Co., Stryker Corp., and Gyrus/ACMI. Some of our competitors and some potential competitors may have greater financial resources, research and development personnel, manufacturing and marketing capabilities than we do. In addition, any company that is able to significantly redesign conventional flexible endoscopes to simplify the disinfection process, or significantly improve the current methods of disinfecting flexible endoscopes, may result in competition for our products.

In FY 05, a competing manufacturer of disposable sheaths for ENT scopes emerged in the European market. We believe this competitor is selling products with features that are within the claims of our patents. We are defending, and intend to continue to defend, our intellectual property rights vigorously. We believe our product quality, breadth of product offerings and financial resources are superior to that competitor’s. In FY 06 and FY 07, the existence of the competitor did not adversely affect our sales of disposable sheaths for ENT scopes in our European market.

In our industrial markets, we believe that product effectiveness, ease of use, product reliability and price are the principal competitive factors.

Patents and Proprietary Rights

Our success depends in part on our ability to maintain patent protection for our products, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. Our strategy regarding the protection of proprietary rights and innovations is to seek patents on those portions of our technology which we believe are patentable, and to protect as trade secrets other confidential and proprietary information.

We, along with our subsidiary Machida, currently hold 32 U.S. patents and have 8 U.S. patent applications pending. In addition, we have 20 foreign patents and have 18 foreign patent applications pending. These patents relate to disposable sheaths for endoscopes and reusable flexible endoscopes, as well as other various products. The issued patents will expire on various dates in the years 2008 through

12

2022. We also hold worldwide, perpetual and exclusive rights to two U.S. patents which are royalty-free for ENT endoscopy applications. In addition to those listed above, we have 2 U.S. patents issued and 5 U.S. patents pending in the U.S. and 12 corresponding foreign applications for Complementary Metal Oxide Semiconductor (“CMOS”) image sensor design patents. There can be no assurance that our pending patent applications will result in patents being issued or that our competitors will not circumvent, or challenge the validity of, any patents issued to us. In addition, in the event that another party infringes our patent rights, the enforcement of such rights is at our option and can be a lengthy and costly process, with no guarantee of success.

Some of the technology used in, and that may be important to, our products is not covered by any patent or patent application. We seek to maintain the confidentiality of our proprietary technology by requiring all our employees to sign confidentiality agreements, and by limiting access by outside parties to such confidential information. However, there can be no assurance that these measures will prevent the unauthorized disclosure or use of this information, or that others will not be able to independently develop such information. Moreover, as is the case with our patent rights, the enforcement of our trade secret rights can be lengthy and costly, with no guarantee of success.

To date, no claims have been brought against us alleging that our technology or products infringe any intellectual property rights of others. However, there can be no assurance that such claims will not be brought against us in the future or that any such claims will not be successful.

Government Regulation

The medical products that we currently market and which are under development are regulated as medical devices by the FDA under the federal Food, Drug and Cosmetic Act (the “FDC Act”), and require regulatory clearance prior to commercialization in the United States. Under the FDC Act, the FDA regulates clinical testing, manufacturing, labeling, distribution and promotion of medical devices in the United States. Various states and other countries in which our products may be sold in the future may impose additional regulatory requirements.

Following the enactment of the Medical Device Amendments to the FDC Act in May 1976, the FDA classified medical devices in commercial distribution into one of three classes, Class I, II, or III. This classification is based on the controls necessary to reasonably ensure the safety and effectiveness of the medical device. Class I devices are those devices whose safety and effectiveness can reasonably be ensured through general controls, such as adequate labeling, pre-market notification, and adherence to the FDA’s Quality System Regulations (“QSR”). Some Class I devices are further exempted from some of the general controls. Class II devices are those devices whose safety and effectiveness can reasonably be ensured through the use of special controls, such as performance standards, post-market surveillance, patient registries and FDA guidelines. Class III devices are devices that must receive pre-market approval by the FDA to ensure their safety and effectiveness. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices.

If a manufacturer or distributor of medical devices can establish that a new device is “substantially equivalent” to a legally marketed Class I or Class II medical device or to a Class III medical device for which the FDA has not required pre-market approval, the manufacturer or distributor may seek FDA marketing clearance for the device by filing a 510(k) Pre-market Notification. The 510(k) Pre-market Notification and the claim of substantial equivalence may have to be supported by various types of information indicating that the device is as safe and effective for its intended use as a legally marketed predicate device.

Following submission of the 510(k) Pre-market Notification, the manufacturer or distributor may not place the device into commercial distribution until an order is issued by the FDA. By regulation, the FDA has no specific time limit by which it must respond to a 510(k) Pre-market Notification. At this time, the

13

FDA typically responds to the submission of a 510(k) Pre-market Notification within approximately 90 days. The FDA may declare that the device is “substantially equivalent” to another legally marketed device and allow the proposed device to be marketed in the United States. The FDA may, however, determine that the proposed device is not substantially equivalent, or may require further information, such as additional test data, before the FDA is able to make a determination regarding substantial equivalence. Such determination or request for additional information could delay the market introduction of our products and could have a material adverse effect on us.

Flexible endoscopes, EndoSheaths, and accessory products have been classified by the FDA as Class II devices, and a Section 510(k) Pre-market Notification must be submitted to and cleared by the FDA before such devices can be sold. We have received FDA clearance of our 510(k) Pre-market Notifications for all of our products that require clearance. We expect that we will be required to obtain 510(k) clearance for each additional EndoSheath and endoscope system that we develop in the future.

Effective July 1998, our Natick, MA facility was certified as having established, and we continue to maintain, a quality system that meets the requirements of ISO 9001 and EN 46001. In addition, the certification confirmed conformance to the essential requirements of the Council Directive 93/42/EEC(Medical Device Directive, MDD), and application of this system at every stage from initial design controls to final product release to distribution. Subsequent audits resulted in successful certification to ISO 13485: 1996 and the Canadian Medical Device Regulations (CMDR). During this time period the Orangeburg, NY facility was audited under the Natick quality system and referenced as a second location with limited activities.

In August 2005, our Natick quality system was re-certified for conformance to ISO 13485: 2003 and continued conformance to MDD 93/42/EEC and the Canadian Medical Device Regulations (CMDR). In addition to the three-year certification audits, we undergo annual surveillance audits to confirm that we are maintaining our quality system. During April 2007, the Orangeburg facility passed a facility audit for full ISO 13485: 2003 and CMDR certification and updated certificates are still pending. The Natick and Orangeburg facilities are registered with the FDA as medical device manufacturers. As a result, these facilities are subject to the FDA’s QSR, which regulate their design, manufacturing, testing, quality control and documentation procedures. We are also required to comply with the FDA’s labeling requirements, as well as its information reporting regulations.

The export of medical devices is also subject to regulation in certain instances. Our compliance with these various regulatory requirements will be monitored through periodic inspections by the FDA and audits by independent authorities to maintain our ISO 13485 (CMDR), MDD status.

The process of obtaining required regulatory clearances can be lengthy and expensive, and compliance with ISO 13485 and the FDA’s QSR and regulatory requirements can be burdensome. Moreover, there can be no assurance that the required regulatory clearances will be obtained, and those obtained may include significant limitations on the uses of the product in question. In addition, changes in existing regulations or the adoption of new regulations could make regulatory compliance by us more difficult in the future. The failure to obtain the required regulatory clearances or to comply with applicable regulations may result in fines, delays or suspensions of clearances, seizures, recalls of products, operating restrictions or criminal prosecutions, and could have a material adverse effect on our operations.

Third-Party Reimbursement

Hospitals, medical clinics and physicians’ offices that purchase medical devices such as our EndoSheaths and flexible endoscopes generally rely on third-party payers, such as Medicare, Medicaid and private health insurance plans to pay for some or all of the costs of the screening, diagnostic and therapeutic procedures performed with these devices. Whether a particular procedure qualifies for third-party reimbursement depends upon such factors as the safety and effectiveness of the procedure, and

14

reimbursement may be denied if the medical device used is experimental or was used for a non-approved indication. We believe, based upon our knowledge and experience of third-party reimbursement practices and advice from consultants in this area, that third-party reimbursement is available for most procedures that utilize our products. However, not all third-party payers will reimburse health-care providers separately for the cost of our EndoSheath.

Third-party payers use a variety of mechanisms to determine reimbursement amounts for procedures such as endoscopies. In most cases, payment is based upon amounts determined by the Centers for Medicare & Medicaid Services (“CMS”), a governmental agency under the U.S. Department of Health and Human Services. As part of its responsibilities, CMS assigns relative value units (“RVUs”) to over 10,000 physician services. An RVU for a specific procedure is comprised of values for work, practice expense and malpractice insurance, and when multiplied by a Conversion Factor, represents a dollar value for a specific procedure.

CMS has multiple fee schedules to accommodate payment to the hospital, the ambulatory surgery center (“ASC”) and the physician. Physician services are reimbursed based on where the service is performed. If the physician performs the service in his or her office and the office bears the burden of overhead costs, the physician is reimbursed based on non-facility relative value units to accommodate the overhead costs. If the physician performs the service within a hospital or ASC, the payment is lower, reflecting the physician work and malpractice expenses, but without the overhead since the facility bears that financial burden. The 2007 physician fee schedule did not change significantly from 2006. There was little change in hospital outpatient payments under Medicare, as well. Based upon a review of calendar year 2007 fee schedules for the hospital outpatient and physician payment for procedures that utilize our TNE-D EndoSheath and TNE-Bx EndoSheath, physicians will receive between 49% and 154% more by performing procedures in their offices, than if they performed those procedures in hospitals, due to the increased office expense for the purchase of the device. For a diagnostic cystoscopy, the physician will receive 87% more by doing the procedure in his or her office, than if they performed that procedure in the hospital, again because the increase in fee accommodates the cost of the device purchased by the physician practice.

We believe that, based upon the resource-based practice expense RVU, the number of procedures performed in non-facility settings will increase. This increase will be due primarily to the increased differential in payments that physicians will receive for performing these procedures. As these procedures move to non-facility settings, physicians will have to contend with the cost and effort required to reprocess endoscopes. We believe our disposable EndoSheaths, which eliminate the time and cost of cleaning endoscopes, will provide an economically beneficial alternative to the use of endoscopes without EndoSheaths. This economic benefit is based upon the provider not having to purchase multiple conventional endoscopes and expensive sterilizing equipment and supplies, as well as not having to spend valuable time cleaning endoscopes. In addition, we believe that with approximately 79 million people in the United States over the age of 50, there will be an increase in the potential number of procedures that physicians will be performing. We believe our disposable EndoSheaths, combined with the resource-based system for setting values for physician services, represent a sound economic solution for physicians to perform diagnostic and therapeutic procedures in their offices.

There can be no assurance that third-party reimbursement will continue to be available for procedures performed with our products, or that the cost of our EndoSheaths would be covered by such reimbursement in the future. In addition, reimbursement standards and rates may change. We believe that the inability of users of our GI and pulmonary EndoSheaths to obtain adequate reimbursement from third-party payors has had a materially adverse effect on us.

15

Product Liability and Insurance

The nature of our products exposes the Company to significant product liability risks. We maintain product liability insurance with coverage limits of $15 million. We believe that this level of coverage is adequate, given our past sales levels and our anticipated sales levels for FY 08. We evaluate the adequacy of this coverage periodically to determine if we need to adjust it. No product liability claims have been brought against us to date.

However, there can be no assurance that product liability insurance will continue to be available to us on acceptable terms, or that product liability claims in excess of our insurance coverage, if any, will not be successfully asserted against us in the future.

Research and Development

We believe that our future success depends in part upon our ability to develop new products and enhance our existing products. In the past, we have devoted significant resources to research and development.

Our research and development (“R&D”) expenses in FY 05, FY 06 and FY 07 were approximately $1,422, $2,234 and $2,372 respectively.

In FY 05, our research and development efforts focused on the introduction of our TNE-Bx and cystoscopes, each with Slide-On EndoSheaths. The ENT Slide-On Channeled EndoSheath, the ENT Slide-On Sensory EndoSheath, the TNE-D and TNE-Bx endoscopes and their Slide-On EndoSheaths. During FY 06, our research and development efforts focused on the introduction of our ENT-3000 portable endoscope with battery-powered LED light source, and efforts to establish processes for high volume and low cost manufacture of EndoSheaths. In addition, we incurred higher spending for personnel and supplies for a variety of R&D programs, including a new D-shaped endoscope design, and the design of a new product family of video endoscopes (“Videoscopes”).

In FY 07, we continued our research and development efforts of the videoscope product family, which will have a miniature digital camera mounted at the distal end of the insertion tube. Additionally, we were working on the design and cost improvements to our TNE-D, TNE-Bx and CST-2000A cystoscope.

In FY 08, we expect our R&D expense to include development efforts regarding new technologies which will enhance the competitive position of our endoscopes. Our goal remains to release products where we believe our technology can increase physicians’ practice efficiency, provide for patient safety and result in lower costs to provide medical care.

Employees

As of May 31, 2007 we had 92 employees, including temporary employees. None of our employees is represented by a labor union. We believe that its employee relations are good. Our success depends in large part upon our ability to attract and retain highly qualified scientific, management, sales and marketing personnel.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our web site at www.visionsciences.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The information posted on our web site is not incorporated into this Annual Report.

16

Executive Officers of the Company

Ron Hadani, age 51, has been our President and Chief Executive Officer since February 2003. From 2001 to February 1, 2003, Mr. Hadani was a self-employed consultant, working in various capacities with early-stage companies in the U.S and Israel. From 1999-2001, he served as President of Kontron Medical, LLC. From 1997-1999 he served as Divisional Vice President of U.S. Surgical, a division of Tyco International, Ltd.

Yoav M. Cohen, age 49, joined the Company in September 2006 as a Vice-President and on January 1, 2007 became the Chief Financial Officer. Prior to joining the Company, from 2001 to 2006, Mr. Cohen was a Managing Director of NYC Advisors LLC, a business and financial advisory firm. Prior to that, between 2000 and 2001, Mr. Cohen was the COO of Selway Partners, LLC, an early-stage venture capital fund, and between 1995 and 2000, Mr. Cohen was Senior VP Business Development & CFO of Bogen Communications International, Inc.

Mark S. Landman, age 53, has served as Vice President Operations and General Manager of the Natick, MA Operation since 2007, and as Vice President of the medical segment since July 1999. Mr. Landman joined the Company in January 1991, and served in a variety of roles in product development, project management, manufacturing engineering and material control from that date to July 1999.

Jitendra Patel, age 54, is the Vice President Sales and Marketing of Machida Inc. (the industrial segment), a wholly-owned subsidiary of the Company, since August 2000. From August 1995 to July 2000, he served as the Manager of Sales and Marketing for that segment.

Carlos Babini, age 56, joined the Company in April 2007 as Executive Vice President, Chief Sales and Marketing Officer of the medical segment. Prior to joining the Company, from 2003 until recently, Mr. Babini held the position of President, International, Executive Vice President and Chief Sales and Marketing Officer at Curon Medical Inc. Between 1999 and 2003, Mr. Babini held the position of COO at Infomedix Communication, and was the co-founder of the company Shape International. From 1979 through 1999, Mr. Babini held various executive and managerial sales and marketing positions at U.S. Surgical.

Officers are elected on an annual basis and serve at the discretion of the Board of Directors.

17

Item 1ARisk Factors

You should carefully consider the risks and uncertainties we describe below and the other information in this Annual Report or incorporated by reference before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results or liquidity could be materially harmed.

We have a history of operating losses and we may not achieve or maintain profitability in the future.

We have incurred substantial operating losses since our inception (our net income in FY 07 resulted from the sale of a product line) and there can be no assurance that we will achieve a profitable level of operations in the future. We anticipate a negative cash flow during FY 08, because of additional spending for research and development, increasing our global network of independent sales representatives for the urology market, general business operations and capital expenditures. As of March 31, 2007, we had cash and cash equivalents totaling $29.0 million. Although we do not anticipate the need for additional financing in FY 08, management may seek new financing, if terms are favorable. However, there can be no assurance that such financing will be available on terms acceptable to us, if at all.

Our stock price is volatile, and you may not be able to sell your shares for a profit.

The trading price of our common stock is volatile. Our common stock price could be subject to fluctuations in response to a number of factors, including:

·Actual or anticipated variations in quarterly operating results;

·Conditions or trends in the medical device market;

·Announcements by us or our competitors of significant customer wins or losses, gains or losses of distributors, technological innovations, new products or services;

·Addition or departures of key personnel;

·Sales of a large number of shares of our common stock;

·Adverse litigation;

·Unfavorable legislative or regulatory decisions;

·Variations in interest rates; and

·General market conditions.

In the past, companies that have experienced volatility in the market price of their stock have been the target of securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert management attention, which could seriously harm our business.

Reimbursements from third-party healthcare payers is uncertain because of factors beyond our control, and changes in third-party healthcare payers’ policies could adversely affect our sales growth.

In the U.S. and other foreign countries, government-funded or private insurance programs, or third-party payers, pay a significant portion of the cost of a patient’s medical expenses. There is no uniform policy of reimbursement among all these payers. We believe that reimbursement is an important factor to the success of our product sales.

18

All U.S. and foreign third-party reimbursement programs, whether government funded or commercially insured, are developing increasingly sophisticated methods of controlling healthcare costs through prospective reimbursement and capitation programs, group purchasing, redesign of benefits, careful review of bills, and exploring more cost-effective methods of delivering healthcare. These types of programs can potentially limit the amount which healthcare providers may be willing to pay for our products.

There can be no assurance that third-party reimbursement will continue to be available for procedures performed with our products. In addition, reimbursement standards and rates may change. We believe that the failure of users of our products to obtain adequate reimbursement from third-party payers has had a materially adverse effect on our sales.

Our products and manufacturing practices are subject to regulation by the FDA and by other state and foreign regulatory agencies.

Our products are medical devices and therefore subject to extensive regulation in the United States and in the foreign countries where we do business.

In the U.S., we are subject to regulation by the Food and Drug Administration (“FDA”) and other regulatory agencies. The process of obtaining required regulatory clearances can be lengthy and expensive, and compliance with the FDA’s Quality Systems Regulation can be burdensome. FDA regulations govern, among other things, the following activities that we perform, and will continue, to perform in connection with our products:  design and development; product testing; manufacturing; labeling and packaging; storage; shipping and receiving; pre-market clearance or approval; advertising and promotion; and sales, distribution, and servicing.

There can be no assurance that the required regulatory clearances will be obtained, and those obtained may include significant limitations on the uses of the product in question. In addition, changes in existing regulations or the adoption of new regulations could make regulatory compliance by us more difficult in the future. The failure to obtain the required regulatory clearances or to comply with applicable regulations may result in fines, delays, suspensions of clearances, seizures, recalls of products, operating restrictions or criminal prosecutions, and could have a material adverse effect on our operations.

Foreign government regulations vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ significantly.

The European Union has adopted legislation, in the form of directives to be implemented in each member state, concerning the regulation of medical devices within the European Union. The directives include, among others, the Medical Device Directive that establishes standards for regulating the design, manufacture, clinical trials, labeling, and vigilance reporting for medical devices. Under the European Union Medical Device Directive, medical devices are classified into four classes, I, IIa, IIb, and III, with Class I being the lowest risk and Class III being the highest risk. Under the Medical Device Directive, a competent authority is nominated by the government of each member state to monitor and ensure compliance with the Directive. The competent authority of each member state then designates a notified body to oversee the conformity assessment procedures set forth in the Directive, whereby manufacturers demonstrate that their devices comply with the requirements of the Directive and are entitled to bear the “CE” mark. The CE Mark is an abbreviation for Conformité Européene (or European Conformity) and the CE mark, when placed on a product, indicates compliance with the requirements of the applicable directive. Medical devices properly bearing the CE mark may be commercially distributed throughout the European Union. We have received CE certification from the Underwriters Laboratories—UK for conformity with the European Union Medical Device Directive allowing us to use the CE mark on our product lines. This quality system has been developed by the International Organization for

19

Standardization to ensure that companies are aware of the standards of quality to which their products will be held worldwide. While no additional pre-market approvals in individual European Union countries are required prior to marketing of a device bearing the CE mark, practical complications with respect to marketing introduction may occur. For example, differences among countries have arisen with regard to labeling requirements. Failure to maintain the CE mark will preclude us from selling our products in the European Union. We may not be successful in maintaining certification requirements necessary for distribution of our products in the European Union.

Under the Canadian Medical Devices Regulations, all medical devices are classified into four classes, Class I being the lowest risk class and Class IV being the highest risk. Class I devices include among others, devices that make only non-invasive contact with the patient. Classes II, III and IV include devices of increasingly higher risk as determined by such factors as degree of invasiveness and the potential consequences to the patient if the device fails or malfunctions. Our current products sold in Canada generally fall into Classes II and III. All Class II, III and IV medical devices must have a valid Medical Device License issued by the Therapeutic Products Directorate of Health Canada before they may be sold in Canada (Class I devices do not require such a license). We have obtained applicable Medical Device Licenses for many of our products. Failure to maintain required Medical Device Licenses in Canada or to meet other requirements of the Canadian Medical Devices Regulations (such as quality system standards and labeling requirements) for our products will preclude us from selling our products in Canada. We may not be successful in continuing to meet the medical device licensing requirements necessary for distribution of our products in Canada.

We currently purchase certain critical components from several single source manufacturers under various  supply agreements, and if these manufacturers are unable or unwilling to produce our product requirements in quality and quantity to our satisfaction, our business will be harmed.

In the medical segment, certain critical components of our products, such as image bundles, are currently being purchased solely from a key supplier, which is a competitor of ours. These components are being purchased pursuant to a supply agreement that expires in March 2009, and is renewable automatically for two years. It is subject to termination by mutual consent or upon breach or bankruptcy. We believe that while substitute components, which are currently produced by sources other than that key supplier would be available, such substitute components may be more expensive and of a lower quality, and may require a redesign of our endoscope and additional regulatory clearances. Moreover, such substitute components may not be immediately available in quantities needed by us. Our inability to obtain a sufficient quantity of such critical components on favorable terms could materially adversely affect our business.

In the industrial segment, borescopes are assembled using components and subassemblies purchased from independent vendors. While most components and subassemblies are currently available from more than one supplier, certain critical components are currently purchased only from two key suppliers. The failure of us to obtain a sufficient quantity of such components on favorable terms could materially adversely affect our business.

If we do not continue to develop and commercialize new products and identify new markets for our products and technology, we may not remain competitive, and our revenues and operating results could suffer.

The endoscopy industry is subject to continuous technological development and product innovation. If we do not continue to be innovative in the development of new products and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications. Accordingly, our success depends in part on developing new and innovative applications of our endoscopy technology and identifying new markets for and applications of existing products and technology. If we are unable to develop and commercialize new products and identify new markets for our

20

products and technology, our products and technology could become obsolete and our revenues and operating results could be adversely affected.

Our operating results could be negatively impacted if we are unable to capitalize on research and development spending.

We have spent, and continue to spend, a significant amount of time and resources on research and development projects, in order to develop and validate new and innovative products. We believe that these projects will result in the manufacturing of new products and will create additional future sales. However, factors including regulatory delays, safety concerns, or patent disputes could slow down the introduction or marketing of new products. Additionally, unanticipated issues may arise in connection with current and future clinical studies, which could delay or terminate a product’s development prior to regulatory approval. We may also experience an unfavorable impact on our operating results if we are unable to capitalize on those efforts by attaining the proper FDA approval, or other foreign regulatory approvals, or to successfully market new products, including the new family of videoscope products, or other flexible endoscope products.

Competition in the medical device industry is intense, and many of our competitors have greater resources than we do.

The flexible endoscopes and related products currently sold and under development by us face competition primarily from medical products companies such as Olympus Group, Pentax Imaging Company, Karl Storz GmbH & Co., Stryker Corp, and Gyrus Group PLC. In addition, any company that is able to significantly redesign conventional flexible endoscopes to simplify the cleaning process, or significantly improve the current methods of cleaning flexible endoscopes, would provide competition for our products.

The principal competitors for our industrial products are Olympus, General Electric—Inspection Technology and Karl Storz GmbH & Co. Many of our competitors and potential competitors have far greater financial resources, research and development personnel, and manufacturing and marketing capabilities than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to acquire new technologies or products that could effectively compete with our product lines. In addition, it is possible that other large health care companies may enter the flexible endoscope market in the future.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:

·product performance and design;

·ability to sell products tailored to meet the applications needs of clients and patients;

·quality of customer support;

·product pricing;

·product safety;

·sales, marketing and distribution capabilities;

·success and timing of new product development and introductions; and

·Intellectual property protection.

21

We may not be able to protect our intellectual property rights or technology effectively.

Our success depends in part on our ability to maintain patent protection for our products, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. There can be no assurance that our pending patent applications will result in patents being issued, or that our competitors will not circumvent, or challenge the validity of, any patents issued to us. There can be no assurance that measures taken by us to protect our proprietary information will prevent the unauthorized disclosure or use of this information or that others will not be able to independently develop such information. In addition, in the event that another party infringes our patent rights or other proprietary rights, the enforcement of such rights is at our option and can be a lengthy and costly process, with no guarantee of success. Moreover, there can be no assurance that claims alleging infringement by us of other’s proprietary rights will not be brought against us in the future or that any such claims will not be successful. If we are unable to maintain the proprietary nature of our technologies, our ability to market or be competitive with respect to some or all of our products may be affected, which could reduce our sales and affect our ability to become profitable.

Product liability suits against us may result in expensive and time consuming litigation, payment of substantial damages and an increase in our insurance rates.

The development, manufacture and sale of our products involve a significant risk of product liability claims. We maintain product liability insurance with coverage limits of $15 million. We believe that this level of coverage is adequate, given our past sales levels, our anticipated sales levels for FY 08, and our claims experience. We will reevaluate the adequacy of this coverage when and if our sales substantially increase, or another need arises. No product liability claims have been brought against us to date. However, there can be no assurance that product liability insurance will continue to be available to us on acceptable terms, or that product liability claims in excess of our insurance coverage, if any, will not be successfully asserted against us in the future.

We sell our products in numerous international markets.

Our operating results may suffer if we are unable to manage our international sales and marketing activities effectively. We sell some of our products in foreign countries, and we therefore are subject to risks associated with having international sales, such as:

·foreign certification and regulatory requirements;

·maintenance of agreements with competent distributors;

·import and export controls;

·currency exchange fluctuation; and

·political and economic instability.

Sales to unaffiliated customers outside of the United States were approximately $3,370, $4,122 and $3,733 for the fiscal years ended March 31, 2005, 2006 and 2007, respectively.

We may be unable to attract and retain management and other personnel we need to succeed.

Our success depends on the services of our senior management team and other key employees in our research and development, manufacturing, operations and sales and marketing departments. If we are unable to recruit, hire, develop and retain a talented, competitive work force, we may not be able to meet our strategic business objectives.

22

Our operating results could be negatively impacted by economic, political or other developments in countries in which we do business

Our business requires us to move some goods across international borders. Any events that interfere with, or increase the costs of, the transfer of goods across international borders could have a material adverse effect on our business.

We transport some of our goods across international borders, primarily those of the United States, Canada, Europe, Japan and Israel. Since September 11, 2001, there has been more intense scrutiny of goods that are transported across international borders. As a result, we may face delays, and increase in costs due to such delays in delivering goods to our customers. Any events that interfere with, or increase the costs of the transfer of goods across international borders could have a material adverse effect on our business.

Conditions in Israel affect our operations and may limit our ability to produce and sell our products.

Currently we use several sub-contractors in Israel to develop and produce some of our products. Political, economic and military conditions in Israel may directly affect our operations, and we could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. Israel frequently has been subject to terrorist activity, with varying levels of severity, and the United States Department of State has issued an advisory regarding travel to Israel. According to the U.S. Department of State’s website, the violence in Iraq and the clashes between Palestinians and Israelis have the potential to produce demonstrations and unrest throughout the region. Also, although it has not yet occurred, the political and security situation in Israel may result in certain parties with whom we have contracts claiming that they are not obligated to perform their commitments pursuant to force majeure provisions of those contracts.

In addition, since some of the components of our manufacturing and research and development sub-contractors are located in Israel, we could experience disruption of our manufacturing, and research and development activities due to terrorist attacks. If terrorist acts were to result in substantial damage to our sub-contractors facilities, our business activities would be disrupted, and our revenues may be severely impacted. Our business interruption insurance may not adequately compensate us for losses that may occur, and any losses or damages sustained by us could have a material adverse effect on our business.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

The operations of our medical segment currently occupy approximately 20,000 square feet of space in Natick, MA. under a lease which expires in January 2008. The operations of the Company’s industrial segment and the offices of the Company’s corporate segment are located in Orangeburg, NY under a lease for approximately 10,000 square feet, which expires in August 2010, and a sublease for 5,250 square feet, which expires in December 2007. In November 2006, the lease for the Company’s 10,000 square feet was amended to include the additional 5,250 square feet from the current sub-lease, effective January 1, 2008.

Our Natick and Orangeburg facilities are registered with the FDA as medical device manufacturing facilities and, therefore, are subject to the FDA’s QSR regarding manufacturing, testing, quality control and documentation procedures. We believe that the physical characteristics and layouts of these facilities are adequate to manufacture our products in compliance with applicable FDA regulations. In addition, our Natick facility is registered as meeting the requirements of ISO 13485 and the Medical Device Directive, allowing us to sell our medical products in Europe and Canada.

23

Item 3.Legal Proceedings

As of March 31, 2007, there were no material legal proceedings to which we or any of our subsidiaries are a party, or to which any of our properties are subject.

Item 4.Submission of Matters to a Vote of Security Holders

At a Special Meeting of shareholders held on March 20, 2007, pursuant to the Notice of Special Meeting of Stockholders dated March 6, 2007, the following actions were taken:

1.      The approval of the sale by Vision-Sciences of certain assets relating to its ENT EndoSheath products pursuant to an Asset Purchase Agreement dated as of January 12, 2007, between Vision-Sciences and Medtronic Xomed, Inc. At the Special Meeting 22,136,947 shares voted in favor of the sale, and no shares were voted against, or abstained or were broker non-votes.

2.      No other matters were submitted to a vote of the Company’s stockholders during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise.

24

PART II

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Since October 30, 1997, the Company’s Common Stock has been quoted on the NASDAQ Small Cap Market under the symbol VSCI. The following table sets forth the high and low sale prices for the Common Stock on the NASDAQ Small Cap Market, as reported by NASDAQ during the periods indicated.

Fiscal Year Ended
March 31, 2006	High		Low
1st Quarter	$	2.91	$	1.93
2nd Quarter	2.31		1.85
3rd Quarter	2.25		1.59
4th Quarter	2.19		1.55

Fiscal Year Ended
March 31, 2007	High		Low
1st Quarter	$	2.09	$	1.11
2nd Quarter	1.80		1.29
3rd Quarter	1.56		1.20
4th Quarter	1.49		1.02

Such over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

As of June 21, 2007, there were 35,253,031 outstanding shares of Common Stock held by 186 stockholders of record, in addition to which there were approximately 1,300 beneficial stockholders.

We have never paid cash dividends on our Common Stock, and we do not expect to pay any cash dividends on our Common Stock in the foreseeable future.

On February 14, 2005, the Company sold in a private equity placement, an aggregate of 3,703,702 shares of common stock at a price of $2.70 per share, resulting in gross proceeds of approximately $10 million. The per share price represented 91% of the closing price of the Company’s common stock on the NASDAQ Small Cap Market at February 14, 2005. Two financial investors, who are independent of the Company, acquired approximately $8 million of the common stock sold, and two directors, who were also Company employees at the time (the “Insiders”), acquired the remainder. In addition, as part of the transaction, the Company issued warrants to purchase an additional 1,103,704 shares of common stock to the investors and to the placement agent. The warrants are exercisable immediately over a period of five years at a price of $3.75 per share. The agreement does not require the Company to file any registration statement covering the resale of any of the common stock or warrants acquired by the investors in the transaction. However, the agreement does provide the investors with piggyback registration rights when and if the Company does file a registration statement. The transaction was determined to be at fair market value based upon a review by the Board of Directors of the daily volume of trading of the Company’s common stock on the NASDAQ Small Cap, and based upon the fact that there was no requirement for registering the shares. The transaction was approved by the Company’s Board of Directors in a unanimous written consent.

On March 30, 2005, in response to the NASDAQ Stock Market informing the Company that it was in violation of certain NASDAQ Marketplace Rules regarding the above sale of common stock to officers and directors at less than the closing bid price of the common stock on February 14, 2005, the Company

25

and the Insiders executed separate agreements to remediate the violation. One of the Insiders executed a contribution agreement providing for the payment of an additional amount in respect of the common stock purchased from the Company on February 14, 2005, thus bringing the price paid by him to $2.95 per share, the closing bid price of the common stock on February 14, 2005. The other Insider executed a rescission agreement, agreeing to rescind 31,387 shares of common stock purchased by him on February 14, 2005, thus increasing the cash price paid by him for the remaining shares to $2.95 per share. The Company recorded the contribution, received on April 7, 2005, as a subscription receivable and additional-paid-in-capital as of March 31, 2005. The Company recorded the rescission as a change in outstanding shares as of March 31, 2005.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the securities authorized for issuance under our equity compensation plans as of March 31, 2007

Equity Compensation Plan Information

	(a)		(b)			(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)(2)		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (1)(2)
Equity compensation plans approved by security holders		5,820,404		$	1.76		216,108
Equity compensation plans not approved by security holders(3)		—		—			—
Total		5,820,404		$	1.76		216,108

(1)In addition to being available for future issuance upon exercise of options that may be granted after March 31, 2007, shares issuable under the 2000 Stock Incentive Plan may instead be issued in the form of restricted stock, unrestricted stock, stock appreciation rights, performance shares or other equity-based awards.

(2)Includes any shares of Common Stock that would be issuable pursuant to the 2003 Director Option Plan, approved by the stockholders in July 2003.

(3)All of our equity compensation plans have been approved by our stockholders.

There were no repurchases of registered equity securities during FY 07.

26

Item 6.Selected Financial Data

The following table summarizes certain selected financial data and should be read in conjunction with the financial statements and related notes contained in Appendix A to this report.

	Year Ended March 31,
	2003			2004			2005			2006			2007
	(in thousands, except per share data)
Statement of Operations Data:
Net sales	$	6,430		$	9,927		$	10,326		$	11,150		$	9,487
Gross profit	1,667			3,771			2,944			2,636			1,951
Loss from operations	(1,759		)	(3,794		)	(2,558		)	(4,227		)	(5,603		)
Net income (loss)	(1,707		)	(3,748		)	(2,505		)	(4,036		)	20,112
Net income (loss) per share—basic	(.06		)	(.12		)	(.08		)	(.11		)	.57
Net income (loss) per share—diluted	(.06		)	(.12		)	(.08		)	(.11		)	.56
Balance Sheet Data:
Cash and cash equivalents	$	2,869		$	2,715		$	9,869		$	6,138		$	28,955
Total assets	5,447			6,729			14,748			11,511			33,003
Total liabilities	1,311			1,763			1,907			2,013			2,587
Stockholders’ equity	4,136			4,966			12,841			9,498			30,416

27

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Annual Report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects”, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the availability of capital resources, the availability of third-party reimbursement, government regulation, the availability of supplies, competition, technological difficulties, the completion of  obligations under our contract with Medtronic Xomed, Inc., general economic conditions and other risks detailed in this Annual Report on Form 10-K and any subsequent periodic filings made with the Securities and Exchange Commission. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.

Executive Summary

We develop, manufacture and sell flexible endoscopes and disposable EndoSheaths for the medical device market, and flexible borescopes for the industrial device markets. We operate in three reporting segments: medical, industrial and corporate.

All amounts in the financial notes, except for share and per share data, are reported in ($000’s), unless otherwise indicated.

Medical Segment

The medical segment supplies flexible endoscopes and disposable EndoSheaths to the ENT, urology, GI and pulmonary markets. Health-care providers use EndoSheaths to cover the insertion tube of flexible endoscopes, such as ENT endoscopes, TNE endoscopes, cystoscopes, sigmoidoscopes and bronchoscopes. The EndoSheaths allow the health-care providers to process patients economically by permitting the providers to minimize reprocessing the endoscopes between procedures. In addition, the EndoSheaths ensure a sterile insertion tube for each patient procedure.

Our strategy in the medical segment is comprised of three components: a) improve sales distribution and customer service and support, b) lower manufacturing costs, and c) increase the number of new product offerings.

In March 2007, the Company closed the sale of certain assets with respect to its ENT EndoSheath business to Medtronic Xomed, Inc. (“Medtronic”), a wholly-owned subsidiary of Medtronic, Inc. (NYSE:MDT). The closing took place after the transaction was approved by a majority vote of our shareholders during a special shareholders meeting convened on March 20, 2007. As part of the transaction, Vision-Sciences has granted Medtronic an exclusive, royalty-free worldwide license to certain Vision-Sciences intellectual property, for use in making and selling sheath products solely within the field of ENT (otorhinolaryngology). Under the terms of the agreement, Medtronic will pay Vision-Sciences up to $34 million, of which $27 million was paid at the closing. Up to an additional $4 million will be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to Medtronic, and an additional $3 million will be payable 15 months after closing, assuming Vision-Sciences has complied with its obligations under the asset purchase agreement, and that Medtronic has not made any indemnification claims based on the Company’s representations and warranties under the agreement. As part of this transaction, Vision-Sciences is transferring its existing ENT production lines

28

for the EndoSheath ENT products from its Natick, MA facility to Medtronic in Jacksonville, FL. Medtronic will also now distribute, market and sell Vision-Sciences’ ENT endoscope products worldwide, on a co-branded basis, through Medtronic’s dedicated sales force. Sales of our EndoSheaths within the field of ENT were $3.7 million or 39% of total sales in FY 07 and $3.3 million or 30% of total sales in FY 06. These sales will not be made after the transition milestones have been met, which we anticipate will occur in the second half of FY 08. In addition to providing liquidity, we believe that this transaction will allow us to focus on sales of our existing products and our new videoscope product family to the TNE, ENT, urology and GI markets, and the patented EndoSheath product to the TNE, urology and GI markets.

Sales Distribution

Since September 2003, we have been distributing all of our products for the ENT market in the United States and Canada through Medtronic ENT (“MENT”) under the Medtronic Agreement. The initial term of the Medtronic Agreement was three years. Under the Medtronic Agreement, we granted MENT exclusive distribution rights in the United States and Canada to market and sell our ENT and TNE EndoSheaths and endoscopes to ENT practitioners. The Medtronic Agreement resulted in an increase in sales of our ENT EndoSheaths and ENT endoscopes due to the quantities of endoscopes and EndoSheaths purchased by Medtronic in the initial twelve-month period. In the second year (“Year 2”) of the Medtronic Agreement, MENT purchased fewer units of ENT endoscopes and ENT EndoSheaths than in the initial period, due to the build up of inventory that resulted from the purchases in the initial period. During Year 2, to expedite depletion of the inventory, we and MENT began a rebate program, whereby we agreed to pay MENT a cash rebate for ENT EndoSheaths they sold to new users who committed to a large annual purchase. The rebate program was designed to run for one year, ending September 2005. During that period, we recorded deferred revenue of approximately $60 for the rebate program. As of December 31, 2005, the inventory of ENT SOS at MENT had declined to a level where MENT re-commenced ordering, allowing us to terminate the rebate program. We recognized the deferred revenue in sales for the three months ended December 31, 2005.

As part of the sale of certain assets our ENT EndoSheath business to Medtronic, the Medtronic Agreement was amended and restated. Under terms of the amended and restated Medtronic Agreement, Medtronic will now distribute, market and sell Vision-Sciences’ ENT endoscope products worldwide, on a co-branded basis, through Medtronic’s dedicated sales force. The terms of the amended and restated Medtronic Agreement is through December 31, 2008, subject to automatic one year renewals thereafter, unless terminated by either party on 90 day notice prior to the end of the initial term or renewal term as applicable.

In December 2004, we signed an agreement (the “MGU Agreement”) with Medtronic USA, Inc., the gastroenterology/urology division of Medtronic, Inc. (“MGU”), granting MGU the exclusive right to distribute our new cystoscope with Slide-On EndoSheath System to urologists in the United States and Canada. The term of the MGU Agreement was through March 31, 2006, renewable for successive one-year periods unless either party notified the other party in writing at least 90 days prior to the end of any term that it did not want to renew. In May 2006, we and MGU mutually terminated the MGU Agreement, due to lower sales than we expected, and a change in strategy by MGU. MGU has decided to put greater focus on therapies and narrow its overall uro-diagnostics product offerings, which included our products. We decided to distribute our flexible cystoscope and Slide-On EndoSheath System through a network of independent sales representatives.

We have a domestic network of independent sales representatives for the GI and pulmonary product lines. Also, we have our own international network of distributors for all our medical product lines.

29

Cost Reduction

Throughout FY 07 the Company reviewed its various cost structures in an effort to implement reductions in the cost of materials, labor and other expenses across our various business segments.

New Products

In November 2006, we released to the market our new cystoscope, the CST-2000A, which included improvements requested by our customers to our CST-2000 cystoscope. In addition, during the last quarter of FY 07, we released our redesigned cystoscope sheath, which incorporates improvements making the product easier to use. In May 2005, we received approval from the FDA to market the ENT-3000 endoscope with battery powered LED light source. In FY 05, we received approval from the FDA to market our TNE-Bx endoscope with Slide-On EndoSheath system, and our cystoscope with Slide-On EndoSheath System. In addition, we released a line of peripheral products for ENT and urology physicians’ offices.

Our plans for product development in FY 08 include the design of a new family of videoscopes with a miniature digital camera mounted on the distal end of the insertion tube, and design and cost improvements to our existing family of fiberscopes for the medical segment. In addition, we intend to release a new line of video borescopes for the industrial market. We also plan to work on improvements to our manufacturing processes that should result in lower costs to produce our endoscopes and EndoSheaths.

In April 2007, we announced that we had executed a definitive investment agreement under which Vision-Sciences acquired a strategic interest in Minos Medical, Inc. (“Minos’’). Minos is a privately held California based development stage medical device company concentrating in the emerging field of N.O.T.E.S. (Natural Orifice Trans-luminal Endoscopy Surgery). N.O.T.E.S. is a new frontier in surgery, focusing on using natural orifices to enter the body to facilitate incision-less surgical procedures. We invested $1 million in cash in the common stock of Minos in exchange for 30% of their issued and outstanding capital stock. We have also agreed to expend $165 in development costs in collaboration with Minos to exploit a specific common surgical procedure.

Vision-Sciences is focusing on the development of new products and technologies, looking to acquire related technologies, and to enter new markets which the Company has identified. N.O.T.E.S. is one of our targeted fields, and this investment is our Company’s first publicly announced step towards positioning us in the forefront of this new field. N.O.T.E.S. represents the next generation of surgical procedures, going beyond minimally invasive laparoscopic surgery to achieve incision-less surgery. We are confident that Minos will be a valuable strategic partner for Vision-Sciences as we pursue a leading position in the emerging N.O.T.E.S. field.

Industrial Segment

The industrial segment designs, manufactures and sells flexible endoscopes and termed borescopes for industrial users, and manufactures and repairs flexible endoscopes for the medical segment. The industrial segment users consist primarily of the medical segment, companies in the aircraft engine manufacturing and maintenance markets, the defense market and a variety of specialized industrial markets.

Corporate Segment

The corporate segment consists of certain administrative and business development activities applicable to the company as a whole.

30

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. See the Notes to the Consolidated Financial Statements included elsewhere herein. Certain accounting policies of ours require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based upon our historical experience, current trends and information available from other sources, as appropriate. If different conditions result from those assumptions used in our judgment, the results could be materially different from our estimates. Our critical accounting policies include the following:

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements. This pronouncement requires that five basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services were rendered; (3) the fee is fixed and determinable; (4) collectibility is reasonably assured; and (5) the fair value of undelivered elements, if any, exists. Determination of criterion (4) is based on management’s judgment regarding the collectibility of invoices for products and services delivered to customers. Should changes in conditions cause management to determine this criteria is not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. We recognize revenue when title passes to the customer, generally upon shipment of our products F.O.B. shipping point.

During FY 07, we sold our ENT products in the United States and Canada through MENT, according to the terms of the Medtronic Agreement. During FY 06, we sold our urology products in the United States and Canada through MGU, according to the terms of the MGU Agreement. Neither of these agreements provide for any terms related to product acceptance, warranty or contingencies, such as rights of return, that are different than the normal terms we grant to other customers. Both agreements provided for a discount for payment within 10 days of invoice for all products shipped under these agreements.

During the fiscal year ended March 31, 2005, the Company and MENT modified the Medtronic Agreement to provide for a rebate to MENT for sales of ENT EndoSheaths to new customers who commit to large purchases. The rebate program was designed to run for one year, ending September 30, 2005. The Company accounted for this modification under Emerging Issues Task Force (“EITF”) 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). During that period, we recorded deferred revenue of approximately $60 for the rebate program. We recognized the deferred revenue in sales when the rebate program was terminated in the three months ended December 31, 2005.

Non-qualified Options Issued to Non-employees

Effective March 31, 2004, we amended the non-qualified option agreements previously granted to non-employees. This amendment provides that we may settle our obligation to the holder by delivering unregistered shares to the holder. As a result of this amendment, we now account for these non-qualified options as equity instruments, and the fair market value of these options was transferred to the equity section of our balance sheet. Effective April 1, 2004, we account for options issued to non-employees in accordance with the provisions of EITF 96-18.

31

Income Taxes

Under our income tax policy, we record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. The evaluation of the recoverability of any tax assets recorded on the balance sheet is subject to significant judgment. We have provided valuation allowances for all our deferred tax assets to date due to our history of net operating losses.

Results of Operations

Fiscal Year Ended March 31, 2007 Compared to the Fiscal Year Ended March 31, 2006

Sales

Net sales in FY 07 were $9,487, a decrease of $1,663, or 15%, compared to net sales in FY 06. Sales in the medical segment decreased by $1,560, or 19%, to $6,776, while sales of the industrial segment decreased by $103, or 4%, to $2,711. In the medical segment, we track sales of endoscopes and EndoSheaths by market. We also track sales of peripheral items that can be sold to more than one market. Sales of other products include sales of GI products, repairs and accessories. Sales by segment and by category in FY 07 and FY 06 were as follows:

Category	FY 07		FY 06		Increase (Decrease)				Percent
ENT	$	5,126	$	5,809		$	(683	)		(12	)%
Urology	495		1,010			(515		)		(51	)%
Peripherals	300		549			(249		)		(45	)%
Other	855		968			(113		)		(12	)%
Total medical	$	6,776	$	8,336		$	(1,560	)		(19	)%
Total industrial	$	2,711	$	2,814		$	(103	)		(4	)%
Total Sales	$	9,487	$	11,150		$	(1,663	)		(15	)%

Medical Segment—ENT Market

Sales to the ENT market include products for the domestic and international markets as follows:

ENT Market	FY 07		FY 06		Increase (Decrease)				Percent
Domestic	$	2,615	$	2,734		$	(119	)		(4	)%
International	2,511		3,075			(564		)		(18	)%
Total ENT	$	5,126	$	5,809		$	(683	)		(12	)%

We further delineate the products sold to the domestic market, as follows:

Products	FY 07		FY 06		Increase (Decrease)				Percent
Slide-On EndoSheaths	$	1,647	$	1,199		$	448			37	%
Endoscopes	968		1,535			(567		)		(37	)%
Total Domestic ENT	$	2,615	$	2,734		$	(119	)		(4	)%

32

The primary reason for the decrease in sales of products to the domestic ENT market was the lower demand for our scopes, while sales of our EndoSheaths increased $448, or 37%, compared to FY 06. MENT is our exclusive distributor of ENT products in the United States. The success of our ENT product lines is substantially dependent upon the success of the marketing and sales activities of MENT, over which we have limited control. Total sales to MENT were $3.4 million in FY 07 and FY 06. Total sales to MENT include sales in the Other category, which includes accessories and repair services. Usage of TNE endoscopes by ENT physicians allows them to perform procedures in their offices, which are currently performed by GI physicians in hospitals. Educating this market on the advantages of these procedures has proven more difficult than we or MENT had anticipated. We expect these procedures will be more popular among ENT physicians in the future to diagnose and treat gastroesophageal reflux disease (“GERD”), especially as the population ages. A TNE (Trans Nasal Esophagoscopy) procedure allows patients to receive procedures in a physician’s office using only a topical anesthetic, as opposed to the more common Trans Oral Esophagoscopy procedure, which requires a patient to be consciously sedated in a hospital. A patient who undergoes a TNE procedure can recover more quickly than one who is consciously sedated. In addition, physicians can receive higher reimbursement rates and treat more patients in a given day, by performing these procedures in their offices, than by performing them in hospitals. It is our view that these procedures will increase in the future because the inconvenience to the patient is less, and the total cost is lower when done in an office, compared to in a hospital. However, it will take time to educate and train the physicians and educate the patient population on the advantages of this approach.

During FY 07, we increased our ENT SOS (Slide-On EndoSheaths) sales to MENT, an increase of approximately 37% as compared to FY 06.

We further delineate the products sold to the international market as follows:

Products	FY 07		FY 06		Increase (Decrease)				Percent
Slide-On EndoSheaths	$	2,091	$	2,134		$	(43	)		(2	)%
Endoscopes	420		941			(521		)		(55	)%
Total International ENT	$	2,511	$	3,075		$	(564	)		(18	)%

Sales of ENT products to the international market decreased 18%, compared to sales in FY 06. The sales decrease was due primarily to transition within our international sales organization and our lack of success in fully staffing this area.

Medical Segment—Urology Market

Sales to the urology market in FY 07 (including sales of our flexible cystoscope and Slide-On Cystoscope EndoSheath System to MGU) were $495, a decrease of $515, or 51%. During FY 06, MGU modified its strategy to place greater focus on therapies, and to narrow its overall uro-diagnostics product offering, which included our system. As a result, we and MGU terminated the MGU Agreement on May 1, 2006. We currently market and sell our flexible cystoscope and Slide-On EndoSheath System through a network of independent sales representatives.

The lower sales of urology products to our international distributors in FY 07 were primarily due to our distributor in the U.K. acquiring a major urology company that manufactures and sells conventional cystoscopy products, in which they decided to concentrate their efforts. We mutually terminated our relationship with that U.K. distributor for our urology products, and have entered into a distribution agreement for urology products with another company in the U.K. In addition, regulatory authorities in Australia required physicians to reprocess cystoscopes after each use, regardless of whether an EndoSheath was used in the procedure. This regulatory requirement reduced the economic benefits of our system, resulting in lower sales in that market. We plan to continue selling through our current

33

international distributor network, and to expand this network to include distributors in countries where we do not presently sell our urology products.

Medical Segment—Peripherals and Other

Sales of peripheral products in FY 07 were $300, a decrease of $249, or 45%, compared to $549 in FY 06. Sales of other products, which also include sales to the GI and pulmonary markets in FY 07, decreased $113, or 12%, compared to sales of $968 in FY 06. We are currently not promoting products in the GI and pulmonary markets because we believe that colonoscopies, a more thorough examination of a person’s colon, are more common than sigmoidoscopies in the GI market.

Industrial Segment

Sales in FY 07 of products in this segment decreased as demand for our borescopes declined from FY 06. The lower demand reflects the market’s desire for videoscopes, as opposed to fiber-optic scopes. We expect our sales of this product line will remain flat until we release our own line of video borescopes in the later part of FY 08.

Gross Profit

The company’s gross profit was $1,952, a decrease of $684, or 26%, from FY 06. The gross profit decrease was mainly caused by significant sales decreases in the more profitable endoscope markets, along with a high proportion of fixed costs associated with endoscope production.

Medical Segment

The decrease in the gross profit of the medical segment was primarily due to the lower unit volume of ENT endoscopes sold to the domestic and international markets, offset partially by higher sales of EndoSheaths.

During the first fiscal quarter of FY 06, it became apparent that by utilizing a sub-contractor for our EndoSheaths products, we were not able to maintain sufficient control over the manufacturing processes to have the confidence level we believe necessary for our product quality. In addition, we realized that the costs savings we had planned on by manufacturing our EndoSheaths in Israel were not going to be what we had expected. Thus, we decided to move the production of our EndoSheaths back to our Natick, MA facility. In October 2005, we entered into a termination agreement with this sub-contractor, resulting in the purchase of 180,000 units of our ENT SOS over a six-month period. This purchase was completed in May 2006, after which we brought the equipment used in Israel to our Natick, MA facility.

Industrial Segment

The lower gross profit in the industrial segment was due primarily to the lower volume of new product sold to customers and to higher repair income which has lower profit margins.

34

Operating Expenses

Operating expenses increased by $693, or 10%, in FY 07 as compared to FY 06. Selling, general and administrative expenses (“SG&A”) increased by $549, or 12%, and research and development (“R&D”) increased by $144, or 6%, as compared to FY 06. Operating expenses by segment were as follows.

Expense Category	FY 07		FY 06		Increase (Decrease)
S,G& A
Medical	$	2,459	$	2,142		$	317
Industrial	850		869			(19		)
Corporate	1,875		1,624			251
Total S,G &A	$	5,184	$	4,635		$	549
R&D
Medical	$	2,372	$	2,228		$	144

In the medical segment, the increase in SG&A expenses of $317, or 15%, was primarily due to an increase in consulting and professional fees of $162, and an increase in computer related expenses of $70, both related to the continued support and expansion of our sales and reporting systems. We also had an increase in spending for trade shows and travel & entertainment of approximately $73, as part of the costs of creating our own direct sales force, following the termination of the marketing agreement with MGU.

In the industrial segment, the decrease in SG&A costs of $19, or 2%,was primarily due to a decrease in bad debt expense of $73 incurred during the year, offset by an increase in advertising expense of $14, and computer expense of $21, related to our sales and reporting systems.

In the corporate segment, SG&A costs increased by approximately $251, or 15%, primarily due to higher employee compensation expenses of $143, resulting from the expansion and upgrade of our management team. In addition, our legal and professional charges increased $68 compared to FY 06. This increase was related primarily to our decision to transfer our corporate headquarters from Natick, MA to Orangeburg, NY.

R&D expenses increased in the medical segment by approximately $144, or 6%. This increase was driven by an additional investment of $423 during FY 07 in developing our next generation of videoscopes. This decision also resulted in additional personnel costs of $73. The increase were partially offset by a reduction in spending of approximately $353 on the design of low cost methods of manufacturing our EndoSheaths. We expect our R&D expense will be greater in FY 08 than in FY 07 due to our continued development efforts of new technologies that will enhance the competitive position of our endoscopes. Our goal remains to release products where we believe our endoscopes and our EndoSheath technology can increase physicians’ practice efficiency, provide for patient safety and result in lower costs to provide medical care.

Other Income (Expense)

Interest income decreased, primarily to lower average cash balances throughout FY 07, as we did not generate positive cash flows from operations. Other expense increased slightly due to higher royalties paid for a patent licensed for the production of a component used in our pulmonary and urology EndoSheaths, partially offset by higher royalties received on a patent licensed to a company in the urology market.

In March of 2007, we completed the sale to Medtronic Xomed, Inc. (“Medtronic”), a wholly-owned subsidiary of Medtronic, Inc. (NYSE:MDT) of certain assets with respect to our ENT sheath business. The closing took place after the transaction was approved by a majority vote of our shareholders during a special shareholders meeting convened on March 20, 2007. As part of the transactions, we granted

35

Medtronic an exclusive, royalty-free worldwide license to certain of our intellectual property, for use in making and selling sheath products solely within the field of ENT (otorhinolaryngology). Under the terms of the agreement, Medtronic will pay us up to $34 million, of which $27 million was paid at the closing. Up to an additional $4 million will be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to Medtronic, and an additional $3 million will be payable 15 months after closing, assuming Vision-Sciences has complied with its obligations under the agreement, and that Medtronic has not made any indemnification claims based on the Company’s representations and warranties under the agreements. The Company will record the revenue on these future payments when our obligations have been satisfied and the cash has been received from Medtronic. As part of this transaction, Vision-Sciences is transferring its existing ENT production lines for the EndoSheath ENT products from its Natick, MA facility to the Medtronic facility in Jacksonville, FL. The Company has recognized a net gain of $26.1 million on this transaction in FY 07.

Sales of our EndoSheaths within the field of ENT were $3.7 million, or 39% of total sales in FY 07, $3.3 million, or 30% of total sales in FY 06, and $2.7 million, or 26% of total sales in FY 05.

Income Tax Expense

We recorded income tax expense of $520 in FY 07 compared to $0 in FY 06. The income tax expense resulted primarily from alternative minimum tax due on FY 07 income.

Fiscal Year Ended March 31, 2006 Compared to the Fiscal Year Ended March 31, 2005

Sales

Net sales in FY 06 were $11,150, an increase of $824, or 8%, compared to net sales in FY 05. Sales in the medical segment increased by $1,099, or 15%, to $8,336 while sales of the industrial segment decreased by $275 or 9% to $2,814. In the medical segment, we track sales of endoscopes and EndoSheaths by market. We also track sales of peripheral items that can be sold to more than one market. Sales of other products include sales of GI and pulmonary products, repairs and accessories. Sales by segment and by category in FY 06 and FY 05 were as follows:

Category	FY 06		FY 05		Increase (Decrease)				Percent
ENT	$	5,809	$	5,140		$	669			13	%
Urology	1,010		761			249				33	%
Peripherals	549		372			177				48	%
Other	968		964			4				0	%
Total medical	$	8,336	$	7,237		$	1,099			15	%
Total industrial	$	2,814	$	3,089		$	(275	)		(9	)%
Total Sales	$	11,150	$	10,326		$	824			8	%

Medical Segment—ENT Market

Sales to the ENT market include products for the domestic and international markets as follows:

ENT Market	FY 06		FY 05		Increase (Decrease)				Percent
Domestic	$	2,734	$	3,084		$	(350	)		(11	)%
International	3,075		2,056			1,019				50	%
Total ENT	$	5,809	$	5,140		$	669			13	%

36

We further delineate the products sold to the domestic market, as follows:

Products	FY 06		FY 05		Increase (Decrease)				Percent
Slide-On EndoSheaths	$	1,199	$	1,192		$	7			1	%
Endoscopes	1,535		1,892			(357		)		(19	)%
Total Domestic ENT	$	2,734	$	3,084		$	(350	)		(11	)%

The primary reason for the decrease in sales of products to the domestic ENT market was the lower sales of TNE endoscopes to MENT, our exclusive distributor of ENT products in the United States and Canada. Usage of TNE endoscopes by ENT physicians allows them to perform procedures in their offices that currently are performed by GI physicians in hospitals. Educating this market on the advantages of these procedures has proven more difficult than we or MENT had anticipated. A TNE procedure allows patients to receive procedures in a physician’s office using only a topical anesthetic, as opposed to the more common Trans Oral Esophagoscopy procedure that requires a patient to be consciously sedated in a hospital. A patient who undergoes a TNE procedure can recover more quickly than one who is consciously sedated. In addition, physicians can receive higher reimbursement rates, and treat more patients in a given day, by performing these procedures in their offices, than by performing them in hospitals.

Sales of ENT endoscopes increased in FY 06, compared to FY 05, due primarily to the release of our new ENT-3000 portable endoscope with battery-powered LED light source. These new scopes increase the mobility of ENT physicians, allowing them to perform procedures remotely without having to utilize conventional cumbersome light sources.

During FY 06, unit sales of our ENT SOS to MENT increased approximately 4%, compared to FY 05. During FY 06, MENT sold their excess inventory, allowing us to increase our sales to them.  In addition, during FY 06, we experienced a significant percentage increase in the sales of ENT Sensory and TNE Diagnostic EndoSheaths. While the total number of units sold is small, we believe the increase in sales of these EndoSheaths proves need and growing acceptance in the market for these procedures to be performed in physician’s offices. The ENT Sensory EndoSheath is used with a conventional ENT endoscope to test for swallowing disorders, a condition common among the elderly populations and stroke victims. The TNE Diagnostic EndoSheath is used with our proprietary TNE Diagnostic endoscope to diagnose GERD and other disorders of the esophagus.

Total sales to MENT in FY 06 were $3.4 million, a decrease of approximately $0.2 million, or 4%, compared to $3.6 million in FY 05. Total sales to MENT include sales in the Other category, which includes accessories and repair services. Although MENT did not purchase the required number of ENT SOS to maintain their exclusivity under the Medtronic Agreement, we did not exercise our right to terminate their exclusivity, as we believed they represented the best alternative for us to distribute our current line of ENT products and drive product acceptance of new ENT products in the domestic market.

As a result of the Medtronic Agreement, the success of our ENT product lines is substantially dependent upon the success of the marketing and sales activities of MENT over which we have limited control.

37

We further delineate the products sold to the international market as follows:

Products	FY 06		FY 05		Increase (Decrease)			Percent
Slide-On EndoSheaths	$	2,134	$	1,490		$	644		43	%
Endoscopes	941		566			375			66	%
Total International ENT	$	3,075	$	2,056		$	1,019		50	%

Unit sales of ENT SOS to the international market increased 44%, compared to unit sales in FY 05. The sales increase was due primarily to higher demand in the U.K. and France, and in the Benelux countries, where we changed distributors. In addition, we hired an International Sales Manager who contributed significantly to our efforts to open new markets. This effort bore fruit in the Middle East, where establishing agreements with new distributors resulted in approximately 16% of the increase in unit volume. Price was not a significant factor in the sales increase in FY 06, as our average selling price (“ASP”) for ENT SOS was flat, compared to FY 05.

Sales of ENT endoscopes in FY 06, increased 82%, compared to unit sales in FY 05. The ASP for ENT endoscopes was approximately 6% lower in FY 06 compared to FY 05. Approximately half of the increase was due to the release of our ENT-3000 endoscope with portable battery-powered LED light source. The remainder of the increase was due to a combination of higher sales of ENT-2000 endoscopes to our established network of international distributors and to new distributors and customers in Eastern Europe, the Middle East and South America. As of May 31, 2006, we have 17 independent distributors, covering Europe, the Far East, Australia and the Middle East. In addition, we have a number of other international customers to whom we sell products, but with whom we do not have formal distribution agreements.

Medical Segment—Urology Market

Sales to the urology market include sales of our flexible cystoscope and Slide-On Cystoscope EndoSheath System to MGU of $873, and to international distributors of $137, compared to $367 and $394, respectively, in FY 05. According to the MGU Agreement, we had expected to sell $1,611,500 in FY 06. However, MGU’s sales force was too small to properly educate and train urologists in the use and benefits of our system. As a result, MGU purchased fewer EndoSheaths than expected. Also during FY 06, MGU modified its strategy to place greater focus on therapies, and to narrow its overall uro-diagnostics product offering, which included our system. As a result, we and MGU terminated the MGU Agreement on May 1, 2006.

The lower sales of urology products to our international distributors in FY 06 were due primarily to our initial distributor in the U.K. acquiring a major urology company that manufactures and sells conventional cystoscopy products in which they decided to concentrate their efforts. We mutually terminated our relationship with that distributor for our urology products, and have entered into a distribution agreement for urology products with another company in the U.K. In addition, regulatory authorities in Australia required physicians to reprocess cystoscopes after each use, regardless of whether an EndoSheath was used in the procedure. This regulatory requirement reduced the economic benefits of our system, resulting in lower sales.

Medical Segment—Peripherals and Other

Sales of peripheral products in FY 06 increased to $549 compared to $372 in FY 05, due primarily to higher sales of our digital video add-on camera, and our line of light sources. The camera is a video solution for fiberscopes, allowing physicians to enhance their clinical setting by projecting an image of the patient on a monitor, printing the image and recording historical data. Our digital video add-on camera works with our proprietary endoscopes and with competitive endoscopes. Sales of other products also

38

include sales to the GI and pulmonary markets. We have a small installed base of users of these products, but we are currently not promoting products in the GI and pulmonary markets. In addition, we believe that colonoscopies, a more thorough examination of a person’s colon, are more common than sigmoidoscopies in the GI market.

Industrial Segment

Sales in FY 06 of products in this segment decreased as demand for new borescopes declined from FY 05. The lower demand reflects the market’s desire for video scopes, as opposed to fiberoptic scopes.

Gross Profit

Gross profit was $2,636, a decrease of $307, compared to FY 05. The gross profit during FY 06 in the medical segment increased by $85 to $1,934 and the gross profit in the industrial segment decreased by $392 to $702.

Medical Segment

The gross profit of the medical segment increased by $85 to $1,934, and was 23% of sales, compared to 26% of sales in FY 05. The increase in the gross profit of the medical segment was primarily due to the higher unit volume of ENT EndoSheaths sold to the international market, offset partially by lower sales of TNE endoscopes, provision for inventory reserves and higher spending for freight costs, payroll and outside services. We added approximately $300 to our inventory reserves, primarily to recognize that the manufacturing costs of our cystoscope EndoSheaths are higher than the prices we are able to attain in the market.

During FY 04, we began the process of moving the manufacturing of our EndoSheaths to a sub-contractor in Israel, where we expected the unit costs of these products would decline by approximately 50%. The transfer of the manufacturing took longer than we had expected due to delays in the manufacturing of the equipment and difficulties inherent in the transfer of production techniques. We began receiving manufactured product from Israel at the end of our second fiscal quarter of FY 05. During the third and fourth fiscal quarters of FY 05, the Israeli sub-contractor manufactured EndoSheaths for the GI and ENT markets. We also continued to manufacture some EndoSheaths for the ENT, pulmonary and urology markets in our Natick, MA facility. During the first fiscal quarter of FY 06, it became apparent that by utilizing the sub-contractor, we were not able to exert sufficient control over the manufacturing processes to have the confidence level we believe necessary for our product quality. In addition, we realized that the costs savings we had planned on by manufacturing our EndoSheaths in Israel were not going to be what we had expected. Thus, we decided to move the production of our EndoSheaths back to our Natick, MA facility. In October 2005, we entered into a termination agreement with this sub-contractor and in May 2006, we brought back the equipment used in Israel to our Natick, MA facility.

Industrial Segment

Gross profit of the industrial segment decreased by $392 to $702 and was 25% of sales, compared to 35% of sales in FY 05. The lower gross profit in the industrial segment was due primarily to the lower volume of new product sold to customers and to unabsorbed overhead expenses. In addition, in FY 05 the industrial segment was able to use inventory totaling approximately $166 previously reserved for, in the production and repair of borescopes. That did not recur in FY 06.

39

Operating Expenses

Operating expenses increased by $1,361 in FY 06, compared to FY 05. Selling, general and administrative expenses (“SG&A”) increased by $555, and research and development (“R&D”) increased by $806. Operating expenses by segment were as follows:

Expense Category	FY 06		FY 05		Increase (Decrease)
S,G&A
Medical	$	2,142	$	1,924		$	218
Industrial	869		801			68
Corporate	1,624		1,355			269
Total S,G&A	$	4,635	$	4,080		$	555
R&D
Medical	$	2,228	$	1,381		$	847
Corporate	—		41			(41		)
Total R&D	$	2,228	$	1,422		$	806

SG&A Expenses

In the medical segment, the increase in SG&A expenses was due primarily to higher spending on personnel of approximately $222 higher spending for travel & entertainment related to international sales of approximately $39 and higher spending for outside services of approximately $81 related primarily to our computer system. These increases were partially offset by lower spending for product promotion and other items of approximately $124.

In the industrial segment, the increase in SG&A costs was due primarily to an increase in the reserve for uncollectible accounts of approximately $73.

In the corporate segment, SG&A costs increased by approximately $269 due primarily to higher spending for personnel, including the cost of stock based compensation, of approximately $193 and higher spending for outside professional services of approximately $76, net.

Stock-based compensation was part of the change in SG&A expenses during FY 05 and FY 06. The increase in expense for stock-based compensation was due primarily to complying with Internal Revenue Code Section 409A. In June 2003, we granted options to purchase 1,295,000 shares of common stock to certain of our employees at an exercise price of $1.04 per share. The fair market value of the common stock on the date of grant was $1.09 per share. As a result, we recognized deferred compensation for the difference between the fair market value and the option exercise price. This expense was recorded as the options vested. In the fiscal year ended March 31, 2005, we recognized $13 of expense related to these options.

In September 2005, the U.S. Treasury Department and Internal Revenue Service issued proposed regulations under Section 409A of the Internal Revenue Code (“Section 409A”), which was enacted as part of the American Jobs Creation Act of 2004. The proposed regulations covering Section 409A provide that stock options that vest after December 31, 2004 may be subject to Section 409A as “deferred compensation” if the exercise price is below the fair market value of the underlying stock on the date of grant. Unless such discounted stock options were amended, the stock options would not be compliant with Section 409A and would likely have resulted in income recognition to the option holder prior to exercise (i.e., at the time of vesting), an additional 20% income tax and potential interest charges.

40

In order to comply with Section 409A, we and the subject employees agreed to amend the original option agreements, and issue new amended options. The new options are for shares that vested after December 31, 2004, and have a new option price of $1.09 per share, the fair market value of the underlying common stock on June 3, 2003, the original date of the options, bringing them into compliance with Section 409A. According to EITF 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, these options have an accounting effect, due to the change in the measurement date. The fair market value of the common stock at December 30, 2005, the date of grant, was $2.08 per share. We accounted for this change in the year ended March 31, 2006 according to APB 25 by recognizing compensation expense of $312 which was equal to the difference between the fair market value per share and the option price for the calendar year 2005. Subsequent to March 31, 2006, we recognize stock-based compensation for unvested options under SFAS 123R.

R&D Expenses

R&D expenses increased in the medical segment by approximately $847, while declining by approximately $41 in the corporate segment. The higher spending in the medical segment was due primarily to spending of approximately $400 on the design of low cost methods to reduce the cost of manufacturing our EndoSheaths. In addition, we incurred higher spending for personnel and supplies for a variety of programs, including a new D-shaped endoscope design and the design of a new family of video endoscopes. In the corporate segment, we ceased our efforts in Israel for CMOS patent applications in FY 05, and did not incur any expenses for these applications in FY 06.

Other Income (Expense)

Interest income increased, due primarily to higher cash balances in FY 06 subsequent to the issuance of new equity in February 2005. Other income decreased slightly due to higher royalties paid for a patent licensed for the production of a component used in our pulmonary and urology EndoSheaths, partially offset by higher royalties received on a patent licensed to a company in the urology market.

Liquidity and Capital Resources

In FY 07, the amount of cash used in our operations was approximately $3,351, compared to a usage of approximately $3,624 in FY 06. This decreased utilization was primarily due to an increase in accrued expenses, and a decrease in our receivables. We also incurred a decrease in inventory, primarily related to raw materials and finished goods for TNE-D, TNE-Bx, cystoscope and their companion EndoSheaths. We expect our working capital needs may increase in FY 08, especially for accounts receivable due to higher sales, and to inventory due to manufacturing a broader range of product offerings, and a desire to build safety stock for some key inventory components.

Cash provided by investing activities was approximately $26,164, primarily from the proceeds from the agreement with Medtronic for the sale of certain manufacturing assets and the granting of an exclusive, royalty-free worldwide license to certain of our intellectual property, for use in making and selling sheath products solely within the field of ENT. Under the terms of the agreement, Medtronic will pay Vision-Sciences up to $34 million, of which $27 million was paid at the closing in March 2007. Also part of the investing activity was spending for the purchase of equipment and equipment manufactured internally to support our production, and the purchase and installation of new computers. We expect we may spend approximately $1 million for new property, plant and equipment in FY 08, primarily for equipment related to automating the manufacture of current products, improving the production processes of current products, and for production equipment related to the manufacture of new products.

41

Cash generated from financing activities totaled approximately $4. The primary source of this cash was the exercise of stock options by employees and non-employees. There are approximately 3.7 million vested options to purchase Common Stock outstanding at March 31, 2007, split between employees (63%) and non-employees (37%). These options have a weighted average exercise price of $1.31 per share. It is possible that some of these options will be exercised in FY 08.

The primary composition of customers in the medical segment includes MENT and international distributors. We have good relations with these customers and expect our collection experience will remain approximately the same in FY 08 as in FY 07. Our day’s sales outstanding (“DSO”), a calculation of the number of calendar days that accounts receivable remain unpaid at March 31, 2007 for the medical segment was 25, a decrease of 21 days, from our DSO at March 31, 2006. This decrease was due primarily to faster payment cycle by MENT, and also reflects our focused collection effort with our international distributors, who normally pay in 30-60 days from date of invoice.

The composition of customers in the industrial segment includes large and small industrial companies, and aircraft maintenance companies. The DSO for that group of customers was 34 at March 31, 2007, compared to 51 at March 31, 2006. The decrease is a result of better collection efforts for a few customers who are relatively slower payers. We monitor our customer accounts formally on a monthly basis, and more often as necessary. During FY 07, the change in the composition of our accounts receivable and our overall reduced sales resulted in a reduction in the balance of accounts receivable, resulting in a decrease in the allowance for doubtful accounts of approximately $15 net. We will continue to monitor our receivables and will adjust the allowance for doubtful accounts accordingly.

At March 31, 2007, our principal sources of liquidity included $29.0 million in cash and cash equivalents, and working capital of approximately $29.8 million. In February 2007, we terminated our bank agreement. We plan to use leasing arrangements for future capital equipment, and we have negotiated payment terms with our foreign vendors, thereby reducing our cost and reducing the need for banker’s acceptances.

We have incurred operating losses since our inception, and we expect to incur losses in FY 08. We have funded the losses principally with the proceeds from public and private equity financings. The Company believes its cash and cash equivalents on-hand, together with the balance of the expected cash received from the sale of our ENT product line will be sufficient to fund the working capital, capital expenditures, future operating losses and possible acquisitions for at least the next twelve months.

From time to time the Company may attempt to raise capital with potential equity financings, although no such equity financings are currently anticipated. Should we seek additional financing, there can be no assurance that capital will be available on terms acceptable to us, if at all.

Contractual Obligations

The following chart summarizes our contractual obligations as of March 31, 2007.

	Payment Due by Period
Contractual Obligations	Total		Less than 1 year			Between 1-3 years			Between 3-5 years
Operating leases	$	1,181		$	438		$	743		$	0
Purchase commitments	1,090			1,090			0			0
Total	$	2,271		$	1,528		$	743		$	0

42

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recently Issued Accounting Standards

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109, which seeks to reduce the significant diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Upon adoption, the cumulative effect of any changes in net assets resulting from the application of FIN 48 will be recorded as an adjustment to retained earnings. The Company is currently evaluating the impact, if any, that FIN 48 will have on its financial position and results of operations.

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006 and is therefore required to be adopted by the Company in the first quarter of its fiscal year ended March 31, 2008. The Company does not expect SFAS 155 to have an impact on its consolidated financial statements as it does not currently use any financial derivative instruments.

In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires public entities with defined benefit pension plans and other postretirement plans to fully recognize, as an asset or a liability, the overfunded or underfunded status of its benefit plans in its 2006 balance sheet. The Company does not expect SFAS 158 to have an impact on its consolidated financial statements as it has no defined benefit pension or other postretirement plans.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such misstatements that existed in prior years existing in the current year’s ending balance sheet. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the adoption of SAB No. 108 to have an impact on its financial position and results of operations.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets

43

or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged. The Company has not yet determined the effect the adoption of SFAS 157 will have on its financial position and results of operations.

In June 2006, the FASB ratified the consensus on EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. The scope of EITF Issue No. 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund (“USF”) contributions and some excise taxes. The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on Issue No. 06-03 will be effective for interim and annual reporting periods beginning after December 15, 2006. The Company is currently evaluating the impact of EITF No. 06-03. Should the Company need to change the manner in which it records gross receipts, it is not expected that the change will have a material impact on total operating revenue and expenses and operating income and net income would not be affected.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We, in the normal course of business, are subject to the risks associated with fluctuations in interest rates and changes in foreign currency exchange rates.

Interest and Market Risk

We currently invest our excess cash in a high grade investment instruments in line with our investment policy. We attempt to limit our exposure to interest rate and credit risk by placing our investments with high-quality financial institutions, and we have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. We have not used derivative financial instruments in our investment portfolio.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates decline. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates.

Foreign Currency Exchange

Because we purchase raw materials from foreign suppliers, and sell some of our products in foreign markets, we face exposure to adverse movements in the value of foreign currencies against the US Dollar. This exposure may change over time, and could have a materially adverse effect on our financial results. We may attempt to limit this exposure by purchasing forward contracts, as required. Most of our foreign exchange liabilities are settled within 90 days of receipt of materials. At March 31, 2007, our liabilities relating to foreign currencies were approximately $4.

Item 8.Financial Statements and Supplementary Data

Financial statements and unaudited supplementary data are contained in Appendix A to this annual report on Form 10-K.

44

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9a.Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15e) and 15d-15(e) as of March 31, 2007, the end of the period covered by this annual report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective.

b) Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

45

Part III

Item 10.Directors and Executive Officers of the Registrant

The information required by this Item appears under the headings “Proposal 1: Election of Directors” “Proposal 1: Election of Directors—Board Structure, Committee of the Board and Meetings” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2007 Annual Meeting of Stockholders (the “2007 Proxy Statement”), which sections are incorporated herein by reference, and in Part I hereof under the caption “Executive Officers of the Company.”

The Company has adopted a Code of Ethics for directors, officers and employees of the Company and its subsidiaries, including but not limited to the principal executive officer, the principal financial officer, the controller, and other officers of the Company and its subsidiaries. If the Company makes any substantive amendment to the Code of Ethics or grants any waiver from a provision of the Code of Ethics for its executive officers or directors, the Company will disclose the nature of such amendment or waiver in a filing on Form 8-K. The Company will also provide a copy of such Code of Ethics to any shareholder, without charge, upon written request made to the Company’s Secretary in writing to the following address: Vision-Sciences, Inc. Attn: Corporate Secretary, 40 Ramland Road South, Orangeburg, NY 10962.

Item 11.Executive Compensation

The information required by this Item appears under the headings “Proposal 1: Election of Directors—Compensation Committee Interlocks and Insider Participation” “Director Compensation” “—Compensation Discussion and Analysis” “Executive Compensation”, and “—Compensation Committee Report” in the 2007 Proxy Statement, which sections are incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item appears under the heading “Stock Ownership of Certain Beneficial Owners and Managers” in the 2007 Proxy Statement, which section is incorporated herein by reference, and in Part II hereof under the caption “Securities Authorized for Issuance Under Equity Compensation Plans.”

Item 13.Certain Relationships and Related Transactions

The information required by this Item appears under the “headings “Proposal 1: Election of Directors” and “Proposal 1: Election of Directors—Certain Relationships and Related Transactions” in the 2007 Proxy Statement, which sections are incorporated herein by reference, and in Part II hereof under the caption “Market for Registrant’s Common Stock and Related Stockholder Matters.”

Item 14.Principal Accountant Fees and Services

The information required in this Item appears under the heading “Fees and Services” in the 2007 Proxy Statement which section is incorporated herein by reference.

46

Part IV

Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)Index to Consolidated Financial Statements.

1.Financial Statements. The following financial statements and schedules of Vision-Sciences, Inc. are included as Appendix A of this Report:

Report of Independent Public Registered Accounting Firm.

Consolidated Balance Sheets—March 31, 2006 and 2007.

Consolidated Statements of Operations—For the years ended March 31, 2005, 2006 and 2007.

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss—For the years ended March 31, 2005, 2006 and 2007.

Consolidated Statements of Cash Flows—For the years ended March 31, 2005, 2006 and 2007.

Notes to Consolidated Financial Statements.

2.Financial Statement Schedules.

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted.

3.Exhibits. The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index.

47

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	VISION-SCIENCES, INC.
Date: June 28, 2007	By:	/s/ RON HADANI
		Ron Hadani
		President, Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ron Hadani and Yoav M. Cohen, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission hereby ratifying and confirming that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

	Signature		Title		Date
/s/ RON HADANI		President and CEO (Principal Executive Officer),		June 28 2007
Ron Hadani		Director
/s/ YOAV M. COHEN		Chief Financial Officer (Principal Financial and		June 28, 2007
Yoav M. Cohen		Accounting Officer)
/s/ LEWIS C. PELL		Chairman of the Board of Directors		June 28, 2007
Lewis C. Pell
/s/ KATSUMI ONEDA		Director		June 28, 2007
Katsumi Oneda
/s/ DAVID W. ANDERSON		Director		June 28, 2007
David W. Anderson
/s/ KENNETH ANSTEY		Director		June 28, 2007
Kenneth Anstey
/s/ WARREN L. BIELKE		Director		June 28, 2007
Warren L. Bielke
/s/ JOHN J. WALLACE		Director		June 28, 2007
John J. Wallace

48

APPENDIX A

Vision-Sciences, Inc. and Subsidiaries

CONSOLIDATED FINANCIAL STATEMENTS

as of March 31, 2006 and 2007
And for each of the Three Years in the Period Ended
March 31, 2007

Together with Report of Independent Public
Registered Accounting Firm

VISION-SCIENCES, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

	Page
Report of Independent Public Registered Accounting Firm		F-1
Consolidated Balance Sheets		F-2
Consolidated Statements of Operations		F-3
Consolidated Statements of Stockholders’ Equity		F-4
Consolidated Statements of Cash Flows		F-5
Notes to Consolidated Financial Statements		F-6

REPORT OF INDEPENDENT PUBLIC REGISTERED ACCOUNTING FIRM

Board of Directors and Stockholders

Vision-Sciences, Inc.
Orangeburg, New York

We have audited the accompanying consolidated balance sheets of Vision-Sciences, Inc. and subsidiaries as of March 31, 2006 and 2007 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vision-Sciences, Inc. and subsidiaries as of March 31, 2006 and 2007 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 4(c) to the consolidated financial statements, in 2007 Vision-Sciences, Inc. and subsidiaries changed its method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), “Share Based Payment”.

/s/ BDO Seidman, LLP

Valhalla, New York

June 28, 2007

F-1

Vision-Sciences, Inc. and Subsidiaries

Consolidated Balance Sheets—March 31, 2006 and 2007

	2006			2007
Assets
Current Assets:
Cash and cash equivalents	$	6,138,148		$	28,955,497
Accounts receivable, net of allowance for doubtful accounts of $145,400 and $129,600 in 2006 and 2007, respectively	1,767,913			1,230,285
Inventories, net	2,384,993			2,102,757
Prepaid expenses and other current assets	59,532			111,282
Total current assets	10,350,586			32,399,821
Property and Equipment, at cost:
Machinery and equipment	4,747,964			3,713,074
Furniture and fixtures	250,865			307,961
Leasehold improvements	582,631			591,196
	5,581,460			4,612,231
Less—Accumulated depreciation and amortization	4,489,529			4,071,537
Total property and equipment, net	1,091,931			540,694
Other Assets, net of accumulated amortization of $60,100 and $81,700 in 2006 and 2007, respectively	68,505			62,393
Total Assets	$	11,511,022		$	33,002,908
Liabilities and Stockholders’ Equity
Current Liabilities:
Current portion of note payable	$	26,431		$	3,785
Accounts payable	953,934			591,166
Accrued expenses	1,028,146			1,443,434
Income taxes payable	—			549,000
Total current liabilities	2,008,511			2,587,385
Long-term Portion of Note Payable	4,193			—
Total Liabilities	2,012,704			2,587,385
Commitments and Contingencies (Note 5)	—			—
Stockholders’ Equity:
Preferred stock, $.01 par value—
Authorized—5,000,000 shares
Issued and outstanding—none	—			—
Common stock, $.01 par value—
Authorized—50,000,000 shares
Issued and outstanding—35,148,427 shares and 35,243,931 shares at March 31, 2006 and 2007, respectively	351,483			352,438
Additional paid-in capital	75,678,615			76,483,273
Accumulated deficit	(66,531,780		)	(46,420,188		)
Total stockholders’ equity	9,498,318			30,415,523
Total liabilities and stockholders’ equity	$	11,511,022		$	33,002,908

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

F-2

Vision-Sciences, Inc. and Subsidiaries

Consolidated Statements of Operations

for the Fiscal Years Ended March 31, 2005, 2006 and 2007

	2005			2006			2007
Net Sales	$	10,325,973		$	11,150,371		$	9,486,712
Cost of Sales	7,382,431			8,514,218			7,534,721
Gross Profit	2,943,542			2,636,153			1,951,991
Selling, General and Administrative Expense	4,079,930			4,635,078			5,183,717
Research and Development Expense	1,421,577			2,227,759			2,371,630
Loss from Operations	(2,557,965		)	(4,226,684		)	(5,603,356		)
Interest Income	46,316			196,785			151,347
Interest Expense	(4,971		)	(3,159		)	(1,415		)
Other Income (Expense), net	11,317			(2,530)			(11,839		)
Gain On Sale of Product Line, net of direct costs	—			—			26,096,855
(Loss) Income Before Provision for Income Taxes	(2,505,303		)	(4,035,588		)	20,631,592
Provision For Income Taxes	—			—			520,000
Net (Loss) Income	$	(2,505,303	)	$	(4,035,588	)	$	20,111,592
Net (Loss) Income per Common Share—Basic	$	(.08	)	$	(.11	)	$	.57
Net (Loss) Income per Common Share—Diluted	$	(.08	)	$	(.11	)	$	.56
Shares Used in Computing Net (Loss) Income per Common Share:
Basic	31,447,332			35,102,798			35,166,760
Diluted	31,447,332			35,102,798			35,772,764

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

F-3

Vision-Sciences, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

for the Fiscal Years Ended March 31, 2005, 2006 and 2007

	Common Stock			Additional					Total
	Number of Shares	$.01 Par Value		Paid-in Capital		Accumulated Deficit			Stockholders’ Equity
Balance, March 31, 2004	30,687,963	$	306,879	$	64,649,956	$	(59,990,889	)	$	4,965,946
Sale of common stock, net	3,672,315	36,723		9,407,760		—			9,444,483
Exercise of incentive stock options	456,449	4,564		522,746		—			527,310
Exercise of non-qualified stock options	182,150	1,822		224,507		—			226,329
Compensation expense related to employee non-qualified stock options	—	—		13,187		—			13,187
Compensation expense related to non- qualified stock option exercises	—	—		169,392		—			169,392
Net loss	—	—		—		(2,505,303		)	(2,505,303		)
Balance, March 31, 2005	34,998,877	349,988		74,987,548		(62,496,192		)	12,841,344
Receipt of subscription receivable for shares sold February 2005, net	—	—		55,869		—			55,869
Exercise of incentive stock options	137,900	1,379		125,257		—			126,636
Exercise of non-qualified stock options	11,650	116		12,125		—			12,241
Compensation expense related to employee non-qualified stock options	—	—		312,266		—			312,266
Compensation expense related to non-employee non-qualified stock options	—	—		185,550		—			185,550
Net loss	—	—		—		(4,035,588		)	(4,035,588		)
Balance, March 31, 2006	35,148,427	351,483		75,678,615		(66,531,780		)	9,498,318
Exercise of stock options, net	95,504	955		91,472		—			92,427
Compensation expense related to employee stock options	—	—		713,186		—			713,186
Net income	—	—		—		20,111,592			20,111,592
Balance, March 31, 2007	35,243,931	$	352,438	$	76,483,273	$	(46,420,188	)	$	30,415,523

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

F-4

Vision-Sciences, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

for the Fiscal Years Ended March 31, 2005, 2006 and 2007

	2005			2006			2007
Cash Flows from Operating Activities:
Net income (loss)	$	(2,505,303	)	$	(4,035,588	)	$	20,111,592
Adjustments to reconcile net income (loss) to net cash used in operating activities—
Depreciation and amortization	318,205			455,780			490,263
Gain On Sale of Product Line	—			—			(26,096,855		)
Stock-based compensation from non-qualified options	182,579			497,816			713,186
Changes in assets and liabilities—
Accounts receivable	20,973			(105,427		)	537,628
Inventories	(524,108		)	(508,169		)	282,236
Prepaid expenses and other current assets	218			2,432			(51,750		)
Accounts payable	(44,590		)	254,990			(301,412		)
Accrued expenses	242,822			(185,431		)	415,288
Income Taxes Payable	—			—			549,000
Net cash used in operating activities	(2,309,204		)	(3,623,597		)	(3,350,824		)
Cash Flows from Investing Activities:
Purchase of property and equipment	(666,466		)	(338,227		)	(627,451		)
Net proceeds from sale of product line	—			—			26,791,572
(Increase) decrease in other assets	(14,452		)	—			—
Net cash (used in)provided by investing activities	(680,918		)	(338,227		)	26,164,121
Cash Flows from Financing Activities:
Proceeds from (payments of) bankers acceptances	(51,766		)	61,536			(61,536		)
Payments of note payable	(2,589		)	(24,896		)	(26,839		)
Proceeds from the sale of common stock, net	9,444,483			55,869			—
Proceeds from exercise of stock options, net	753,639			138,877			92,427
Net cash provided by financing activities	10,143,767			231,386			4,052
Net Increase (Decrease) in Cash and Cash Equivalents	7,153,645			(3,730,438		)	22,817,349
Cash and Cash Equivalents, beginning of year	2,714,941			9,868,586			6,138,148
Cash and Cash Equivalents, end of year	$	9,868,586		$	6,138,148		$	28,955,497
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Manufacturing equipment acquired in exchange for advance	$	267,500		$	—		$	—
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest	$	4,971		$	3,159		$	1,415

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

F-5

All Financial Amounts, Except Share and Per Share Data, are presented in ($000’s)

(1)Operations and Significant Accounting Policies

The consolidated financial statements include the accounts of Vision-Sciences, Inc. (the “Company”), a Delaware corporation, and its wholly-owned subsidiaries. The Company’s subsidiaries are as follows: Machida Incorporated, a Delaware corporation; and Vision Sciences Ltd., an Israeli corporation. Vision Sciences Ltd. has been inactive since the fiscal year ended March 31, 2002. The principal markets we serve are in the United States and Europe, representing approximately 61% and 30% of total sales in 2007, respectively.

The Company was organized in 1987 to manufacture and assemble optical products. The Company’s products and accessories are used within two industry segments, medical and industrial. The medical segment designs, manufactures and markets proprietary single-use EndoSheath® Systems (“EndoSheaths”) that slide onto the insertion tube of flexible endoscopes used by health-care providers. The sheaths allow quick, efficient product turnover for health-care providers while ensuring a sterile insertion tube for each patient. The medical segment also designs and markets flexible endoscopes for use by physicians in the Ear-Nose-Throat (“ENT”), urology, pulmonary and gastrointestinal (“GI”) markets. The industrial segment designs, manufactures and markets borescopes for the industrial market, and manufactures and repairs endoscopes for the medical segment. Endoscopes and borescopes provide minimally invasive access to areas not readily visible to the human eye. Segment information is presented in Note 7.

The Company expects to derive a substantial portion of its future revenues from its various endoscope and EndoSheath Systems. The Company has invested substantial funds developing these products. The Company has incurred losses for the fiscal years ended March 31, 2005 and 2006, our net income in FY 07 resulted from the sale of a product line and we expect to incur a loss for the fiscal year ending March 31, 2008. The Company may require more financing to fund operations in the future. The Company is also subject to risks, including, but not limited to, the successful marketing of its products, United States Food and Drug Administration (“FDA”) clearance and regulation, and dependence on key personnel.

The accompanying consolidated financial statements reflect the application of certain accounting policies as described below and elsewhere in the notes to the consolidated financial statements. The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results in the future could differ from those estimates.

(a)Principles of Consolidation

The accompanying consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

(b) Basic and Diluted Net Income (Loss) per Common Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding. For the years ended March 31, 2005 and 2006 the diluted net loss per common share is the same as basic net loss per common share as the inclusion of other shares of stock issuable pursuant to stock options and warrants would be antidilutive. The diluted net income per share for 2007 is calculated by dividing the net income by the weighted average number of shares and

F-6

(1)Operations and Significant Accounting Policies (Continued)

(b)Basic and Diluted Net Income (Loss) per Common Share (Continued)

adding 606,004 of common stock equivalents. The Company has excluded from the FY 07 diluted calculation 5,214,400 options that are antidilutive.

(c) Depreciation and Amortization

The Company provides for depreciation and amortization using the straight-line method in amounts that allocate the cost of the assets over their estimated useful lives, as follows:

Asset Classification	Estimated Useful Life
Machinery and equipment		3-5 years
Furniture and fixtures		5 years

Leasehold improvements are amortized over the shorter of their estimated useful live or the lease live.

(d)Revenue Recognition

The following must occur before the Company recognizes revenue: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectibility is reasonably assured. The Company recognizes revenue when title passes to the customer, generally upon shipment of products. The Company’s medical segment has distributed all of its products for the ENT market in the U.S.A. and Canada through Medtronic ENT as part of the Medtronic Agreement.

From December 2004 to May 2006, the Company’s medical segment distributed all of its products for the urology market in the U.S.A. and Canada through Medtronic USA, Inc. (the Medtronic Gastroenterology/Urology business, or “MGU”) as part of a separate exclusive agreement (the “MGU Agreement”). The MGU Agreement continued in full force and effect until March 31, 2006, renewable thereafter annually, unless terminated by either party. In May 2006, the Company and MGU terminated the MGU Agreement. Subsequent to May 1, 2006, the Company is distributing its products for the urology market through a network of independent sales representatives.

Neither the Medtronic Agreement nor the MGU Agreement provide for any contingencies, nor provide any terms related to product acceptance or warranty that are different from the normal terms provided by the Company to its other customers.

The Company’s medical segment distributes its products for the pulmonary and GI markets through a network of independent domestic sales representatives. The Company’s medical segment distributes all its products outside the U.S.A. and Canada through a network of independent international distributors.

The Company’s industrial segment distributes all its products using direct sales personnel and a network of independent sales representatives.

F-7

(1)Operations and Significant Accounting Policies (Continued)

(e)Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. The components of inventories are as follows:

	March 31,
	2006		2007
Raw materials	$	1,601	$	1,447
Work-in-process	144		273
Finished goods	640		383
	$	2,385	$	2,103

Raw materials include components purchased from independent suppliers. Most purchased components are available from multiple sources. With the exception of a supply agreement with a key supplier, the Company does not have long-term agreements with suppliers. The agreement with this key supplier was automatically renewed for an additional two-year period in March 2007. The Company purchased approximately $1,828 and $1,069 of products under the supply agreement with this key supplier in the FY 2006 and FY 2007, respectively. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead.

(f) Other Assets

Other assets consist of deposits and $62 of patent costs. Patent costs are amortized on a straight-line basis over approximately 15 years.

(g)Long-Lived Assets

The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. The Company believes that the carrying value of these assets is fully realizable at March 31, 2007.

(h)Income Taxes

The Company accounts for income taxes under the liability method and deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates.

(i)Foreign Currency Transactions

The Company charges foreign currency exchange gains or losses in connection with its purchases of products from foreign vendors to operations. For each of the three years in the period ended March 31, 2007, these amounts were not material.

(j)Cash and Cash Equivalents

The Company classifies investments with original maturities of ninety days or less, consisting of commercial paper and a money market account at a bank, as cash equivalents. Cash equivalents are stated at amortized cost, which approximates market value.

(k)Research and Development Expenses

Research and development expenses are charged to operations as incurred.

F-8

(1)Operations and Significant Accounting Policies (Continued)

(l)Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk are principally cash, marketable securities and accounts receivable. The Company places its cash in federally insured institutions and invests in highly-rated investment vehicles. Concentration of credit risk with respect to accounts receivable relates to certain domestic and international customers to whom the Company makes substantial sales (see Note 7). To reduce risk, the Company routinely assesses the financial strength of its customers and, when appropriate, obtains letters of credit or advance payments for its international sales; as a consequence, the Company believes that its accounts receivable credit risk exposure is limited. The Company had two customers who individually accounted for 28% and 14% of the total accounts receivable balance as of March 31, 2007. The Company had one customer who individually accounted for 34% of the total accounts receivable balance at March 31, 2006. The Company maintains an allowance for potential credit losses, but historically has not experienced any significant credit losses related to any individual customer or group of customers in any particular industry or geographic area. In the year ended March 31, 2007 the Company had two customers who accounted for 50% and 14%, respectively, of net sales. In the year ended March 31, 2006 the Company had two customers who accounted for 41% and 12%, respectively, of net sales. In the year ended March 31, 2005 one customer accounted for 35% of total sales.

(m)Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, accounts receivable, acceptances payable and notes payable. The estimated fair value of these financial instruments approximates their carrying value at March 31, 2006 and 2007. The estimated fair values have been determined through information obtained from market sources and management estimates.

(n)Accounting for Option Grants to Non-employees

Effective March 31, 2004, the Company amended the non-qualified option agreements previously granted to non-employees. This amendment allowed the Company to settle its obligations to the holders by delivering unregistered shares upon exercise by the holders. As a result of this amendment, the options were characterized to be equity instruments, and accordingly, the fair market value of these options was transferred to the equity section of the Company’s balance sheet as of March 31, 2004. The Company determines the fair value of options granted to non-employees using the Black-Scholes option-pricing model on the measurement date which is either the date a commitment for performance has been reached, or when performance has been completed, depending upon the facts and circumstances of the option. The fair value of the options valued at the measurement date is expensed over the vesting period of the options. This method approximates the same periods the expense would be recognized, had the Company paid cash for the services. The Company does not account for the fair value of options granted, in which the quantity and terms are known up front, prior to the measurement date, as services are not rendered prior to those dates. The Company accounts for the fair value of options granted, in which the quantity and terms are not known up front, when the services are performed.

F-9

(1)Operations and Significant Accounting Policies (Continued)

(o) Employee Stock-Based Compensation Arrangements

Effective April 1, 2006 the Company began accounting for compensation expense related to stock options granted to employees and directors in accordance with SFAS No. 123 (Revised 2004) Share-Based Payment (“SFAS 123R”). Prior to April 1, 2006, the Company accounted for stock options according to Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees.

The Company has adopted the modified prospective transition method and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock options now includes: (i) amortization related to the remaining unvested portion of all stock options outstanding at March 31, 2006, based on the fair value determined on the grant date, and (ii) amortization related to all stock option awards granted subsequent to March 31, 2006, based upon the fair value estimated. The compensation expense for stock-based compensation awards is recognized over the vesting period of the options, and includes an estimate for forfeitures. The Company recorded expenses of $713 ($0.02 per diluted share) in 2007 upon adopting SFAS 123R.

SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption, as if the Company had accounted for all its employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation in the prior year.

Had compensation expense for all stock option grants to employees prior to April 2006  been determined under the fair value method at the grant dates, consistent with the method prescribed by SFAS No. 123, the Company’s net loss and net loss per share would have changed to the pro forma amounts indicated as follows:

	2005			2006
Net (loss)—as reported	$	(2,505,303	)	$	(4,035,588	)
Stock-based employee compensation—as reported	13,187			312,266
Pro forma stock-based employee compensation	(417,899		)	(1,013,914		)
Net loss—pro forma	$	(2,910,015	)	$	(4,737,236	)
Net loss per share—as reported	$	(.08	)	$	(.11	)
Stock-based employee compensation—as reported	—			—
Pro-forma stock-based employee compensation	(.01		)	(.03		)
Net loss per share—pro forma	$	(.09	)	$	(.13	)

The Company has computed the pro-forma disclosures for stock options granted to employees after January 1, 1995 using the Black-Scholes option-pricing model prescribed by SFAS No. 123. The assumptions used during each of the two years ended March 31, 2006 were as follows:

	March 31,
	2005		2006
Risk-free interest rate	1.36%-3.07%		3.33%-4.64%
Expected dividend yield	—		—
Expected lives	5 years		5 years
Expected volatility	73%-80%		64%-72%
Weighted average value of grants per share	$	3.20	$	1.39
Weighted average remaining contractual life of options outstanding, in years	9.40		8.97

F-10

(1)Operations and Significant Accounting Policies (Continued)

(p) Recently Issued Accounting Standards

In the year ended March 31, 2005 and March 31, 2006, the Company recorded in selling, general and administration expenses stock compensation expense of $183 and $498, respectively

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109, which seeks to reduce the significant diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Upon adoption, the cumulative effect of any changes  in net assets resulting from the application of FIN 48 will be recorded as an adjustment to retained earnings. The Company is currently evaluating the impact, if any, that FIN 48 will have on its financial position and results of operations.

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006 and is therefore required to be adopted by the Company in the first quarter of its fiscal year ended March 31, 2008. The Company does not expect SFAS 155 to have an impact on its consolidated financial statements as it does not currently use any financial derivative instruments.

In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires public entities with defined benefit pension plans and other postretirement plans to fully recognize, as an asset or a liability, the overfunded or underfunded status of its benefit plans in its 2006 balance sheet. The Company does not expect SFAS 158 to have an impact on its consolidated financial statements as it has no defined benefit pension or other postretirement plans.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such misstatements that existed in prior years existing in the current year’s ending balance sheet. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the adoption of SAB No. 108 to have an impact on its financial position and results of operations.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after

F-11

(1)Operations and Significant Accounting Policies (Continued)

(p)Recently Issued Accounting Standards (Continued)

November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged. The Company has not yet determined the effect the adoption of SFAS 157 will have on its financial position and results of operations.

In June 2006, the FASB ratified the consensus on EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. The scope of EITF Issue No. 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund (“USF”) contributions and some excise taxes. The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on Issue No. 06-03 will be effective for interim and annual reporting periods beginning after December 15, 2006. The Company is currently evaluating the impact of EITF No. 06-03. Should the Company need to change the manner in which it records gross receipts, it is not expected that the change will have a material impact on total operating revenue and expenses and operating income and net income would not be affected.

(q) Reclassifications

For presentation purposes, the Company has reclassified certain items from its prior year financial statements.

(2)Financing Arrangement

In February 2007, we terminated our bank agreement. We plan to use leasing arrangements for future capital equipment, and we have negotiated new payment terms with our foreign vendors; thereby reducing our cost and eliminating the need for banker’s acceptances.

Prior to the Company’s February 2007 decision to terminate its bank arrangements, in October 2005, the Company entered a financing arrangement with a bank. The arrangement included a revolving line of credit (the “Revolver”) and an equipment line of credit (the “Equipment Line”). Under the Revolver, the Company could have borrowed up to $250 for working capital purposes, including letters of credit and bankers’ acceptances. Under the Equipment Line, the Company could have requested advances totaling up to $750 for the purchase of machinery and equipment. The Revolver and the Equipment Line which were originally scheduled to expire on July 31, 2006, were renewed through July 31, 2007, but were terminated by the company during February 2007.

At March 31, 2006 and March 31 2007, the Company had bankers’ acceptances payable of approximately $62 and $0 respectively, and had in 2006 $34 and in 2007 $0 reserved under the arrangement to cover a domestic letter of credit in favor of a landlord.

(3)Income Taxes

The Company accounts for income taxes under the liability method and deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates.

F-12

(3)          Income Taxes (Continued)

The Provision for Income Taxes consists of the following:

	2005		2006		2007
Current:
Federal		—		—	$	340
State		—		—	$	180
		—		—	$	520
Deferred:
Domestic		—		—	$	(340	)
Valuation Allowance		—		—	$	340
Provision for Income Taxes		—		—	$	520

The Difference Between the Provision For Income Taxes and Statutory Rate is as follows:

	2005			2006			2007
U.S. Statutory Rate		(34	)%		(34	)%		34	%
State Taxes, Net of Federal Tax Benefit		—			—			1	%
Change in valuation allowance		34	%		34	%		(32	)%
Effective Tax Tate		—			—			3	%

The components of the net deferred tax asset recognized in the accompanying consolidated balance sheets with the approximate income tax effect of each type of temporary difference are as follows:

	March 31,
	2006			2007
Net operating loss carry-forwards	$	21,206		$	12,713
Nondeductible reserves	757			441
Tax credit carry-forwards	427			678
Stock based compensation	1,339			1,625
Other Temporary Differences	497			364
	24,226			15,821
Less—Valuation allowance	(24,226		)	(15,821		)
Net deferred tax asset	$	—		$	—

The Company has recorded a valuation allowance equal to its net deferred tax asset due to its assessment that it would be more likely than not that realization of  the benefit of this asset will not occur. The uncertainty is due to current and projected net losses. During FY 07, the valuation allowance decreased by $8,366 primarily due to the utilization of net operating losses in the current fiscal year.

On March 31, 2007, the Company had operating loss carry-forwards available to offset future federal taxable income of approximately $31,570. These operating loss carry-forwards expire at various dates through, commencing in 2010. On March 31, 2007, the Company had tax credit carry-forwards available to offset future federal taxable income of approximately $678. The federal alternative minimum tax credit of $340 does not expire, and the balance of our tax credits may expire beginning in 2008 through 2013. The Internal Revenue Code limits the amount of net operating loss carry-forwards that companies may use in any one year in the event of certain cumulative changes in ownership over a three-year period. The Company has not assessed the applicability or impact of the ownership change rules on its carry-forwards, however, it believes such effect, if any, would be immaterial.

F-13

(4)Stockholders’ Equity

(a)Sale of Stock

On February 14, 2005, the Company sold, in a private equity placement, an aggregate of 3,703,702 shares of common stock at a price of $2.70 per share, resulting in gross proceeds of approximately $10 million. The per share price represented 91% of the closing price of the Company’s common stock on the NASDAQ Small Cap Market at February 14, 2005. Two financial investors, who are independent of the Company, acquired approximately $8 million of the common stock sold, and two stockholders, who are also directors and at that time, were employees of the Company, (the “Insiders”) acquired the remainder. In addition, as part of the transaction, the Company issued warrants to purchase an additional 1,103,704 shares of common stock to the investors and to the placement agent. The warrants are exercisable immediately over a period of five years at a price of $3.75 per share. The agreement does not require the Company to file any registration statement covering the resale of any of the common stock or warrants acquired by the investors in the transaction. However, the agreement does provide the investors with piggyback registration rights when and if the Company does file a registration statement.

On March 30, 2005, in response to the NASDAQ Stock Market informing the Company that it was in violation of certain NASDAQ Marketplace Rules regarding the sale of common stock to officers and directors at less than the closing bid price of the common stock, the Company and the two Insiders executed separate agreements to remediate the violation. One of the Insiders executed a contribution agreement providing for the payment of an additional amount in respect of the common stock purchased from the Company on February 14, 2005, thus bringing the price paid by him to $2.95 per share, the closing bid price of the common stock on February 14, 2005. The other Insider executed a rescission agreement, agreeing to rescind 31,387 shares of common stock purchased by him on February 14, 2005, thus increasing the cash price paid by him for the remaining shares to $2.95 per share. The Company recorded the contribution received on April 7, 2005 as a subscription receivable and additional-paid-in-capital as of March 31, 2005. The Company recorded the rescission as a change in outstanding shares as of March 31, 2005. The discount was dictated by the level of interest of investors in the future prospects of the Company, and to the market for private placements generally. The transaction was determined to be at fair market value by the Company’s Board of Directors, and was approved in a unanimous written consent. The approval of the Board of Directors was made after their review of numerous factors, including the level of investor interest, the number of shares sold compared to the average trading volume of the Company’s stock on the NASDAQ Small Cap Market, and whether registration of the stock was a requirement of the investors.

(b) Stock Option Plan

The Company had initial stock option plan (the “1990 Plan”) allowed it to grant key employees and consultants incentive and non-statutory stock options at the fair value of the stock on the date of grant. Options became exercisable at varying dates ranging up to five years from the date of grant. The Board of Directors had authorized the issuance of options for the purchase of up to 4,375,000 shares of common stock under the 1990 Plan.

This Plan expired in 2001 and was replaced with the 2000 Stock Incentive Plan, (the “2000 Plan”). The terms of the 2000 Plan are substantially the same as the 1990 Plan. The Board of Directors and shareholders have authorized the issuance of options for the purchase of up to 4,500,000 shares of common stock under the 2000 Plan. The Company grants options to both employees and non-employee consultants with vesting periods ranging from immediate to four years. For options granted in the current year, we have chosen to employ the simplified method of calculating the expected option term, which averages an award’s weighted average vesting period and its contractual term. The contractual term of our options is ten years. The risk-free rate is based upon the daily Treasury yield curve for a period approximately equal

F-14

(4)          Stockholders’ Equity (Continued)

(b) Stock Option Plan (Continued)

to the expected option term. We used historical data to estimate the expected price volatility and forfeiture rate. The expected dividend yield is 0%, based on our history of not paying dividends.

The Company recorded $713 of stock-based compensation expense in the statement of operations for the year ended March 31, 2007, in the following expense categories:

	Year Ended
	March 31, 2007
Cost of Goods Sold		$	60
Selling General & Administrative		590
Research & Development		63
Total		$	713

On March 31, 2007, the total unamortized stock-based compensation is approximately $839. The Company will expense over the period ending March 31, 2011. The Company does not expect to realize any tax benefits from future disqualifying dispositions, if any, due to its Net Operating Loss Carry-forwards and its policy of recording valuation allowances equal to all deferred tax assets.

A summary of the 2000 and 1990 Plans activity for employees is as follows:

	Number of Shares		Exercise Price Range		Weighted Average Exercise Price
Outstanding March 31, 2004	3,215,750		$	.79–$1.82		$	1.11
Granted	325,500		2.57–4.30			3.20
Exercised	(491,099	)	.79–1.50			1.16
Canceled	(77,500	)	.89–4.00			2.52
Outstanding March 31, 2005	2,972,651		.79–4.30			1.29
Granted	1,121,500		1.09–2.83			1.39
Exercised	(149,550	)	.89–1.50			1.11
Canceled	(907,250	)	.89–3.59			1.16
Outstanding March 31, 2006	3,037,351		.79–4.30			1.38
Granted	750,000		1.32–1.67			1.39
Exercised	(95,504	)	.89–1.19			.97
Canceled	(433,147	)	.89–2.57			2.10
Outstanding March 31, 2007	3,258,700		$	.79–$4.30		$	1.23
Exercisable, March 31, 2005	1,618,401		$	.79–$1.82		$	1.14
Exercisable, March 31, 2006	1,946,351		$	.79–$4.30		$	1.19
Exercisable, March 31, 2007	2,347,075		$	.79–$4.30		$	1.23

F-15

(4)          Stockholders’ Equity (Continued)

(b) Stock Option Plan (Continued)

In the year ended March 31, 2007, the Company granted options to purchase 750,000 shares of the Company’s common stock to employees. The fair value of these options measured at the option grant dates was approximately $693, determined using the Black-Scholes option-pricing model, and is being recorded as an expense over the four year vesting period. The assumptions used in the Black-Scholes option-pricing model by the Company were as follows:

	Year Ended March 31, 2007
Risk-free interest rate	4.51%-4.96%
Expected dividend yield	—
Expected life	6.25 years
Expected volatility	67%-69%
Weighted average value grant per share	$	1.39

A summary of the 2000 and 1990 Plans activity for non-employees is as follows:

	Number of Shares		Exercise Price Range		Weighted Average Exercise Price
Outstanding March 31, 2004	1,384,914		$	.94–$5.50		$	1.68
Granted	150,000		3.69–4.05			3.81
Exercised	(147,500	)	.94–3.00			1.24
Canceled	(25,517	)	5.44–5.50			5.49
Outstanding March 31, 2005	1,361,897		1.05–5.44			1.90
Granted
Exercised
Canceled	(31,897	)	1.88–5.44			3.28
Outstanding March 31, 2006	1,330,000		1.05–4.05			1.86
Granted	100,000		1.60			1.60
Exercised	—		—			—
Canceled	(60,000	)	1.25–3.00			1.54
Outstanding March 31, 2007	1,370,000		$	1.05–$4.05		$	1.86
Exercisable, March 31, 2005	1,186,897		$	1.05–$5.44		$	1.65
Exercisable, March 31, 2006	1,255,000		$	1.05–$4.05		$	1.75
Exercisable, March 31, 2007	1,270,000		$	1.05–$4.05		$	1.46

During the fiscal year ended March 31, 2007, the Company granted options to purchase 100,000 shares to a non-employee. The fair value measured at the option grant dates was approximately $107,000, determined using the Black-Scholes option-pricing model.

The assumptions used in the Black-Scholes option-pricing model by the Company were as follows:

	March 31, 2007
Risk-free interest rate		4.91		%
Expected dividend yield		—
Expected lives		6.25 years
Expected volatility		69		%
Weighted average value of grants per share		$	1.60

F-16

(4)          Stockholders’ Equity (Continued)

(b) Stock Option Plan (Continued)

Under the 1990 Plan and the 2000 Plan, there remain 1,515,750 and 2,851,601 shares of common stock, respectively, issued but not yet exercised.

On August 16, 1993, the Company adopted the 1993 Director Option Plan (the “1993 Plan”) under which it may grant up to 200,000 non-statutory stock options to non-employee directors of the Company at the fair value of the stock on the date of grant. Options become exercisable over a four-year period from the date of grant. The Company has reserved 200,000 shares of common stock for the exercise of stock options under the 1993 Plan. As of March 31, 2005, there were no shares available for future grant under the 1993 Plan.

In July 2003, the Company adopted, and the stockholders approved, a 2003 Director Option Plan (the “2003 Plan”). The terms of the 2003 Plan include automatic grants of 4,000 shares to each outside director on each date on which an annual meeting of the stockholders of the Company is held, provided that such outside director does not hold on such date any outstanding options to purchase Common Stock of the Company’s 1993 Plan, which options are not fully exercisable. If the Company’s annual meeting of stockholders is held in August of each year, the Company will grant options to purchase 16,000 shares in each of 2006, 2007 and 2008. The Company has reserved 200,000 shares of Common Stock for grant under the 2003 Plan.

A summary of the 1993 and 2003 Plan’s activity is as follows:

	Number of Shares			Exercise Price Range		Weighted Average Exercise Price
Outstanding March 31, 2004		80,000		$	.97–$1.50		$	1.19
Granted		—		—			—
Exercised		—		—			—
Canceled		—		—			—
Outstanding March 31, 2005		80,000		$	.97–$1.50		$	1.19
Granted		12,000		1.92–2.10			2.03
Exercised		—		—			—
Canceled		(20,000	)	.97			.97
Outstanding March 31, 2006		72,000		1.00–2.10			1.39
Granted		16,000		1.49			1.49
Exercised		—		—			—
Canceled		—		—			—
Outstanding March 31, 2007		88,000		$	1.00–$2.10		$	1.41
Exercisable March 31, 2004		56,000		$	.97–$1.50		$	1.24
Exercisable March 31, 2005		68,000		$	.97–$1.50		$	1.21
Exercisable March 31, 2006		72,000		$	1.00–$2.10		$	1.39
Exercisable March 31, 2007		88,000		$	1.00–$2.10		$	1.41

F-17

(4)          Stockholders’ Equity (Continued)

In August 2006, the Company granted options to purchase 16,000 shares of the Company’s common stock to outside members of the board of directors in accordance with the terms of the 2003 Plan. The fair value of these options measured at the option grant date was approximately $15 determined using the Black-Scholes option-pricing model, and was recorded as an expense in the three months ended September 30, 2006, as the options were 100% vested upon grant. The assumptions used in the Black-Scholes option-pricing model by the Company were as follows:

Risk-free interest rate	4.91		%
Expected dividend yield	—
Expected life	5.50 years
Expected volatility	69		%
Weighted average value grant per share	$	1.49

(5)Commitments

The Company rents its facilities in Natick, MA and Orangeburg, NY from non-related parties under various agreements due to expire on January 31, 2008 and August 31, 2010, respectively. The Company also leases some office equipment under leases that expire in 2010. Rental expense charged to operations under leases was approximately $392, $415 and $480 for the years ended March 31, 2005, 2006 and 2007, respectively. Approximate future minimum lease commitments under all operating leases are as follows:

Year Ending March 31,	Commitment
2008		$	438
2009		339
2010		295
2011		109
		$	1,181

(6)401(K) Plan

The Company has a 401(k) plan (the “Plan”) whereby employees may contribute a certain percentage of their annual compensation, up to a defined maximum. The Company may, but is not obligated to, make a matching contribution up to a certain percentage of each employee’s contribution. During the years ended March 31, 2005, 2006 and 2007, the Company recorded matching contributions of approximately $42, $51 and $54, respectively, relating to the Plan.

F-18

(7)Segment Information

The Company has determined it has three reportable segments—medical, industrial and corporate. The medical segment designs, manufactures and sells EndoSheaths and sells endoscopes to users in the health care industry. The industrial segment designs, manufactures and sells borescopes to a variety of users, primarily in the aircraft maintenance industry. In addition, the industrial segment manufactures and repairs endoscopes for the medical segment. The corporate segment consists of certain administrative expenses applicable to the Company as a whole.

The accounting policies of the segments are described in the summary of significant accounting policies. The Company evaluates segment performance based upon operating income. Identifiable assets are those used directly in the operations of each segment. Corporate assets include cash, marketable securities and the investment in Vision Sciences Ltd. Data regarding management’s view of the Company’s segments is provided in the following tables.

Fiscal Year Ended March 31,	Medical			Industrial				Corporate				Adjustments				Total
2005
Sales to external customers	$	7,237			$	3,089			$	—			$	—		$	10,326
Inter-segment sales	—				2,737				—				(2,737		)	—
Operating (loss) income	(1,626		)		293				(1,225		)		—			(2,558		)
Interest income (expense), net	—				—				41				—			41
Depreciation and amortization	261				51				6				—			318
Other significant non-cash items:
Stock-based compensation	170				—				12				—			182
Total assets	3,380				1,655				9,955				(242		)	14,748
Expenditures for fixed assets	630				36				—				—			666
2006
Sales to external customers	$	8,336			$	2,814			$	—			$	—		$	11,150
Inter-segment sales	—				3,015				—				(3,015		)	—
Operating (loss)	(2,640		)		(167		)		(1,420		)		—			(4,227		)
Interest income (expense), net	—				—				194				—			194
Depreciation and amortization	422				34				—				—			456
Other significant non-cash items:
Stock-based compensation	204				—				294				—			498
Total assets	3,716				1,993				6,224				(422		)	11,511
Expenditures for fixed assets	289				49				—				—			338
2007
Sales to external customers	$	6,776			$	2,711			$	—			$	—		$	9,487
Inter-segment sales	—				2,087				—				(2,087		)	—
Operating (loss)	(2,993		)		(735		)		(1,875		)		—			(5,603		)
Interest income (expense), net	—				—				150				—			150
Depreciation and amortization	459				31				—				—			490
Other significant non-cash items:
Stock-based compensation	252				—				461				—			713
Total assets	3,301				1,745				29,042				(1,085		)	33,003
Expenditures for fixed assets	(552		)		(75		)		—				—			(627		)

F-19

(7)          Segment Information (Continued)

The following table identifies sales by geographic region. Sales are attributable to geographic regions based upon the location of customers

	Fiscal Years Ended March 31,
Geographic Region	2005		2006		2007
Asia, Australia, India	$	718	$	507	$	381
Canada	96		184		317
Europe	2,139		2,995		2,860
Middle East and Africa	257		237		90
Central & South America	160		198		85
United States	6,956		7,029		5,754
Total	$	10,326	$	11,150	$	9,487

(8)Accrued Expenses

Accrued expenses consist of the following:

	March 31,
	2006		2007
Accrued payroll and related expenses	$	632	$	678
Accrued other	396		765
	$	1,028	$	1,443

Included in accrued payroll and related expenses is approximately $319 and $214 at March 31, 2006 and 2007, respectively, owed to an employee/director of the Company, whose salary was accrued but not paid to him from October 1995 through December 2001. The employee/director resumed receiving his salary in cash in January 2002.

(9)Valuation and Qualifying Accounts

Description (rounded)	Balance, Beginning of Year			Charged to Costs and Expenses			Write-Offs / Utilization			Balance, End of Year
Deducted from Assets Accounts:
Allowance for doubtful accounts—
Year ended March 31, 2005		$	53		$	22		$	5	$	70
Year ended March 31, 2006		70			109			34		145
Year ended March 31, 2007		145			13			28		130
Inventory reserves—
Year ended March 31, 2005		$	932		$	116		$	197	$	851
Year ended March 31, 2006		851			294			28		1,117
Year ended March 31, 2007		1,117			71			363		825
Deferred tax asset reserves—
Year ended March 31, 2005		$	21,666		$	938		$	—	$	22,604
Year ended March 31, 2006		22,604			1,622			—		24,226
Year ended March 31, 2007		24,226			—			8,405		15,821

F-20

(10)Related Party Transactions

In the fiscal year ended March 31, 2007, the Company purchased approximately $1,069 of flexible endoscope components from a key supplier pursuant to a 1992 supply agreement. This key supplier, Pentax Corporation, is the record and beneficial holder of 5.7% of the Company’s outstanding Common Stock.

(11)Summary of Quarterly Operational Data (Unaudited)

The following table contains certain selected quarterly financial data for the fiscal years ended March 31, 2006 and 2007.

	Quarterly Operating Results
	Q1 2006			Q2 2006			Q3 2006			Q4 2006
Statement of Operations Data:
Net sales	$	2,533		$	2,301		$	3,330		$	2,986
Gross profit	610			494			885			647
Loss from operations	(882		)	(1,118		)	(1,057		)	(1,170		)
Net loss	(831		)	(1,079		)	(1,002		)	(1,124		)
Net loss per share	(.02		)	(.03		)	(.03		)	(.03		)
	Q1 2007			Q2 2007			Q3 2007			Q4 2007
Net sales	$	2,007		$	2,291		$	2,216		$	2,973
Gross profit	488			397			294			773
Loss from operations	(1,204		)	(1,386		)	(1,430		)	(1,583		)
Gain on sale of product line	—			—			—			26,097
Net income/(loss)	(1,160		)	(1,347		)	(1,405		)	24,024
Net income/(loss) per share - diluted	(0.03		)	(0.04		)	(0.04		)	0.67

Gross profit in Q4 07 includes income resulting from the reversal of accounts payable of approximately $189.

(12)Sale of Product Line

In March 2007, we completed the sale to Medtronic Xomed, Inc. (“Medtronic”), a wholly-owned subsidiary of Medtronic, Inc. of certain assets with respect to our ENT sheath business. The closing took place after the transaction was approved by a majority vote of Vision-Sciences’ shareholders during a special shareholders meeting convened on March 20, 2007. As part of the transactions, Vision-Sciences granted Medtronic an exclusive, royalty-free worldwide license to certain Vision-Sciences intellectual property, for use in making and selling sheath products solely within the field of ENT (otorhinolaryngology). Sales of our EndoSheaths within the field of ENT were $3.7 million or 39% of total sales in FY 07 and $3.3 million or 30% of total sales in FY 06. The Gross Profit for the ENT EndoSheaths products was approximately $1,508 in FY 07 and $1,103 in FY 06, constituting approximately 75% and 42% of the Company’s total gross profit, respectively. These sales will not be made after transition milestones have been met, which we anticipate will occur in the second half of FY 08. Under the terms of the agreement, Medtronic will pay us up to $34 million, of which $27 million was paid at the closing. Up to an additional $4 million will be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to Medtronic, and an additional $3 million will be payable 15 months after closing, assuming Vision-Sciences has complied with its obligations under the agreement, and that Medtronic has not made any indemnification claims based on the Company’s representations and warranties under the agreements. The Company will record the revenue on these future payments when the obligations (which are not significant) have been satisfied and the cash has been received from Medtronic. As part of this transaction, Vision-Sciences is transferring its existing ENT production lines for

F-21

(12)        Sale of Product Line (Continued)

the EndoSheath ENT products from its Natick, MA facility to the Medtronic facility in Jacksonville, FL. The Company recognized a net gain of $26.1 million on this transaction in FY 07.

(13)Subsequent Event

In April 2007, we acquired a strategic interest in Minos Medical, Inc. (“Minos’’). Minos is a privately held California based development stage medical device company concentrating in the emerging field of N.O.T.E.S. (Natural Orifice Trans-luminal Endoscopy Surgery). N.O.T.E.S. is a new frontier in surgery, focusing on using natural orifices to enter the body to facilitate incision-less surgical procedures. We invested $1 million in cash in the common stock of Minos in exchange for 30% of their issued and outstanding capital stock. We have also agreed to expend $165 in development costs in collaboration with Minos to exploit a specific common surgical procedure.

F-22

VISION-SCIENCES, INC.

EXHIBIT INDEX

Exhibit			Description of Exhibit
	3.1.	(1)	Amended and Restated Certificate of Incorporation of the Company, as amended to date
	3.2.	(2)	By-laws, as amended to date
	*10.1.	(3)	1990 Stock Option Plan, as amended
	*10.2.	(3)	1993 Director Option Plan
	*10.3.	(4)	2000 Stock Incentive Plan
	*10.4.	(2)	Vision-Sciences, Inc. 401(k) Plan, as amended
	*10.5.	(2)	Form of Vision-Sciences, Inc. Invention, Non-Disclosure and Non-Competition Agreement for employees
	*10.6		Letter Agreement between the Company and Ron Hadani dated January 24, 2003
	*10.7.	(5)	Letter Agreement between the Company and James A. Tracy dated July 18, 1997
	*10.8.	(10)	Letter Agreement between the Company and Thomas M. Olmstead dated October 1, 2001
	10.9.	(2)	Registration Rights Agreement dated as of February 28, 1992 among the Registrant and the persons listed therein
	10.10.	(1)	Piggyback Registration Rights Agreement, dated January 2, 2001, between the Company and the individuals and entities listed therein
	10.11.	(11)	Supply Agreement dated March 16, 1992 between the Registrant and Pentax Corporation (formerly known as Asahi Optical Co., Ltd.) and amendment dated October 1, 2002
	**10.12.	(6)	Investment Agreement dated as of August 6, 1998 among Vision-Sciences, Inc., 3DV Systems Ltd. and RDC Rafael Development Corporation Ltd.
	10.13.	(2)	Non-Exclusive License Agreement among Opielab, Inc., O.S. Limited Partnership and Pentax Corporation (formerly Asahi Optical Co., Ltd.) dated September 28, 1988
	10.14.	(7)	License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated June 10, 1993
	10.15.	(8)	Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated April 5, 1994
	10.16.	(9)	Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated April 5, 1995
	10.17.	(9)	Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated April 5, 1996
	**10.18.	(6)	License and Manufacturing Agreement dated as of August 6, 1998 between Vision-Sciences, Inc. and 3DV Systems Ltd.
	**10.19.	(6)	License Agreement dated as of August 6, 1998 between Vision-Sciences, Inc. and Pentax Corporation (formerly Asahi Optical Co., Ltd.)
	10.20.	(9)	Lease between Paul D. McKeon, Trustee of 14 Burr Street Realty Trust and Vision-Sciences, Inc. dated April 23, 1993
	10.21.	(4)	Agreement of Lease between 30 Ramland Road LLC and Vision-Sciences, Inc. dated as of March 23, 2000
	**10.22.	(6)	Memorandum of Understanding dated August 6, 1998 between Vision-Sciences, Inc. and Imagineering, Ltd.
	10.22.	(10)	Business Loan Agreement and Commercial Pledge and Security Agreement among Vision-Sciences, Inc., Machida, Inc. and The First National Bank of Boston dated January 24, 1995
	10.23.	(10)	Extension to Business Loan Agreement and Commercial Pledge and Security Agreement among Vision-Sciences, Inc., Machida, Inc. and The First National Bank of Boston dated January 7, 2002
	10.24.	(10)	Loan Agreement between Vision-Sciences, Inc. and Citizens Bank of Massachusetts dated April 30, 2002
	10.25.	(10)	Pledge Agreement between Vision-Sciences, Inc. and Citizens Bank of Massachusetts dated April 30, 2002

10.26	(12)	Exclusive Distribution Agreement between the Company and Medtronic Xomed, Inc. dated August 6, 2003.
10.27	(13)	Contract Manufacturing Agreement between the Company and Three BY Ltd. dated June 25, 2003.
10.28	(13)	Loan Agreement between the Company and Three BY Ltd. dated June 25, 2003.
10.29	(13)	Pledge Agreement between the Company and Three BY Ltd. dated June 25, 2003.
*10.30		Letter Agreement between the Company and James A. Tracy dated July 28, 2005, amending Mr. Tracy’s employment letter agreement
10.31		Asset Purchase Agreement dated as of January 16, 2007 by and between Medtronic Xomed, Inc. and the Company (14)
10.32		Amended and Restated Exclusive Distribution Agreement dated as of March 26, 2007 by and between the Company and Medtronic Xomed, Inc.
10.33		License Agreement dated as of March 26, 2007 by and between the Company and Medtronic Xomed, Inc.
*10.33		Amendment dated April 4, 2007 to Employment Letter Agreement of Yoav Cohen
*10.34		Amendment dated April 4, 2007 to Employment Letter Agreement of Ron Hadani
21.1		Subsidiaries of the Company
23.1		Consent of BDO Seidman, LLP
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 15(a) and 15(b) of Form 10-K.

**Confidential treatment granted as to certain portions, which portions have been deleted and filed separately with the Securities and Exchange Commission.

(1) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 2001.

(2) Incorporated by reference to the Registration Statement on Form S-1 (File No. 33-53490).

(3) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 1994.

(4) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 2000.

(5) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

(6) Incorporated by reference to the Current Report on Form 8-K dated August 20, 1998.

(7) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.

(8) Incorporated by reference to the Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1994.

(9) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 1996.

(10) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 2002.

(11) Incorporated by reference to the Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2002.

(12) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

(13) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.

(14) Incorporated by reference to the Proxy Statement dated March 6, 2007 filed with the Securities and Exchange Commission on March 7, 2007 on Schedule 14A.

EX-10.32

Exhibit 10.32

AMENDED AND RESTATED EXCLUSIVE DISTRIBUTION AGREEMENT

This Amended and Restated Exclusive Distribution Agreement (the “Agreement”) is made as of March 1, 2007 by and between Vision-Sciences, Inc., a Delaware corporation with a principal office located at 9 Strathmore Road, Natick, Massachusetts 01760 (“Company”), and Medtronic Xomed, Inc., a Delaware corporation with a principal office located at 6743 Southpoint Drive North, Jacksonville, Florida 32216 (“MDTX”).

WHEREAS, Company is engaged in developing, manufacturing and marketing medical devices for use in otorhinolaryngology and related applications; and

WHEREAS, Company appointed MDTX as its exclusive distributor of certain products pursuant to the terms and conditions of that certain Exclusive Distribution Agreement effectively dated August 6, 2003, as first amended effective as of January 26, 2004, and as further amended effective as of April 21, 2004 (the “Prior Agreement”); and

WHEREAS, Company and MDTX have entered an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which MDTX has agreed to purchase certain assets from the Company; and

WHEREAS, pursuant to the Purchase Agreement, Company and MDTX have agreed to enter into this Agreement and to amend and restate the terms upon which MDTX distributes Sheath Products and Scope Products in the Field as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and pursuant to the Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.             DEFINITIONS

1.1“Affiliate” means, in respect of any specified Person, any other Person which, but only for so long as such other Person, directly or indirectly, controls, is controlled by, or is under common control with, such specified Person.  The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, through the ownership of voting securities or other equity interests, and the terms “controlled” and “common control” shall have correlative meanings.

1.2“Effective Date” means the date hereof.

1.3“Field” means the field of otorhinolaryngology (as defined by the American Academy of Otorhinolaryngology and Head and Neck Surgery), including, without limitation, sinus endoscopy, laryngoscopy, esophagoscopy and other applications or procedures where flexible scopes are inserted into the ear, nose or throat, all of the foregoing as and to the extent it is practiced by licensed otorhinolaryngologists.

1.4“Intellectual Property” means all forms of intellectual property in any jurisdiction and under any law, whether now or hereafter existing, including, without limitation: (a) inventions,

discoveries, patent applications, patents (including letters patent, industrial designs, and inventor’s certificates), design registrations, invention disclosures, and applications to register industrial designs, and any and all rights to any of the foregoing anywhere in the world, including any provisionals, substitutions, extensions, supplementary patent certificates, reissues, re-exams, renewals, divisions, continuations, continuations in part, continued prosecution applications, and other similar filings or notices provided for under the laws of the United States, or of any other country; (b) trademarks and any all rights thereto anywhere in the world; (c) trade secrets and other confidential or non-public business information, including ideas, formulas, compositions, inventor’s notes, discoveries, improvements, concepts, know-how, manufacturing and production processes and techniques, testing information, research and development information, data resulting or derived from research activities, inventions, blue prints, drawings, specifications designs, plans, proposals and technical data, business and marketing plans, market surveys, market know-how and customer lists and related information; (d) copyrights, whether or not registered, and any non-registered copyright to any writings and other copyrightable works of authorship, including source code, object code, documentation (whether or not released), and databases; (e) integrated circuit topographies and mask works; (f) moral rights; (g) features of shape, configuration, pattern or ornament; and (h) registrations of, and applications to register, any of the foregoing with any governmental entity and any renewals or extensions thereof and all other rights to any of the foregoing.

1.5“Person” means any natural person or any corporation, partnership, limited liability company, business association, joint venture or other entity.

1.6“Products” means the Scope Products and the Sheath Products, collectively.

1.7“Scopes” means those endoscope products listed under the heading “Scopes” on Annex A.

1.8“Scope Accessories and Replacement Components” means those products listed under the heading “Scope Accessories and Replacement Components” on Annex A.

1.9“Scope Products” means the product or product groups listed on Annex A attached to and made a part of this Agreement, including Scopes and Scope Accessories and Replacement Products and all improvements and replacements for those products, and such other product or product groups as shall be added to Annex A by the mutual agreement of the parties, as contemplated by Section 2.4.

1.10“Sheath Products” means the product or product groups listed on Annex B attached to and made a part of this Agreement, improvements and replacements for those products, and such other product or product groups as shall be added to Annex B by the mutual agreement of the parties.

1.11“Territory” means the entire world, excluding the jurisdictions set forth in Annex C or any other jurisdiction that MDTX shall have notified the Company in writing that it does not intend to distribute or sell Products to in accordance with the terms of this Agreement.

2

2.             APPOINTMENT OF DISTRIBUTOR; PRODUCTS

2.1           Appointment.

(a)  Sheath Products.  Company hereby agrees to manufacture and to supply to MDTX Sheath Products for MDTX’s distribution and sale of Sheath Products to customers practicing within the Field and for use within the Field anywhere in the Territory effective for each area of the Territory as of the dates set forth in Annex D for each such area.  Notwithstanding anything to the contrary set forth in this Agreement, Company’s obligation to manufacture and supply Sheath Products for MDTX shall terminate on the date on which MDTX provides written notice to the Company pursuant to Section 2.2(c) of the Transition Agreement to be entered into between the Company and MDTX as of the Closing Date (as defined in the Purchase Agreement) that the Company is to begin the transfer of the Phase 2 Equipment (as defined in the Transition Agreement) to MDTX pursuant to the terms of the Transition Agreement (the “Phase 2 Equipment Transfer Date”); provided that MDTX may terminate the supply by Vision-Sciences of Sheath Products earlier than the Phase 2 Equipment Transfer Date by providing a sixty (60) days prior written notice to Vision-Sciences (the “Sheath Distribution Termination Date”).  MDTX hereby grants the Company a worldwide, royalty-free license to use the Vision-Sciences Intellectual Property (as defined in the License Agreement to be entered into between the Company and MDTX as of the Closing Date (as defined in the Purchase Agreement), the “License Agreement”) in the Field, which was licensed to MDTX pursuant to the License Agreement, solely for the purpose of performing the Company’s obligations with respect to the manufacture and supply of Sheath Products to MDTX pursuant to this Agreement, which license to use such Vision-Sciences Intellectual Property in the Field shall terminate on the Sheath Distribution Termination Date.

(b) Scope Products.  Company hereby grants MDTX the exclusive right to distribute, sell, advertise, promote and market the Scope Products solely to customers practicing within the Field and for use within the Field anywhere in the Territory effective for each area of the Territory as of the dates set forth in Annex E for each such area.  MDTX hereby accepts such appointment.

2.2           Except as otherwise permitted under this Agreement and unless and until this Agreement shall have been terminated in the manner provided herein, the Company agrees not to, after the Effective Date (i) distribute, market or sell the Products to any Person other than MDTX, (ii) authorize any Person other than MDTX to distribute, market or sell the Products or (iii) enter into any agreement or arrangement for the private labeling of any of the Products or any product that is identical or substantially similar in form or function to any of the Products, in each case of clauses (i) through (iii) above for applications within the Field.  The Company reserves the right to promote the technology underlying Scope Products, the use and application of Scope Products and the Company’s role in developing and manufacturing Scope Products, both within and outside the Field.  Subject to Section 2.4 below, it is agreed that the Company shall coordinate with MDTX in advance of any promotion or other publicity of the Scope Products within the Territory and for use or application within the Field.

2.3           MDTX shall have the right to perform its obligations and exercise its rights under this Agreement through one or more of its Affiliates, and to appoint agents (including Affiliates of MDTX) to market and sell the Products solely to customers practicing within the Field and for use within the Field.  MDTX shall have the right to appoint subdistributors to perform MDTX’s obligations hereunder in such local markets where MDTX does not currently maintain a direct sales force.  All

3

such agents and subdistributors shall be party to agreements with MDTX containing terms and conditions that are consistent with the terms of this Agreement, including, without limitation, those provisions relating to the marketing and sale of Scope Products, the protection of the Company’s confidential information, trademarks and intellectual property rights, the compliance with regulatory requirements, and the termination of this Agreement.

2.4           If the Company develops new Scope Products for use and application within the Field and within the Territory (“New Products”) then the Company and MDTX shall, for a period of 90 days prior to any commercial launch of such New Product within the Field and within the Territory, negotiate exclusively and in good faith the reasonable terms and conditions for adding such New Product to Annex A.  If the parties are unable to reach an agreement with respect to the terms and conditions of the sale of New Products within such ninety (90) days period, then the Company shall have the right to market and sell such New Products in any areas within the Territory, whether directly or through any third party, at its sole discretion; provided, however, that if the Company, directly or indirectly, sells a New Product that competes with the Scope Products in one or more of the Designated Areas, then (i) MDTX shall be relieved of its minimum purchase requirement obligations pursuant to Section 5.1, and (ii) MDTX shall be relieved of its non-compete obligations pursuant to Section 3.1(c).

2.5           The Company may, at any time during the Term, request to have the right to sell Scope Products in areas within the Territory by written notice to MDTX (“Company Notice”).  MDTX shall, within thirty (30) days following the furnishing of such Company Notice, notify the Company in writing of its decision regarding whether to allow the Company to sell Scope Products in the area(s) designated in the Company Notice (“MDTX Notice”).  MDTX shall not unreasonably withhold its consent to allow the Company to sell Scope Products in an area as set forth in a Company Notice.  Unless otherwise agreed in writing by the Company and MDTX, in the event MDTX allows the Company to sell Scope Products in an area within the Territory pursuant to this Section 2.5, this Agreement shall terminate with respect to such area within the Territory and MDTX will have no right to distribute Scope Products in such area, but will not be subject to the non-compete obligations set forth in Section 3.1(c) and Medtronic shall have no further obligations hereunder with respect to such area.

3.             MDTX’S DUTIES

3.1MDTX agrees to:

(a)Use its commercially reasonable best efforts to market, promote, distribute, sell and support the Scope Products in those major market areas within the Territory set forth on Annex H (“Designated Areas”) and use its commercially reasonable best efforts to refrain from marketing or promoting the Scope Products in the Territory in a manner that is materially inferior to the manner in which MDTX markets and promotes any other comparable products.  MDTX’s obligation to market the Scope Products under this Agreement in the Designated Areas shall require MDTX, among other things, to: (i) conduct periodic promotions and obtain usual and customary market feedback (but without the requirement of MDTX to undertake or requisition any formal studies from third parties) with respect to the Scope Products, (ii) maintain a well-staffed and appropriately supervised sales force,

4

(iii) utilize its existing training facilities and programs to present live-demonstration courses relating to the Scope Products, (iv) maintain adequate levels of Product inventory, and (v) feature the Scope Products in its catalogs and other promotional materials and on each of its appropriate websites, at trade shows, congresses and similar conferences, and at sales and training courses and programs for MDTX sales and marketing personnel.

(b) Carry out the marketing, promotion and sale of the Scope Products in the Territory efficiently and in an orderly and regulated manner.

(c)From and after the date that is set forth in Annex E with respect to each area within the Territory, until the termination or expiration of this Agreement, refrain from selling or promoting in the Territory products that are directly competitive with the Scope Products, provided, however, that the restrictions in this Section 3.1(c) shall not apply from and after the date that the repair rate resulting from design or manufacturing quality defects for Scope Products in any six (6) month period meets or exceeds twenty-five percent (25%) of the Scope Products sold by  MDTX or its distributors pursuant to this Agreement; and provided further, however, that the restrictions in this Section 3.1(c) shall not apply with respect to any area of the Territory in which MDTX is not the exclusive distributor of the Scope Products; and provided further, however, that the restrictions in this Section 3.1(c) shall not apply with respect to the sale by MDTX of no more than 62 scopes in the aggregate held in inventory by MDTX for sale in the territories of France, Australia, New Zealand and Latin America.

(d)Refrain from making any oral or written statements or representations that vary from the specifications, instructions, warranties or representations given or made in this Agreement by the Company to MDTX with respect to Products.

(e)Not modify, adulterate, misbrand, alter or remove labels from Products.

(f)MDTX shall be responsible to report incidents and near incidents, as applicable, to the competent regulatory authorities in the Territory in accordance with applicable laws and regulations (in the case of the European Union, MDDEV 2.12). MDTX shall promptly inform Company of any such incident and near incident.

(g)Not take any action detrimental to the reputation or goodwill of the Scope Products and/or the Company.

(h)Promptly notify the Company in writing of any and all material modifications, design changes or improvements to the Scope Products (collectively, “Ideas”) suggested by any customer, employee, subdistributor or agent of MDTX for any purpose, except those that, in the reasonable opinion of MDTX, are of no commercial value to either party.  In the event that the Company agrees to incorporate any such Idea into a Scope Product or New Product, then to the extent that MDTX has, obtains or derives any rights or benefit in or to any such Idea by MDTX, its employees, agents, customers or other persons, MDTX hereby grants to the Company a perpetual, irrevocable, royalty-free, transferable and nonexclusive license to use for any purpose such Idea, without the payment of any additional consideration thereof either to MDTX or to any such persons, except to the extent, and then

5

only to the extent, required by applicable law or as set forth below.  MDTX shall cause each of its employees, agents and subdistributors to execute invention assignment agreements with respect to any Ideas.  To the extent that the Company agrees to incorporate an Idea developed by MDTX and based on valid claims in patents or patent applications filed by or on behalf of MDTX or its Affiliates (each such Idea, an “Invention”) into a Scope Product or New Product which MDTX does not have the right to distribute or sell hereunder, or from such time as MDTX’s right to distribute and sell such Scope Product or New Product is terminated or otherwise lapses, the Company shall license the use and application of such Invention for any purpose, on a non-exclusive, perpetual, irrevocable and transferable basis, in exchange for a royalty based on a percentage of the annual net sales of such Scope Products or New Products incorporating such valid claims in patents or patent applications, ranging from 2% to 4%, as determined by an independent arbitrator mutually selected by the parties, who shall base his or her decision on factors typically taken into account in determining reasonable royalties.  To the extent that MDTX develops any Invention which the Company has not agreed to incorporate into a Scope Product, the Company shall have the option to license the use and application of such Invention for any purpose, on a non-exclusive, perpetual, irrevocable and transferable basis, in exchange for a royalty based on a percentage of the annual net sales of products incorporating valid claims in patents or patent applications granted or filed, as the case may be, with respect to such Invention, ranging from 2% to 4%, as determined by an independent arbitrator mutually selected by the parties, who shall base his or her decision on factors typically taken into account in determining reasonable royalties.  The Company’s obligation to pay royalties hereunder with respect to a product incorporating an Invention shall continue until the expiration of the patent applicable to such Invention.  In no event shall royalties be payable hereunder with respect to Ideas that are not Inventions (i.e., based on valid claims in unexpired patents or patent applications filed by or on behalf of MDTX or its Affiliates).

(i)Not commence or initiate, or cause to be commenced or initiated, any engineering, research, development or other technical activities on any of the Scope Products or, except as set forth in the License Agreement, otherwise utilize the Company’s intellectual property without the prior written consent of the Company.

(j)Consistent with established industry standards and applicable laws, not pay or make any gift of value, directly or indirectly, to any officer, employee or agent of a political party, government or administrative or governmental agency or to any candidate for public office, for the purpose of obtaining or retaining business related to the Scope Products.

3.2           MDTX will comply, and will cause each agent appointed by it to comply, in all material respects with all applicable federal, state and local laws, rules, regulations and orders of all governmental authorities affecting the sale and distribution of the Products, as they are presently in effect and as they may be revised or supplemented from time to time.

3.3           MDTX will, and will cause each agent appointed by it to, adhere to good and sound business practices and carry out its duties under this Agreement according to the highest standards of professional business conduct.

6

3.4           Any and all marketing, promotional, sales and administrative costs, including any costs associated with attendance at or participation in trade shows, congresses or similar conferences, shall be borne by MDTX at its own expense.

3.5           If MDTX shall fail to perform its obligations pursuant to Section 3.1(a) above and does not cure any such failure within thirty (30) days after receiving written notice from the Company, then, as the sole and exclusive remedy of the Company pursuant to this Agreement or otherwise, the Company shall have the right and option, in its sole discretion, upon written notice to MDTX, to (x) terminate the exclusivity of this Agreement in the Designated Area or other area in the Territory with respect to which MDTX failed to perform its obligations or (y) terminate this Agreement with respect to such Designated Area or other such area within the Territory.

3.6           For the avoidance of doubt, it is hereby clarified that in the event that MDTX’s exclusivity rights pursuant to this Agreement are terminated pursuant to Section 3.5 or Section 5.1 hereunder, with respect to the Territory or any area of the Territory, the restrictions on MDTX that are set forth in Section 3.1(c) shall no longer apply and MDTX may distribute, market, sell or promote in any area of the Territory with respect to which MDTX’s exclusivity or this Agreement was terminated, products that are directly competitive with the Scope Products.

4.             THE COMPANY’S COVENANTS AND DUTIES

4.1The Company agrees to:

(a)Inventory and ship Products upon order and request of MDTX, in accordance with Section 5.

(b)Label Products in accordance with this Agreement.

(c)Comply in all material respects with all applicable federal, state and local laws, rules, regulations and orders of all governmental authorities affecting the manufacture, labeling, inspection and sale of the Products, as they are presently in effect and as they may be revised and/or supplemented from time to time.  The Company shall provide MDTX all translations for the labels and instructions for use for Scope Products it currently has in its possession.

(d)Staff and maintain a service and repair facility for the purpose of repairing and/or replacing Scope Products that are within or outside of their warranty period.  When MDTX receives Scope Products on return from customers, MDTX shall advise the Company of Scope Products requiring repair or replacement and shall forward such Scope Products to the Company’s designated facility, but only after obtaining from the Company a return authorization approval pursuant to customary return procedures established from time to time by the Company.  The Company shall inspect the Scope Products and make necessary repairs or replacement, as appropriate, at its facilities and return the repaired or replacement Scope Product to MDTX within thirty (30) business days of receipt of repair authorization from MDTX.  For Scope Products repaired and/or replaced that are within their warranty scope and period, the Company shall bear all costs and expenses relating to servicing such

7

Scope Products (including, without limitation, shipping and handling costs from MDTX to Company and back to MDTX).  For Scope Products repaired that are outside their warranty scope or period, the Company shall charge MDTX its standard time and materials rate, plus shipping and handling.   Notwithstanding anything to the contrary herein, upon MDTX’s reasonable request, the Company, at no charge to MDTX, shall engage and train up to three (3) third parties at the Company’s production facilities or other location to be determined by the Company at its sole discretion, to perform repair services in areas outside the United States, in which case the Company agrees to sell spare parts to such third parties as may be needed for such third parties to perform repair services.

(e)Subject to clause (d) of this Section, incorporate any modifications and improvements that the Company makes to any of its products into the Scope Products if so desired by MDTX and make the changed Scope Products immediately available to MDTX.  If MDTX requests that the Company make modifications or improvements to the Scope Products, such changes shall be made only if mutually agreed to by the Company and MDTX (including, without limitation, concerning price).

(f)Provide training to MDTX’s product managers and sales representatives on an as-needed and reasonable basis to enable MDTX to promote the sale of the Scope Products.  Such training will be conducted at MDTX’s facilities or other facilities designated by MDTX, and will be provided without charge to MDTX, except for the reimbursement of reasonable out-of-pocket expenses of the Company.  In addition, the Company will provide to MDTX Product updates and service bulletins as they become available.

(g)Consistent with established industry standards and applicable laws, not pay or make gift of value, directly or indirectly, to any officer, employee or agent of a political party, government or administrative or governmental agency or to any candidate for public office, for the purpose of obtaining or retaining business related to the Products.

4.2           The Company shall provide MDTX with all technical and clinical information related to and necessary for the sale of the Scope Products that the Company has in its possession without any requirement of the Company to produce or requisition any formal studies, data or information.  The Company shall be entitled to withhold any information that the Company determines, in its sole discretion, constitutes trade secrets of the Company.

4.3           The Company reserves the right to change a Scope Product or its specifications without payment of compensation to MDTX, so long as such changes do not affect the efficacy, safety, form, fit or function of the Scope Product or require regulatory approval or amendment.  If such changes do affect the efficacy, safety, form, fit or function of a particular Scope Product, or require regulatory approval or amendment, the Company shall not be entitled to make such change without the prior written consent of MDTX, which consent shall not be unreasonably withheld.  The Company shall provide MDTX with ninety (90) days’ advance notice of any changes of Scope Products to the extent possible.

4.4           The Company will adhere to good and sound business practices and will carry out its duties under this Agreement according to the highest standards of professional business conduct.

8

5.             ORDERING, SUPPLY, PRICE AND PAYMENT

5.1           Minimum Purchase Commitments.  If MDTX fails to purchase, during each 12-month period set forth on Annex F (each such period, a “Quota Period”), the number of Scope Products as set forth on Annex F for such Quota Period and such failure has not been cured within thirty (30) days after the Company has furnished to MDTX a written notice of such failure, then the Company shall have the right and option, in its sole discretion, and as its sole and exclusive remedy, to (x) terminate the exclusivity of this Agreement upon written notice to MDTX or (y) terminate this Agreement upon written notice to MDTX.

5.2           Forecasts/Purchases.  MDTX shall provide to the Company, on a monthly basis, a rolling twelve-month forecast of Products it expects to purchase.  The current month plus the following three (3) months-forecast will represent firm order quantities for Scopes and the current month plus the following one (1) month-forecast will represent firm order quantities for Sheath Products and Scope Accessories and Replacement Components.  MDTX shall also provide to the Company a Min-Max spreadsheet substantially in the form attached to this Agreement as Annex G (the “Min-Max”).  For each Product, the Min-Max will show a target range of inventory levels (i.e., minimum-maximum) of finished goods that the Company shall maintain in stock at its facility to meet the firm order quantities noted above.  The minimum inventory level shall be set to approximately one month of forecasted demand and adjusted on a quarterly basis, and the maximum quantity shall be set to the sum of the unshipped portion of Products out of the forecasted demand for the current month plus (i) with respect to Scopes, the subsequent three (3) months of forecasted demand and (ii) with respect to Sheath Products and Scope Accessories and Replacement Components, the subsequent one (1) month of forecasted demand.  The Min-Max will also show a target stocking level that MDTX will retain in inventory at its Jacksonville, Florida facility at a level of approximately one month of forecasted demand.  MDTX will deliver to the Company, on a semi-monthly basis, a completed Min-Max indicating the type and quantity of Products needed for shipment by the Company to MDTX, and the Company shall ship such Products to MDTX within five (5) business days from receipt of the applicable Min-Max.  The Company shall maintain inventory levels adequate to meet its obligations under this Agreement and the requirements of the Min-Max.  MDTX’s minimum purchase commitments hereunder shall be tolled for any period during which the Company is unable to ship Products in accordance with its obligations under this Agreement and any Quota Period in respect of which such minimum purchase commitments shall apply shall be extended by the amount of time during which the minimum purchase periods have been so tolled.

5.3           Upon shipment, the Company shall promptly invoice MDTX in U.S. Dollars.  Payment for Products shall be in U.S. Dollars and is due net thirty (30) days from shipment of the Product by the Company; provided that MDTX shall be entitled to a one percent (1%) discount on any amounts paid and received by the Company within ten (10) days of invoice.  Late payments will be assigned a monthly service fee equal to 1% of the amount due.  Persistent failure to pay invoices when due shall constitute a material breach of this Agreement.   MDTX shall pay all invoices in full according to the stated terms.  The Company will issue credits for any rejected Product pursuant to Section 5.7 below that MDTX may use to reduce payment of future invoices.

9

5.4           Prices for the Scope Products ordered by MDTX from Company shall be as set forth in Annex A to this Agreement.  Prices for Sheath Products ordered by MDTX from the Company shall be as set forth in Annex B to this Agreement.

5.5           All prices and charges for Products are FOB designated Company facility.  Title to Products delivered hereunder and all risks of loss or damage thereto shall pass to MDTX upon shipment from the Company’s facility.

5.6           The Company shall package Products in accordance with good commercial practices and mutually agreed specifications, and in a manner sufficient to withstand the rigors of transportation.

5.7           MDTX shall have the right, within fifteen (15) days from receipt, to reject any Product that does not meet the Company’s published specifications or any applicable laws or regulations or that is otherwise defective.  Any such rejection shall be accomplished by a notice from MDTX identifying and specifying, in reasonable detail, the Product rejected and the reasons for rejection.  Any Product rejected by MDTX shall be made available, on reasonable notice and during normal business hours, for inspection by the Company or its representatives in a manner consistent with the Company’s return authorization procedures established from time to time and as previously communicated to MDTX.  The Company will replace any rightfully rejected Product free of charge and will indemnify MDTX for reasonable out-of-pocket expenses (including freight and customs clearance, if any) incurred by MDTX in connection with (a) shipment of replacement Product to the same location and (b) shipment of the nonconforming Product back to the Company (if so requested by the Company and then pursuant to the Company’s return authorization approval procedures).  In the event of a rejection of defective Product, the Company shall ship replacement Product within seven (7) days of its receipt of the rejected Product from MDTX, or such longer period of time as may be reasonable under the circumstances.

6.             WARRANTIES; INDEMNITY

6.1           The Company hereby represents and warrants to, and covenants with, MDTX as follows:

(a)           Ownership.  Except for rights held by MDTX pursuant to the License Agreement, the Company is the sole and rightful owner of all right, title and interest in and to the Products or otherwise has the unrestricted right to grant to MDTX the rights granted in this Agreement without violating any rights of any third party.  There are no actual or threatened claims against any of the Products and no demands of any person or entity pertaining to any of the Products.  No proceedings have been threatened, instituted or are pending that challenge the rights of the Company in the Products.  The Company has not been charged with infringement or violation of any Intellectual Property right of any person or entity, and, to the Company’s knowledge, is not infringing any Intellectual Property right of any person or entity in connection with the manufacture, use, sale or other disposition of any of the Products.

(b)           Product Warranty.  The Products have been and shall be designed, manufactured, labeled, packaged and sold to MDTX in a manner consistent with good commercial practice, and the regulations and guidelines of the U.S. Food and Drug Administration for such medical devices, free from defects in material and workmanship, and shall conform to all applicable laws and regulations in the Territory relating to medical devices and to the Product’s published specifications and all other applicable manufacturing requirements.  The Company further represents and warrants to MDTX that the

10

Company’s manufacturing and quality system is in compliance with the Quality System Regulations promulgated by the U.S. Food and Drug Administration (or any successor requirements) and has been certified to be in compliance with the standards set forth in (i) ISO 13485:2003 or later; (ii) for E.U. countries, the appropriate European Medical Device Directive 93/42/EEC annexes; and (iii) for Canada, CAN/CSA ISO 13485:2003 or later.  The Company shall maintain such certifications (or successor requirements) in force throughout the Term of this Agreement, at its sole cost.  The Company shall promptly inform MDTX when the Company has identified a quality issue that affects the safety or efficacy of any Product or that otherwise affects the performance of any Product.  Once per year during the Initial Term (as hereafter defined) of this Agreement or any renewal thereof, the Company shall provide MDTX’s personnel reasonable access to the facilities and records of the Company for the purpose of confirming the Company’s and the Products’ compliance with all applicable laws and regulations.  The Products shall, for a period of time (as specified by the Company for its products in its relevant published specifications) from date of sale by MDTX (or its subdistributor or agent) to the customer, be free from defects in material and workmanship and remain in good working order, and function properly and in conformity with the terms of this Agreement and with published specifications and documentation.  The Company shall inform MDTX in writing of the warranty periods applicable to all of its products.  The Company shall, at the request of MDTX, its customer or end-user, promptly repair or replace at its sole cost and expense any Product found to be defective (in accordance with the above) within the applicable warranty period.  MDTX may pass such Company warranty to its customers and to end-users.

(c)           Disclaimer.  THE COMPANY MAKES NO REPRESENTATION OR WARRANTY WITH REGARD TO ANY PRODUCT OR OTHER ITEM FURNISHED UNDER THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT.  EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, THE COMPANY DISCLAIMS AND MDTX WAIVES AND RELEASES ALL RIGHTS AND REMEDIES OF MDTX AND ALL WARRANTIES AND OBLIGATIONS OF THE COMPANY, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY PRODUCTS OR OTHER ITEMS DELIVERED BY OR ON BEHALF OF THE COMPANY PURSUANT TO THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OR DEALING OR USAGE OF TRADE, AND ANY IMPLIED WARRANTY OF NONINFRINGEMENT.

(d)           No Royalties.  No royalties or other amounts will be payable by MDTX to others as a result of this Agreement or any of the transactions contemplated hereby.

6.2           Infringement Indemnity.  The Company, at its own expense, shall defend, indemnify and hold harmless MDTX, its subsidiaries, affiliates or permitted assignees, and their respective directors, officers, employees, agents, permitted subcontractors, representatives, successors and permitted assigns, and defend any action brought against same with respect to any claim, demand, cause of action, debt or liability, including attorneys’ fees, based upon a claim that any Scope Product infringes or violates any Intellectual Property right of any third party (an “Infringement Claim”).  MDTX may, at its own expense, assist in such defense if it so chooses, provided that, as long as the Company can demonstrate sufficient financial resources, the Company shall control such defense and all negotiations relative to the settlement of any such claim.  MDTX shall promptly provide the Company with written notice of any claim which MDTX believes falls within the scope of this Section 6.2.  In the event that the Scope Product, or any

11

portion thereof, is held to infringe and its use is enjoined, the Company shall have the obligation to, at its option and expense, (i) modify the infringing Scope Product without impairing in any material respect the functionality or performance, so that it is non-infringing, (ii) procure for MDTX the right to continue to distribute, sell, advertise, promote, market and otherwise commercialize the infringing Scope Product, or (iii) replace said Scope Product with equally suitable, non-infringing product.  If none of the foregoing alternatives are available to the Company, the Company shall repurchase from MDTX at the price charged to MDTX by the Company, all Scope Products that are in good and saleable condition and are in unopened, undamaged packages.  Except as set forth above, the Company shall have no further liability to MDTX with respect to any Infringement Claim.

7.             RELATIONSHIP

The relationship between the Company and MDTX is that of independent contractors.  Nothing contained in this Agreement shall be construed to imply a joint venture, partnership, or principal-agent relationship between the parties; and neither party by virtue of this Agreement shall have any right, power or authority, express or implied, to act on behalf of or enter into any undertaking binding the other party, and the Company and MDTX shall each refrain from making any representations to the contrary.  Except as otherwise set forth herein, all costs of each party’s operations, including but not limited to salaries, wages, taxes (corporate, service, employment, franchise, etc.) and employee benefits of each party and its employees shall be paid solely by such party, and the other party hereto shall have no liability or responsibility therefor.

8.             TERM AND RENEWAL

This Agreement shall apply only to Sheath Products purchased by MDTX on or prior to the Sheath Distribution Termination Date.  With respect to Scope Products, subject to earlier termination as provided in Section 9 of this Agreement, the term of this Agreement shall commence on the date hereof and continue in full force and effect until December 31, 2008 (the “Initial Term”).  Thereafter, this Agreement will automatically be renewed for successive one (1) year periods unless either party notifies the other party in writing at least ninety (90) days prior to the end of the Initial Term or any renewal thereof that it does not wish to extend this Agreement.  The Initial Term and any renewal thereof, if any, are collectively referred to as the “Term.”

9.             TERMINATION

9.1           Each party shall have the right to terminate this Agreement if the other party is in material breach of any term or condition herein.  A party that materially breaches this Agreement shall be given written notice of such breach by the other party and shall have the opportunity to take remedial action within a period of sixty (60) days or other longer period defined in such notice.  If the breaching party fails to remedy the breach within such sixty (60) day or other longer defined period, the other party shall have the right to immediately terminate this Agreement.

9.2           If either party becomes insolvent or files, or has filed against it, any petition under any bankruptcy or insolvency law or similar law which is not dismissed or stayed within sixty (60) days, is adjudged bankrupt or insolvent or the like, makes or attempts to make an assignment for the benefit of creditors or the like, or a trustee in bankruptcy or a receiver is appointed for either party, the other party shall have the right to immediately terminate this Agreement.

12

9.3           Any expiration or termination of this Agreement shall not alter the rights, duties and obligations of the parties for any purchase orders placed by MDTX, or amounts due, prior to the date of such expiration or termination, nor shall it affect the rights of end-users of the Products.

9.4           Upon termination or expiration of this Agreement, MDTX shall have the right to sell its existing, saleable inventory of Products in the market, and MDTX shall negotiate in good faith with the Company regarding the purchase of finished goods Products held in inventory by the Company pursuant to the terms specified in Section 5.2 ..  MDTX shall retain the rights under this Agreement necessary for it to sell its remaining inventory of Products, and the Company shall provide the necessary materials and support to assist MDTX in doing so, for a period of six (6) months following any such termination or expiration of this Agreement and unless and until the Company shall elect, in its sole discretion, to repurchase such remaining inventory at MDTX’s cost.

9.5           If any of the Scope Products sold by MDTX is recalled from the market or withdrawn from sale within the Territory for reasons of product safety or quality as determined by any applicable governmental authority or by mutual agreement of the parties, any minimum purchase commitment or Quota with respect to such Scope Product shall be suspended until 90 days after the date on which the Product has been re-introduced into the market.

9.6           This Agreement shall terminate automatically in the event that the Purchase Agreement terminates prior to the Closing (as defined in the Purchase Agreement).  Notwithstanding anything to the contrary herein, in the event this Agreement terminates pursuant to this Section 9.6, the terms of the Prior Agreement shall be revived effective simultaneously with the termination of this Agreement and shall continue in full force and effect as if never amended pursuant to the terms of this Agreement.

10.           PRODUCT LABELING, REGISTRATION

10.1         Product Labeling.   All Products shall be marketed to indicate that MDTX is the distributor of Products and shall prominently and conspicuously bear the name of the Company and the Company’s logo, and shall also contain such other designations of the Company, including identification of the Company as the manufacturer of the Products, and the country of manufacture, where applicable, as may be necessary to comply with Title III of the Medical Device User Fee and Modernization Act of 2002 (P.L.107-250).  MDTX shall sell the Products in the same condition as they are delivered to it and shall not alter, deface, remove, cover up or mutilate in any manner whatsoever any trademark, serial or model number, the words “patent pending” and/or “patent” and/or the patent number, copyright symbol and any other reference to the Intellectual Property rights of the Company which the Company may attach or fix to or make part of the Products.  So long as the requirements of this Section 10.1 are otherwise complied with, and subject to MDTX’s obligations under Section 12.2 hereof, MDTX shall be entitled to affix to Products such additional labels as it shall deem reasonably necessary to identify MDTX as the distributor of the Products, provided, that, the Company shall have approved in writing in advance of such labeling, such approval not to be unreasonably withheld.

13

10.2         Product Registration.  The Company, at its cost, shall obtain and maintain all necessary registrations, licenses and permits for the Scope Products with health and other competent authorities that may from time to time be required by law, regulation or otherwise in the US and shall obtain in its own name and maintain at its sole expense the CE Mark for Scope Products.  The Company shall appoint an affiliate of MDTX (as designated by MDTX) within the European Union to serve as the EC Representative of Scope Products for as long as MDTX is the exclusive distributor of the Scope Products in all the Designated Areas within the European Union, and MDTX shall bear all costs and expenses in connection with such representation.  MDTX, at its cost, shall obtain and maintain all necessary registrations, licenses and permits for the Scope Products with health and other competent authorities that may from time to time be required by law, regulation or otherwise throughout the countries and regions of the Territory in which MDTX is promoting, advertising and selling the Scope Product, outside the US, within a six-month time period.  Any such registrations, licenses or permits shall be in the name of the Company unless prohibited by law, in which case they shall be held in trust by MDTX acting as in-country caretaker for the Company, and shall be subject to transfer, cancellation, modification or supplement for Scope Product changes at the Company’s direction.  The Company shall provide, free of charge, data and investigation reports and all other documentation as it possesses to the extent that they are required by local law and will cooperate with MDTX, as reasonably requested by MDTX, in obtaining the registration throughout the Territory.  The Company shall also obtain the appropriate approval of all governmental control agencies as required in the US and MDTX shall obtain the appropriate approval of all governmental control agencies as required throughout the Territory for any purchases and sales contemplated by this Agreement where MDTX is selling Scope Products, and specifically, MDTX shall obtain all necessary approvals for the importing, storing and selling of Scope Products subject to sterile conditions. 

11.           RECALLS; COMPLAINTS

11.1         MDTX shall provide the Company from time to time upon the reasonable written request of the Company, a list of MDTX customers, including customer contact information and the lot numbers and models of Products purchased by such customers, for the purpose of being able to track Products in the event of a Product recall otherwise to ensure that the Company is able to comply with any statutory or other obligation in respect of Products sold hereunder.  In the event of a recall, MDTX must provide the above-mentioned information within two business days of being advised in writing of such recall by the Company.  In this regard, MDTX agrees to advise the Company within forty-eight (48) hours of each complaint that responsible employees of MDTX (those employees or agents that are usually and customarily required to receive and report on customer complaints or adverse events involving the Products) may receive or become aware of concerning the Products, including any complaint that any of the Products may have been associated in any way with an injury or death to a user or patient or may have been associated with an incident that could likely cause serious health problems or death.  MDTX agrees to work with and cooperate with the Company to resolve complaints.  In the event of a Product recall, the Company shall promptly reimburse MDTX for all reasonable costs and expenses incurred by MDTX in connection with any such recall.  Each of the Company and MDTX shall notify the other of any potentially reportable product incident of which either the Company or MDTX becomes aware and MDTX shall, in its sole discretion, determine to report such incident to the appropriate governmental agencies within the Territory or to take a field action or commence a recall as a result of such incident.

14

11.2         MDTX shall handle all customers’ complaints it receives with a view of securing and maintaining the goodwill of the Company and of the Products, and shall record all complaints it receives in detail and promptly submit the same to the Company for its review, as set forth above.  Company (a) shall notify MDTX of any complaints it receives related to Products in the Territory; and (b) shall be responsible for investigation of the reports and submission of U.S. Medical Device Reports (21 CFR Part 803), and/or other governmental agency reports as required by applicable law or regulation within the Territory.

12.           INTELLECTUAL PROPERTY

12.1         The Company shall have and shall retain at all times all rights in and to its Intellectual Property relating to the Scope Products.

12.2         The Company and MDTX acknowledge and agree that MDTX will market and sell the Scope Products under the Company’s and MDTX’s trademarks, as mutually agreed by the parties; provided that in connection with any promotional or other Scope Product related materials or events, MDTX shall use reasonable efforts to prominently depict or display the Company’s name, logo and Scope Product related trademarks or service marks, and indicate that the Scope Products have been manufactured by the Company using the Company’s proprietary technologies and all packaging and physical embodiments of the Scope Product shall display the Company’s mark.  Any use of any trademarks or service marks that are owned by the Company in any such promotional materials shall be accompanied by an appropriate legend indicating that such trademarks and service marks are the property of the Company.

13.           REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY

The Company hereby represents, warrants and covenants to MDTX that:

13.1         The Company and its employees have all necessary rights, authorizations or licenses to perform their obligations hereunder and to provide all related materials and services required under this Agreement.

13.2         Each Product shall be manufactured and/or developed in a manner consistent with good commercial practice and regulations and guidelines of the U.S. Food and Drug Administration for such medical devices, free from defects in material and workmanship, and shall conform to all applicable laws and regulations relating to medical devices and to the Product’s published specifications.

13.3         The Company does not have any obligations or liabilities that might reasonably be expected to have a material adverse effect on its ability to perform its obligations hereunder.

13.4         There are no actions, suits, or proceedings instituted or pending or, to the best knowledge of the Company’s management, threatened against the Company that might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations hereunder.

15

13.5         The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is duly qualified to do business in all jurisdictions where it does business, and has all requisite corporate power and authority to execute, deliver and perform the terms of this Agreement.

13.6         The execution, delivery and performance of the obligations of this Agreement have been validly authorized by all necessary corporate action of the Company, and this Agreement represents the Company’s valid and legally binding obligation.

13.7         The execution, delivery and performance of the obligations of this Agreement by the Company in accordance with the terms of this Agreement do not and will not conflict with or otherwise violate the terms of any other agreement to which the Company is a party.

14.           REPRESENTATIONS, WARRANTIES AND COVENANTS OF MDTX

MDTX hereby represents, warrants and covenants to Company that:

14.1         MDTX and its employees have all necessary rights, authorizations or licenses to perform their obligations hereunder and to provide all related materials and services required under this Agreement.

14.2         MDTX does not have any obligations or liabilities that might reasonably be expected to have a material adverse effect on its ability to perform its obligations hereunder.

14.3         There are no actions, suits, or proceedings instituted or pending or, to the best knowledge of MDTX’s management, threatened against MDTX that might reasonably be expected to have a material adverse effect on the ability of MDTX to perform its obligations hereunder.

14.4         MDTX is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and in all jurisdictions where it does business, and has all requisite corporate power and authority to execute, deliver and perform the terms of this Agreement.

14.5         The execution, delivery and performance of the obligations of this Agreement have been validly authorized by all necessary corporate action on the part of MDTX, and this Agreement represents MDTX’s valid and legally binding obligation.

15.           LIMITATION OF LIABILITY

IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR FOR LOST PROFITS, SAVINGS, USE, OPPORTUNITY OR REVENUES OF ANY KIND, OR ANY OTHER COMMERCIAL DAMAGE, WHETHER OR NOT THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OCCURRING, AND WHETHER SUCH DAMAGES ARISE FROM CONTRACT, NEGLIGENCE, TORT OR OTHERWISE.  TO THE EXTENT THAT A PARTY HERETO IS HELD LIABLE TO ANY THIRD PARTY FOR ANY SUCH PUNITIVE OR CONSEQUENTIAL DAMAGES AS A RESULT OF ANY ACT OR OMISSION OF THE OTHER PARTY HERETO SUBJECT TO THE INDEMNIFICATION PROVISIONS OF SECTIONS 6.2 AND

16

16, SUCH DAMAGES SHALL NOT SOLELY BY VIRTUE OF THIS SECTION 15 BE EXCLUDED OR DISCLAIMED.

16.           INDEMNIFICATION

16.1         MDTX shall indemnify and defend the Company, its affiliates, and their respective directors, officers, representatives, employees, agents, subcontractors, successors and assigns, against and hold them harmless from any liability, damage, cost or expense resulting from any claim made by any third party (including, without limitation, any claim alleging personal injury or property damage) attributable to any breach of this Agreement by MDTX or to any intentional or negligent act or omission of MDTX, its employees, agents, or subcontractors in the performance of this Agreement, except to the extent that a claim is caused by the negligence or willful misconduct of the Company, its employees, agents, or subcontractors.

16.2         The Company shall indemnify and defend MDTX, its affiliates, and their respective directors, officers, employees, agents, subcontractors, successors and assigns, against and hold them harmless from any liability, damage, cost or expense resulting from:

(a)any claim made by any third party (including any claim alleging personal injury or property damage) attributable to any breach of this Agreement by Company or to any intentional or negligent act or omission of Company, its employees, agents, or subcontractors in the performance of this Agreement, except to the extent that a claim is caused by the negligence or willful misconduct of MDTX, its employees, agents, or subcontractors;

(b)any third party claim for bodily injury, including death, or property damage caused by defects in design or manufacture of the Products, except to the extent a claim is caused by the negligence or willful misconduct of MDTX in its sale, distribution or handling of the such Products; provided however, that with respect to Sheath Products, this provision shall apply only to Sheath Products purchased pursuant to the Prior Agreement.

(c)any third party claim for bodily injury, including death, or property damage caused by defects in manufacture of the Sheath Products, except to the extent a claim is caused by the negligence or willful misconduct of MDTX in its sale, distribution or handling of the Sheath Products; and

(d)any Product recalls or replacements by any competent government authority or other agency deemed appropriate by mutual agreement of the Company and MDTX, except to the extent such recall or replacement is caused by the negligence or willful misconduct of MDTX in its sale, distribution or handling of the Products; provided, however, that with respect to Sheath Products purchased after the date of this Agreement, this provision shall apply only to the extent that such recall or replacement is initiated as a result of a manufacturing defect.

16.3         In the event of any claim subject to the indemnification provisions of this Section 16, the party seeking indemnification shall promptly notify the other party in writing, and permit that party upon its request, to control the defense and/or settlement of the relevant claim.  Each party shall make a

17

reasonable effort to cooperate in such settlement and/or defense and neither party shall settle any claim for which it is obligated under this Section 16 without the prior written approval of the other party.

17.           CONFIDENTIALITY AND NON-DISCLOSURE

17.1         Both parties acknowledge and agree that this Agreement creates a privileged and confidential relationship between MDTX and Company and that information concerning both parties’ business affairs, customers, vendors, finances, properties, methods of operations, computer programs and documentation, diagrams, verbal and written disclosures, drawings, samples, technical descriptions, specific configurations, dimensions, materials, concepts, developments, techniques, know-how, inventions, and other such materials and  information, whether written or oral, is confidential in nature.  All such information is hereinafter collectively referred to as “Confidential Information.”  Neither party will use, directly or indirectly, for its own benefit or the benefit of others, both during the term of this Agreement and subsequent to its termination, any Confidential Information of the other party which may be acquired or developed in connection with or as a result of the performance of this Agreement without the prior written consent of the other party.

17.2         Both parties agree, except as directed by the other party or provided in this Section 17.2, not to disclose any Confidential Information of the other party to any person whatsoever at any time during or after the term of this Agreement.  Upon termination of this Agreement and at a party’s written request, each party will turn over to the other party all documents, papers and other materials in its possession or control (except for one copy that may be retained solely for archival purposes) that relate to the other party or the Intellectual Property of the other party.  Both parties further agree to bind its employees and subcontractors to the terms and conditions of this Agreement.  Each party acknowledges that disclosure of any Confidential Information of the other party by it may give rise to irreparable injury to the other party, its subsidiaries and/or affiliated companies or the owner of such information, inadequately compensable in damages.  Accordingly, the disclosing party may seek and obtain injunctive relief against the breach or threatened breach of the foregoing undertakings, in addition to any other legal remedies that may be available.  Each party acknowledges and agrees that the covenants contained herein are necessary for the protection of legitimate business interests of the other party, its subsidiaries and/or affiliated companies and are reasonable in scope and content.

17.3         Each party’s obligation of non-disclosure and non-use shall not apply to information (i) which at the time of its disclosure to the receiving party is available to the public, (ii) which the receiving party can show was properly in its possession prior to disclosure, (iii) that is published or otherwise becomes available to the public through no fault of the receiving party, (iv) that the receiving party can show was received by it from a third party without breach of a confidentiality obligation, (v) is independently developed by the receiving party without use of any Confidential Information of the other party, or (vi) is required to be disclosed by any governmental agency, provided that the disclosing party shall give the other party reasonable notice of such requirement and shall afford the other party the opportunity to prevent such disclosure.

18.           NOTICES

Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered by (a) personal delivery, (b) expedited delivery service, (c) facsimile transmission or

18

(d) certified or registered mail, postage prepaid, addressed as follows:

If to MDTX:

Medtronic Xomed, Inc.
6743 Southpoint Road North
Jacksonville, Florida 32216
Attn:       Mark J. Fletcher, President ENT Division
Tel:   (904) 279-7511
Fax:  (904) 281-2779
and
Jaime A. Frias, Esq., Vice President, Senior Legal Counsel
Tel:   (904) 332-2451
Fax:  (904) 332-8914

If to the Company:

Vision-Sciences, Inc.
9 Strathmore Road
Natick, Massachusetts 01760
Attn:  Ron Hadani, President & CEO
Tel:   (845) 365-0600 (ext.116)
Fax:  (845) 365-0620

With a copy to (which shall not constitute notice):

Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn:  Paul I. Rachlin, Esq.
Tel:  (212) 969-3640
Fax  (212) 969-2900

Any party may, by notice given in accordance with this Section 18 to the other party, designate another address or person for receipt of notices.

19.           GENERAL PROVISIONS

19.1         This Agreement shall be governed in all respects by the laws of the State of Delaware, without regard to any rules of conflict and choice of laws that would require the application of laws of another jurisdiction.

19.2         This Agreement shall be binding on the parties and their respective successors and assigns.  This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all previous proposals, negotiations, representations or commitments between the parties, both written and oral.  The terms of this Agreement shall prevail in the event that there is a

19

conflict or variance with the terms and conditions of any purchase order form or other document submitted by MDTX or with any invoice or other document submitted by the Company.

19.3         All rights and remedies conferred under this Agreement or by any other instrument or law shall be cumulative and may be exercised singularly or concurrently.

19.4         The failure by either party to enforce any term or condition of this Agreement, the written waiver of any term or condition of this Agreement or the acceptance of any payment shall not be a waiver of further enforcement of that or any other term or condition.

19.5         The captions used herein are for convenience only and shall not be considered in construing or interpreting the provisions hereof.

19.6         If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

19.7         Notwithstanding the termination or expiration of this Agreement, it is acknowledged and agreed that the following provisions shall survive any such termination in addition to such other provisions of this Agreement which by their terms are intended to survive the termination of this Agreement or otherwise apply to the interpretation or meaning of any provisions of this Agreement that survive the termination of this Agreement:  Sections 6.2, 9.3, 9.4, 11.1, 11.2, 12.1, 12.2, 15, 16.1, 16.2, 16.3, 17.1, 17.2, 17.3, 18 and 19.1.

19.8         This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all such counterparts together shall constitute but one and the same instrument.

19.9         This Agreement shall not be valid until signed and accepted by authorized representatives for each party, and no party shall be bound by any change, alteration, amendment modification, termination or attempted waiver of any of the provisions hereof unless in writing and signed by an authorized officer of the party against whom it is sought to be enforced.

19.10       Without derogating from anything contained in Section 2.3 hereof, neither this Agreement nor any rights granted hereby may be assigned by either party without the other party’s prior written consent, such consent not to be unreasonably withheld.  Any attempted assignment in violation of the proceeding sentence shall be null and void.  Notwithstanding the foregoing, consent shall not be required for an assignment of this Agreement resulting from (i) a merger, reorganization, reincorporation or other acquisition of a party or (ii) the sale of all or substantially all of the ENT business or endoscope business of the Company.  This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto.  In the event that this Agreement is assigned by the Company to a direct competitor of MDTX as a result of the sale of all or substantially all of the Company’s ENT endoscope business to such competitor of MDTX, MDTX shall have the right to terminate this Agreement upon written notice to the Company.

20

19.11       Neither party shall be liable for any delay or failure to perform in whole or in part, resulting from causes beyond such party’s reasonable control, including, but not limited to, fires, war, terrorism, strikes, insurrections, riots, embargoes, delays in transportation, inability to obtain supplies of raw materials, or requirements or regulations of any governmental and/or semi-governmental authority.  If such delay or failure extends beyond thirty (30) days, the party not affected by the delay shall have the right to terminate this Agreement upon written notice.

19.12       Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any person other than the parties to this Agreement and their respective successors and permitted assigns.

19.13       Except as set forth in the Asset Purchase Agreement, neither party shall make any public announcement or statement regarding the relationship of the parties hereunder.

[END OF TEXT]

21

IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date above written.

MEDTRONIC XOMED, INC.	VISION-SCIENCES, INC.
By:	By:
Name:	Name:	Ron Hadani
Title:	Title:	President & CEO
Date:	Date:

EX-10.33

Exhibit 10.33

LICENSE AGREEMENT

THIS LICENSE AGREEMENT (this “Agreement”) is made and entered into as of March 26, 2007 (the “Effective Date”), by and among Medtronic Xomed, Inc., a Delaware corporation (“Medtronic”), and Vision-Sciences, Inc., a Delaware corporation (“Vision-Sciences”).

WITNESSETH:

WHEREAS, Medtronic and Vision-Sciences have entered into an Asset Purchase Agreement, dated as of January 16, 2007 (the “Asset Purchase Agreement”) pursuant to which Vision-Sciences is selling to Medtronic certain assets;

WHEREAS, Medtronic and Vision-Sciences have entered into an Amended Distribution Agreement (as defined in the Asset Purchase Agreement) pursuant to which Vision-Sciences is supplying Medtronic endoscopes for use in the Field of Use in connection with EndoSheath Products;

WHEREAS, as part of the transaction between the parties relating to the Asset Purchase Agreement and Amended Distribution Agreement, Vision-Sciences will exclusively license to Medtronic rights to certain intellectual property in accordance with the terms of this Agreement; and

WHEREAS, the execution and delivery of this Agreement is a condition precedent to the consummation of the Asset Purchase Agreement and the Amended Distribution Agreement.

NOW, THEREFORE, in consideration of the respective representations, warranties, covenants and agreements contained herein, and subject to the terms and conditions set forth herein, the parties hereto agree as follows:

ARTICLE 1
DEFINITIONS

1.1)          Specific Definitions.  As used in this Agreement, the following terms shall have the meanings set forth or referenced below:

“Affiliate” of a specified person (natural or juridical) means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. For purpose of this definition, “control” shall mean ownership of more than fifty percent (50%) of the shares of stock entitled to vote for the election of directors in the case of a corporation, and more than fifty percent (50%) of the voting power in the case of a business entity other than a corporation.

“Agreement” means this Agreement and all Exhibits hereto.

“Amended Distribution Agreement” has the meaning set forth in the Asset Purchase Agreement.

“Asset Purchase Agreement” has the meaning set forth in the Recitals.

“Asset Sale” has the meaning set forth in Section 7.8.

“Competitor” has the meaning set forth in Section 7.8.

“Confidential Information” means information disclosed by or on behalf of one of the parties (the “disclosing party”) to the other party (the “receiving party”), generated under this Agreement, or otherwise learned by the receiving party from the disclosing party, excluding information which:

(a)           was already in the possession of the receiving party prior to its original receipt from the disclosing party (provided that the receiving party is able to provide the disclosing party with written proof thereof and, if received from a third party, that such information was acquired without any party’s breach of a confidentiality or non-disclosure obligation to the disclosing party related to such information);

(b)           is or becomes part of the public domain by reason of acts not attributable to the receiving party;

(c)           is or becomes available to the receiving party from a source other than the disclosing party which source has rightfully obtained such information and has no direct or indirect obligation of non-disclosure or confidentiality to the disclosing party with respect thereto; or

(d)           has been independently developed by or for the receiving party without breach of this Agreement or use of any such information of the other party (provided that the receiving party is able to provide the disclosing party with written proof thereof).

“EndoSheath Products” means the products described on Schedule A, and any and all related sheath technology owned or controlled by Vision-Sciences which are used or can be used for the development, manufacture, and sale of products or other use in the Field of Use.

“Enforcement Action” has the meaning set forth in Section 3.2(b).

“Field of Use” means the field of otorhinolaryngology (as defined by the American Academy of Otorhinolaryngology and Head and Neck Surgery), including, without limitation, sinus endoscopy, laryngoscopy, esophagoscopy and other applications or procedures where flexible or rigid scopes are inserted into the ear, nose or throat, all of the foregoing as and to the extent it is practiced by licensed otorhinolaryngologists.

“Indemnifiable Losses” has the meaning set forth in Section 6.1.

“Indemnified Parties” has the meaning set forth in Section 6.2.

2

“Intellectual Property” means all forms of intellectual property in any jurisdiction and under any law, whether now or hereafter existing, including, without limitation: (a) inventions, discoveries, patent applications, patents (including letters patent, industrial designs, and inventor’s certificates), design registrations, invention disclosures, and applications to register industrial designs, and any and all rights to any of the foregoing anywhere in the world, including any provisionals, substitutions, extensions, supplementary patent certificates, reissues, re-exams, renewals, divisions, continuations, continuations in part, continued prosecution applications, and other similar filings or notices provided for under the laws of the United States, or of any other country; (b) trademarks and any all rights thereto anywhere in the world; (c) trade secrets and other confidential or non-public business information, including ideas, formulas, compositions, inventor’s notes, discoveries, improvements, concepts, know-how, manufacturing and production processes and techniques, testing information, research and development information, data resulting or derived from research activities, invention disclosures, unpatented blue prints, drawings, specifications designs, plans, proposals and technical data, business and marketing plans, market surveys, market know-how and customer lists and related information; (d) copyrights, whether or not registered, and any non-registered copyright to any writings and other copyrightable works of authorship, including source code, object code, documentation (whether or not released), and databases; (e) integrated circuit topographies and mask works; (f) moral rights; (g) features of shape, configuration, pattern or ornament; and (h) registrations of, and applications to register, any of the foregoing with any governmental entity and any renewals or extensions thereof and all other rights to any of the foregoing.

“Knowledge” of Vision-Sciences means, with respect to the individual officers and employees of Vision-Sciences listed on Schedule B, actual knowledge of such individuals or the knowledge any of such individuals would reasonably be expected to have, assuming reasonable inquiry of any facts or circumstances actually known to and recognized by such persons to create significant doubt concerning the accuracy of any representation, warranty, or statement without regard to such “knowledge” qualifier.

“Medtronic Indemnified Parties” has the meaning set forth in Section 6.1.

“Notice of Dispute” has the meaning set forth in Section 7.7.

“Patents” means (a) the patents and patent applications, together with any patents that may issue based thereon, set forth on Schedule C; (b) any other patents or patent applications owned by or licensed (with the right to sublicense) to Vision-Sciences which claim inventions conceived or reduced to practice within the three year period after the Effective Date that are necessary or useful for designing, developing, processing, manufacturing, using or selling EndoSheath Products in the Field of Use; (c) any patents or patent applications that could claim priority to, or from which priority could be claimed by, any of the foregoing referenced patents or patent applications, including, but not limited to, all continuation, divisional, continuation in part, re-issue, re-examination and substitution applications that may be filed by or for the benefit of Vision-Sciences based on the foregoing referenced patents or patent applications, together with any patents that may issue based thereon; and (d) all foreign applications that may be filed by or for the benefit of Vision-Sciences based on the foregoing referenced U.S. patents and patent applications, together with all patents which may issue based thereon.

3

“Product Liability” means any liability, claim or expense related to the EndoSheath Products, including but not limited to reasonable attorneys’ fees and medical expenses, arising in whole or in part out of a breach of any express or implied product warranty, strict liability in tort, negligent manufacture of product, negligent provision of services, product recall, or any other allegation of liability arising from the design, testing, manufacture, packaging, labeling (including instructions for use), marketing, distribution or sale of EndoSheath Products (whether for clinical trial purposes, commercial use or otherwise).

“Response to Dispute” has the meaning set forth in Section 7.7.

“Trademarks” means the trademark and trademark applications, together with any registrations that may issue based thereon, set forth on Schedule D.

“Vision-Sciences Indemnified Parties” has the meaning set forth in Section 6.2.

“Vision-Sciences Intellectual Property” means collectively all Intellectual Property related to EndoSheath Products that is (a) owned by, controlled by or licensed to Vision-Sciences as of the Effective Date, specifically including, without limitation, the Patents and Trademarks; and (b) owned by, acquired by, licensed to, or filed, conceived or reduced to practice by or on behalf of Vision-Sciences within the three year period after the Effective Date.

“Vision-Sciences Current Intellectual Property” means collectively all Intellectual Property related to EndoSheath Products that is owned by, controlled by or licensed to Vision-Sciences as of the Effective Date, specifically including, without limitation, the Patents and Trademarks.

1.2)          Other Terms.  Other terms may be defined elsewhere in the text of this Agreement and shall have the meaning ascribed thereto in this Agreement.

ARTICLE 2
LICENSE TO MEDTRONIC

2.1)          Grant of License.

(a)           Subject to the terms and conditions of this Agreement, Vision-Sciences hereby grants to Medtronic and its Affiliates, and Medtronic and its Affiliates hereby accept, a perpetual, irrevocable, worldwide, sublicensable (including through multiple tiers, but in no event shall the rights or obligations under Section 3.1 or 3.2 be sublicensed, assigned, transferred or otherwise delegated), paid-up, royalty-free, exclusive license (or sublicense, as the case may be) to exploit the Vision-Sciences Intellectual Property solely in the Field of Use, including the right to research, develop, make, have made, use, sell, import, have imported, offer to sell, have sold, distribute, and have distributed EndoSheath Products.

(b)           Medtronic hereby acknowledges and agrees that the Field of Use license granted to Medtronic pursuant to this Agreement does not extend to any application outside of the Field of Use, and that Vision-Sciences otherwise retains all rights in and to Intellectual

4

Property owned or licensed by Vision-Sciences (including without limitation, the Vision-Sciences Intellectual Property) not granted to Medtronic herein, including, but not limited to, the right to research, develop, make, have made, use, sell, import, have imported, offer to sell, have sold, distribute, and have distributed EndoSheath Products outside the Field of Use.  For the avoidance of doubt, as between the parties hereto, each party acknowledges and agrees that any and all Intellectual Property which is conceived, developed, reduced to practice or acquired by or on behalf of such party shall be the sole and exclusive property of such party, subject to the licenses expressly granted in this Agreement.

2.2)          Assistance.    From and after the Transition Completion Date (as defined in the Transition Agreement between the parties dated as of the Effective Date), at Medtronic’s request and expense, Vision-Sciences shall provide to Medtronic copies, or electronic files, of all writings, drawings and materials, if any, that document the Vision-Sciences Intellectual Property, including copies of any patents, patent applications and documents representing embodiments of the Vision-Sciences Intellectual Property.  In addition, at Medtronic’s request, Vision-Sciences will provide explanation and assistance to Medtronic to allow Medtronic to understand any invention covered by the Vision-Sciences Intellectual Property conceived of or reduced to practice after the Transition Completion Date.

ARTICLE 3
INTELLECTUAL PROPERTY

3.1)          Prosecution and Maintenance of Vision-Sciences Intellectual Property.

(a)           Vision-Sciences shall, at its own expense, use commercially reasonable efforts to protect the Vision-Sciences Intellectual Property by applying for and maintaining appropriate worldwide patent and trademark registrations, except as allowed otherwise below, and Vision-Sciences agrees to consult with patent counsel regarding patent prosecution matters.  Vision-Sciences and its attorneys or agents shall consult with Medtronic with respect to the preparation, filing, prosecution, foreign filing and maintenance of any Patent and shall provide Medtronic sufficient opportunity to comment, at its own expense, on any material document that Vision-Sciences intends to file or to cause to be filed with the relevant patent office.

(b)           Vision-Sciences shall advise Medtronic in the event that it intends to abandon any Patent or if it elects not to file a patent application with respect to an invention that is necessary or useful for designing, developing, processing, manufacturing or selling EndoSheath Products in the Field of Use, and the parties shall thereupon consult in good faith in an effort jointly to decide whether such Patent should be abandoned or whether such patent application should be filed.  If, following such consultation, Vision-Sciences wishes to abandon such Patent and Medtronic wishes to maintain it, or Vision-Sciences wishes not to file such patent application and Medtronic wishes to file such patent application, then Medtronic shall be entitled, at its own cost and expense, to maintain such Patent or to file such patent application.  If Medtronic elects to maintain such Patent or to file such patent application, Vision-Sciences will assign the rights in such Patent or invention, as applicable, to Medtronic.

5

(c)           Except as expressly provided in this Section 3.1(a) and 3.1(b) above, Medtronic shall not have any rights to prosecute and maintain any of the Vision-Sciences Intellectual Property or to file or prosecute any applications with respect thereto without Vision-Sciences’ prior written consent.

(d)           Each party shall cooperate with the other party, as reasonably requested, to execute all lawful papers and instruments and to make all rightful oaths and declarations as may be necessary in the preparation, prosecution, maintenance and enforcement of any and all Patents.

(e)           Vision-Sciences shall not breach and shall comply with all of the material provisions of, and shall maintain in full force and effect, all license agreements with third parties pursuant to which Vision-Sciences is a licensee of Vision-Sciences Intellectual Property, including without limitation the licenses set forth on Schedule E.  Vision-Sciences shall promptly notify Medtronic if any such third party licensor alleges any material breach by Vision-Sciences of any such license agreement.  To the extent permitted by such contract, Medtronic shall be entitled, but not obligated, after consultation with Vision-Sciences, to cure, on behalf of Vision-Sciences, any alleged breach by Vision-Sciences of such license agreement and seek to recapture the cost of such cure against Vision-Sciences to the extent Vision-Sciences does not cure such breach.  If Vision-Sciences becomes aware of any third party’s breach of any license agreement with Vision-Sciences pursuant to which Vision-Sciences is licensee of Vision-Sciences Intellectual Property, including without limitation the licenses set forth on Schedule E, Vision-Sciences shall promptly notify Medtronic.  Medtronic shall be entitled, but not obligated, to take action against any such third party at its own expense after consultation with and approval of Vision-Sciences to the extent Vision-Sciences does not take such action.  For the avoidance of doubt, Vision-Sciences may take any such action at its own expense.

(f)            Vision-Sciences shall promptly notify Medtronic of any Vision-Sciences Intellectual Property created, obtained, licensed, or acquired by Vision-Sciences after the Effective Date but before the third anniversary of the Effective Date.

(g)           Medtronic shall, in exercising its Trademark rights hereunder: (i) adhere to the Vision-Sciences brand equity and design guidelines, as provided by Vision-Sciences from time to time; (ii) ensure that its advertising and promotional material are consistent with industry norms; and (iii) ensure that its products are of good quality consistent with industry standards. Medtronic acknowledges and agrees that all use of the Trademarks and goodwill in relation thereto will inure to the benefit of Vision-Sciences.

(h)           So long as any EndoSheath Products or other products sold by Medtronic are covered in any commercially meaningful manner by any valid claim of an unexpired patent included within the Patents, Medtronic shall include on the product packaging for such EndoSheath Products or such other products sold in the country where such patent has issued a reference that such EndoSheath Products or such other products are sold under a license from Vision-Sciences, Inc., or words to similar affect identifying Vision-Sciences by name.

6

3.2)          Enforcement of Infringement of Vision-Sciences Intellectual Property.

(a)           Notice.  Each party shall promptly report in writing to the other party during the term of this Agreement any (i) known or suspected infringement of Vision-Sciences Intellectual Property; and (ii) known or suspected unauthorized use or misappropriation of Vision-Science Intellectual Property, of which such party becomes aware, and shall provide the other party with all available evidence supporting such infringement, suspected infringement, unauthorized use or misappropriation or suspected unauthorized use or misappropriation.

(b)           General. Except as otherwise expressly provided herein, neither party shall be obligated to bring suit or take such other actions against infringement, misuse or misappropriation of the Vision-Sciences Intellectual Property, defend against challenges to the Vision-Sciences Intellectual Property or otherwise enforce the Vision-Sciences Intellectual Property (an “Enforcement Action”).

(c)           Enforcement Within the Field of Use.  Medtronic shall have the first right to initiate an Enforcement Action that it believes is reasonably required to protect Vision-Science Intellectual Property in the Field of Use and to control and settle all resulting actions and litigation, including selection and direction of legal counsel.

(d)           Enforcement Outside of the Field of Use.  Vision-Sciences shall use commercially reasonable efforts to initiate an Enforcement Action that it believes (in its sole discretion) is reasonably required to protect Vision-Science Intellectual Property outside of the Field of Use and to control and settle all resulting actions and litigation, including selection and direction of legal counsel.

(e)           Step-in Right.  If either party, pursuant to Section 3.2(c) or 3.2(d) above, as applicable, fails to initiate an Enforcement Action within sixty (60) days after becoming aware of the cause for an Enforcement Action (or such shorter period as the other party may deem reasonable in the event such party believes that pursuing equitable relief is necessary or appropriate), then the other party may, in its discretion, provide to the party failing to initiate the Enforcement Action with notice of its intent to initiate an Enforcement Action, such notice to be provided within thirty (30) days after the expiration of such sixty (60) day period.  If a party provides such notice and the other party fails to initiate a suit or take other appropriate action within thirty (30) days after receipt of such notice (or ten (10) days after receipt of notice if the party providing such notice has specified in such notice that it desires to pursue equitable relief), then the party providing such notice shall have the right to initiate an Enforcement Action that it believes is reasonably required to enforce, defend or protect the Vision-Sciences Intellectual Property. The party providing such notice and initiating the Enforcement Action shall give the other party sufficient advance notice of its intent to initiate an Enforcement Action and the reasons therefor, and shall provide such party with an opportunity to make suggestions and comments regarding such action.

(f)            Updates.  Each party shall take all reasonably necessary steps to ensure that the other party is informed and updated with respect to all material aspects of actual or potential Enforcement Actions, providing upon request copies of all material court filings in

7

connection with any Enforcement Action and notice of any and all material developments, including, without limitation, any claims or other challenges (threatened or pending) affecting the Vision-Sciences Intellectual Property. All notices hereunder shall be provided as set forth below in Section 7.5.

(g)           Cooperation.

(i)            The parties agree to consult and cooperate in good faith with respect to any actual or potential Enforcement Action.  Except as provided herein, each party shall bear its own expenses in any Enforcement Action.  Each of the parties agree to join in any Enforcement Action (or allow the other party to sue in such party’s name) if requested by the party initiating the Enforcement Action, at the expense of the party initiating the Enforcement Action.  Where the parties agree to join in any Enforcement Action, any monetary benefit arising from such Enforcement Action shall first be applied to reimburse each party its costs and expenses, and the remainder shall be distributed to the party that initiated the Enforcement Action.

(ii)           In the event that an Enforcement Action is reasonably required to protect Vision-Sciences Intellectual Property both within and outside the Field of Use, Vision-Sciences and Medtronic agree to consult and cooperate in good faith to determine if the parties will co-initiate any such Enforcement Action.  Any monetary benefit arising from any such co-initiated Enforcement Action shall first be applied to reimburse each party its costs and expenses, and the remainder shall be shared between the parties on the basis of the damages within or outside of the Field of Use. If a party declines to co-initiate any such Enforcement Action, the other party shall have the right to initiate any such Enforcement Action and solely retain any benefit obtained after both parties’ costs and expenses have been reimbursed.

(h)           No Settlement Without Consent.  In no event shall either party enter into any settlement, make any statement or take any other action with respect to the Vision-Sciences Intellectual Property without the prior written consent of the other party, which shall not unreasonably withheld.

(i)            Information Confidential.  Each of the parties hereby acknowledges and agrees that information, if any, shared by a party regarding Enforcement Actions is highly confidential and shall not be disclosed to any third party without prior written consent from the party producing or disclosing such information.  The parties agree that there shall be a community of interest with respect to any shared information regarding enforcement and that disclosure to one another of such information shall in no way affect the confidential nature of the information or its qualification for protection from discovery as attorney client communications and/or attorney work product.

8

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF VISION-SCIENCES

Vision-Sciences represents and warrants to Medtronic as follows:

4.1)          Organization; Directors and Officers.  Vision-Sciences is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  Vision-Sciences has all necessary power and authority to own its properties and assets and conduct the business presently being conducted by it.

4.2)          Authority.  Vision-Sciences has full power and authority to enter into this Agreement and to perform its obligations hereunder.  This Agreement has been duly authorized, executed, and delivered by Vision-Sciences, and constitutes a legal, valid and binding agreement of Vision-Sciences, enforceable against it in accordance with its terms, subject to (a) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles and (b) laws relating to the availability of specific performance, injunctive relief or other equitable remedies.  No further proceeding on the part of Vision-Sciences is necessary to authorize this Agreement and the transactions contemplated hereby.  Neither the execution and delivery of this Agreement nor compliance by Vision-Sciences with its terms and provisions will violate (i) any provision of the certificate of incorporation, bylaws or other governing instruments of Vision-Sciences,  (ii) any contract, or governmental permit or license of Vision-Sciences, or (iii) to the knowledge of Vision-Sciences, any law, statute, regulation, injunction, order or decree of any government agency or authority or court to which Vision-Sciences or any of the Specified Assets is subject.

4.3)          Intellectual Property.

(a)           All right, title and interest in and to the Vision-Sciences Current Intellectual Property licensed under the License Agreement is exclusively owned by Vision-Sciences or to the extent licensed by Vision-Sciences, is licensed exclusively to Vision-Sciences for use in applications including, but not limited to, in connection with EndoSheath Products without royalties, fees or commissions, and free and clear of any liens. The manufacture and sale of the EndoSheath Products listed on Schedule A by Vision-Sciences do not infringe, misuse, or misappropriate the rights, including Intellectual Property rights or contract rights, of others.  The Vision-Sciences Current Intellectual Property has not been challenged in any judicial or administrative proceeding.  Neither any shareholder nor any employee or consultant of Vision-Sciences (or the employer of any such consultant) has any rights in or to any of the Vision-Sciences Current Intellectual Property or any of the EndoSheath Products.  All Patents are still pending in good standing and have not been abandoned, and all fees necessary to maintain such Patents in full force and effect have been and as of the Closing will have been paid.  To the knowledge of Vision-Sciences, other than as set forth on Schedule F, no person nor such person’s business nor any of its products has infringed, misused, or misappropriated the Vision-Sciences Intellectual Property or currently is infringing, misusing, misappropriating or conflicting with such rights.  All former or current employees or independent contractors of Vision-Sciences that had or have access to Vision-Sciences’ confidential information that relates to EndoSheath Products or Vision-Sciences Intellectual Current Property have entered into customary confidentiality and invention assignment

9

agreements with Vision-Sciences and no such employee or consultant has any rights in such EndoSheath Products or Vision-Sciences Current Intellectual Property.  Vision-Sciences has the right to grant the licenses granted under this Agreement.  To the Knowledge of Vision-Sciences, the Vision-Sciences Intellectual Property is valid and enforceable.

(b)           There are no actions, suits, claims, disputes or proceedings or governmental investigations pending or threatened in writing against Vision-Sciences or any of its Affiliates with respect to the Vision-Sciences Current Intellectual Property or the use thereof by Vision-Sciences, either at law or in equity, before any court or administrative agency or before any governmental department, commission, board, bureau, agency or instrumentality, or before any arbitration board or panel whether located in the United States or a foreign country.  Vision-Sciences has complied with any and all laws, rules, regulations, writs, judgments, injunctions, decrees, determinations, awards or other orders of any court or other governmental agency or instrumentality, domestic or foreign, except which the failure in any case would not in any material respect impair any rights of Medtronic under this Agreement.

(c)           All Vision-Sciences Intellectual Property identified in Schedule C has the status indicated therein and all applications are still pending in good standing and have not been abandoned.  The Patents identified in Schedule C constitute all of the current patents and patent applications owned by or licensed (with the right to sublicense) to Vision-Sciences which claim inventions that are necessary or useful for designing, developing, processing, manufacturing, using or selling EndoSheath Products in the Field of Use.  Vision-Sciences has made all statutorily required filings, if any, to record its interests and taken reasonable actions to protect its rights in the Vision-Sciences Current Intellectual Property.

4.4)          Endosheath Products. All current EndoSheath Products are set forth on Schedule A, including any EndoSheath Products that are currently under development by Vision-Sciences.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MEDTRONIC

Medtronic represents and warrants to Vision-Sciences as follows:

5.1)          Organization of Medtronic.  Medtronic is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  Medtronic has all necessary power and authority to own its properties and assets and conduct the business presently being conducted by it.

5.2)          Authority.  Medtronic has full power and authority to enter into this Agreement and to perform its obligations hereunder.  This Agreement has been duly authorized, executed, and delivered by Medtronic, and constitutes a legal, valid and binding agreement of Medtronic, enforceable against Medtronic in accordance with its terms, subject to (a) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles and (b) laws relating to the availability of specific performance, injunctive relief or other equitable remedies.  No further proceeding on the part of Medtronic is necessary to authorize this Agreement and the

10

transactions contemplated hereby.  Neither the execution and delivery of this Agreement nor compliance by Medtronic with its terms and provisions will violate (i) any provision of the articles of incorporation or bylaws of Medtronic, (ii) any contract, permit or license of Medtronic, or (iii) to the knowledge of Medtronic, any law, statute, regulation, injunction, order or decree of any government agency or authority or court to which Medtronic or any of Medtronic’s assets are subject.

ARTICLE 6
INDEMNIFICATION

6.1)          Indemnification of Medtronic.  Vision-Sciences shall indemnify, defend and hold harmless Medtronic and each of its subsidiaries, divisions, officers, directors, employees, and shareholders (the “Medtronic Indemnified Parties”) from and against and in respect of any and all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, interest and penalties, costs and expenses (including, without limitation, reasonable legal fees and disbursements incurred in connection therewith and in seeking indemnification therefor, and any amounts or expenses required to be paid or incurred in connection with any action, suit, proceeding, claim, appeal, demand, assessment or judgment) whether or not involving a third-party claim (collectively “Indemnifiable Losses”), directly or indirectly resulting from, arising out of, or imposed upon or incurred by any Medtronic Indemnified Party by reason of the following:

(a)           any breach of any representation or warranty of Vision-Sciences contained in this Agreement; or

(b)           any alleged infringement of any valid and enforceable claim of a third party patent or other Intellectual Property by any EndoSheath Product set forth on Schedule A, except to the extent such infringement is due to an alteration of the EndoSheath Product made after the Effective Date.

6.2)          Indemnification of Vision-Sciences.  Medtronic shall indemnify, defend and hold harmless Vision-Sciences and each of its subsidiaries, divisions, officers, directors, employees and shareholders (the “Vision-Sciences Indemnified Parties” and together with the Medtronic Indemnified Parties, the “Indemnified Parties”) from and against and in respect of any and all Indemnifiable Losses resulting from, arising out of, or imposed upon or incurred by any Vision-Sciences Indemnified Party by reason of the following:

(a)               any breach of any representation or warranty of Medtronic contained in this Agreement; or

(b)           any Product Liability claims in connection with the EndoSheath Products designed, manufactured or sold by or on behalf of Medtronic after the Effective Date.

6.3)          Third-Party Claims and Other Claims.

(a)               If a claim by a third party is made against any Indemnified Party, and if the Indemnified Party intends to seek indemnity with respect thereto under this Article 6, such

11

Indemnified Party shall promptly notify the indemnifying party of such claim; provided, however, that failure to give timely notice shall not affect the rights of the Indemnified Party so long as the failure to give timely notice does not adversely affect the indemnifying party’s ability to defend such claim against a third party and the indemnifying party shall be entitled to settle or assume the defense of such claim, including the employment of counsel reasonably satisfactory to the Indemnified Party.  If the indemnifying party elects to settle or defend such claim, the indemnifying party shall notify the Indemnified Party within thirty (30) days (but in no event less than twenty (20) days before any pleading, filing or response on behalf of the Indemnified Party is due) of the indemnifying party’s intent to do so.  If the indemnifying party elects not to settle or defend such claim or fails to notify the Indemnified Party of the election within thirty (30) days (or such shorter period provided above) after receipt of the Indemnified Party’s notice of a claim of indemnity hereunder, the Indemnified Party shall have the right to contest, settle or compromise the claim without prejudice to any rights to indemnification hereunder.  Regardless of which party is controlling the settlement of defense of any claim, (i) both the Indemnified Party and indemnifying party shall act in good faith, (ii) the indemnifying party shall not thereby permit to exist any lien, encumbrance or other adverse charge upon any asset of any Indemnified Party or of its subsidiaries, (iii) the indemnifying party shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by the Indemnified Party, with all fees, costs and expenses of such counsel borne by the Indemnified Party, unless the indemnifying party and Indemnified Party have available inconsistent defenses to such third-party claim, in which case such fees, costs and expenses shall be borne by the indemnifying party, (iv) no entry of judgment or settlement of a claim may be agreed to without the written consent of the Indemnified Party, which consent shall not be unreasonably withheld, and (v) the indemnifying party shall promptly reimburse the Indemnified Party for the indemnified amount as incurred by the Indemnified Party pursuant to this Article 6.  So long as the indemnifying party is reasonably contesting any such third party claim in good faith as permitted herein, the Indemnified Party shall not pay or settle any such claim (or, if it does, it shall not be indemnified for such settlement amount).  The controlling party shall upon request deliver, or cause to be delivered, to the other party copies of all correspondence, pleadings, motions, briefs, appeals or other written statements relating to or submitted in connection with the settlement or defense of any such claim, and timely notices of any hearing or other court proceeding relating to such claim.

(b)               A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought.  Such notice shall state the amount of Indemnifiable Losses, if known, the method of computation thereof, and contain a reference to the provisions of the Agreement in respect to which such right of indemnification is claimed or arises.

6.4)          Cooperation as to Indemnified Liability.  Each party hereto shall cooperate fully with the other parties with respect to access to books, records, or other documentation within such party’s control, if deemed reasonably necessary or appropriate by any party in the defense of any claim that may give rise to indemnification hereunder.

6.5)          Calculation of Damages.  The amount of any Indemnifiable Losses for which indemnification is provided under this Article 6 shall be reduced by any insurance proceeds that

12

the Indemnified Party is entitled to pursuant to any insurance policy on account of the matter resulting in such Indemnifable Loss.

6.6)          Nature of Indemnification.  The Indemnified Party’s right to indemnification and payment of Indemnifiable Losses, or other remedy, based on the indemnified party’s representations, warranties, covenants and obligations, shall not be affected by any investigation conducted by the indemnified party or any knowledge acquired (or capable of being acquired) at any time by the Indemnified Party, whether before or after the execution and delivery of this Agreement, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation.

6.7)          Indemnification Limitation.  Except with respect to claims based on fraud, criminal activity, intentional misrepresentation or intentional misconduct, the rights of the Indemnified Parties under this Article 6 shall be the sole and exclusive remedies (other than any equitable remedies as may be available) of the Indemnified Parties with respect to claims resulting from or relating to Indemnifiable Losses arising from the claims described in Sections 6.1 and 6.2 above.

ARTICLE 7
MISCELLANEOUS

7.1)          Further Assurances.  At any time and from time to time the parties shall, without further consideration, execute and deliver or cause to be executed and delivered to the other party any additional instruments, and shall take such other action as the other party may reasonably request to carry out, or evidence the consummation of, the transactions contemplated by this Agreement.

7.2)          Complete Agreement.  The Schedules to this Agreement shall be construed as an integral part of this Agreement to the same extent as if they had been set forth verbatim herein.  This Agreement and the Schedules hereto constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements whether written or oral relating hereto.

7.3)          Survival of Representations and Warranties.  The representations and warranties contained in this Agreement shall survive and remain in full force and effect for three years after the Effective Date.  No independent investigation by Vision-Sciences or Medtronic, its counsel, or any of its agents or employees shall in any way limit or restrict the scope of the representations and warranties made by Vision-Sciences or Medtronic in this Agreement.

7.4)          Waiver, Discharge, Amendment, Etc.  The failure of any party hereto to enforce at any time any of the provisions of this Agreement, shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part thereof or the right of the party thereafter to enforce each and every such provision.  No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.  Any amendment to this Agreement shall be in writing and signed by the parties hereto.

13

7.5)          Notices.  All notices hereunder shall be deemed given if in writing and delivered personally or sent by telecopy (with confirmation of transmission) or certified mail (return receipt requested) or reputable courier service to the parties at the following addresses (or at such other addresses as shall be specified by like notice):

if to Medtronic, to:

Medtronic, Inc.
World Headquarters
710 Medtronic Parkway
Minneapolis, MN 55432-5604

with separate copies thereof addressed to

Attention: General Counsel
FAX No.:  (763) 572-5459

and

Attention: Vice President and Chief Development Officer
FAX No.:  (763) 505-2542

with a separate copy thereof addressed to:

General Counsel
Medtronic Xomed, Inc.
6743 Southpoint Drive North
Jacksonville, FL 32216

and if to Vision-Sciences, to:

Vision-Sciences, Inc.
40 Ramland Road South, Suite 1
Orangeburg, NY 10962
Facsimile:  (845) 365-0620
Attention:  Ron Hadani, President and CEO

with separate copies thereof addressed to:

Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Facsimile:  (212) 969-2900
Attention:  Paul I. Rachlin, Esq.

Any party may change the above specified recipient and/or mailing address by notice to all other parties given in the manner herein prescribed.  All notices shall be deemed given on the

14

day when actually delivered as provided above (if delivered personally, by telecopy or by reputable courier service) or on the date that is three days after the date shown on the return receipt (if delivered by mail).

7.6)          Expenses.  Except as otherwise expressly provided herein, Medtronic and Vision-Sciences shall each pay their own expenses (including, but not limited to, all compensation and expenses of counsel, financial advisors, consultants, actuaries and independent accountants) incident to this Agreement and the preparation for, and consummation of, the transactions provided for herein.

7.7)          Governing Law.

(a)           This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, including all matters of construction, validity, performance and enforcement, without giving effect to principles of conflict of laws.

(b)           The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives of each party who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this Agreement.  Either party may give the other party written notice of any dispute not resolved in the normal course of business (“Notice of Dispute”), which Notice of Dispute shall include (i) a statement of that party’s position and a summary of arguments supporting that position, (ii) the dollar amount of the dispute, if known, and the section(s) of the Agreement to which the dispute relates and (iii) the name and title of the executive who will represent that party and of any other person who will accompany the executive.  Within 10 days after delivery of the Notice of Dispute, the receiving party shall submit to the other a written response (the “Response to Dispute”).  The Response to Dispute shall include (iv) a statement of that party’s position and a summary of arguments including references to any section(s) of the Agreement, if applicable, supporting that position and (v) the name and title of the executive who will represent that party and of any other person who will accompany the executive. Within 10 days after delivery of the Response to Dispute, the designated executives of both parties shall meet at a mutually acceptable time and place or by conference telephone, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence.

(c)           If the dispute has not been resolved by negotiation as provided under subparagraph (b), above, within 30 days after delivery of the initial Notice of Dispute, or if the parties failed to meet within 30 days after delivery of the initial Notice of Dispute, the parties shall endeavor to settle the dispute by mediation under the Center for Public Resources (CPR) Mediation Procedure then currently in effect, provided, however, that if one party fails to participate in the negotiation as provided under subparagraph (b), above, the other party can initiate mediation prior to the expiration of the 30 days.  Unless otherwise agreed, the parties will select a mediator from the CPR Panels of Distinguished Neutrals, and if unable to agree the CPR shall select a mediator.

15

7.8)          Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors or assigns of the parties hereto.  The rights and obligations of Vision-Sciences herein may not be assigned or transferred without the written consent of Medtronic, which consent shall not be unreasonably withheld.  The rights of Medtronic may be assigned only to an Affiliate or to such business organization that shall succeed to the business of Medtronic or of such subsidiary to which this Agreement relates.  For the avoidance of doubt, Medtronic’s rights and obligations under Sections 3.1 and 3.2 may not be sublicensed, assigned, transferred or otherwise delegated.  For the avoidance of doubt, a sublicense of any Vision-Sciences Intellectual Property that is not otherwise prohibited by this Agreement shall not be considered a “transfer” of an interest in the Vision-Sciences Intellectual Property for purposes of this Section 7.8.  In addition, Vision-Sciences shall not complete or facilitate an acquisition by any person or group of persons of 50% or more of the voting securities of Vision-Sciences without first (x) obtaining from the purchaser a written statement acknowledging Vision-Sciences’ obligations pursuant to this Agreement and agreeing not to take any action that would cause Vision-Sciences to breach any of its obligations hereunder, and (y) promptly providing a copy of such written commitment to Medtronic.

7.9)          Titles and Headings; Construction.  The titles and headings to Sections herein and Schedules hereto are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.  This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted.  Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective permitted successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

7.10)        Severability.  If any provision of this Agreement is held invalid, unenforceable or void by a court of competent jurisdiction, the remaining provisions shall nonetheless be enforceable according to their terms.  In such case, the parties agree to negotiate in good faith to create an enforceable contractual provision to achieve the purpose of the invalid provision.  Further, if any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended.

7.11)        Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be deemed as original and all of which together shall constitute one instrument.

7.12)        Confidentiality.  Each party will, for a period of five (5) years, (i) keep confidential and not disclose to others, all Confidential Information of the other party, and (ii) not use any of the other party’s Confidential Information for its own direct or indirect benefit, or the direct or indirect benefit of any third party, except that a party may use the other party’s Confidential Information to the extent necessary to perform its duties and obligations, or to enforce or exercise such party’s rights, under this Agreement.  The foregoing shall not prohibit disclosures: (x) made to the receiving party’s sub-distributors, employees or agents who have a “need to know” the other party’s Confidential Information to the extent such disclosure is

16

necessary to perform such party’s duties and obligations, or to enforce such party’s rights, under this Agreement, provided that such sub-distributors, employees or agents agree in writing or are otherwise compelled to comply with the obligations of this Section 7.12, and the receiving party remains directly responsible to the disclosing party for their compliance; or (y) compelled to be made by any requirement of law or pursuant to any legal, regulatory or investigative proceeding before any court, or governmental or regulatory authority, agency or commission so long as the party so compelled to make disclosure of Confidential Information of the other party provides prior written notice to such other party so that the other party may seek a protective order or other remedy to protect the confidentiality of the Confidential Information and/or waive the compelled party’s compliance with this Section 7.12, provided that all such information so disclosed (other then in a way which makes it generally available to the public) shall remain Confidential Information for all other purposes.  If such protective order, other remedy or waiver is not obtained by the time the compelled party is required to comply, the compelled party may furnish only that portion of the Confidential Information of the other party that it is legally compelled, in the opinion of counsel, to disclose and shall request, at the other party’s expense, that such Confidential Information be accorded confidential treatment (if such procedure is available), including redaction of any payment terms specified herein. Each party further agrees to take appropriate measures to prevent any such prohibited disclosure of Confidential Information by its present and future employees, officers, agents, subsidiaries, or consultants.

(Remainder of page intentionally blank; signatures follow on next page)

17

IN WITNESS WHEREOF, each of the parties has caused this License Agreement to be executed and delivered in the manner appropriate for each, as of the date first above written.

MEDTRONIC XOMED, INC.
By
	Its
VISION-SCIENCES, INC.
By
	Its

Schedule A

EndoSheath Products

Schedule B

Officers and Employees of Vision Sciences

Schedule C

Patents and Patent Applications

Schedule D

Tradenames

Schedule E

License Agreements

Schedule F

Infringements of Vision-Sciences’ Intellectual Property

EX-10.34

Exhibit 10.34

April 4, 2007

Mr. Yoav M. Cohen
c/o Vision-Sciences, Inc.
40 Ramland Road, Suite 1
Orangeburg, New York 10962

Re:  Amendment to Employment Letter Agreement dated September 22, 2006

Dear Yoav:

The purpose of this letter (the “Amendment”) is to amend certain terms and conditions of that certain Letter Agreement dated September 22, 2006 (the “Original Letter Agreement”) by and between you and Vision-Sciences, Inc., a Delaware corporation (the “Company”).  Accordingly, the following are the amended terms and conditions of your employment with the Company which we have agreed upon:

Salary:	$205,000 per annum, payable in accordance with the Company’s normal payroll schedules.
Options:	In addition to the options previously granted to you pursuant to the Original Letter Agreement, you are entitled to receive an additional incentive stock option to purchase Three Hundred Fifty Thousand (350,000) shares of common stock of the Company, subject to approval of the Compensation Committee of the Board of Directors, at a purchase price equal to the closing market price on your effective date, with vesting as follows:
	- 37,500 shares vesting on April 1, 2008
	- 62,500 shares vesting on April 1, 2009
	- 87,500 shares vesting on April 1, 2010
	- 87,500 shares vesting on April 1, 2011
	- 50,000 shares vesting on April 1, 2012
	- 25,000 shares vesting on April 1, 2013
Severance:	If the Company terminates your employment without cause, you will be entitled to receive, as severance, an amount equal to three (3) months of your base salary then in effect on the date of termination (“Effective Base Salary”) for each year of your employment with the Company (“Severance Pay”); provided, however, that the Severance Pay shall not exceed an amount equal to twelve (12) months of the Effective Base Salary. The Severance Pay shall be payable in accordance with the Company’s normal payroll schedules, beginning on the first pay day following the date of termination of your employment with the Company.

Governing Law:	This Amendment will be governed by, and construed under and in accordance with, the internal laws of the State of New York, without reference to rules relating to conflicts of laws.
Integration:	From and after the date of this Amendment, the Original Letter Agreement and this Amendment shall be read as one agreement.  Except as set forth in this Amendment, all other terms and conditions of the Original Letter Agreement are not being modified or amended, and shall remain in full force and effect.

We hope that you find the foregoing terms and conditions acceptable. You may indicate your agreement with the terms and conditions set forth in this Amendment by signing the enclosed duplicate original of this Amendment.

We look forward to your continued employment with the Company

Very truly yours,
VISION-SCIENCES, INC.
By:	/s/ Ron Hadani
Name:	Ron Hadani
Title:	President and Chief
	Executive Officer

ACCEPTED AND AGREED:

/s/ Yoav M. Cohen

Yoav M. Cohen

Dated:  April 4, 2007

2

EX-10.35

Exhibit 10.35

April 4, 2007

Mr. Ron Hadani
c/o Vision-Sciences, Inc.
40 Ramland Road, Suite 1
Orangeburg, New York 10962

Re:   Amendment to Employment Letter Agreement dated January 24, 2003

Dear Ron:

The purpose of this letter (the “Amendment”) is to amend certain terms and conditions of that certain Letter Agreement dated January 24, 2003 (the “Original Letter Agreement”) by and between you and Vision-Sciences, Inc., a Delaware corporation (the “Company”).  Accordingly, the following are the amended terms and conditions of your employment with the Company which we have agreed upon:

Salary:	$290,000 per annum, payable in accordance with the Company’s normal payroll schedules.
Severance:	If the Company terminates your employment without cause, you will be entitled to receive, as severance, an amount equal to three (3) months of your base salary then in effect on the date of termination (“Effective Base Salary”) for each year of your employment with the Company (“Severance Pay”); provided, however, that the Severance Pay shall not exceed an amount equal to twelve (12) months of the Effective Base Salary. The Severance Pay shall be payable in accordance with the Company’s normal payroll schedules, beginning on the first pay day following the date of termination of your employment with the Company.
Governing Law:	This Amendment will be governed by, and construed under and in accordance with, the internal laws of the State of New York, without reference to rules relating to conflicts of laws.
Integration:	From and after the date of this Amendment, the Original Letter Agreement and this Amendment shall be read as one agreement.  Except as set forth in this Amendment, all other terms and conditions of the Original Letter Agreement are not being modified or amended, and shall remain in full force and effect.

We hope that you find the foregoing terms and conditions acceptable. You may indicate your agreement with the terms and conditions set forth in this Amendment by signing the enclosed duplicate original of this Amendment.

We look forward to your continued employment with the Company.

Very truly yours,
VISION-SCIENCES, INC.
By:	/s/ Yoav M. Cohen
Name:	Yoav M. Cohen
Title:	Vice President
	Chief Financial Officer

ACCEPTED AND AGREED:

/s/ Ron Hadani

Ron Hadani

Dated:  April 4, 2007

2

EX-21.1

Exhibit 21.1

Subsidiaries of the Company

Machida Incorporated, a Delaware corporation

Vision Sciences LTD., an Israeli corporation

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Vision-Sciences, Inc.
Orangeburg, New York

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-57298, 33-80762, 333-72547, 333-48654 and 33-80764) of Vision-Sciences, Inc. of our report dated June 28, 2007, relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K.

/s/ BDO Seidman, LLP

Valhalla, New York
June 28, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Ron Hadani, certify that:

1.I have reviewed this annual report on Form 10-K of Vision-Sciences, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omits 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 annual report;

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

4.The registrant’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 registrant and we 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 registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)Evaluated the effectiveness of the registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’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 registrant’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 registrant’s internal control over financial information.

Dated: June 28, 2007	/s/ RON HADANI
	Ron Hadani
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Yoav M. Cohen, certify that:

1.I have reviewed this annual report on Form 10-K of Vision-Sciences, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omits 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 annual report;

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

4.The registrant’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 registrant and we 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 registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)Evaluated the effectiveness of the registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’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 registrant’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 registrant’s internal control over financial information.

Dated: June 28, 2007	/s/ YOAV M. COHEN
	Yoav M. Cohen
	Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Vision-Sciences, Inc. (the “Company”) for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Ron Hadani, Chief Executive Officer of the Company, and Yoav M. Cohen, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: June 28, 2007	/s/ RON HADANI
	Ron Hadani
	Chief Executive Officer
Dated:June 28, 2007	/s/ YOAV M. COHEN
	Yoav M. Cohen
	Chief Financial Officer