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**SECURITIES AND EXCHANGECOMMISSION**WASHINGTON, D. C. 20459

**FORM 10-Q**

**QUARTERLY REPORTUNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTER ENDED June 30, 2001**

**COMMISSION FILE NUMBER 0-20970**

| **VISION-SCIENCES, INC.**                               |
|---------------------------------------------------------|
|                                                         |
| (Exact name of  registrant as specified in its charter) |
|                                                    |   |
| **Delaware**                                            | **13-3430173** |
| ****                                                    | **** |
| (State or other  jurisdiction of                        | (IRS Employer |
| incorporation or  organization)                         | Identification Number) |
| **9  Strathmore Road, Natick, MA**                      | **01760** |
| ****                                                    | **** |
| (Address of principal  executive offices)               | (Zip Code) |
| Registrant's telephone  number, including area code     | **(508)  650-9971** |
|                                                    | **** |
| **None**                                                |
| ****                                                    |
| (Former name, former  address, and                      |
| former fiscal year if  changed since last report)       |

 

             Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirement for the past 90 days.

Yes  ý              No  o

 

             Indicatethe number of shares outstanding of each of the issuer's classes of commonstock, as of June 30, 2001.

| Common Stock, par  value of $.01 | 27,105,355         |
|----------------------------------|--------------------|
|                                  |                    |
| (Title of Class)                 | (Number of Shares) |

----

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**VISION-SCIENCES, INC.TABLE OF CONTENTS**

 

| Part I.  | Item 1            | Financial Information                                                                  |   |
|----------|-------------------|----------------------------------------------------------------------------------------|--------|
|     |              | Consolidated Balance Sheets                                                            |   |
|     |              | Consolidated  Statements of Operations                                                 |   |
|     |              | Consolidated  Statement of Stockholders' Equity                                        |   |
|     |              | Consolidated  Statements of Cash Flows                                                 |   |
|     |              | Notes to  Consolidated Financial Statements                                            |   |
|     | Item  2.          | Management's  Discussion and Analysis of Financial Condition and Results of Operations |   |
|     | Item  3.          | Qualitative  and Quantitative Disclosure about Market Risk                             |   |
| Part II. | Other Information |                                                                                   |
|     | Item  2.          | Changes  in Securities and Use of Proceeds                                             |   |
|     | Item 6.           | Exhibits and  Reports on Form 8-K                                                      |   |
|     | Signature         |                                                                                   |   |

 

**PART I- FINANCIAL INFORMATION**

**Item 1: FINANCIAL STATEMENTS**

**VISION-SCIENCES,INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Unaudited)**

|                                                                                |                                                                                                                                                                                                           |        |            |        |
|-------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|-----------------|-------------|
|                                                                                | June  30, 2001                                                                                                                                                                                                 |        | March  31, 2001 |        |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
| ASSETS                                                                              |                                                                                                                                                                                                           |        | (audited)       |        |
|                                                                                     |                                                                                                                                                                                                           |        |                 |        |
|                                                                                |                                                                                                                                                                                                           |        |            |        |
| Current Assets:                                                                     |                                                                                                                                                                                                           |        |            |        |
|                                                                                | Cash and cash  equivalents                                                                                                                                                                                     | $           | 3,805,364       |        | $ | 2,568,724 |   |
|                                                                                | Marketable securities                                                                                                                                                                                          | 407,677     |            | 1,243,068   |   |
|                                                                                | Accounts receivable,  net of allowance for doubtful accounts of $97,000 and $98,000, respectively                                                                                                              | 1,176,716   |            | 1,148,092   |   |
|                                                                                | Inventories                                                                                                                                                                                                    | 1,169,268   |            | 1,006,016   |   |
|                                                                                | Prepaid expenses and  deposits                                                                                                                                                                                 | 98,662      |            | 66,339      |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                | Total current assets                                                                                                                                                                                           | 6,657,687   |            | 6,032,239   |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
| Property and  Equipment, at cost:                                                   |                                                                                                                                                                                                           |        |            |        |
|                                                                                | Machinery and  equipment                                                                                                                                                                                       | 3,024,363   |            | 2,984,511   |   |
|                                                                                | Furniture and fixtures                                                                                                                                                                                         | 208,934     |            | 208,934     |   |
|                                                                                | Leasehold improvements                                                                                                                                                                                         | 450,396     |            | 450,396     |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                | 3,683,693                                                                                                                                                                                                      |        | 3,643,841       |        |
|                                                                                | Less-Accumulated  depreciation and amortization                                                                                                                                                                | 3,139,108   |            | 3,083,860   |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                | 544,585                                                                                                                                                                                                        |        | 559,981         |        |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                |                                                                                                                                                                                                           |        |            |        |
| Equity investment in  3DV Systems Ltd. (Note 3)                                     | -                                                                                                                                                                                                              |        | 500,000         |        |
| Other assets, net of  accumulated amortization of $30,000 and $28,000, respectively | 100,856                                                                                                                                                                                                        |        | 102,441         |        |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                | Total assets                                                                                                                                                                                                   | $           | 7,303,128       |        | $ | 7,194,661 |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
| LIABILITIES  AND STOCKHOLDERS' EQUITY                                               |                                                                                                                                                                                                           |        |            |        |
|                                                                                     |                                                                                                                                                                                                           |        |            |        |
| Current Liabilities:                                                                |                                                                                                                                                                                                           |        |            |        |
|                                                                                | Acceptances payable to  a bank                                                                                                                                                                                 | $           | 79,016          |        | $ | 38,713 |   |
|                                                                                | Current portion of  note payable                                                                                                                                                                               | 54,535      |            | 52,931      |   |
|                                                                                | Accounts payable                                                                                                                                                                                               | 526,977     |            | 287,458     |   |
|                                                                                | Accrued expenses                                                                                                                                                                                               | 1,164,047   |            | 1,377,455   |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                | Total current  liabilities                                                                                                                                                                                     | 1,824,575   |            | 1,756,557   |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
| Note payable, net of  current portion                                               | 9,739                                                                                                                                                                                                          |        | 23,989          |        |
| Potential obligations  to non-qualified option holders                              | 327,169                                                                                                                                                                                                        |        | 188,515         |        |
| Stockholders' Equity:                                                               |                                                                                                                                                                                                           |        |            |        |
|                                                                                | Common stock, $.01 par  value— Authorized—50,000,000 shares.       Issued and outstanding—27,105,355 shares at June 30, 2001 and  26,520,831 shares at March 31, 2001. | 271,052     |            | 265,207     |   |
|                                                                                | Additional paid-in  capital                                                                                                                                                                                    | 58,386,502  |            | 57,601,457  |   |
|                                                                                | Accumulated deficit                                                                                                                                                                                            | (53,515,909 | )               | (52,641,064 | ) |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                | Total stockholders'  equity                                                                                                                                                                                    | 5,141,645   |            | 5,225,600   |   |
|                                                                                |                                                                                                                                                                                                           |             |            |             |   |
|                                                                                | Total liabilities and  stockholders' equity                                                                                                                                                                    | $           | 7,303,128       |        | $ | 7,194,661 |   |
|                                                                                |                                                                                                                                                                                                                |        |                 |        |
|                                                                                     |                                                                                                                                                                                                                |             |                 |             |  |  |  |  |

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**

 

|                                                                  | Three  Months Ended                                                  |      |
|-----------------------------------------------------------------------|----------------------------------------------------------------------|-----------|
|                                                                  | June  30,                                                            |      |
|                                                                  |                                                                      |      |
|                                                                  | 2000                                                                 |      | 2001 |   |
|                                                                  |                                                                      |      |  |   |
| Net sales                                                             | $                                                                    | 1,731,880 |   | $ | 1,579,656 |   |
| Cost of sales                                                         | 1,144,992                                                            |      | 1,162,737 |   |
|                                                                  |                                                                      |      |  |   |
|                                                                  |                                                                 |      |   |   |
|                                                                  | Gross profit                                                         | 586,888   |   | 416,919 |   |
|                                                                  |                                                                 |      |   |   |
| Selling, general and  administrative expenses                         | 644,816                                                              |      | 809,969 |   |
| Research and  development expenses                                    | 33,140                                                               |      | 218,841 |   |
|                                                                  |                                                                      |      |  |   |
|                                                                  | Loss from operations                                                 | (91,068   | ) | (611,891 | ) |
|                                                                  |                                                                 |      |   |   |
| Interest income                                                       | 41,747                                                               |      | 22,676 |   |
| Equity in losses of  3DV Systems Ltd                                  | (500,000                                                             | )         | (222,553 | ) |
| Other income                                                          | 1,645                                                                |      | 222 |   |
|                                                                  |                                                                      |      |  |   |
|                                                                  |                                                                 |      |   |   |
|                                                                  | Net loss before  cumulative effect of change in accounting principle | (547,676  | ) | (811,546 | ) |
| Cumulative effect of  change in accounting principle (Note 2)         | 327,169                                                              |      | - |   |
|                                                                  |                                                                      |      |  |   |
|                                                                  | Net loss after  cumulative effect of change in accounting principle  | $         | (874,845 | ) | $ | (811,546 | ) |
|                                                                  |                                                                      |      |  |   |
|                                                                  |                                                                 |      |   |   |
| Basic and diluted net  loss per common share                          | $                                                                    | (0.03     | ) | $ | (0.04 | ) |
|                                                                  |                                                                      |      |  |   |
|                                                                  |                                                                 |      |   |   |
| Shares used in  computing basic and diluted net loss per common share | 26,636,627                                                           |      | 20,926,672 |   |
|                                                                  |                                                                      |      |  |   |

 

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OFSTOCKHOLDERS' EQUITY (Unaudited)**

 

 

|                                                              | Common  Stock     |   |   |           |    |                        |       |                 |     |                             |
|-------------------------------------------------------------------|-------------------|--------|--------|----------------|---------|-----------------------------|------------|----------------------|----------|----------------------------------|
|                                                              |                   |   |   |           |    |                        |       |                 |     |                             |
|                                                              | Number  of Shares |   | $      | .01  Par Value |    | Additional  Paid-in-Capital |       | Accumulated  Deficit |     | Total  Stockholders’ Equity |   | Total  Comprehensive Loss |   |
|                                                              |                   |   |        |           |         |                        |            |                 |          |                             |  |   |
|                                                              |              |   |   |           |    |                        |       |                 |     |                             |   |   |
| Balance, March 31,  2001 (audited)                                | 26,520,831        |   | $      | 265,207        |    | $                           | 57,601,457 |                 | $        | (52,641,064                      | ) | $ | 5,225,600 |   |   |   |
| Reclass of potential  obligations to non-qualified option holders | -                 |   | -      |           | 188,515 |                        | -          |                 | 188,515  |                             |   |   |
| Exercise of stock  options                                        | 2,000             |   | 20     |           | 2,355   |                        | -          |                 | 2,375    |                             |   |   |
| Sale of common stock,  net                                        | 582,524           |   | 5,825  |           | 594,175 |                        | -          |                 | 600,000  |                             |   |   |
| Net loss                                                          | -                 |   | -      |           | -       |                        | (874,845   | )                    | (874,845 | )                                | $ | (874,845 | ) |
|                                                              |                   |   |        |           |         |                        |            |                 |          |                             |  |   |
| Total comprehensive  loss                                         |              |   |   |           |    |                        |       |                 |     |                             | $ | (874,845 | ) |
|                                                              |              |   |   |           |    |                        |       |                 |     |                             |  |   |
| Balance June 30, 2001                                             | 27,105,355        |   | $      | 271,052        |    | $                           | 58,386,502 |                 | $        | (53,515,909                      | ) | $ | 5,141,645 |   |   |   |
|                                                              |                   |   |        |           |         |                        |            |                 |          |                             |   |   |

 

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

 

 

|                                                     |                                                                          |      |                |     |
|----------------------------------------------------------|-------------------------------------------------------------------------------|-----------|---------------------|----------|
|                                                     | Three  Months Ended                                                           |      | Three  Months Ended |     |
|                                                     | June 30, 2001                                                                 |      | June  30, 2000      |     |
|                                                     |                                                                               |      |                     |     |
|                                                     |                                                                          |      |                |     |
|                                                     |                                                                          |      |                |     |
| Cash flows from  operating activities:                   |                                                                          |      |                |     |
|                                                     | Net loss                                                                      | $         | (874,845            | )        | $ | (811,546 | ) |
|                                                     | Adjustments to  reconcile net loss to net cash used for operating activities: |      |                |     |   |
|                                                     | Depreciation and  amortization                                                | 56,833    |                | 101,830  |   |
|                                                     | Equity in losses of  3DV Systems, Ltd.                                        | 500,000   |                | 222,553  |   |
|                                                     | Loss on disposal of  property and equipment                                   | -         |                | 2,773    |   |
|                                                     | Stock compensation to  non-employees                                          | 327,169   |                | 199,004  |   |
|                                                     | Changes in assets and  liabilities:                                           |      |                |     |   |
|                                                     | Accounts receivable                                                           | (28,624   | )                   | 161,125  |   |
|                                                     | Inventories                                                                   | (163,252  | )                   | (73,254  | ) |
|                                                     | Prepaid expenses and  deposits                                                | (32,323   | )                   | (14,280  | ) |
|                                                     | Accounts payable                                                              | 239,519   |                | 68,960   |   |
|                                                     | Accrued expenses                                                              | (213,408  | )                   | (122,742 | ) |
|                                                     |                                                                          |           |                |          |   |
|                                                     | Net cash used for  operating activities                                       | (188,931  | )                   | (265,577 | ) |
|                                                     |                                                                          |           |                |          |   |
|                                                     |                                                                          |      |                |     |   |
| Cash flows provided by  (used for) investing activities  |                                                                          |      |                |     |
|                                                     | Decrease in marketable  securities                                            | 835,391   |                | -        |   |
|                                                     | Purchase of property  and equipment, net                                      | (39,852   | )                   | (12,039  | ) |
|                                                     | Proceeds from disposal  of equipment                                          | -         |                | 14,395   |   |
|                                                     |                                                                          |           |                |          |   |
|                                                     |                                                                          |      |                |     |   |
|                                                     | Net cash provided by  investing activities                                    | 795,539   |                | 2,356    |   |
|                                                     |                                                                          |           |                |          |   |
|                                                     |                                                                          |      |                |     |   |
| Cash flows provided by  (used for) financing activities: |                                                                          |      |                |     |
|                                                     | Foreign exchange  losses                                                      | -         |                | (1,062   | ) |
|                                                     | Payments on notes  payable                                                    | (12,646   | )                   | -        |   |
|                                                     | Proceeds from  acceptances payable to a bank                                  | 40,303    |                | 52,753   |   |
|                                                     | Proceeds from the sale  of common stock, net                                  | 600,000   |                | -        |   |
|                                                     | Exercise of stock  options                                                    | 2,375     |                | 323      |   |
|                                                     |                                                                          |           |                |          |   |
|                                                     |                                                                          |      |                |     |   |
|                                                     | Net cash provided by  financing activities                                    | 630,032   |                | 52,014   |   |
|                                                     |                                                                          |           |                |          |   |
|                                                     |                                                                          |      |                |     |   |
| Net increase  (decrease) in cash and cash equivalents    | 1,236,640                                                                     |      | (211,207            | )        |
| Cash and cash  equivalents, beginning of period          | 2,568,724                                                                     |      | 1,581,381           |     |
|                                                     |                                                                               |      |                     |     |
| Cash and cash  equivalents, end of period                | $                                                                             | 3,805,364 |                | $        | 1,370,174 |   |
|                                                     |                                                                               |      |                     |     |
| Supplemental  Disclosure of Cash Flow Information:       |                                                                          |      |                |     |
|                                                     | Cash paid during the  period for interest                                     | $         | 2,182               |     | $ | - |   |
|                                                     |                                                                          |           |                |          |   |
|                                                          |                                                                               |           |                     |          |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES, INC. ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)**

 

**1**.          **Basis of Presentation**

|   | The  unaudited consolidated financial statements included herein have been  prepared by the Company in accordance with generally accepted accounting  principles, without audit, pursuant to the rules and regulations of the  Securities and Exchange Commission and include, in the opinion of management,  all adjustments (consisting only of normal and recurring adjustments) that  the Company considers necessary for a fair presentation of such information.  Certain information and footnote  disclosures normally included in financial statements have been condensed or  omitted pursuant to such rules and regulations.  The Company believes, however, that its disclosures are  adequate to make the information presented not misleading.  These consolidated financial statements  should be read in conjunction with the audited consolidated financial  statements and notes thereto included in the Company's latest annual report to  stockholders.  The results for the  interim periods presented are not necessarily indicative of results to be  expected for the full fiscal year. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**2**.          **Summary of Significant Accounting Policies**

|   | The accompanying  consolidated financial statements reflect the application of certain | accounting policies  described below: |
|--------|----------------------------------------------------------------------------------------|---------------------------------------|

 

|   | a.     | *Principles of Consolidation*:  The accompanying consolidated financial statements include the accounts of  the Company and its wholly-owned subsidiaries.  All material intercompany accounts and transactions have been  eliminated in consolidation.                                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | b**.** | *Cash Equivalents*:  Cash equivalents are carried at market value, which approximates amortized  cost*.** *Cash equivalents are short-term,  highly liquid investments with original maturities of less than three months.                                                                                                                                      |
|   | c.     | *Marketable Securities*:  Marketable securities are carried at market value, which approximates  amortized cost.  The Company has  classified its investments in marketable securities as available-for-sale  securities.  At June 30, 2001, the  Company’s marketable securities consisted of a taxable municipal bond with a  maturity of 160 days. |
|   | d.     | *Inventories*:  Inventories are stated at the lower of  cost or market using the first-in, first-out (FIFO) method and consist of the  following:                                                                                                                                                                                                               |

 

|            | June  30, 2001 |      | March  31, 2001 |   |
|-----------------|----------------|-----------|-----------------|--------|
|            |                |      |                 |   |
|            |           |      | (audited)       |   |
|            |           |      |            |   |
| Raw materials   | $              | 197,940   |            | $      | 118,194 |   |
| Work-in-process | 164,398        |      | 177,804         |   |
| Finished goods  | 806,930        |      | 710,018         |   |
|            |                |      |                 |   |
|            | $              | 1,169,268 |            | $      | 1,006,016 |   |
|            |                |      |                 |   |

                           Work-in-process andfinished goods inventories consist of material, labor, and manufacturingoverhead.

 

|   | e. | *Depreciation and  Amortization*: The Company provides  for depreciation and amortization using the straight-line method in amounts  that allocate the cost of the assets to operations over their estimated  useful lives as follows: |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|                     |                   |
|--------------------------|------------------------|
| Asset  Classification    | Estimated  Useful Life |
|                          |                        |
| Machinery and  Equipment | 3-5  Years             |
| Furniture and Fixtures   | 5  Years               |

 

                           Leaseholdimprovements are amortized over the shorter of their estimated useful lives orthe lives of the leases.

|   | f.                                                                                                                                                  | *Basic  and Diluted Net Loss Per Common Share*:  Basic and diluted net loss per common share is based on the weighted average  number of common shares outstanding.   Shares of common stock issuable pursuant to outstanding stock options  of 470,000 and 1,132,300 as of June 30, 2000 and 2001, respectively, have not  been considered, as their effect would be antidilutive. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | g.                                                                                                                                                  | *Revenue  Recognition*: The Company  recognizes revenue upon product shipment.                                                                                                                                                                                                                                                                                                           |
|   | h.                                                                                                                                                  | *Foreign  Currency Transactions*: In accordance with  SFAS No. 52, *Foreign Currency Translation,* the Company charges foreign  currency exchange gains or losses, in connection with its purchases of  products from vendors in Japan, to operations, and charges foreign exchange  translation gains and losses to retained earnings.                                                  |
|   | i.                                                                                                                                                  | *Income  Taxes*: The Company accounts  for income taxes under the liability method in accordance with SFAS No. 109, *Accounting  for Income Taxes*.  Under  SFAS No. 109, deferred tax assets or liabilities are computed based upon the  differences between the financial statement and income tax bases of assets  and liabilities as measured by the enacted tax rates.         |
|   | The  Company has recorded a valuation allowance equal to its net deferred tax  asset due to the uncertainty of realizing the benefit of this asset. |

 

|   | j. | *Accounting for Derivatives*:  In September 2000, the Emerging Issues Task Force issued EITF 00-19, *Accounting for Derivative Financial Instruments  Indexed to, and Potentially Settled in, a Company’s Own Stock*,  which requires freestanding contracts that are settled in a company’s own  stock, including common stock options and warrants, to be designated as an  equity instrument, an asset or a liability.   Under the provisions of EITF 00-19, a contract designated as an asset  or a liability must be carried at fair value, with any changes in fair value  recorded in the results of operations.   A contract designated as an equity instrument must be included within  equity, and no fair value adjustments are required.  In accordance with EITF 00-19, the Company has determined that  outstanding options as of June 30, 2001 to purchase 1,335,747 shares of the  Company’s common stock should be designated as a liability. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Underthe transition rules of EITF 00-19, effective June 30, 2001, the Company hasrecorded these options as a liability at fair value with a required adjustmentincluded as a cumulative adjustment in its results of operations for the threemonths ended June 30, 2001.  After June30, 2001, the outstanding options will be recorded at fair value with anychanges in the fair value included in the Company’s results of operations.  Pursuant to EITF 00-19, as of June 30, 2001,the Company has recorded an option liability totaling approximately $327,000,which is included under “Potential obligations to non-qualified option holders”in the accompanying balance sheet.  Inaddition, the Company has recorded a cumulative adjustment of approximately$327,000 in the accompanying statement of operations related to all suchoptions.

|   | k. | *Recent Accounting Pronouncements*:  In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.  141, Business Combinations.  SFAS No.  141 requires all business combinations initiated after June 30, 2001 to be  accounted for using the purchase method.   This statement is effective for all business combinations initiated  after June 30, 2001. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

InJuly 2001, the FASB issued SFAS No. 142, *Goodwilland Other Intangible Assets*. This statement applies to goodwill andintangible assets acquired after June 30, 2001, as well as goodwill andintangible assets previously acquired. Under this statement goodwill as well as certain other intangibleassets, determined to have an infinite life, will no longer be amortized,instead these assets will be reviewed for impairment on a periodic basis.  This statement is effective for the Companyfor the first quarter of the fiscal year ended March 2002.  Management does not expect that thesestatements will have a material impact on the Company's financial statements.

**3.**          **Investments in Israel**

*3DV Systems Ltd.*

TheCompany accounts for its investment in 3DV Systems Ltd. (“3DV”) using theequity method of accounting.  Due to theCompany’s commitment to finance the working capital needs of 3DV, the Companyabsorbed 100% of the losses of 3DV up through December 23, 1999.  On that date, 3DV completed a second roundof financing which resulted in an amendment to the Agreement between 3DV andthe Company signed on August 6, 1998. The effect of that amendment was to eliminate the Company’s option topurchase the remaining shares of 3DV under certain conditions, and to exemptthe Company from guaranteeing the working capital requirements of 3DV.  Subsequent to December 23, 1999, the Companycontinued to account for its investment in 3DV using the equity method ofaccounting.  However, after December 23,1999, the Company included only its proportional share of 3DV’s losses, not100% of 3DV’s losses.

InApril and May 2000, 3DV executed a third round of financing with investorsother than the Company.  In March 2001,3DV executed a fourth round of financing with all its investors.  As part of this round, the Company invested$500,000 in Series A Convertible Subordinated Notes (the “Notes”) of 3DV.  The Notes are non-interest bearing, and areconvertible into shares of 3DV at the higher of $22.63 per share or the pricepaid for common shares of 3DV in any subsequent financing that occurs on orbefore March 31, 2002.  As a result, theCompany owned approximately 25% and 24%, respectively, of the outstandingshares of 3DV as of June 30, 2000 and 2001.

Inthe three months ended June 30, 2000, 3DV incurred losses of approximately$2,412,000.  The Company’s investment in3DV totaled $222,553 at March 31, 2000, and accordingly, the Company recognizedequity in losses of 3DV of the total value of that investment in the threemonths ended June 30, 2000.  The Companyrecognized no losses in the three-month periods ended September 30, 2000,December 31, 2000 and March 31, 2001.

Inthe three months ended June 30, 2001, 3DV incurred losses of approximately $2,177,000.  The Company’s investment in 3DV totaled$500,000 at March 31, 2001, and accordingly, the Company recognized equity inlosses of 3DV of the total value of that investment in the three months endedJune 30, 2001.

**4.          StockholdersEquity**

OnJune 13, 2001, the Company completed a private equity placement with a privateinvestor, not previously affiliated with the Company in an offering exempt fromregistration under Section 4(2) of the Securities Act of 1933, as amended.  The Company sold an aggregate of 582,524shares of common stock at a price of $1.03 per share, which represented 90% ofthe average closing price of the common stock on the Nasdaq SmallCap Marketduring the five trading days ended May 31, 2001.  The Company received an aggregate consideration of $600,000 forthe newly issued shares of common stock.

**5.**          **Segment Information**

TheCompany has three reportable segments – Medical, Industrial and Corporate.  The medical segment designs, manufacturesand sells EndoSheaths and sells endoscopes to users in the health careindustry.  The industrial segmentdesigns, manufactures and sells borescopes to a variety of users, primarily inthe aircraft maintenance industry.  Inaddition, the industrial segment manufactures and repairs endoscopes for the medicalsegment.  The corporate segment consistsof certain administrative expenses beneficial to the Company as a whole and themanagement oversight of the Company’s investment in 3DV, Vision-Sciences Ltd.,the Company’s Israeli subsidiary, and the Egypt Project.

The accounting policiesof the segments are described in the summary of significant accountingpolicies.  The Company evaluates segmentperformance based upon operating income. Identifiable assets are those used directly in the operations of each segment.  Corporate assets include cash, marketablesecurities, the assets of Vision-Sciences, Ltd. and the investment in 3DV.  The carrying value of the investment in 3DVat June 30, 2001 was $0.  Data regardingmanagement’s view of the Company’s segments are provided in the followingtable.

 

| Three months ended  June 30,       | Medical                                              |    | Industrial |   | Corporate |     | Adjustments |   | Total     |     |
|------------------------------------|------------------------------------------------------|---------|------------|--------|-----------|----------|-------------|--------|-----------|----------|
|                                    |                                                      |    |            |   |           |     |             |   |           |     |
| **2001**                           |                                                 |    |       |   |      |     |        |   |      |     |
| Sales to external  customers       | $                                                    | 728,981 |       | $      | 1,002,899 |     | $           | -      |      | $        | - |   | $ | 1,731,880 |   |
| Intersegment sales                 | -                                                    |    | 114,097    |   |      |     | (114,097    | )      | -         |     |
| Operating income  (loss)           | (141,434                                             | )       | 180,926    |   | (130,560  | )        | -           |   | (91,068   | )        |
| Interest income, net               | -                                                    |    | (2,182     | )      | 43,929    |     | -           |   | 41,747    |     |
| Depreciation and  amortization     | 48,370                                               |    | 8,463      |   | -         |     | -           |   | 56,833    |     |
| Other significant  non-cash items: |                                                 |    |       |   |      |     |        |   |      |     |
|                               | Equity in losses of  3DV Systems                     | -       |       | -      |      | (500,000 | )           | -      |      | (500,000 | ) |
|                               | Cumulative effect of  change in accounting principle | -       |       | -      |      | (327,169 | )           | -      |      | (327,169 | ) |
| Total assets                       | 1,975,416                                            |    | 1,375,225  |   | 4,309,493 |     | (357,006    | )      | 7,303,128 |     |
| Expenditures for fixed  assets     | 39,852                                               |    | -          |   | -         |     | -           |   | 39,852    |     |
|                               |                                                 |    |       |   |      |     |        |   |      |     |
| **2000**                           |                                                 |    |       |   |      |     |        |   |      |     |
| Sales to external  customers       | $                                                    | 872,518 |       | $      | 707,138   |     | $           | -      |      | $        | - |   | $ | 1,579,656 |   |
| Intersegment sales                 | -                                                    |    | 168,724    |   |      |     | (168,724    | )      | -         |     |
| Operating income  (loss)           | (203,067                                             | )       | (97,503    | )      | (311,321  | )        | -           |   | (611,891  | )        |
| Interest income, net               | -                                                    |    | -          |   | 22,676    |     | -           |   | 22,676    |     |
| Depreciation and  amortization     | 97,676                                               |    | 4,145      |   | 9         |     | -           |   | 101,830   |     |
| Other significant  non-cash items: |                                                 |    |       |   |      |     |        |   |      |     |
|                               | Equity in losses of  3DV Systems                     | -       |       | -      |      | (222,553 | )           | -      |      | (222,553 | ) |
|                               | Cumulative effect of  change in accounting principle | -       |       | -      |      | -        |        | -      |      | -        |   |
| Total assets                       | 2,553,905                                            |    | 945,019    |   | 1,490,582 |     | (695,885    | )      | 4,293,621 |     |
| Expenditures for fixed  assets     | 4,127                                                |    | 7,912      |   | (14,395   | )        | -           |   | (2,356    | )        |
|                               |                                                 |    |       |   |      |     |        |   |      |     |

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Results of Operations

Except for the historical informationherein, the matters discussed in this Form 10-Q include forward-lookingstatements that may involve a number of risks and uncertainties.  Future results may vary significantly basedupon a number of important factors including, but not limited to, risks inmarket acceptance of new products and services and continuing demand for same,the impact of competitive products and pricing, seasonality, changing economicconditions, and other risk factors detailed in the Company’s most recent annualreport and other filings with the Securities and Exchange Commission.

Net sales for the three months ended June30, 2001 (“Q1 02”) were $1,731,880, an increase of $152,224, or 10%, comparedto the three-month period ended June 30, 2000 (“Q1 01”).  During this period, sales of medicalproducts decreased by $143,537, or 16%, and sales of industrial productsincreased by $295,761, or 42%.

The decrease in medical sales was dueprimarily to decreases in sales of EndoSheathsÒ and endoscopes ofapproximately $137,000 and $21,000, respectively, offset partially by a salesincrease of $14,000 for accessories. Sales of EndoSheathsÒfor the Ear-Nose-Throat (“ENT”) market decreased by $3,000, and sales ofEndoSheaths to the gastrointestinal (“GI”) market decreased by $134,000.  Sales of ENT endoscopes increased by $3,000and sales of sigmoidoscopes decreased by $24,000.

Although the number of ENT EndoSheathunits shipped in Q1 02 was greater than in Q1 01, the lower average sellingprice resulted in slightly lower sales. The lower average selling price was due to two factors, the percentageof units shipped to international distributors, and to lower prices institutedby the Company in June 2001 to make the ENT EndoSheath more affordable tocustomers.  The Company shippedapproximately 51,500 ENT EndoSheaths in Q1 02, an increase of 6,400 compared toshipments of approximately 45,100 in Q1 01. Shipments to international distributors comprised approximately 54% oftotal ENT EndoSheath unit shipments in Q1 02, compared to approximately 41% inQ1 01.  International demand for theCompany’s ENT EndoSheath continues to be high, especially in Europe andAustralia.  Although during the threemonths ended June 30, 2001, the Company acquired approximately 39 new domesticENT customers, unit shipments to all domestic customers declined in Q1 02,compared to Q1 01, due to lower demand. The Company expects the lower unit prices will encourage more usage ofthe ENT EndoSheath, both in domestic and international markets.  However, there can be no assurance that thehigher number of units shipped will more than offset the lower unit sellingprices.

The decrease in sales of GI endoscopeswas due primarily to lower demand in Q1 02, compared to Q1 01.  The Company believes the continued lack ofreimbursement for the GI EndoSheath by insurance companies to health care providersis the primary cause for the lower demand.

The higher sales of industrial productsin Q1 02, compared to Q1 01, were due primarily to sharply higher demand duringthis period for the Company’s products by the defense and aircraft maintenancemarkets.

Gross profit in Q1 02 increased to $586,888,or 34% of net sales, compared to $416,919, or 26% of net sales in Q1 01.  Gross profit decreased in the medicalsegment, due primarily to the lower volume of sales of GI EndoSheaths and GIendoscopes, and to lower prices for ENT EndoSheaths.  Gross profit increased in the industrial segment, due primarilyto higher sales volume, product mix and manufacturing efficiencies.

Selling, general and administrativeexpenses in Q1 02 decreased by $165,153, or 20% compared to Q1 01.  Selling, general and administrative expensesamounted to 37% of net sales in Q1 02, compared to 51% in Q1 01.  The decrease in these categories wasprimarily attributable to lower expenses for public relations, productpromotion, commissions and facilities.

Research and development expensesdecreased by $185,701 in Q1 02 compared to Q1 01, and were 2% of sales in Q102, compared to 14% of sales in Q1 01. The lower expenses for research and development were due primarily tolower spending for payroll costs by the medical segment, the inclusion ofcompensation expense related to a non-qualified option holder as a cumulativeaccounting change in Q1 02, compared to a research and development expense ofthe corporate segment in Q1 01, and the elimination of costs at VisionSciences, Ltd., the Company’s Israeli subsidiary.  See note 1 above.

Equity in losses of 3DV Systems in Q1 02was $500,000, an increase of $277,447 compared to equity in losses of 3DVSystems of $222,553 in Q1 01.  See note3 above.

The net loss per share for the three monthsended June 30, 2001 was $.03, compared to a net loss of $.04 per share for thesame period last year.  The loss pershare from operations was $.00 and $.03 in Q1 02 and Q1 01, respectively.

Liquidity and CapitalResources

As of June 30, 2001, the Company had $3.8million in cash and cash equivalents, and working capital of  $4.8 million.  The Company also had a cash collateralized demand line of creditwith a bank for borrowings of up to $250,000. At June 30, 2001, there was approximately $171,000 available under thisline for use in support of general working capital needs and the issuance ofcommercial and standby letters of credit.

The Company’s cash and cash equivalentsincreased by $1,237,000 in the three months ended June 30, 2001, due primarilyto cash provided by investing activities of $796,000, and cash provided byfinancing of $630,000.  These werepartially offset by cash used in operations of $189,000.

Use of Proceeds

The Company expects to use the proceedsof $600,000 raised in a private placement for working capital, the purchase ofnew manufacturing equipment and for general corporate purposes.  In the fiscal year ended March 31, 2001, theCompany entered into a contract for approximately $203,000 for the design andmanufacture of new equipment for manufacturing its ENT EndoSheaths, and hasmade advance payments to the supplier of $87,000 as of June 30, 2001.  The Company expects to make other progresspayments for the new equipment in the second quarter of the fiscal year endingMarch 31, 2002 (“FY 02”) amounting to approximately $70,000.  The Company expects total spending forproperty and equipment will not exceed $350,000 for all of FY 02.  The Company expects the new equipment willbe in place during the second half of FY 02. In addition, as reported in the Company’s Form 10-K for the fiscal yearended March 31, 2001, the Company will continue to evaluate its investment in3DV, and may make further investments if it believes it is in the bestinterests of the Company’s shareholders.

The Company has incurred losses since itsinception, and losses are expected to continue at least during FY 02.  The Company has funded the lossesprincipally with the proceeds from public and private equity financings.  Although the Company does not anticipate theneed for additional financing in FY 02, management has decided that newfinancing may be desirable.  However,there can be no assurance that additional funding will be available, oravailable on reasonable terms.

**Item 3.  QUALITATIVE AND QUANTITATIVE DISCLOSUREABOUT MARKET RISK**

The Company, in the normal course ofbusiness, is subject to the risks associated with fluctuations in interestrates and changes in foreign currency exchange rates.

*Interest and Market Risk*

The Company maintains a portfolio ofmarketable, primarily fixed income, available-for-sale securities of variousissuers, types and maturities.  TheCompany has not used derivative financial instruments in its investmentportfolio.  The Company attempts tolimit its exposure to interest rate and credit risk by placing its investmentswith high-quality financial institutions and has established investmentguidelines relative to diversification and maturities designed to maintainsafety and liquidity.

Investments in both fixed-rate and floating-rateinterest earning instruments carry a degree of interest rate risk.  Fixed-rate securities may have their fairmarket value adversely impacted due to a rise in interest rates, whilefloating-rate securities may produce less income than expected if interestrates decline.  Due in part to thesefactors, the Company’s future investment income may fall short of expectationsdue to changes in interest rates, or the Company may suffer losses in principalif forced to sell securities which have seen a decline in market value due tochanges in interest rates.

*Foreign Currency Exchange*

The Company faces exposure, due topurchases of raw materials from Japanese suppliers, to adverse movements in thevalue of the Japanese Yen.  Thisexposure may change over time, and could have a materially adverse effect onthe Company’s financial results.  TheCompany may attempt to limit this exposure by purchasing forward contracts, asrequired.  Most of the Company’sliabilities are settled within 90 days of receipt of materials.  At June 30, 2001, the Company’s liabilitiesrelating to Japanese Yen were approximately $132,000.

**PART II - OTHER INFORMATION**

**Item 2.  Changes in Securities and Use of Proceeds**

OnJune 13, 2001, the Company completed a private equity placement with a privateinvestor, not previously affiliated with the Company in an offering exempt fromregistration under Section 4(2) of the Securities Act of 1933, as amended.  The Company sold an aggregate of 582,524 sharesof common stock at a price of $1.03 per share, which represented 90% of theaverage closing price of the common stock on the Nasdaq SmallCap Market duringthe five trading days ended May 31, 2001. The Company received an aggregate consideration of $600,000 for thenewly issued shares of common stock.

**Item 6.  Exhibits andReports on Form 8-K**

|   | (a)    | Exhibits             |   |
|--------|--------|----------------------|--------|
|   | .      | None.                |   |
|   | (b)    | Reports  on Form 8-K |   |
|   |   | None.                |   |

 

**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

|                   |   | Vision-Sciences,  Inc.                                 |
|------------------------|--------|--------------------------------------------------------|
|                   |   |                                                   |
| Date:  August 14, 2001 |   | By:                                                    |
|                   |   |                                                   |   |   |
|                   |   |                                                   |
|                   |   | /s/  Gerald B. Lichtenberger                           |
|                   |   |                                                        |
|                   |   | Dr.  Gerald B. Lichtenberger, Ph. D.                   |
|                   |   | Vice  President of Business Development                |
|                   |   |                                                   |
|                   |   |                                                   |
|                   |   | /s/  James A. Tracy                                    |
|                   |   |                                                        |
|                   |   | James  A. Tracy                                        |
|                   |   | Vice  President Finance, Chief Financial Officer and   |
|                   |   | Controller  (Principal Financial Officer and Principal |
|                   |   | Accounting  Officer)                              |
|                   |   |                                                   |
|                   |   |                                                   |