SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        to


COMMISSION FILE NUMBER 0-20970

VISION-SCIENCES, INC.(Exact name of registrant as specified in its charter)

Delaware

13-3430173(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification Number)40 Ramland Road South, Orangeburg, NY

10962(Address of principal executive offices)

(Zip Code)


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

None(Former name, former address, and
former fiscal year if changed since last report)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes ý        No o

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company.
See definitions of "accelerated filer", "large accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes o        No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 11, 2008

Common Stock, par value of $.01

36,666,274(Title of Class)

(Number of Shares)




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VISION-SCIENCES, INC.
TABLE OF CONTENTS

Part I.

Financial InformationItem 1.

Financial StatementsConsolidated Balance Sheets

3Consolidated Statements of Operations

4Consolidated Statement of Stockholders' Equity

5Consolidated Statements of Cash Flows

6Notes to Consolidated Financial Statements

7Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

15Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26Item 4.

Controls and Procedures

26Item 4T.

Controls and Procedures

26Part II.

Other Information

28Item 1.

Legal Proceedings

28Item 1A.

Risk Factors

28Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40Item 3.

Defaults Upon Senior Securities

40Item 4.

Submission of Matters to a Vote of Stockholders

49Item 5.

Other Information

40Item 6.

Exhibits

40Signatures

41


2

---





PART IFINANCIAL INFORMATION  Item 1: Financial Statements

VISION-SCIENCES, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS(Unaudited)

June 30,
2008

March 31,
2008ASSETSCurrent assets:Cash and cash equivalents

$
3,247,289

$
10,655,033Short term investments


13,415,579


8,062,418Accounts receivable, net of allowance for doubtful accounts of $162,800 and $129,600 in 2008 and 2007, respectively


2,022,260


1,092,460Inventories, net


5,642,362


4,021,077Prepaid expenses and deposits


281,989


446,682Total current assets


24,609,479


24,277,670Property and equipment, at cost:Machinery and equipment


5,379,965


5,073,701Furniture and fixtures


497,473


390,586Leasehold improvements


594,953


594,9536,472,391


6,059,240LessAccumulated depreciation and amortization


4,381,208


4,282,783Total property and equipment, net


2,091,183


1,776,457Other assets, net of accumulated amortization of $72,200 and $81,700 in 2008 and 2007, respectively


333,462


363,225Total assets

$
27,034,124

$
26,417,352LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Capital lease obligations

$
43,153

$
56,810Accounts payable


988,888


1,768,859Accrued expenses


2,345,591


2,439,159Total current liabilities


3,377,632


4,264,828Capital lease obligations, net of current portion


81,083


81,083Total liabilities


3,458,715


4,345,911Commitments and contingencies





Stockholders' equity:Preferred stock, $.01 par valueAuthorized5,000,000 sharesIssued and outstandingnone





Common stock, $.01 par valueAuthorized50,000,000 sharesIssued and outstanding36,661,899 shares and 35,647,512 shares at June 30, 2008 and 2007, respectively


366,618


356,474Additional paid-in capital


79,114,347


77,477,690Accumulated deficit


(55,905,556
)

(55,762,723
)Total stockholders' equity


23,575,409


22,071,441Total liabilities and stockholders' equity

$
27,034,124

$
26,417,352


See accompanying notes to consolidated financial statements.

3

---





VISION-SCIENCES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

Three Months Ended
June 30,2008

2007Net sales

$
2,928,934

$
2,430,438Cost of sales


2,239,802


1,487,046Gross profit


689,132


943,392Selling, general and administrative expenses


2,919,369


1,747,288Research and development expense


1,171,092


835,273Restructuring charge


27,744


Loss from operations


(3,429,073
)

(1,639,169
)Interest income


79,571


279,057Interest expense


(13,904
)

Other income (expense), net





(1,560
)Gain on sale of product line, net of direct costs


3,229,885


Loss in equity investment





(82,255
)Loss before provision for income taxes


(133,521
)

(1,443,927
)Provision for income taxes


9,312


Net loss

$
(142,833
)
$
(1,443,927
)Basic and diluted net loss per common share

$
(0.00
)*
$
(0.04
)Shares used in computing basic and diluted net loss per common share


36,661,899


35,249,431


---

See
accompanying notes to consolidated financial statements.

4

---





VISION-SCIENCES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(Unaudited)

Preferred Stock

Common StockNumber
of Shares

$0.01
Par Value

Number
of Shares

$0.01
Par Value

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
EquityBalance, April 1, 2007


5,000,000

$



35,243,931

$
352,438

$
76,483,273

$
(46,420,188
)
$
30,415,523Exercise of stock options








403,581


4,036


525,095





529,131Stock based compensation expense














469,322





469,322Net loss

















(9,342,535
)

(9,342,535
)Balance, March 31, 2008


5,000,000

$



35,647,512

$
356,474

$
77,477,690

$
(55,762,723
)
$
22,071,441Exercise of stock options and warrants








1,014,387


10,144


1,467,657





1,477,801Stock based compensation expense














169,000





169,000Net loss

















(142,833
)

(142,833
)Balance, June 30, 2008


5,000,000

$



36,661,899

$
366,618

$
79,114,347

$
(55,905,556
)
$
23,575,409


See accompanying notes to consolidated financial statements.

5

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VISION-SCIENCES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

Three Months Ended
June 30,2008

2007Cash flows from operating activities:Net loss

$
(142,833
)
$
(1,443,927
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


99,895


40,200Cashless exercise of warrants





Gain on sale of product line


(3,229,885
)

Loss in equity investment





82,255Stock-based compensation


169,000


132,164Changes in assets and liabilities:Accrued interest receivable


(21,300
)

(217,003
)Accounts receivable


(929,800
)

(12,769
)Inventories


(1,621,285
)

(715,453
)Prepaid expenses and deposits


192,986


(288,638
)Accounts payable


(779,971
)

206,827Accrued expenses


(93,568
)

(128,228
)Income taxes payable





(549,000
)Net cash used in operating activities


(6,356,761
)

(2,893,572
)Cash flows from investing activities:Purchase of short term investments


(11,167,052
)

(9,631,499
)Sale of short term investments


5,835,191


Purchase of property and equipment


(413,151
)

(380,863
)Net proceeds from sale of product line


3,229,885


Purchase of equity investment





(1,000,000
)Net cash used in investing activities


(2,515,127
)

(11,012,362
)Cash Flows from financing activities:Payments on capital leases


(13,657
)

(931
)Exercise of stock options


1,477,801


8,790Net cash provided by financing activities


1,464,144


7,859Net decrease in cash and cash equivalents


(7,407,744
)

(13,898,075
)Cash and cash equivalents, beginning of year


10,655,033


28,322,316Cash and cash equivalents, end of year

$
3,247,289

$
14,424,241Supplemental disclosure of cash flow information:Cash paid during the period for interest

$
13,904

$



See
accompanying notes to consolidated financial statements.

6

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VISION-SCIENCES, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

1.     Basis of Presentation

The accompanying financial data as of June 30, 2008 and for the three months ended June 30, 2008 ("Q1 09") and June 30, 2007 ("Q1 08") has
been prepared by Vision-Sciences, Inc. ("we", "us" or "the Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to
such rules and regulations. The March 30, 2008 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles
generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

Our
fiscal year-end is on March 31 of each year, and is referred to herein as Fiscal 2009 ("FY 09") ("our current Fiscal Year") and Fiscal 2008 ("FY 08"),
respectively.All amounts in the financial notes except for share and per-share data are reported in ($000's), unless otherwise indicated.

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

c.Short Term Investments:We classify investments with original maturities of greater than 90 days in
Government Securities and high grade Commercial Paper as Short Term Investments. We intend to hold these investments to maturity. The following table summarizes these securities classified as held to
maturity:

June 30, 2008

March 31, 2008Fair Value

Cost

Fair Value

CostHeld to maturity less than one year:Government securities

$
11,697

$
11,722

$
6,563

$
6,512Commercial paper


1,673


1,694


1,534


1,550Total short term investments including accrued interest

$
13,370

$
13,416

$
8,097

$
8,062


7

---



d.Inventories:Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and consist of the following:

June 30, 2008

March 31, 2008Raw materials

$
4,203

$
2,924Work-in-process


283


497Finished goods


1,156


600$
5,642

$
4,021


Raw
materials include components purchased from independent suppliers. Most purchased components are available from multiple sources, but we also rely on several single-source key
suppliers. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead.

e.Depreciation and Amortization:We calculate depreciation and amortization using the straight-line
method in amounts that allocate the cost of the assets over their estimated useful lives, as follows:

Asset Classification

Estimated
Useful LifeMachinery and equipment

3 - 5 yearsFurniture and fixtures

5 yearsIntangible assets

6 - 15 years


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

f.Basic and Diluted Net Income (Loss) per Common Share:Basic net income (loss) per share is calculated by
dividing the net income (loss) by the weighted average number of common shares outstanding. For Q1 09 and Q1 08, the diluted net loss per common share is the same as basic net loss per
common share, as the inclusion of other shares of stock issuable pursuant to stock options and warrants would be anti-dilutive.

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

h.Foreign Currency Transactions:We charge to operations all foreign currency exchange gains or losses in
connection with our purchases of products from foreign vendors. For each of the two years in the period ended June 30, 2008, these amounts were immaterial.

i.Income Taxes:We account for income taxes under the liability method, and deferred tax assets or liabilities
are computed based on the differences between the financial statement and income tax basis of assets and liabilities as measured by the enacted tax rates.

j.Stock-based:Effective April 1, 2006 the Company began accounting for compensation expense related to
stock options in accordance with SFAS No. 123 (Revised 2004)Share-Based Payment("SFAS 123R").

8

---



Compensation
costs associated with stock options include: (i) amortization related to the remaining unvested portion of all stock options outstanding at March 31, 2006,
based on the fair value determined on the grant date in accordance with the original provisions of SFAS 123, and (ii) amortization related to all stock option awards granted subsequent
to March 31, 2006, based upon the fair value estimated in accordance with SFAS 123R. The compensation expense for stock-based compensation awards under SFAS 123R is recognized
over the vesting period of the options, and includes an estimate for forfeitures.

In
accordance with SFAS 123R, the Company recorded stock-based compensation expense in the statement of operations for Q1 09 and Q1 08, respectively, in the following expense
categories:

Three Months Ended
June 30,2008

2007Cost of Goods Sold

$
13

$
13Selling, General and Administrative


117


102Research and Development


39


17Total

$
169

$
132


At
June 30, 2008, total unamortized stock-based compensation was approximately $1,902. The Company will expense that amount over periods ending through June 30, 2013. The
Company does not expect to realize any tax benefits from future disqualifying dispositions, if any, since it currently has a full valuation allowance against its deferred tax asset.

In
the three months ended June 30, 2008, the Company granted options to purchase a total of 294,000 shares of the Company's Common Stock to employees, non-employee
consultants and directors. The fair value of these options measured at the option grant date was approximately $982, determined using the Black-Scholes option-pricing model. This amount is reduced by
an estimated forfeiture rate and is being recorded as an expense over the vesting period. The assumptions used in the Black-Scholes option-pricing model in the period by the Company were as follows:

June 30, 2008Risk-free interest rate


3.55%Expected dividend yield


Expected life


6.25 yearsExpected volatility


74%Weighted average value grant per share

$
3.34


We
grant options with vesting periods ranging from immediate to six years. We use the simplified method of calculating the expected option term, which averages an award's weighted
average vesting period and its contractual term. The contractual term of our options is ten years. The risk-free rate is based upon the daily treasury yield curve for a period
approximately equal to the expected option term. We used historical data to estimate the expected price volatility and forfeiture rate. The expected dividend yield is 0%, based on our history of not
paying dividends.

k.Recently Issued Accounting Standards:On April 1, 2008, we adopted the provisions of Financial
Accounting Standards Board (FASB) Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.This Statement allows
companies the option to measure eligible financial instruments at fair value. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. We have
elected not to apply the fair value option to any of our financial instruments except for those expressly required by U.S. GAAP.

9

---



In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment to FASB Statement No. 133" ("SFAS 161"),
which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB
Statement No. 133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows.
SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 (which for our company would be on April 1, 2009, our 2010 Fiscal Year), with early adoption encouraged. We are
currently assessing the impact that the adoption of SFAS 161 will have on our financial statement disclosures.

In
2007 the FASB issued Statement No. 141(R),Business CombinationsA Replacement of FASB Statement No. 141.This Statement significantly changes the principles and requirements for how an acquisition is recognized and measured in a company's financial statements including the identifiable
assets acquired and the liabilities assumed. This Statement also provides guidance for recognizing and measuring goodwill acquired in a business combination and required disclosures to enable users of
the financial statements to evaluate the nature and financial effects of the business combination. This Statement is effective prospectively, except for certain retrospective adjustments to deferred
income tax balances, for the Company beginning on January 1, 2009. The Company has not yet determined the impact, if any, the adoption of this Statement will have on its financial position.

In
2007 the FASB issued Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.This Statement
significantly changes the financial accounting and reporting of noncontrolling (or minority) interests
of a subsidiary in consolidated financial statements. For our Company it would be effective prospectively beginning on January 1, 2009. We have not yet determined the impact, if any, the
adoption of this Statement will have on the financial position of the Company.

3.     Stock Option Plans

Our first stock option plan (the "1990 Plan") allowed us to grant key employees and non-employee consultants incentive and non-statutory
stock options at the fair value of the stock on the date of grant. Options became exercisable at varying dates ranging up to five years from the date of grant. Our Board of Directors (our "Board") had
authorized the issuance of options for the purchase of up to 4,375,000 shares of common stock under the 1990 Plan. This plan expired in 2001 and was replaced with the 2000 Plan. The terms of the 2000
Plan are substantially the same as the 1990 Plan. Our Board and stockholders authorized the issuance of options for the purchase of up to 4,500,000 shares of common stock under the 2000 Plan, of which
29,155 shares remain available for future grants.

In
August, 2007, our stockholders approved our 2007 Stock Incentive Plan (the "2007 Plan"). Under the 2007 Plan, we are authorized to issue options for the purchase of up to 4,000,000
shares of common stock. The terms of the 2007 Plan are substantially the same as the 2000 Plan. As of June 30, 2008, there remain 2,149,500 shares available for future grants under the 2007
Plan. In the 2007 Plan, we grant options to both employees and non-employee-consultants, with vesting periods ranging from immediate to six years. For options granted under this plan, we
have chosen to employ the simplified method of calculating the option term, which averages an award's weighted average vesting period and its contractual term. The contractual term of our options is
ten years.

On
June 30, 2008, the total unamortized stock-based compensation for the 1990, 2000 and 2007 plans is approximately $1,902, which will be expensed through the period ending
June 30, 2013. The Company does not expect to realize any tax benefits from future disqualifying dispositions, if any,

10

---



because
of its net operating loss carry-forwards and its policy of recording valuation allowances equal to all deferred tax assets.

A
summary of the stock option activity for employees and non-employee consultants under the 1990, 2000 and 2007 plans for the three months ended June 30, 2008 is as
follows:

Number
of Shares

Exercise
Price Range

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual LifeOutstanding March 31, 2008


6,130,369


$0.79$4.30

$
1.49


6.25 yearsGranted


290,000


4.885.10


4.89Exercised


(799,785
)

0.894.00


1.63Canceled


(10,000
)

2.053.20


2.91Outstanding June 30, 2008


5,610,584


$0.79$5.10

$
1.64


7.16 yearsExercisable June 30, 2008


3,037,146


$0.79$4.30

$
1.41


5.61 years


In
August 1993, we adopted the 1993 Director Option Plan (the "1993 Plan") under which we may grant up to 200,000 non-statutory stock options to non-employee
directors of the Company at the fair value of the stock on the date of grant. Options become exercisable over a four-year period from the date of grant. The Company had reserved 200,000
shares of common stock for the exercise of stock options under the 1993 Plan. We no longer grant options under this plan.

In
July 2003, we adopted, and our stockholders approved, a 2003 Director Option Plan (the "2003 Plan"). The terms of the 2003 Plan are similar to the 1993 Directors Option Plan, and
include automatic grants of 4,000 shares to each outside member of our Board on the date of the annual meeting of stockholders, so long as such outside director does not hold at that time any
outstanding options to purchase Common Stock under the Company's 1993 Plan, which options are not fully exercisable. Options granted under the 2003 Plan are 100% vested on the date of grant. In
January 2008, upon the recommendation of the Executive Committee, our Board approved changes to the compensation of our outside directors, among other things, by recommending an increase in the annual
grant to 10,000 options per director, and increasing the maximum number of options available under the plan from 200,000 to 450,000, pending stockholder approval at our Annual Stockholders Meeting
scheduled to be held on August 28, 2008. If our annual meeting of stockholders is held in August of each year, and in the event that the number of outside directors remains unchanged (currently
there are five outside directors), we would be required to grant options to purchase an aggregate of 50,000 shares in each of August 2008 and August 2009. During our FY 08 Annual Shareholders meeting,
held in August 2007, we granted 4,000 options to each our then four outside directors, and an additional 4,000 options to another outside director were granted in May, 2008. As of June 30,
2008, there remain 152,000 shares available for future grants under the 2003 Plan Assuming the amendments to the plan are approved by our stockholders.

A
summary of the Director Option Plans activity is as follows:

Number
of Shares

Exercise
Price Range

Weighted Average
Exercise PriceOutstanding March 31, 2008


104,000


$1.00$2.10

$
1.39Granted


4,000


$4.88$4.88

$
4.88Exercised








Canceled


(20,000
)

$1.50$1.50

$
1.50Outstanding June 30, 2008


88,000


$1.00$4.88

$
1.55Exercisable June 30, 2008


88,000


$1.00$4.88

$
1.55


11

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4. Segment Information

As of October 1, 2007, we operate in three reportable segments:medical, industrial, and health services.



Until the end of our fiscal year ended March 31, 2007, (FY 07), we had three reportable segments: medical, industrial and
corporate. Our corporate segment consisted of certain administrative expenses applicable to the company as a whole. As of April 1, 2007 (FY 08), we eliminated the corporate segment by
consolidating it into the medical and industrial segments.

Our medical segmentdesigns, manufactures, and sells our advanced line of endoscopy based products for a variety of specialties, including our
state-of-the-art flexible endoscopes and our Slide-On EndoSheath technology.

Our industrial segment,through our wholly-owned subsidiary, Machida, Inc., designs, manufactures and sells borescopes to a variety of users, primarily in
the aircraft engine-manufacturing and aircraft engine-maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities, such as the bore of a
gun.

Our health services segmentis our newly formed wholly-owned subsidiary BEST-DMS, which was established in October 2007. BEST-DMS is a
service-based segment, providing the Bedside Endoscopic Swallowing Test ("BEST") to nursing homes, rehabilitation centers, and assisted living facilities.

Between
April 1, 2007 and September 30, 2007, we operated under two reportable segments, medical and industrial. In March 2007, we completed the license and sale of certain
assets with respect to our ENT sheath business to Medtronic. That transaction resulted in a thorough review of our business, including how we evaluate and report our results of operations. In order to
enable our Chief Executive Officer to make operating and financial decisions about allocating our resources and assessing performance, effective April 1, 2007, we began operating under two
reportable segments, medical and industrial. All expenses formerly reported under the corporate segment are allocated as follows: 95% to the medical segment and 5% to the industrial segment.

We
also changed our method for inter-segment cost allocations between the medical and the industrial segments. As part of our business review, we examined the resources allocated between
departments and changed the allocations accordingly. These changes affect certain expenses such as Cost of Goods Sold ("COGS"), Research and Development ("R&D") and Sales, Marketing and Administration
("SG&A").

We
reclassified our FY 07 segment information according to Statement of Financial Accounting Standard 131 ("SFAS 131") to reflect the change in reportable segments. All expenses
reported during FY 07 under the corporate segment, were allocated at a rate of 95% to the medical segment and 5% to the industrial segment. We determined, however, that it is impracticable to restate
our FY 07 inter-segment allocations.

SFAS 131
states that if an enterprise changed the structure of its internal organization in a manner that causes the composition of its reportable segments to change, and if
segment information for earlier periods, including interim periods, is not restated to reflect the change, the enterprise must disclose in
the year in which the change occurs segment information for the current period under both the old basis and the new basis of segmentation, unless it is impracticable to do so. We determined that it is
impracticable for us to report our new allocation methodology under the old and new basis, and we are therefore reporting only under the new basis.

12

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4. Segment Information (Continued)

The
three segments follow the accounting policies described in the Summary of Significant Accounting Policies, above. We evaluate segment performance based upon operating income.
Identifiable assets are those used directly in the operations of each segment and general corporate assets, such as cash and marketable securities are allocated to each segment. Our segments are
described in the following tables:

Three Months Ended June 30,

Medical

Industrial

Health

Adjustments

Total2008 (Q1 09)Sales to external customers

$
2,000

$
696

$
233

$


$
2,929Operating loss


(3,199
)

(42
)

(188
)




(3,429
)Interest income


80











80Depreciation and amortization


82


9


9





100Stock-based compensation


169











169Total assets


27,625


2,473


587


(3,651
)

27,034Expenditures for fixed assets


393





20





4132007 (Q1 08)Sales to external customers

$
1,832

$
598

$


$


$
2,430Operating loss


(1,654
)

15








(1,639
)Interest income


279











279Depreciation and amortization


31


9








40Stock-based compensation


129


3








132Total assets


31,172


1,277





(1,220
)

31,229Expenditures for fixed assets


381











381


5.     Acquisition



On October 1, 2007, Vision-Sciences purchased the assets of Best Dysphagia Management, Inc., a Florida based speech
pathology company which specializes in providing what is referred to as the Bedside Endoscopic Swallowing Test ("BEST") to nursing homes, rehabilitation centers and assisted living settings via our
new wholly-owned subsidiary BEST DMS Inc. The purchase price was $1,500, which was comprised of (a) $450 (the "Initial Purchase Price"), paid at the closing, and (b) earn out
payments payable over four years, in an aggregate amount not to exceed $1,050, based on certain milestones being met. The Initial Purchase Price of $450 has been allocated as follows: $135 to fixed
assets and $315 to intangible assets. This acquisition will allow Vision-Sciences access to new markets, including the geriatric market, nursing homes and rehabilitation centers, and it is expected to
provide a boost to our future growth. The operating results of BEST-DMS are included in the operating results as of the acquisition date, and proforma numbers are not presented since this
acquisition was immaterial.



In April 2007, we executed a definitive investment agreement under which we acquired a strategic interest in Minos Medical, Inc.
("Minos"). Minos is a privately held California-based development-stage medical device company concentrating in the emerging field of N.O.T.E.S. (Natural Orifice Trans-luminal Endoscopic Surgery).
N.O.T.E.S. is a new frontier in surgery, focusing on using natural orifices to enter the body to facilitate surgical procedures that require no incisions. We invested $1,000 in cash and have agreed to
expend $165 in development costs in collaboration with Minos, in order to exploit

13

---



4. Segment Information (Continued)

certain
surgical procedures. Our investment amounted to 30% of the outstanding shares of Minos, and we accounted for this transaction on our balance sheet as an equity investment.

During
FY 08, we recorded our share of equity losses totaling $350, and at March 31, 2008, we wrote off our remaining investment balance of $650 due to liquidity issues at Minos.
Minos is presently in the process of seeking additional sources of funding for development and for sales and marketing of their new products. In that regard, in early June, Minos received a 510K
clearance for their initial product, the Megachannel, from the Food and Drugs Administration ("FDA"). The Megachannel is a 22mm diameter flexible tube that rides along with a colonoscope
to the target site. Once in place it creates a 20mm working channel (or super highway) that allows rapid access beyond the sigmoid colon.

6.     Subsequent Events

None.

14

---





Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995, which are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such
factors include, but are not limited to, pricing pressures, including cost-containment measures which could adversely affect the price of, or demand for, our products; changes in economic
conditions that may adversely affect the level of demand for our products; changes in foreign exchange markets; changes in financial markets and changes in the competitive environment. Other examples
of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital
resources to meet anticipated requirements. Generally, words such as "expect" "believe", "anticipate", "may", "will", "plan", "intend", "estimate", "could", and other similar expressions are intended
to identify forward-looking statements. The forward-looking statements are based on our future plans, strategies, projections and predictions and involve risks and uncertainties, and our actual
results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference could include the availability of capital resources, the
availability of third-party reimbursement, government regulation, the availability of raw material components, our dependence on certain distributors and customers,
competition, technological difficulties, the completion of obligations under our contract with Medtronic Xomed, Inc. ("Medtronic", or "MENT"), general economic conditions and other risks
detailed in our most recent Annual Report on Form 10-K and any subsequent periodic filings we make with the Securities and Exchange Commission. We do not undertake an obligation to
update our forward-looking statements to reflect future events or circumstances.



Vision-Sciences, Inc. and its subsidiaries own the registered trademarks Vision Sciences®,
Slide-On®, EndoSheath® and BEST®.

Our
fiscal year-end is on March 31 of each year, and is referred to herein as FY 08 and FY 09 (our current fiscal year), respectively. Q1 09 refers to the period from
April 1, 2008 to June 30, 2008; and Q1 08 refers to the period from April 1, 2007 to June 30, 2007.

We
("Vision-Sciences" or the "Company") design, develop, manufacture and market products for endoscopythe science of using an instrument, known as an
endoscopeto provide minimally invasive access to areas not readily visible to the human eye.

We
were incorporated in Delaware in 1987 under the name Machida Incorporated ("Machida"). Since that time, we have acquired by merger Cyberex Corporation (October 1988),
Vascu-Care, Inc. (March 1989), and we acquired Opielab, Inc. through a share exchange (September 1990). In December 1990, we changed our name to Vision-Sciences, Inc.
("VSI") and Machida became wholly owned subsidiary. Another VSI subsidiary, Vision Sciences Ltd., an Israeli corporation, has been inactive since the fiscal year ended March 31, 2002.

VSI
primarily operates in the medical segment, while Machida primarily operates in the industrial segment. In October, 2007 we purchased the assets of BEST Dysphagia Management
Services, Inc., a Florida based speech pathology company which specializes in providing what is referred to as the Bedside Endoscopic Swallowing Test ("BEST") to nursing homes, rehabilitation
centers and assisted living facilities, via our new wholly-owned subsidiary BEST DMS Inc. ("BEST-DMS"). BEST-DMS is our health services segment.

15

---



Our
principal executive offices are currently located at 40 Ramland Road South, Orangeburg, New York 10962. Our telephone number is (845) 365-0600. Our corporate
website iswww.visionsciences.com. Through a link on the Investor Relations section of our website, we make available all filings as soon as reasonably
practicable after they are electronically filed with or furnished to the Securities and Exchange Commission ("SEC") including, our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. All such filings are available free of charge.

We
now operate in three reportable segments:medical, industrial, and health services



Until the end of our fiscal year ended March 31, 2007, (FY 07), we had three reportable segments: medical, industrial and
corporate. Our corporate segment consisted of certain administrative expenses applicable to us as a whole. As of April 1, 2007 (FY 08), we eliminated the corporate segment by consolidating it
into the medical and industrial segments.

Our medical segmentdesigns, manufactures and sells our advanced line of endoscopy products for a variety of specialties, including our
state-of-the-art flexible endoscopes, and our Slide-On EndoSheath technology ("Sheath" or "EndoSheath disposable").

Our
long standing primary lines of high-quality fiber-based flexible endoscopes is now augmented with our first generation CCD-based flexible video endoscope
systems, which were announced and cleared for sale by the Food & Drugs Administration ("FDA") in Q3 and Q4 of FY 08. This new high-performance imaging technology platform is
expected to redefine the Company's place in the minimally invasive device market. These flexible endoscopes are unlike conventional endoscopes, and when utilized with the EndoSheath technology, offer
a multitude of benefits and advantages to the healthcare practice.

"EndoSheath
Endoscopy", the differentiating term given to procedures performed with our unique technology, consists of a reusable flexible endoscope combined with a
single-use, sterile, protective sheath. The insertion tube is the part of the endoscope that enters the patient's body. The use of the EndoSheath technology gives health-care
providers clinical and economic advantages, as it allows them to avoid the elaborate high level disinfection and sterilization routines required of conventional endoscopes. This design of "always
ready" equipment which allows for a rapid
and less caustic cleaning process provides a multitude of benefits, such as; less capital inventory investment, less service and maintenance costs of capital equipment, less staff exposure to toxic
chemicals, increased patient scheduling flexibility, improved staff productivity, and a more practical implementation of office-based endoscopy.

Our
EndoSheath technology allows for unprecedented practice efficiency in a wide array of healthcare settings; from the private practice to the busy academic hospital. In addition, each
EndoSheath disposable is a sterile device, providing patients with a contaminant-free insertion tube for each procedure, which reduces the risk of cross-contamination from the reuse of
conventional flexible endoscopes, which are difficult to clean and disinfect.

Our industrial segment,through our wholly-owned subsidiary, Machida, Inc., designs, manufactures and sells borescopes to a variety
of users, primarily in the aircraft engine-manufacturing and aircraft engine-maintenance industries. A borescope is an instrument using optical fibers for the visual inspection of narrow cavities,
such as the bore of a gun. Machida's quality line of borescopes includes a number of advanced standard features normally found only in custom designed instruments. The borescopes are constructed in
one of three standard body types, each specifically designed to cover a multitude of needs and applications; Slim Lever, Knob Type, and Battery Operated.

16

---



Our health services segment,through our newly formed wholly-owned subsidiary BEST-DMS, is a service-based segment, providing
the Bedside Endoscopic Swallowing Test to nursing homes, rehabilitation centers and assisted living settings.

On
October 1, 2007, Vision-Sciences purchased the assets of Best Dysphagia Management, Inc., a Florida based speech pathology company which specializes in providing what is
referred to as the Bedside Endoscopic Swallowing Test ("BEST") to nursing homes, rehabilitation centers and assisted living settings via our new wholly-owned subsidiary BEST DMS Inc. The
purchase price was $1,500, which was comprised of (a) $450 (the "Initial Purchase Price"), paid at the closing, and (b) earn out payments payable over four years, in an aggregate amount
not to exceed $1,050, based on certain milestones being met. The Initial Purchase Price of $450 has been allocated as follows: $135 to fixed assets and $315 to intangible assets. This acquisition will
allow Vision-Sciences access to new markets, including the geriatric market, nursing homes and rehabilitation centers, and it is expected to provide a boost to our future growth.

BEST
is a comprehensive dysphagia (swallowing) evaluation, performed by a speech-language pathologist clinically privileged to perform endoscopy. Patients may be recommended for a BEST
because of symptoms suggesting swallowing problems that may include: congestion;
wet-gurgly or weak voice; fever, pneumonia or chronic bronchitis; chronic weight loss and/or a decreasing desire to eat; coughing and/or choking on meals or medications; and pressure in a
patient's chest during eating or drinking.

The
procedure involves inserting an endoscopic tube through the nose and down to the patient's throat. The test is mildly uncomfortable with patients feeling like they need to clean
their nose of an obstruction. Most patients' report that the uncomfortable feeling subsides in 60-90 seconds as the nasal passage adjusts to the endoscope sitting on the floor of the nose.
Patients suffering from dementia and Alzheimer's disease are approached with a special protocol to create a calm and non-threatening environment.

We
believe that the benefits of BEST over other types of instrumentation and evaluations include: No limit on the length of time available during the BEST to diagnose dysphagia
accurately; patients are tested with the food and liquid that they consume daily; no X-ray exposure or barium coated food substances are involved; patients can be tested in any position,
regardless of contracture, posture or cooperation level; full color view of the swallowing structures; and immediate recommendations to enable quick intervention on behalf of the patients.

Research and Development

During our current fiscal quarter we released our new family of videoscopes, with a miniature digital camera mounted on the distal end
of the insertion tube. This videoscope line includes the ENT-5000 (Ear, Nose and Throat) videoscope, the TNE-5000 (Transnasal Esophagoscopy) videoscopes and our Urology's
video-based flexible Cystoscope, the CST-5000.

We
are continuing the development of our next generation of improved family of medical and industrial fiber scopes, which will no longer have any Pentax parts. We anticipate that we will
be able to have completed the development and the FDA approval process for our new line of fiberscopes by the end of this fiscal year.

We
are also working on improving our manufacturing processes, which we believe will result in lower costs to produce our endoscopes and EndoSheaths. In addition to the above research and
development projects, we are at various stages of exploration of opportunities in, and development of products for use in the medical fields of gynecology, pulmonology and gastroenterology, among
others.

17

---



The MINOS Medical Inc. Investment

In April 2007, we executed a definitive investment agreement under which we acquired a strategic interest in Minos. Minos is a
privately held California-based development-stage medical device company concentrating in the emerging field of N.O.T.E.S. (Natural Orifice Trans-luminal Endoscopic Surgery). N.O.T.E.S. is a new
frontier in surgery, focusing on using natural orifices to enter the body to facilitate surgical procedures that require no incisions. We invested $1,000 in cash and have agreed to expend $165 in
development costs in collaboration with Minos, in order to exploit certain surgical procedures. Our investment amounted to 30% of the outstanding shares of Minos, and we accounted for this transaction
on our balance sheet as an equity investment.

During
FY 08, we wrote off our entire investment balance of $1,000 due to liquidity issues at Minos. Minos is presently in the process of seeking additional sources of funding for
development and for sales and marketing of their new products. In that regard, in early June, Minos received from the FDA a 510k clearance for their initial product, the Megachannel. The
Megachannel is a 22mm diameter flexible tube that rides along with a colonoscope to the target site. Once in place it creates a 20mm working channel (or super highway) that allows rapid access beyond
the sigmoid colon.

Other Developments



On June 19, 2008 we entered into a Development and Supply Agreement (the "SpineView Agreement"), pursuant to which we are to develop and supply a
CCD-based video endoscope to SpineView for use with SpineView's products. SpineView is engaged in the development and manufacture of miniature, minimally invasive, disposable spine surgery
Devices that include reusable endoscopes for visualization and image guidance.

SpineView
agreed to pay us $225 for certain non-recurring engineering costs, and to reimburse us for up to $40 of our out-of-pocket costs. After the
completion of certain milestones and delivery of a prototype, SpineView has agreed to place an initial firm order with us for 50 video endoscopes at a purchase price of $27 per unit (the "Initial
Order"), for a total of $1,350. Following delivery of the Initial Order, SpineView shall submit a forecast for the following 12 months, of which the first six months will be considered a firm
order at a price of $23.5 per video endoscope. Payment for certain of these items is subject to the closing of certain of SpineView's fundraising activities. We are also to be the exclusive supplier
to SpineView of visualization means for use with some future SpineView products.

The
initial term of the SpineView Agreement is for four years from the date of delivery of the Initial Order, and will automatically renew for successive one year periods, unless either
party gives the other notice of its intention not to renew.

Mr. Lewis
C. Pell, the chairman of our board of directors (our "Board"), is the chairman of the SpineView board of directors and an investor in SpineView. Mr. Ron Hadani,
our president and chief executive officer and a member of our Board, and Mr. Katsumi Oneda, a member of our Board, are also investors in SpineView.

Our
policy with respect to transactions in which any of our directors or officers may have an interest, requires that such transaction (a) be on terms no less favorable to us than
could be obtained from unaffiliated third parties and (b) be approved by a majority of the uninterested, outside members of the Board.

At
a Board meeting held on May 29, 2008, the Board reviewed the terms of the final draft of the SpineView Agreement, outside of the presence of Mr. Pell, Mr. Oneda
and Mr. Hadani. The remaining (uninterested) members of our Board determined that the SpineView Agreement was fair, properly

18

---



negotiated,
and would be at least as favorable to us as could have been obtained from unaffiliated third parties, and accordingly, after discussion, it was approved.



In March of 2007, we completed the sale to Medtronic of certain assets with respect to our ENT EndoSheath business. As part of the transactions, we granted
Medtronic an exclusive, royalty-free worldwide license to certain of our Vision-Sciences intellectual property, for use in making and selling EndoSheath products solely within the field of
ENT (otorhinolaryngology). Under the terms of the agreement, Medtronic paid us $27,000 at the closing, out of a total of up to $34,000.

Up
to an additional $4,000 was scheduled to be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to
Medtronic, and an additional $3,000 was scheduled to be paid 15 months after closing, which was received by the end of June 2008.

We
have completed the first milestone in December 2007, and were paid $1,000. The second milestone was amended into two separate parts: the first part was completed by March 2008, and we
received a partial payment of $750; the second part was completed by this first quarter of FY 09, where we received the remaining balance of $250. As part of this transaction, we transferred our ENT
production lines for the EndoSheath ENT products from our Natick facility to the Medtronic facility in Jacksonville, FL. The remaining milestone is expected to be completed by Q2 09, and the balance
of $2,000 is expected to be received upon completion.

As
of the end of Q1 09, total payments from Medtronic amounted to $32,000.

19

---



Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Options Issued

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

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

20

---



In
accordance with SFAS 123R, we recorded $169 and $132 of stock-based compensation expense in the statement of operations for Q1 09 and for Q1 08, respectively, in
the following expense categories:

Three Months
Ended June 30,2008

2007Cost of Goods Sold

$
13

$
13Selling, General and Administrative


117


102Research and Development


39


17Total

$
169

$
132


At
June 30, 2008, the total unamortized stock-based compensation is approximately $1,902. We will expense that amount over periods ending through June 30, 2013. We do not
expect to realize any tax benefits from future disqualifying dispositions, if any, due to its policy of recording valuation allowances equal to its deferred tax asset.

In
the three months ended June 30, 2008, we granted options to purchase a total of 294,000 shares of our Common Stock. A total 290,000 of these options were granted from our 2007
Stock Incentive Plan (the "2007 Plan") and 4,000 of these options were granted from our 2003 Directors Stock Option Plan (the "2003 Directors Plan"). The fair value of these options measured at the
option grant date was approximately $982, determined using the Black-Scholes option-pricing model. This amount is reduced by an estimated forfeiture rate and is being recorded as an expense over the
vesting period. The assumptions used in the Black-Scholes option-pricing model in the period by the Company were as follows:

June 30, 2008Risk-free interest rate


3.55
%Expected dividend yield


Expected life


6.25 yearsExpected volatility


74
%Weighted average value grant per share

$
3.34


We
account for options issued to directors, non-employees and employees in accordance with the provisions of SFAS 123R. We grant options with vesting periods ranging
from immediate to six years. We use the simplified method of calculating the expected option term, which averages an award's weighted average vesting period and its contractual term. The contractual
term of our options is ten years. The risk-free rate is based upon the daily treasury yield curve for a period approximately equal to the expected option term. We used historical data to
estimate the expected price volatility and forfeiture rate. The expected dividend yield is 0%, based on our history of not paying dividends.



The Company accounts for income taxes under the liability method, and deferred tax assets or liabilities are computed based on the
differences between the financial statement and income tax basis of assets and liabilities as measured by the enacted tax rates. We have recorded a valuation allowance equal to its net deferred tax
asset due to the uncertainty of realizing the benefit of this asset.

21

---





Results of Operations

Net Sales

Three-months ended June 30, 2008 (Q1 09) compared to the Three-months ended June 30, 2007 (Q1 08) in (000's)

Net sales for Q1 09 were $2,929, an increase of $499, or 21%, compared to the sales of $2,430 for Q1 08. During Q1 09 net sales of the
medical segment increased by $168, or 9%, from $1,832 to $2,000, and net sales of the industrial segment increased by $98, or 16%, from $598 to $696. Sales of our new health services segment
contributed $233 to our Q1 09 sales.

Sales
by segment and category in Q1 09 and Q1 08 were as follows:

Segment:

Q1 09

Q1 08

Increase/
(Decrease)

PercentageMedicalScopes

$
1,177

$
656

$
521


79
%EndoSheaths


216


681


(465
)

(68
)%Repairs


499


406


93


23
%Peripherals and Accessories


108


89


19


21
%Total Medical

$
2,000

$
1,832

$
168


9
%IndustrialBorescopes and Accessories

$
459

$
395

$
64


16
%Repairs


237


203


34


17
%Total Industrial

$
696

$
598

$
98


16
%Helth ServicesTotal Health Services

$
233

$


$
233


100
%Total Sales

$
2,929

$
2,430

$
499


21
%


Medical SalesScope Products

Net Sales to the medical scope market include products used for the ENT (including TNE), Urology and other customers, were as follows:

Medical Scope Market

Q1 09

Q1 08

Increase

PercentageENT and TNE

$
690

$
432

$
258


60
%Urology and Other


487


224


263


117
%Total Scopes

$
1,177

$
656

$
521


79
%


Overall
endoscope sales increased by $521, or 79%, from $656 to $1,177, mainly due to more than doubling our sales to the Urology market. Sales in our Urology and Other customers
increased by $263, or 117%, from $224 in Q1 08 to $487 in Q1 09. In Q1 09, our ENT scope sales increased by $258, or 60%, from $432 to $690, compared to Q1 08. The increase in our scope sale this
quarter has partially benefited from the introduction of our videoscope family of products towards the end of the quarter.

Our
ENT scopes are marketed and distributed globally by MENT. As a result of our exclusive ENT distribution agreement with MENT, the success of our ENT endoscope lines depends
substantially upon the success of the marketing and sales activities of MENT, over which we have limited control.

22

---



Medical SalesEndoSheath Products

Net Sales of EndoSheaths include products used for our ENT (including TNE) and Urology customers as follows:

Products

Q1 09

Q1 08

(Decrease)/
Increase

PercentageENT and TNE

$
5

$
600

$
(595
)

(99
)%Urology and Other


211


81


130


160
%Total EndoSheaths

$
216

$
681

$
(465
)

(68
)%


Sales
of our ENT & TNE EndoSheaths decreased by $595, or 99% in Q1 09, compared to Q1 08, as Medtronic ceased its purchases from us, as of December 2007. This is a result of
commencing its own manufacturing of ENT sheaths as part of and in accordance with the Medtronic Transition Agreement of March 26, 2007.

The
increase in sales of Urology and Other sheaths of $130, or 160%, from $81 in Q1 08 to $211 in Q1 09 is a result of additional scopes sales and re-orders from existing
users.

We
believe the Cystoscopy EndoSheath System can significantly enhance the practice efficiency of urologists by allowing them to avoid the tedious and time-consuming
reprocessing of conventional cystoscopes, and presents the significant benefit of a sterile insertion tube for each patient.

Medical SalesRepairs, Peripherals and Accessories

Revenue from repairs together with sales of peripherals and accessories increased in Q1 09 by $112, or 23%, from $495 to $607, as
compared to Q1 08. This increase is primarily related to the higher demand for our medical scopes.

Industrial Segment

Net sales of the industrial segment increased $98, or 16%, from $598 in Q1 08 to $696 in Q1 09. Although sales grew this quarter as
compared to the same quarter last year, future sales in this segment may be negatively impacted by the slowdown in purchases from the airline industry.

Gross Profit

Three-months ended June 30, 2008 (Q1 09) compared to the Three-months ended June 30, 2007 (Q1 08) in (000's)

Gross profit of $703 in Q1 09 decreased by $240 compared to gross profit of $943 in Q1 08. For the current quarter, gross profit was
$492, $171 and $40 for the medical,
industrial and health services segments, respectively. Our gross profit as a percentage of net sales was 24% in Q1 09, vs. 39% in Q1 08. The decrease in gross profit is mainly attributable to startup
costs of our videoscope line of products, offset by the addition of the health services segment which started in Q3 08.

Operating Expenses

Three-months ended June 30, 2008 (Q1 09) compared to the Three-months ended June 30, 2007 (Q1 08) in (000's)

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses in Q1 09 were $2,919, an increase of $1,172, or 67%, compared to SG&A expense of
$1,747 in Q1 08. This increase in SG&A expense is primarily from increases of $658 in sales and marketing expenses due to more trade shows attended

23

---



and
videoscope demo equipment for outside sales reps, as well as $228 in SG&A expenses in Q1 09 from the Health Services segment which we did not have in Q1 08. The increased level of expense reflects
our commitment to establish the Company's infrastructure to support our projected future accelerated growth.

Research and Development Expenses

Research and development ("R&D") expenses in Q1 09 were $1,171, an increase of $336, or 40%, as compared to expenses of $835 in Q1 08.
This increase resulted primarily from additional spending for materials, a feasibility study on a potential new product, and on additional personnel developing our new lines of videoscope and
EndoSheath products. We expect R&D expenses will continue to increase in FY 09 compared to FY 08, as we are developing a new family of fiberscopes to replace our current fiberscopes, and continue
working on the videoscopes as well as other new products.

Loss from Operations

Three-months ended June 30, 2008 (Q1 09) compared to the Three-months ended June 30, 2007 (Q1 08) in (000's)

Loss from operations by segment was as follows:

Segment

Q1 09

Q1 08

ChangeMedical

$
(3,199
)
$
(1,654
)
$
(1,545
)Industrial


(42
)

15


(57
)Health Services


(188
)




(188
)Total

$
(3,429
)
$
(1,639
)
$
(1,790
)


In
the medical segment, the increased loss from operations is primarily due to (i) an increase in our COGS, mainly due to startup costs of production for our new videoscope line
of products; (ii) increases in our SG&A and R&D expenses, as discussed above; and (iii) and an additional $28 in restructuring charges resulting from severance and other termination
expenses due to the closing of our Natick, MA facility and relocation to Orangeburg, NY. Our total loss from operations had an additional expense of $188 from our newly added health services segment.

Liquidity and Capital Resources

At June 30, 2008 our principal source of liquidity was working capital of approximately $21,232, including $16,663 in cash and
short term investments.

During
Q1 09 we purchased $11,167 and sold $5,835 of short term investments for a net investment of $5,332. Net cash used in operating activities of $5,486 included (i) an
increase of $1,621 in inventory, mainly for parts related to the new videoscope production; (ii) an increase of $930 in accounts receivable, mainly due to higher sales volume during the end of
the quarter; (iii) the cashless exercise of warrants in the amount $870,370 which we did not have last year and (iv) a decrease in accounts payable and accrued expenses of $874. In
addition, we recorded $3,230 in net proceeds from the sale of a certain product line to Medtronic.

Our
cash and cash equivalents decreased by approximately $7,408 in Q1 09 as compared to a decrease of $13,898 in Q1 08. The Q1 09 decrease is due to the purchase of short term
investments.

We
expect that our current balance of cash and short term investments will be sufficient to fund our operations for at least the next twelve months.

24

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In
January, 2008, we entered into a $10,000 revolving line of credit agreement with Merrill Lynch Bank USA (the "Bank"), pursuant to the terms of a Merrill Lynch Loan Management Account
Agreement (the "Loan Agreement"). The Loan Agreement permits us to borrow funds from the Bank from time-to-time at fixed, variable or term rates. The current rate for our
borrowing is set at LIBOR plus 1.75%. Any outstanding amounts for variable rate borrowings may be repaid at our option at any time without penalty or premium. If we repay a fixed advance or term
advance prior to its scheduled repayment date, we may be required to pay a breakage fee to the Bank. The amount of advances available under the Loan Agreement varies from time to time and is based on
the value of, and secured by, the securities we maintain with Merrill Lynch, Pierce, Fenner & Smith Incorporated. Under the Loan Agreement, the Bank has the right to demand repayment, in whole
or in part, at any time, of any outstanding amounts. As of June 30, 2008, we have not requested any advances under the Loan Agreement.

We
have incurred losses since our inception, and losses are expected to continue at least during FY 09. We have funded the losses principally with proceeds from operations, proceeds from
public and private equity financings, and payments from Medtronic.

During
FY 09, we expect total spending for property and equipment to be approximately $2,500, including approximately $1,600 for renovation of our new facility in Orangeburg, NY.

We
conduct our operations in certain leased facilities. These leases expire on various dates through August 31, 2013. In addition, we have operating leases for certain office
equipment. At June 30, 2008, the minimum lease and rent commitments are as follows:

Fiscal Year2009

$
5502010


7862011


5932012


4762013


269$
2,674






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

Recently Issued Accounting Standards

On April 1, 2008, we adopted the provisions of Financial Accounting Standards Board (FASB) Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities.This Statement

25

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allows
companies the option to measure eligible financial instruments at fair value. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. We
have elected not to apply the fair value option to any of our financial instruments except for those expressly required by U.S. GAAP.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"),
which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB
Statement No. 133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows.
SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 (which for our company it would be on April 1, 2009, our Fiscal 2010), with early adoption encouraged. We are currently
assessing the impact that the adoption of SFAS 161 will have on its financial statement disclosures.

In
2007 the FASB issued Statement No. 141(R),Business Combinationsa replacement of FASB Statement No. 141.This Statement significantly changes the principles and requirements for how an acquisition is recognized and measured in a company's financial statements including the identifiable assets acquired
and the liabilities assumed. This Statement also provides guidance for recognizing and measuring goodwill acquired in a business combination and required disclosures to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. This Statement is effective prospectively, except for certain retrospective adjustments to deferred income tax
balances, for the Company beginning on January 1, 2009. The Company has not yet determined the impact, if any, the adoption of this Statement will have on the financial position of the Company.

In
2007 the FASB issued Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.This Statement
significantly changes the financial accounting and reporting of noncontrolling (or minority) interests
of a subsidiary in consolidated financial statements. For our Company it would be effective prospectively beginning on January 1, 2009. We have not yet determined the impact, if any, the
adoption of this Statement will have on the financial position of the Company.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act and are not required to provide the
information required by this item.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act and are not required to provide the
information required by this item.

Item 4T.    Controls and Procedures

Disclosure
Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports are recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the

26

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definition
of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

We
have evaluated, under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the
design and operation of our disclosure controls and procedures as of June 30, 2008. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of June 30, 2008 due to a lack of adequate resources within the accounting and finance department. The effect of the lack of resources
has resulted in certain reviews of financial information not being performed on a timely basis or at all, leading to adjustments being made after the books and records were closed and reduced
resources to complete the Company's review and preparation of this Quarterly Report on Form 10-Q to permit its filing within the prescribed time frame. In March 2008 we retained a
new controller, and since then have added two additional senior accountants, and retained an outside certified public accountant on a consulting basis, and we have one more position to fill in order
to be adequately staffed.

Changes
in Internal Controls Over Financial Reporting

There
have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2008 that have materially affected, or
are reasonably likely to materially affect our internal controls over financial reporting.

27

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

None

Item 1A.    Risk Factors

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

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

We have incurred substantial operating losses since our inception (our net income in FY 07 resulted from the sale of a product line)
and there can be no assurance that we will achieve a profitable level of operations in the future. We anticipate a negative cash flow during FY 09, because of additional spending for research and
development, increasing our global network of independent sales representatives for the urology market, general business operations and capital expenditures. As of June 30, 2008, we had cash
and cash equivalents including short term investments totaling $16.7 million. Although we do not anticipate the need for additional financing in FY 09, management may seek new financing, if
terms are favorable. However, there can be no assurance that such financing will be available on terms acceptable to us, if at all.

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

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



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

28

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Rapid growth and a rapidly changing operating environment may strain our limited resources

Our growth strategy includes our efforts to build our brand, develop new products, increase market penetration of our new videoscopes
and develop a new line of fiber-based scopes to replace those manufactured with components supplied by Pentax. This growth strategy requires significant capital resources, and we may not generate an
adequate return on our investment. Our growth may involve the acquisition of new technologies, businesses, products or services or the creation of strategic alliances in areas in which we do not
currently operate. This could require our management to develop expertise in new areas, manage new business relationships and attract new types of customers. We may also experience difficulties
integrating these acquired businesses, products or services into our existing business and operations. The success of our growth strategy also depends in part on our ability to utilize our financial,
operational and management resources and to attract, train, motivate and manage an increasing number of employees. The success of our growth strategy depends on a number of internal and external
factors, such as:



We
may not be able to implement our growth strategy successfully or manage our expansion effectively.

Further,
as we ramp up our manufacturing operations to accommodate our planned growth, we may encounter difficulties associated with increasing production scale, including shortages of
qualified personnel to operate our equipment, assemble our products or manage manufacturing operations, as well as shortages of key raw materials or components for our products. In addition, we may
also experience difficulties in producing sufficient quantities of products or in achieving desired product quality. If we are unable to successfully operate and manage our manufacturing operations to
meet our needs, we may not be able to provide our customers with the quantity or quality of products they require in a timely manner. This could cause us to lose customers and result in reduced
product-sale revenues.

Our inability to continue to hire and retain key employees could have a negative impact on our future operating results

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

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

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

29

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

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

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

The
European Union has adopted legislation, in the form of directives to be implemented in each member state, concerning the regulation of medical devices within the European Union. The
directives include, among others, the Medical Devices Directive that establishes standards for regulating the design, manufacture, clinical trials, labeling, and vigilance reporting for medical
devices. We have received CE (Conformité Européne) certification from Underwriters Laboratories UK for conformity with the European Union Medical Devices Directive
allowing us to use the CE mark on our product lines. This quality system has been developed by the International Organization for Standardization to ensure that companies are aware of the standards of
quality to which their products will be held worldwide. While no additional pre-market approvals in individual European Union countries are required prior to marketing of a device bearing
the CE mark, practical complications with respect to marketing introduction may occur. For example, differences among countries have arisen with regard to labeling requirements. Failure to maintain
the CE mark will preclude us from selling our products in the European Union. We may not be successful in maintaining certification requirements necessary for distribution of our products in the
European Union.

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

The
process of obtaining required regulatory clearances can be lengthy and expensive, and compliance with ISO 13485, CMDR, MDD and the FDA's QSR and regulatory requirements can be
burdensome. Moreover, there can be no assurance that the required regulatory clearances will be obtained, and those obtained may include significant limitations on the uses of the product in question.

30

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In
addition, changes in existing regulations or the adoption of new regulations could make regulatory compliance by us more difficult in the future. The failure to obtain the required regulatory
clearances or to comply with applicable regulations may result in fines, delays or suspensions of clearances, seizures, recalls of products, operating restrictions or criminal prosecutions, and could
have a material adverse effect on our operations.

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

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

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

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

31

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We currently purchase certain critical components from several single source manufacturers under various supply agreements, and if these manufacturers are
unable or unwilling to produce components, meeting our specifications in quantities that meet our production needs, our business will be harmed

In our medical and industrial segments, we purchase certain critical components for the majority of our fiberscopes, and our newly
developed videoscopes, from several single source manufacturers. For example, some critical parts for our existing line of fiberscopes are purchased solely from a key supplier, Pentax, which is a
competitor of ours. These components are being purchased pursuant to a supply agreement now due to expire in February 2009. Although we recently settled our dispute with Pentax, our agreement with
them ends in less than one year and will not be renewed.

As
a result of the expiration of our supply agreement with Pentax, we are designing a new line of fiberscopes that do not use any parts manufactured by Pentax. We anticipate that we will
be able to have completed the redesign and FDA approval process for our new line of fiberscopes by February '09. However, there are no assurances that we will be able to complete this process within
such timeframe. Furthermore, as with the fiberscopes produced with Pentax parts, certain critical components of our redesigned fiberscopes and our newly designed videoscopes are available only from
one or two suppliers. An interruption of supply from one of these suppliers or our inability to obtain a sufficient quantity of such critical components on favorable terms could materially adversely
affect our business.

In
addition, the success of our new videoscopes will depend in part on our ability to manufacture these videoscopes in sufficient quantities to meet customer demand. The failure or
inability of one of these key suppliers to meet our production and quality needs could have a material adverse effect on the sales of our new videoscopes, their acceptance into the marketplace and our
long term prospects.

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

We depend on a small group of independent distributors for all of our revenues, and a loss of one of these distributors may have a material adverse effect on
our business. Although we intend to expand this group, there is no assurance that we will be able to obtain or manage them

In our medical and industrial segments, we depend on distributors of medical devices, supplies, and industrial equipment, respectively,
for all of our product sales. In particular, in FY08 Medtronic accounted for 53% of our sales and 76% of our medical segment sales. We expect that in any given period a relatively small, and changing,
number of distributors will continue to account for all of our product-sales revenues. We do not have long-term contracts with our distributors, but rather typically sell to them on a
unit-by-unit basis. We expect this relatively small group of distributors, which may change from year to year, to generate all of our product-sales revenue. We cannot assure
you that any distributor will continue to purchase our products at the same levels as in prior years, will purchase our new products (such as our videoscopes) or that such relationship will continue
on favorable terms, if at all.

Further,
although we intend to expand our current network of distributors, there is no assurance that we will succeed in doing so in the short term. As we expand our distribution
network, our inability to effectively manage this larger group may adversely impact our reputation among end users of our products, interfere with our ability to service existing customers and reduce
our revenues from product sales, as further described below.

32

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If we fail to effectively manage our distribution network, our business, prospects and brand may be materially and adversely affected by actions taken by our
distributors

We have a limited ability to manage the activities of our third-party, outside distributors, who are independent from us. Our
distributors could take one or more of the following actions, any of which could have a material adverse effect on our business, prospects and brand:



Failure
to adequately manage our distribution network, or the non-compliance of our distributors with their obligations under distribution agreements with us could harm our
corporate image among end users of our products and disrupt our sales, resulting in a failure to meet our sales goals. Although we do not have significantly large overseas sales, foreign governments
have increased their anti-bribery efforts in the healthcare sector to reduce improper payments received by hospital administrators and doctors in connection with the purchase of
pharmaceutical products and medical devices. To our knowledge, none of our distributors engages in corrupt practices. However, our distributors may violate these laws or otherwise engage in illegal
practices with respect to their sales or marketing of our products which would adversely affect our corporate image and business.

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

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

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

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



33

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We need to expand our outside sales force to maintain and grow our business and product-sale revenues. Our failure to expand and maintain an
effective sales force or successfully develop our relationship with other distributors, may materially and adversely affect our business, prospects and brand

We
currently market and sell our existing fiberscopes for our ENT business through a single distributor, Medtronic, and our other scopes through other outside distributors and sales
representatives. As part of our growth plan, we intend to increase the number of distributors we utilize to distribute our fiberscopes and videoscopes. We have limited experience in managing a large
sales force and distributor network. We cannot assure you that we will be able to maintain an effective sales force or successfully develop our relationships with third-party, outside distributors. If
we fail to do any one of those, our sales could fail to grow or could even decline, and our ability to grow our business could be adversely
affected. The expansion of our sales force and distribution network is also likely to require a significant investment of financial resources and management efforts, and the benefits, if any, which we
gain from such expansion, may not be sufficient to generate an adequate return on our investment.

If we fail to increase awareness and acceptance of our new videoscope system in the medical community, we will not be able to grow or even sustain our business

Our new, digital, video-based flexible scopes, which comes with an integrated "built-in light" source, eliminating the need
for a separate camera head, light cable and optical coupler, use new CCD technology, as opposed to older fiber-optic technology. To penetrate the potential market for this family of videoscopes, we
must increase market awareness and use of our new technology, which depends on, among other things, the following:



We
may not have the financial and operational resources required to promote awareness and acceptance of our new videoscope systems as widely or rapidly as is necessary to grow or sustain
our business. Even if we were to devote a substantial portion of our resources to promoting our product, we may not succeed in raising the levels of awareness and acceptance of our videoscopes as
quickly as is necessary to grow or sustain our business, if at all. If we fail to increase awareness and acceptance of

34

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our
videoscopes in the medical community, we will not be able to grow, or even sustain, our business as planned, harming our financial condition and results of operations.

We may not succeed in sustaining a market for our new videoscopes

Certain of our new line of videoscopes only recently received 510k clearance from the FDA. Going forward, the long-term
success of our videoscope system depends on several factors, including our ability to:



Existing
videoscope technology is a well-established method for obtaining clinical diagnoses. As a result, our videoscopes are competing in a market in which there are
already several established industry players. We cannot assure you that we will be able to successfully market or sell our videoscopes in the future. We also cannot assure you that our videoscopes, or
any future enhancements to our videoscopes, will generate adequate revenue to offset our investments and costs in acquiring, developing or marketing our videoscopes. If there is insufficient demand
for our videoscopes, our business, financial condition and results of operations may be harmed. In addition, any announcement of new products, services or enhancements by us or our competitors may
cause our customers to cancel or postpone purchasing decisions for our existing products in anticipation of these new products, services or enhancements.

New product development in the medical device and supply industry is both costly and labor-intensive and has a very low rate of successful commercialization

Our success will depend in part on our ability to enhance our existing products and technologies, through the development of alternate
manufacturing lines for our fiberscopes, and to develop and acquire new products, such our videoscopes. The development process for medical technology is complex and uncertain, as well as
time-consuming and costly.
Product development requires the accurate assessment of technological and market trends as well as precise technological execution. We cannot assure you
that:



We
may also be unable to locate suitable products or technologies to acquire or acquire such products or technologies on commercially reasonable terms. Failure to develop or acquire,
obtain necessary regulatory clearances or approvals for, or successfully commercialize or market potential new products or technologies could have a material adverse effect on our financial condition
and results of operations.

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

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

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

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

We expect gross margins to vary over time, and our level of product gross margins may not be sustainable

Our level of product gross margins may not be sustainable and may continue to be adversely affected by numerous factors,
including:



36

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Product quality problems could lead to reduced revenue, gross margins and net income

We produce highly complex videoscope products that incorporate leading-edge technology, including both hardware and
software. Software typically contains bugs that can unexpectedly interfere with expected operations. There can be no assurance that our Quality Assurance testing programs will be adequate to detect
all defects, either ones in individual products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins. In
the past, we have had to replace certain components and provide remediation in response to the discovery of defects or bugs in products that we had shipped. Although the cost of such remediation has
not been material in the past, there can be no assurance that such a remediation, depending on the product involved, would not have a material impact. An inability to cure a product defect could
result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering expenses, any of which could
have a material impact on our revenue, margins, and net income.

Our costs could substantially increase if we experience a significant number of warranty claims

We provide 12-month product warranties against technical defects of our fiberscopes, and intend to offer a similar warranty
for our new line of videoscopes. Our product warranty requires us to repair defects arising from product design and production process, and if necessary, replace defective components. Historically, we
have received a limited number of warranty claims for our fiberscopes, but we are introducing a new line of videoscopes. The costs associated with our warranty claims have historically been relatively
low. Thus, we generally do not accrue a significant
liability contingency for potential warranty claims. As we only recently developed our videoscope line, we do not currently have historical data on potential warranty claims.

Our
videoscope product is technologically superior to our fiberscope product, and was designed, built and tested against substantially higher benchmarks than our current fiberscope
product line. Although we have insufficient historical warranty data to estimate the expected warranty claims from our videoscope product line, we expect that these warranty claims will be less than
our historical warranty claims for the fiberscope product line. As of June 30, 2008, our warranty reserve was at 2.7% of our medical scopes revenues, reflecting our expected future liability
from fiberscopes and videoscopes warranty claims, based on our historical fiberscope warranty claims.

We
do believe that by using the historical data of our fiberscope product line, and the superior technological nature of our videoscope product, our current warranty reserve is
reasonable, and we believe that the fiberscope historical data represents a reasonable basis for the videoscopes' warranty reserve. We will monitor the warranty data of our videoscope product line on
a quarterly basis, and will update our warranty reserve accordingly.

If
we experience an increase in warranty claims, or if our repair and replacement costs associated with warranty claims increase significantly, we will begin to incur liabilities for
potential warranty claims after the sale of our products at levels that we have not previously incurred or anticipated. In addition, an increase in the frequency of warranty claims or amount of
warranty costs may harm our reputation and could have a material adverse effect on our financial condition and results of operations.

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

The development, manufacture, and sale of our products involve a significant risk of product liability claims. We maintain product
liability insurance with coverage limits of $22 million. We believe that this level of coverage is adequate, given our past sales levels, our anticipated sales levels for FY 09, and our claims
experience. We will re-evaluate the adequacy of this coverage when and if our sales substantially increase, or another need arises. No product liability claims have been brought against us

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

We sell our products in numerous international markets

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



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

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

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

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

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

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

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Currency exchange rate fluctuations could adversely affect our operating results

Because some of our business includes international business transactions, costs and prices of our products or components in overseas
countries are affected by foreign exchange rate changes. As a result, foreign exchange rate fluctuations may adversely affect our business, operating results and financial condition. Given the current
weakness of the dollar, it is likely that we will have to pay more for certain components or subassemblies, which may harm our results, particularly as most of our sales take place in the United
States.

Currently,
we do not enter into foreign exchange forward contracts and we do not hedge anticipated foreign currency cash flows.

We are exposed to credit risk of some of our customers

Most of our sales are on an open credit basis, with typical payment terms of 30 days in the United States and, because of local
customs or conditions, longer in some markets outside the United States. We monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to
amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. Beyond our open credit arrangements, we have also experienced demands
for customer financing and facilitation of leasing arrangements, which we refer to leasing companies unrelated to us.

Our
exposure to the credit risks may increase if there is an economic slowdown. Although we have programs in place that are designed to monitor and mitigate the associated risk, there
can be no assurance that such programs will be effective in reducing our credit risks. Future credit losses, if incurred, could harm our business and have a material adverse effect on our operating
results and financial condition. A portion of our sales is derived through our distributors and retail partners. These distributors and retail partners are generally given business terms that allow
them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We maintain estimated accruals and allowances for such
business terms. However, distributors tend to have more limited financial resources than other resellers and end-user customers and therefore represent potential sources of increased
credit risk because they may be more likely to lack the reserve resources to meet payment obligations.

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

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

There
can be no assurance that our pending patent applications will result in patents being issued or that our competitors will not circumvent, or challenge the validity of, any patents
issued to us. In addition, in the event that another party infringes our patent rights, the enforcement of such rights is at our option and can be a lengthy and costly process, with no guarantee of
success.

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

We may not be able to complete our consolidation on time

On May 1, 2008, we entered into a definitive lease agreement (the "Lease"), with Ramland Realty Associates, L.L.C. (the
"Landlord"), for our new premises, consisting of approximately 34,795 square feet at One Ramland Road, Orangeburg, New York. The new premises will permit us to complete our previously announced
consolidation of our Natick manufacturing facilities with our Orangeburg research and development, manufacturing and office facilities into one site. However, if we are unable to do so by the time our
short term lease in Natick expires in December 2008, and we are unable to extend it for an additional period of time, it could disrupt our production of the EndoSheath, which could adversely affect
the Company.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

N/A

Item 3.    Defaults Upon Senior Securities

N/A.

Item 4.    Submission of Matters to a Vote of Stockholders

N/A.

Item 5.    Other Information

N/A.

Item 6.    Exhibits

Exhibits31.1

Certification of Chief Executive Officer pursuant to Rule 13a-15(e)/15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-15(e)/15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

VISION-SCIENCES, INC.Date: August 14, 2008

/s/RON HADANIRon Hadani President, CEO (Duly Authorized Officer)Date: August 14, 2008

/s/YOAV M. COHENYoav M. Cohen Vice President Finance, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)


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VISION-SCIENCES, INC.        EXHIBIT INDEX

Exhibit No.

Description3.1(1)

Amended and Restated Certificate of Incorporation of the Company, as amended to date3.2(2)

By-laws, as amended to date*10.1(3)

1990 Stock Option Plan, as amended*10.2(3)

2003 Director Option Plan*10.3(4)

2000 Stock Incentive Plan10.3.1(14)

2007 Stock Incentive Plan*10.4(2)

Vision-Sciences, Inc. 401(k) Plan, as amended*10.5(2)

Form of Vision-Sciences, Inc. Invention, Non-Disclosure and Non-Competition Agreement for employees*10.6(17)

Letter Agreement between the Company and Ron Hadani dated January 24, 200310.9(2)

Registration Rights Agreement dated as of February 28, 1992 among the Registrant and the persons listed therein10.10(1)

Piggyback Registration Rights Agreement, dated January 2, 2001, between the Company and the individuals and entities listed therein10.11(9)

Supply Agreement dated March 16, 1992 between the Registrant and Pentax Corporation (formerly known as Asahi Optical Co., Ltd.) and amendment dated October 1, 200210.12(15)

Termination Agreement between Pentax Corporation and Vision-Sciences, Inc. dated February 12, 200810.14(6)

License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated June 10, 199310.15(7)

Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated April 5, 199410.16(8)

Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated April 5, 199510.17(8)

Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated April 5, 1996**10.19(5)

License Agreement dated as of August 6, 1998 between Vision-Sciences, Inc. and Pentax Corporation (formerly Asahi Optical Co., Ltd.)10.21(4)

Agreement of Lease between 30 Ramland Road LLC and Vision-Sciences, Inc. dated as of March 23, 200010.26(10)

Exclusive Distribution Agreement between the Company and Medtronic Xomed, Inc. dated August 6, 2003


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VISION-SCIENCES, INC.

EXHIBIT INDEX

Exhibit No.

Description10.31(11)

Asset Purchase Agreement dated as of January 16, 2007 by and between Medtronic Xomed, Inc. and the Company10.32(11)

Amended and Restated Exclusive Distribution Agreement dated as of March 26, 2007 by and between the Company and Medtronic Xomed, Inc.10.33(11)

License Agreement dated as of March 26, 2007 by and between the Company and Medtronic Xomed, Inc.*10.34(17)

Amendment dated April 4, 2007 to Employment Letter Agreement of Yoav Cohen*10.35(17)

Amendment dated April 4, 2007 to Employment Letter Agreement of Ron Hadani10.36(12)

Merrill Lynch Loan Management Account Agreement (the "Agreement") between Vision-Sciences, Inc. and Merrill Lynch Bank USA ("Bank") and accompanying Commitment Letter from the Bank10.37(13)

Lease Agreement dated as of May 1, 2008 between Ramland Realty Associates LLC and Vision Sciences, Inc.10.38(17)

Third Amendment to Lease between 30 Ramland Road, LLC dated as December 26, 2006 LLC and Vision Sciences, Inc.10.39(16)

Development and Supply Agreement between Vision-Sciences, Inc. and SpineView, Inc. dated June 19, 200821.1(17)

Subsidiaries of the Company31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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VISION-SCIENCES, INC.

EXHIBIT INDEX

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