** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D. C. 20459**

 

**FORM 10-Q**

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

 

**COMMISSION FILE NUMBER 0-20970**

 

 

**VISION-SCIENCES, INC.**

(Exactname 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**

(Formername, former address, and

formerfiscal 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 September 30, 2001.

 

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

 

 

**VISION-SCIENCES, INC.**

**TABLE OF CONTENTS**

 
| Part I.  | Financial Information |                                                                                   |
|----------|-----------------------|----------------------------------------------------------------------------------------|
|     |                  |                                                                                   |   |
|     | Item 1.               | Financial  Statements                                                                  |   |
|     |                  |                                                                                   |   |
|     |                  | 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.               | Quantitative  and Qualitative Disclosures about Market Risk                            |   |
|     |                  |                                                                                   |   |
| Part II. | Other Information     |                                                                                   |
|     |                  |                                                                                   |   |
|     | Item 4                |  Submission of Matters to a Vote of  Stockholders                                 |   |
|     |                  |                                                                                   |   |
|     | Signature             |                                                                                   |

 

**PART I - FINANCIAL INFORMATION**

 
| **Item  1:** | **FINANCIAL  STATEMENTS** |
|--------------|---------------------------|

 

**VISION-SCIENCES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

** **
|                                                                                               |   | **September 30,** |      | **March  31,** |   |
|----------------------------------------------------------------------------------------------------|--------|-------------------|-----------|----------------|--------|
|                                                                                               |   | **2001**          |      | **2001**       |   |
|                                                                                               |   |              |      | **(audited)**  |   |
| **ASSETS**                                                                                         |   |
| Current  Assets:                                                                                   |   |              |      |           |   |
| Cash  and cash equivalents                                                                         |   | $                 | 3,301,700 |           | $      | 2,568,724 |   |
| Marketable  securities                                                                             |   | 801,852           |      | 1,243,068      |   |
| Accounts  receivable, net of allowance for doubtful accounts of $84,000 and $98,000,  respectively |   | 930,055           |      | 1,148,092      |   |
| Inventories                                                                                        |   | 1,301,085         |      | 1,006,016      |   |
| Prepaid  expenses and deposits                                                                     |   | 84,288            |      | 66,339         |   |
| Total  current assets                                                                              |   | 6,418,980         |      | 6,032,239      |   |
|                                                                                               |   |              |      |           |   |
| Property  and Equipment, at cost:                                                                  |   |              |      |           |   |
| Machinery  and equipment                                                                           |   | 3,083,563         |      | 2,984,511      |   |
| Furniture  and fixtures                                                                            |   | 208,934           |      | 208,934        |   |
| Leasehold  improvements                                                                            |   | 451,973           |      | 450,396        |   |
|                                                                                               |   | 3,744,470         |      | 3,643,841      |   |
| Less-Accumulated  depreciation and amortization                                                    |   | 3,198,649         |      | 3,083,860      |   |
|                                                                                               |   | 545,821           |      | 559,981        |   |
|                                                                                               |   |              |      |           |   |
| Equity  investment in 3DV Systems, Ltd. (Note 3)                                                   |   | -                 |      | 500,000        |   |
| Other  assets, net of accumulated amortization of $32,000 and $28,000, respectively                |   | 99,271            |      | 102,441        |   |
| Total  assets                                                                                      |   | $                 | 7,064,072 |           | $      | 7,194,661 |   |
|                                                                                               |   |              |      |           |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                           |   |
| Current  Liabilities:                                                                              |   |              |      |           |   |
| Acceptances  payable to a bank                                                                     |   | $                 | 52,205    |           | $      | 38,713 |   |
| Current  portion of note payable                                                                   |   | 51,244            |      | 52,931         |   |
| Accounts  payable                                                                                  |   | 441,728           |      | 287,458        |   |
| Accrued  expenses                                                                                  |   | 1,079,154         |      | 1,377,455      |   |
| Total  current liabilities                                                                         |   | 1,624,331         |      | 1,756,557      |   |
|                                                                                               |   |              |      |           |   |
| Note  payable, net of current portion                                                              |   | -                 |      | 23,989         |   |
|                                                                                               |   |              |      |           |   |
| Potential  obligations to non-qualified option holders                                             |   | 224,938           |      | 188,515        |   |
| Stockholders'  Equity:                                                                             |   |              |      |           |   |
| Common  stock, $.01 par value—                                                                |   |              |      |           |   |
| Authorized—50,000,000  shares                                                                 |   |              |      |           |   |
| Issued  and outstanding—27,105,355 shares at                                                  |   |              |      |           |   |
| September  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                                                                               |   | (53,442,751       | )         | (52,641,064    | )      |
| Total  stockholders' equity                                                                        |   | 5,214,803         |      | 5,225,600      |   |
| Total  liabilities and stockholders' equity                                                        |   | $                 | 7,064,072 |           | $      | 7,194,661 |   |
|                                                                                                    |        |                   |           |                |        |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
|                                                                           |   | **Three  Months Ended** |      | **Six  Months Ended** |   |
|--------------------------------------------------------------------------------|--------|-------------------------|-----------|-----------------------|--------|
|                                                                           |   | **September  30,**      |      | **September  30,**    |   |
|                                                                           |   | **2001**                |      | **2000**              |   | **2001** |   | **2000** |   |
| Net  sales                                                                     |   | $                       | 1,720,279 |                  | $      | 1,706,969 |   | $ | 3,452,159 |   | $ | 3,286,625 |   |
| Cost  of sales                                                                 |   | 1,059,524               |      | 1,110,905             |   | 2,204,516 |   | 2,273,641 |   |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Gross  profit                                                                  |   | 660,755                 |      | 596,064               |   | 1,247,643 |   | 1,012,984 |   |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Selling,  general and administrative expenses                                  |   | 695,422                 |      | 689,613               |   | 1,340,238 |   | 1,499,582 |   |
| Research  and development expenses(1)                                          |   | 29,760                  |      | 76,273                |   | 62,900 |   | 148,250 |   |
| Stock-based  compensation                                                      |   | (102,231                | )         | 99,203                |   | (102,231 | ) | 246,067 |   |
| Income  (loss) from operations                                                 |   | 37,804                  |      | (269,025              | )      | (53,264 | ) | (880,915 | ) |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Interest  income                                                               |   | 35,182                  |      | 20,069                |   | 79,111 |   | 42,744 |   |
| Interest  expense                                                              |   | (1,799                  | )         | (1,050                | )      | (3,981 | ) | (1,050 | ) |
| Equity  in losses of 3DV Systems Ltd                                           |   | -                       |      | -                     |   | (500,000 | ) | (222,553 | ) |
| Other  income                                                                  |   | 1,972                   |      | 1,421                 |   | 3,616 |   | 1,643 |   |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Net  income (loss) before cumulative effect of change in accounting principle  |   | 73,159                  |      | (248,585              | )      | (474,518 | ) | (1,060,131 | ) |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Cumulative  effect of change in accounting principle (Note 2)                  |   | -                       |      | -                     |   | 327,169 |   | - |   |
| Net  income (loss) after cumulative effect of change in accounting principle   |   | $                       | 73,159    |                  | $      | (248,585 | ) | $ | (801,687 | ) | $ | (1,060,131 | ) |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Basic  and diluted net income (loss) per common share                          |   | $                       | 0.00      |                  | $      | (0.01 | ) | $ | (0.03 | ) | $ | (0.05 | ) |
|                                                                           |   |                    |      |                  |   |   |   |   |   |
| Shares  used in computing basic and diluted net income (loss) per common share |   | 27,105,355              |      | 20,933,413            |   | 26,872,272 |   | 20,930,061 |   |

 

----

(1)   Excludes non-cash stock-based compensation,as follows:

 
| Research  and development expenses (1) |   | $ | (102,231 | ) | $ | 99,203 |   | $ | (102,231 | ) | $ | 246,067 |   |
|----------------------------------------|--------|---|----------|---|---|--------|--------|---|----------|---|---|---------|--------|

 

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS' 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                                                          |   | -                     |   | -                   |    | -                               |   | (801,687                 | )      | (801,687                              | )           | $ | (801,687 | ) |
|                                                              |   |                  |   |                |    |                            |   |                     |   |                                  |        |   |   |
| Total comprehensive loss                                          |   |                  |   |                |    |                            |   |                     |   |                                  |        | $ | (801,687 | ) |
|                                                              |   |                  |   |                |    |                            |   |                     |   |                                  |        |   |   |
| Balance September 30, 2001                                        |   | 27,105,355            |   | $                   | 271,052 |                            | $      | 58,386,502               |   | $                                     | (53,442,751 | ) | $ | 5,214,803 |   |   |   |

 

Seeaccompanying notes to consolidated financial statements.

**VISION-SCIENCES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
|                                                                          |   | **Six  Months Ended**   |           | **Six  Months Ended**   |           |
|-------------------------------------------------------------------------------|--------|-------------------------|----------------|-------------------------|----------------|
|                                                                          |   | **September  30, 2001** |           | **September  30, 2000** |           |
| Cash  flows from operating activities:                                        |   |                    |           |                    |           |
| Net  loss                                                                     |   | $                       | (801,687       | )                       | $              | (1,060,131 | ) |
| Adjustments  to reconcile net loss to net cash used for operating activities: |   |                    |      |                    |      |
| Depreciation  and amortization                                                |   | 117,959                 |           | 132,046                 |           |
| 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                                          |   | 224,938                 |           | 298,207                 |           |
| Changes  in assets and liabilities:                                           |   |                    |           |                    |           |
| Accounts  receivable                                                          |   | 218,037                 |           | 226,668                 |           |
| Inventories                                                                   |   | (295,069                | )              | 43,384                  |           |
| Prepaid  expenses and deposits                                                |   | (17,949                 | )              | (233,994                | )              |
| Accounts  payable                                                             |   | 154,270                 |           | 26,100                  |           |
| Accrued  expenses                                                             |   | (298,301                | )              | (137,071                | )              |
|                                                                          |   |                    |           |                    |           |
| Net  cash used for operating activities                                       |   | (197,802                | )              | (479,465                | )              |
|                                                                          |   |                    |           |                    |           |
| Cash  flows provided by (used for) investing activities                       |   |                    |           |                    |           |
| Decrease  in marketable securities                                            |   | 441,216                 |           | -                       |           |
| Purchase  of property and equipment, net                                      |   | (100,629                | )              | (32,294                 | )              |
|                                                                          |   |                    |           |                    |           |
| Net  cash provided by (used for) investing activities                         |   | 340,587                 |           | (32,294                 | )              |
|                                                                          |   |                    |           |                    |           |
| Cash  flows provided by (used for) financing activities:                      |   |                    |           |                    |           |
| Foreign  exchange losses                                                      |   | -                       |           | (1,062                  | )              |
| Proceeds  from note payable to stockholders                                   |   | -                       |           | 150,000                 |           |
| Payments  on note payable for leasehold improvements                          |   | (25,676                 | )              | (3,893                  | )              |
| Proceeds  from acceptances payable to a bank                                  |   | 13,492                  |           | 19,737                  |           |
| Proceeds  from the sale of common stock, net                                  |   | 600,000                 |           | -                       |           |
| Exercise  of stock options                                                    |   | 2,375                   |           | 323                     |           |
|                                                                          |   |                    |           |                    |           |
| Net  cash provided by financing activities                                    |   | 590,191                 |           | 165,105                 |           |
|                                                                          |   |                    |           |                    |           |
| Net  increase (decrease) in cash and cash equivalents                         |   | 732,976                 |           | (346,654                | )              |
| Cash  and cash equivalents, beginning of period                               |   | 2,568,724               |           | 1,581,381               |           |
| Cash  and cash equivalents, end of period                                     |   | $                       | 3,301,700      |                    | $              | 1,234,727 |   |
|                                                                          |   |                    |           |                    |           |
| Supplemental  Disclosure of Non-Cash Investing Activities:                    |   |                    |           |                    |           |
| Leasehold  improvements acquired in exchange for note payable                 |   | $                       |  -        |                    | $              |  105,000 |   |
| Supplemental  Disclosure of Cash Flow Information:                            |   |                    |           |                    |           |
| Cash  paid during the period for interest                                     |   | $                       | 3,981          |                    | $              | 1,050 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

**VISION-SCIENCES,INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(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 September 30, 2001,  the Company’s marketable securities consisted of commercial paper with a  maturity of 177 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: |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  |

 
|                                                                                                     |   | **September 30,** |      | **March  31,** |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|----------------|--------|
|                                                                                                     |   | **2001**          |      | **2001**       |   |
|                                                                                                     |   |              |      | **(audited)**  |   |
| Raw  materials                                                                                           |   | $                 | 366,654   |           | $      | 118,194 |   |
| Work-in-process                                                                                          |   | 204,539           |      | 177,804        |   |
| Finished  goods                                                                                          |   | 729,892           |      | 710,018        |   |
|                                                                                                     |   | $                 | 1,301,085 |           | $      | 1,006,016 |   |
|                                                                                                     |   |              |      |           |   |   |   |
| Work-in-process and  finished goods inventories consist of material, labor, and manufacturing  overhead. |

 
|   | 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: |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

 
|   |   | Leasehold  improvements are amortized over the shorter of their estimated useful lives  or the 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 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 September 30, 2001 to purchase 1,335,747 shares of the  Company’s common stock should be designated as a liability. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Under  the transition rules of EITF 00-19, effective June 30, 2001, the Company  recorded these options as a liability at fair value with the required adjustment  included as a cumulative adjustment in its results of operations for the  three months ended June 30, 2001.   Pursuant to EITF 00-19, as of June 30, 2001, the Company recorded an  option liability totaling approximately $327,000, which was included under “Potential  obligations to non-qualified option holders” in the Company’s balance  sheet.  For the three months ended  September 30, 2001, the fair value of these outstanding options declined to  approximately $225,000.  Accordingly,  the Company recorded a credit in its results of operations of approximately  $102,000 for the three months ended September 30, 2001.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | k.     | *Recent Accounting Pronouncements:*  In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.  143,*Accounting for Asset Retirement  Obligations*.  SFAS No. 143  requires all entities to recognize the fair value of liabilities for an asset  retirement in the period in which it is incurred if reasonable estimates of  fair value can be made.  This  statement is effective for all financial statements issued for fiscal years  beginning after June 15, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | In  August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or  Disposal of Long-Lived Assets*.   This statement applies to the accounting for long-lived assets, including  reporting the effects of the disposal of a segment of a business.  This statement is effective for all  financial statements issued for fiscal years beginning after December 15,  2001.  Management does not expect that  these statements will have a material impact on the Company's financial  statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 
| **3.** | **Investments in Israel**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *3DV Systems Ltd.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | The  Company accounts for its investment in 3DV Systems Ltd. (“3DV”) using the  equity method of accounting.  Due to  the Company’s commitment to finance the working capital needs of 3DV, the  Company absorbed 100% of the losses of 3DV up through December 23, 1999.  On that date, 3DV completed a second round  of financing which resulted in an amendment to the Agreement between 3DV and  the Company signed on August 6, 1998.   The effect of that amendment was to eliminate the Company’s option to  purchase the remaining shares of 3DV under certain conditions, and to exempt  the Company from guaranteeing the working capital requirements of 3DV.  Subsequent to December 23, 1999, the  Company continued to account for its investment in 3DV using the equity  method of accounting.  However, after  December 23, 1999, the Company included only its proportional share of 3DV’s  losses, not 100% of 3DV’s losses. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | In  April and May 2000, 3DV executed a third round of financing with investors  other 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 are convertible into shares of 3DV at the higher of $22.63 per  share or the price paid for common shares of 3DV in any subsequent financing  that occurs on or before March 31, 2002.   As a result, the Company owned approximately 25% and 24%,  respectively, of the outstanding shares of 3DV as of June 30, 2000 and 2001.                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | In  September 2001, 3DV executed a fifth round of financing with investors other  than the Company, including two employee-directors of the Company.  The terms of this financing are  substantially the same as the fourth round.   The amount being raised is $2,000,000, payable in two equal installments  in September 2001 and December 2001.   Subsequent to the installment of September 2001, the Company holds  approximately 24% of the outstanding shares of 3DV, and would hold  approximately 18% of the shares of 3DV, if all employee options and Notes  were converted to common shares.                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | In  the three months ended June 30, 2000, 3DV incurred losses of approximately  $2,412,000.  The Company’s investment  in 3DV totaled $222,553 at March 31, 2000, and accordingly, the Company  recognized equity in losses of 3DV of the total value of that investment in  the three months ended June 30, 2000.   The Company recognized no losses in the three-month periods ended  September 30, 2000, December 31, 2000 and March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | In  the 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 in losses of 3DV of the total value of that investment in  the three months ended June 30, 2001. The Company recognized no losses in the  three-month period ended September 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 
| **4.** | **Segment Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | The  Company 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 beneficial to the Company as a whole and the  management oversight of the Company’s investment in 3DV, Vision-Sciences  Ltd., the Company’s Israeli subsidiary, and the Egypt Project. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 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, the assets of  Vision-Sciences, Ltd. and the investment in 3DV.  The carrying value of the investment in 3DV at September 30,  2001 was $0.  Data regarding management’s  view of the Company’s segments are provided in the following tables.                                                                                                                                              |

 
| **Three  months ended September 30,**                        |   | **Medical** |    | **Industrial** |   | **Corporate** |   | **Adjustments** |    | **Total** |   |
|--------------------------------------------------------------|--------|-------------|---------|----------------|--------|---------------|--------|-----------------|---------|-----------|--------|
| **2001**                                                     |   |        |    |           |   |          |   |            |    |      |   |
| Sales  to external customers                                 |   | $           | 884,186 |           | $      | 836,093       |   | $               | -       |      | $      | - |   | $ | 1,720,279 |   |
| Intersegment  sales                                          |   | -           |    | 144,283        |   |          |   | (144,283        | )  | -         |   |
| Operating  income (loss)                                     |   | (18,648     | )       | 132,415        |   | (75,963       | )      | -               |    | 37,804    |   |
| Interest  income (expense)                                   |   | -           |    | (1,799         | )      | 35,182        |   | -               |    | 33,383    |   |
| Depreciation  and amortization                               |   | 52,691      |    | 8,436          |   | -             |   | -               |    | 61,127    |   |
| Other  significant non-cash items:                           |   |        |    |           |   |          |   |            |    |      |   |
|                                                         |   |        |    |           |   |          |   |            |    |      |   |
| Expenditures  for fixed assets                               |   | 60,036      |    | 741            |   | -             |   | -               |    | 60,777    |   |
|                                                         |   |        |    |           |   |          |   |            |    |      |   |
| **2000**                                                     |   |        |    |           |   |          |   |            |    |      |   |
| Sales  to external customers                                 |   | $           | 814,250 |           | $      | 892,719       |   | $               | -       |      | $      | - |   | $ | 1,706,969 |   |
| Intersegment  sales                                          |   | -           |    | 89,604         |   |          |   | (89,604         | )  | -         |   |
| Operating  income (loss)                                     |   | (59,978     | )       | 73,688         |   | (282,735      | )      | -               |    | (269,025  | )      |
| Interest  income (expense)                                   |   | -           |    | (1,050         | )      | 20,069        |   | -               |    | 19,019    |   |
| Depreciation  and amortization                               |   | 24,362      |    | 5,854          |   | -             |   | -               |    | 30,216    |   |
| Other  significant non-cash items:                           |   |        |    |           |   |          |   |            |    |      |   |
| Leasehold  improvement acquired in exchange for note payable |   | -           |    | 105,000        |   | -             |   | -               |    | 105,000   |   |
| Expenditures  for fixed assets                               |   | 4,617       |    | 30,033         |   | -             |   | -               |    | 34,650    |   |

 

 
| **Six  months ended September 30,**                          |   | **Medical** |      | **Industrial** |   | **Corporate** |   | **Adjustments** |   | **Total** |   |
|--------------------------------------------------------------|--------|-------------|-----------|----------------|--------|---------------|--------|-----------------|--------|-----------|--------|
| **2001**                                                     |   |        |      |           |   |          |   |            |   |      |   |
| Sales  to external customers                                 |   | $           | 1,613,167 |           | $      | 1,838,992     |   | $               | -      |      | $      | - |   | $ | 3,452,159 |   |
| Intersegment  sales                                          |   | -           |      | 258,380        |   |          |   | (258,380        | )      | -         |   |
| Operating  income (loss)                                     |   | (160,082    | )         | 313,341        |   | (206,523      | )      | -               |   | (53,264   | )      |
| Interest  income (expense)                                   |   | -           |      | (3,981         | )      | 79,111        |   | -               |   | 75,130    |   |
| Depreciation  and amortization                               |   | 101,061     |      | 16,898         |   | -             |   | -               |   | 117,959   |   |
| Other  significant non-cash items:                           |   |        |      |           |   |          |   |            |   |      |   |
| Equity  in losses of 3DV Systems                             |   | -           |      | -              |   | (500,000      | )      | -               |   | (500,000  | )      |
| Cumulative  effect of change inaccounting principle          |   | -           |      | -              |   | (327,169      | )      | -               |   | (327,169  | )      |
| Total  assets                                                |   | 1,838,461   |      | 1,244,522      |   | 4,200,004     |   | (218,915        | )      | 7,064,072 |   |
| Expenditures  for fixed assets                               |   | 99,888      |      | 741            |   | -             |   | -               |   | 100,629   |   |
|                                                         |   |        |      |           |   |          |   |            |   |      |   |
| **2000**                                                     |   |        |      |           |   |          |   |            |   |      |   |
| Sales  to external customers                                 |   | $           | 1,686,769 |           | $      | 1,599,856     |   | $               | -      |      | $      | - |   | $ | 3,286,625 |   |
| Intersegment  sales                                          |   | -           |      | 258,328        |   |          |   | (258,328        | )      | -         |   |
| Operating  income (loss)                                     |   | (263,045    | )         | (23,815        | )      | (594,055      | )      | -               |   | (880,915  | )      |
| Interest  income (expense)                                   |   | -           |      | (1,050         | )      | 42,744        |   | -               |   | 41,694    |   |
| Depreciation  and amortization                               |   | 122,038     |      | 9,999          |   | 9             |   | -               |   | 132,046   |   |
| Other  significant non-cash items:                           |   |        |      |           |   |          |   |            |   |      |   |
| Equity  in losses of 3DV Systems                             |   | -           |      | -              |   | (222,553      | )      | -               |   | (222,553  | )      |
| Leasehold  improvement acquired in exchange for note payable |   | -           |      | 105,000        |   | -             |   | -               |   | 105,000   |   |
| Total  assets                                                |   | 2,346,008   |      | 979,153        |   | 1,573,882     |   | (593,903        | )      | 4,305,140 |   |
| Expenditures  for fixed assets                               |   | 8,744       |      | 37,945         |   | (14,395       | )      | -               |   | 32,294    |   |

 
| **Item 2.** | **MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL 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 endedSeptember 30, 2001 (“Q2 02”) were $1,720,279, an increase of $13,310, or 1%,compared to the three-month period ended September 30, 2000 (“Q2 01”).  During this period, sales of medicalproducts increased by $69,936, or 9%, and sales of industrial productsdecreased by $56,626, or 6%.

 

The increase in medical sales was dueprimarily to higher demand for the Company’s endoscopes and EndoSheathsÒ for the Ear-Nose-Throat(“ENT”) market of approximately $112,000 and $23,000, respectively, and higherdemand for EndoSheaths and endoscopes for the pulmonary market of approximately$24,000.  This higher demand was offsetpartially by lower demand for the Company’s gastrointestinal (“GI”) products ofapproximately $93,000.  In addition,sales of accessories increased by approximately $4,000.

 

The number of ENT EndoSheath unitsshipped in Q2 02 was greater by 24% than in Q2 01.  However, lower average selling prices per unit resulted in asales increase of 5%.  The lower averageselling price was due to two factors, lower prices instituted by the Company inJune 2001 to make the ENT EndoSheath more affordable to customers and to ahigher percentage of units shipped to international distributors.  Shipments to international distributors havea lower average selling price than do shipments to domestic end users.  The Company shipped approximately 62,400 ENTEndoSheaths in Q2 02, an increase of 11,900, or 24%, compared to shipments ofapproximately 50,500 in Q2 01. Shipments to international distributors comprised approximately 54% oftotal ENT EndoSheath unit shipments in Q2 02, compared to approximately 52% inQ2 01.  International demand for theCompany’s ENT EndoSheath continues to be high, especially in Europe andAustralia.  During Q2 02, the Companyacquired approximately 34 new domestic ENT customers, and unit shipments to alldomestic customers increased by 18% in Q2 02, compared to Q2 01, primarily dueto higher demand generated by the lower prices.

 

The decrease in sales ofGI endoscopes was due primarily to lower demand in Q2 02, compared to Q201.  The Company believes the continuedlack of reimbursement for the GI EndoSheath by insurance companies to healthcare providers is the primary cause for the lower demand.

 

The lower sales of industrial products inQ2 02, compared to Q2 01, were due primarily to lower demand during this periodfor the Company’s products by the defense and aircraft maintenance markets.

 

Net sales for the six months endedSeptember 30, 2001 (“2001”) increased by $165,534, or 5% compared to thesix-month period ended September 30, 2000 (“2000”).  During this period, sales of the medical segment decreased by$73,602, or 4%, and sales of the industrial segment increased by $239,136, or15%.

 

The decrease in medical sales was due tolower demand for the Company’s endoscopes and EndoSheaths for the GI market ofapproximately $251,000.  This waspartially offset by higher demand for the Company's endoscopes and EndoSheathsfor the ENT market of approximately $135,000, for the pulmonary market ofapproximately $24,000, and accessories of approximately $19,000.

 

The number of ENT EndoSheath unitsshipped in 2001 was greater by 19% than in 2000.  However, lower average selling prices per unit resulted in asales increase of 2%.  The lower averageselling price was due to two factors, lower prices instituted by the Company inJune 2001 to make the ENT EndoSheath more affordable to customers and anincrease in the percentage of units shipped to international distributors.Shipments to international distributors have a lower average selling price thando shipments to domestic end users.  TheCompany shipped approximately 113,900 ENT EndoSheaths in 2001, an increase of18,300, or 19%, compared to shipments of approximately 95,600 in 2000.  Shipments to international distributorscomprised approximately 54% of total ENT EndoSheath unit shipments in 2001,compared to approximately 47% in 2000. International demand for the Company’s ENT EndoSheath continues to behigh, especially in Europe and Australia. During 2001, the Company acquired approximately 73 new domestic ENTcustomers, and unit shipments to all domestic customers increased in the periodby approximately 2%, compared to 2000, due to higher demand generated by thelower prices.  The Company expects thelower unit prices will encourage more usage of the ENT EndoSheath, both indomestic and international markets. However, there can be no assurance that the higher number of unitsshipped will more than offset the lower unit selling prices.

 

Gross profit in Q2 02 increased to$660,755, or 38% of net sales, compared to $596,064, or 35% of net sales in Q201.  Gross profit decreased slightly inthe medical segment, due primarily to the lower prices for ENT EndoSheaths,lower volume of products shipped to the GI market and higher costs forutilities.  Gross profit increased inthe industrial segment, due primarily to higher sales volume, a favorableproduct mix and lower facility costs.

 

Gross profit in 2001 increased to$1,247,643, or 36% of net sales, compared to $1,012,984, or 31% of net sales in2000.  Gross profit decreased byapproximately 12% in the medical segment, due primarily to the lower prices forENT EndoSheaths, lower volume of products shipped to the GI market and a lessfavorable product mix resulting in less efficient manufacturingoperations.  Gross profit increased inthe industrial segment, due primarily to higher sales volume, a favorableproduct mix resulting in higher manufacturing efficiencies and lower facilitycosts.

 

Selling, general and administrative(“SG&A”) expenses in Q2 02 increased by $5,809, or 1% compared to Q201.  SG&A expenses amounted to 40%of net sales in Q2 02 and in Q2 01.  Theincrease in these categories was primarily attributable to higher expenses inthe industrial and corporate segments of $8,000 and $22,000, respectively,offset partially by lower expenses in the medical segment of $24,000.  The industrial segment incurred higherexpenses for commissions, due to the mix of sales, and higher expenses forproduct promotion.  These were partiallyoffset by lower facility costs.  Thecorporate segment incurred higher payroll costs and higher costs for consultingfees and patent applications related to the CMOS innovations.  The medical segment had lower costs forpayroll, which will change after Q2 02, as the Company hired a new VP of Salesand Marketing in October 2001.

 

SG&A expenses decreased by $159,344in 2001, compared to 2000.  SG&Aexpenses amounted to 39% of sales in 2001, compared to 46% of sales in2000.  SG&A expenses decreased inthe medical and industrial segments by $132,000 and $34,000, respectively,while increasing by $7,000 in the corporate segment.  The primary causes for the decrease in the medical segment werelower costs for payroll and commissions. In the industrial segment the decrease in SG&A expenses was dueprimarily to lower facility costs, resulting from their move to more efficientoffice space in September 2000.  Thecorporate segment incurred higher expenses for payrolls and consulting feesrelated to CMOS patents, while reducing costs for investor relations anddomestic legal fees.

 

Research and development (“R&D”) expensesdecreased by $46,513 in Q2 02 compared to Q2 01, and were 2% of sales in Q2 02,compared to 4% of sales in Q2 01.  Thelower expenses for R&D were due primarily to lower spending for payrollcosts by the medical segment, and a favorable comparison to Q2 01 whichincluded a charge of approximately $26,000 for the Egypt Project. The lowercosts for payroll in the medical segment will change after Q2 02, as theCompany hired a new Project Engineering Manager in October 2001.

 

R&D expenses decreased by $85,350 for2001, compared to 2000, and were 2% of sales in 2001, compared to 5% in2000.  The primary causes for thisdecrease were lower costs for payrolls in the medical segment of approximately$39,000 in 2001, compared to 2000, a charge of $26,000 related to the EgyptProject in 2000 which did not recur in 2001 and a reduction of approximately$20,000 for costs related to the company’s subsidiary in Israel.

 

Stock-based compensation costs declinedby $201,434 in Q2 02, compared to Q2 01. This charge is computed using the Black-Scholes method, which uses stockprice volatility, the closing price of the Company’s common stock as traded onthe Nasdaq SmallCap and other factors to determine the compensation amount ofnon-qualified options.  For Q2 02, the changein the Company’s closing stock price was the largest cause for the reduction inthis cost.

 

The Company did not record equity inlosses of 3DV Systems in Q2 02 nor in Q2 01. For 2001 the Company recorded equity in the losses of 3DV of $500,000,compare to $222,553 in 2000.  See Note 3above.

 

The net loss per share for the threemonths ended September 30, 2001 was $.00, compared to a net loss of $.01 pershare for the same period last year. For 2001, the loss per share was $.03, compared to $.05 for 2000.

 

Liquidity and CapitalResources

 

As of September 30, 2001, the Company had$4.1 million in cash, cash equivalents and marketable securities, and workingcapital of  $4.8 million.  The Company also had a cash collateralizeddemand line of credit with a bank for borrowings of up to $250,000.  At September 30, 2001, there wasapproximately $198,000 available under this line for use in support of generalworking capital needs and the issuance of commercial and standby letters ofcredit.

 

The Company’s cash and cash equivalentsincreased by $733,000 in the six months ended September 30, 2001, due primarilyto cash provided by financing activities of $590,000, and cash provided byinvesting of $341,000.  These werepartially offset by cash used in operations of $198,000.

 

In the fiscal year ended March 31, 2001,the Company entered into a contract for approximately $203,000, subsequentlyincreased by approximately $26,000, for the design and manufacture of newequipment for manufacturing its ENT EndoSheaths, and has made advance paymentsto the supplier of $132,000 as of September 30, 2001.  The Company expects to make other progress payments for the newequipment in the second half of the fiscal year ending March 31, 2002 (“FY 02”)amounting to approximately $96,000.  TheCompany expects total spending for property and equipment will not exceed$350,000 for all of FY 02.  The Companyexpects the new equipment will be in place during the second half of FY02.  In addition, as reported in theCompany’s Form 10-K for the fiscal year ended March 31, 2001, the Company willcontinue to evaluate its investment in 3DV, and may make further investments ifit believes it is in the best interests 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.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.

 

*Interestand 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 andfloating-rate interest earning instruments carry a degree of interest raterisk.  Fixed-rate securities may havetheir fair market value adversely impacted due to a rise in interest rates,while floating-rate securities may produce less income than expected ifinterest rates decline.  Due in part tothese factors, the Company’s future investment income may fall short ofexpectations due to changes in interest rates, or the Company may suffer lossesin principal if forced to sell securities which have seen a decline in marketvalue due to changes in interest rates.

 

*ForeignCurrency 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’s liabilitiesare settled within 90 days of receipt of materials.  At September 30, 2001, the Company’s liabilities relating toJapanese Yen were approximately $68,000.

**PART II- OTHER INFORMATION**

 
| **Item 4:** | **Submission  of Matters to a Vote of Stockholders** |
|-------------|------------------------------------------------------|

** **

TheCompany held the 2001 Annual General Meeting of Shareholders (the “AnnualMeeting”) on August 16, 2001.  At theAnnual Meeting, the following actions were taken:

 
| 1.     | The stockholders  re-elected Lewis C. Pell and John J. Wallace as Class I Directors, to serve  for a three-year term.  Holders of  21,227,006 shares of Common Stock voted for and holders of 108,770 shares of  Common Stock withheld voting for each of Mr. Pell and Mr. Wallace.  In addition to Mr. Pell and Mr. Wallace,  Katsumi Oneda, Dr. Gerald B. Lichtenberger, Ph.D., and Fred E. Silverstein,  M.D. continue to serve on the Board of Directors.                                                                                                              |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.     | The stockholders  adopted a proposal to approve the future issuance of up to $5,000,000 of  Common Stock, provided such issuance did not exceed 10,000,000 shares of  Common Stock, in an offering exempt from registration under the Securities  Act of 1933 (the “Act”), as amended, on terms approved by the Board of  Directors.  Holders of 16,457,416  shares of Common Stock voted for the proposal, holders of 197,694 shares of  Common Stock voted against the proposal and holders of 4,633 shares of Common  Stock abstained from voting on the proposal. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.     | The stockholders  ratified the appointment of Arthur Andersen LLP as the Company’s independent  auditor for the current fiscal year.   Holders of 21,314,396 shares of Common Stock voted for ratification,  holders of 16,780 shares of Common Stock voted against ratification and  holders of 4,600 shares of Common Stock abstained from ratification.                                                                                                                                                                                                                 |

 
| **Item 6.** | **Exhibits and Reports 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: November 2, 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) |