Cogentix Medical 10Q 2006 Q4 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

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

For the quarterly period ended December 31, 2006

OR

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

For the transition period 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		(IRS Employer
incorporation or organization)		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)

9 Strathmore Road, Natick MA 01760

(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 x No o

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

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

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

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 6, 2007.

Common Stock, par value of $.01		35,172,728
(Title of Class)		(Number of Shares)

PART I - FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,			March 31,
	2006			2006
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,549,819		$	6,138,148
Accounts receivable, net of allowance for doubtful accounts of $127,067 and $145,402, respectively	1,432,600			1,767,913
Inventories, net	2,196,752			2,384,993
Prepaid expenses and other current assets	247,520			59,532
Total current assets	6,426,691			10,350,586
Property and Equipment, at cost:
Machinery and equipment	5,171,388			4,747,964
Furniture and fixtures	271,620			250,865
Leasehold improvements	588,795			582,631
	6,031,803			5,581,460
Less-Accumulated depreciation and amortization	4,808,172			4,489,529
	1,223,631			1,091,931

Other assets, net of accumulated amortization of $64,754 and $60,127, respectively	63,878			68,505
Total assets	$	7,714,200		$	11,511,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Acceptances payable to a bank	$	9,952		$	61,536
Current portion of note payable	10,708			26,431
Accounts payable	487,199			892,398
Accrued expenses	1,220,441			1,028,146
Total current liabilities	1,728,300			2,008,511

Long-term portion of note payable	—			4,193

Stockholders’ Equity:
Common stock, $.01 par value—
Authorized—50,000,000 shares Issued and outstanding—35,166,478 shares at December 31, 2006 and 35,148,427 shares at March 31, 2006	351,664			351,483
Additional paid-in capital	76,078,613			75,678,615
Accumulated deficit	(70,444,377		)	(66,531,780		)
Total stockholders’ equity	5,985,900			9,498,318
Total liabilities and stockholders’ equity	$	7,714,200		$	11,511,022

See accompanying notes to consolidated financial statements.

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
Net sales	$	2,215,615		$	3,330,041		$	6,513,993		$	8,164,551
Cost of sales	1,922,092			2,445,318			5,335,946			6,175,340

Gross profit	293,523			884,723			1,178,047			1,989,211

Selling, general and administrative expenses	1,209,500			1,343,478			3,472,969			3,507,814
Research and development expenses	513,765			597,930			1,724,789			1,537,588
Loss from operations	(1,429,742		)	(1,056,685		)	(4,019,711		)	(3,056,191		)

Interest income	27,831			56,237			117,669			143,117
Interest expense	(270		)	(731		)	(1,126		)	(2,549		)
Other income (expense), net	(2,549		)	(1,190		)	(9,429		)	3,610

Net loss	$	(1,404,730	)	$	(1,002,369	)	$	(3,912,597	)	$	(2,912,013	)

Basic and diluted net loss per common share	$	(0.04	)	$	(0.03	)	$	(0.11	)	$	(0.08	)

Shares used in computing basic and diluted net loss per common share	35,166,330			35,128,478			35,161,713			35,089,761

See accompanying notes to consolidated financial statements.

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock								Total
	Number	$.01		Additional		Accumulated			Stockholders’
	of Shares	Par Value		Paid-in-Capital		Deficit			Equity

Balance, March 31, 2006	35,148,427	$	351,483	$	75,678,615	$	(66,531,780	)	$	9,498,318
Exercise of stock options, net	18,051	181		19,395					19,576
Compensation expense related to stock options				380,603					380,603
Net loss						(3,912,597		)	(3,912,597		)

Balance December 31, 2006	35,166,478	$	351,664	$	76,078,613	$	(70,444,377	)	$	5,985,900

See accompanying notes to consolidated financial statements.

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended			Nine Months Ended
	December 31, 2006			December 31, 2005
Cash flows from operating activities:
Net loss	$	(3,912,597	)	$	(2,912,013	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization	323,271			328,498
Stock-based compensation	380,603			388,316
Changes in assets and liabilities:
Accounts receivable	335,313			(300,759		)
Inventories	188,240			(392,345		)
Prepaid expenses and deposits	(187,988		)	(11,483		)
Accounts payable	(405,198		)	212,122
Accrued expenses	192,294			(136,859		)
Net cash used for operating activities	(3,086,062		)	(2,824,523		)

Cash flows used for investing activities:
Purchase of property and equipment, net	(450,344		)	(318,112		)

Net cash used for investing activities	(450,344		)	(318,112		)

Cash flows provided by (used for) financing activities:
Payments on note payable for computer equipment	(19,915		)	(18,493		)
Payments of acceptances payable to a bank, net	(51,584		)	24,266
Proceeds from the sale of common stock, net	—			55,869
Exercise of stock options, net	19,576			145,565
Net cash (used for) provided by financing activities	(51,923		)	207,207
Net decrease in cash and cash equivalents	(3,588,329		)	(2,935,428		)
Cash and cash equivalents, beginning of period	6,138,148			9,868,586
Cash and cash equivalents, end of period	$	2,549,819		$	6,933,158
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	1,126		$	2,549

VISION-SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

2. Summary of Significant Accounting Policies

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

a. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

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

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

	December 31,		March 31,
	2006		2006
	(unaudited)		(audited)

Raw materials	$	1,363,856	$	1,600,652
Work-in-process	372,961		143,803
Finished goods	459,935		640,538
	$	2,196,752	$	2,384,993

Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead.

2. Summary of Significant Accounting Policies (Continued)

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

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

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

e. Basic and Diluted Net Loss Per Common Share: Basic and diluted net loss per common share is based on the weighted average number of common shares outstanding. Shares of common stock issuable pursuant to outstanding stock options have not been considered, as their effect would be antidilutive.

f. Revenue Recognition: The following must occur before the Company recognizes revenue: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable, (4) collectibility is reasonably assured and (5) the fair value of undelivered elements, if any, exists. To date the Company has not entered into any multiple element arrangements. The Company recognizes revenue when title passes to the customer, generally upon shipment of products F.O.B. its plants. Since September 2003, the Company’s medical segment has distributed all of its products for the Ear-Nose-Throat (“ENT”) market in the United States and Canada through an agreement (the “Medtronic Agreement”) with Medtronic ENT, Inc. (“MENT”). The Medtronic Agreement does not provide for any contingencies, nor provide any terms related to product acceptance or warranty that are different from the normal terms provided by the Company to its other customers.

The initial term of the Medtronic Agreement was three years. Thereafter, it provided for an automatic renewal for successive one-year periods, unless terminated by either party upon advance written notice. Neither party provided such notice, so on September 2006, the Medtronic Agreement was renewed for an additional one year (for additional information, please see Note 5, subsequent events, paragraph a).

From December 2004 to May 1, 2006, the Company’s medical segment distributed all of its products for the urology market in the United States and Canada through Medtronic USA, Inc. (the Medtronic Gastroenterology/Urology business, or “MGU”) as part of a separate exclusive agreement (the “MGU Agreement”). The MGU Agreement continued in full force and effect until March 31, 2006, renewable thereafter annually, unless terminated by either party. In May 2006, the Company and MGU terminated the MGU Agreement. Subsequent to May 1, 2006, the Company has been developing its own worldwide independent sales representative organization to distribute its products to the urology market.

The Company’s medical segment distributes its products for the pulmonary and gastro-intestinal (“GI”) markets and the Urology market through a network of independent domestic sales representatives. The Company’s medical segment distributes all its products outside the United States and Canada through a network of independent international distributors.

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

g. Foreign Currency Transactions: In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, Foreign Currency Translation, the Company charges foreign currency exchange gains or losses, in connection with its purchases of products from foreign vendors, to operations.

h. Income Taxes: The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). Under SFAS 109, deferred tax assets or liabilities are computed based upon the differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates. The Company has recorded a valuation allowance equal to its net deferred tax asset due to the uncertainty of realizing the benefit of this asset.

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

The Company has adopted the modified prospective transition method provided for under SFAS 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock options now includes: (i) amortization related to the remaining unvested portion of all stock options outstanding at March 31, 2006, based on the fair value determined on the grant date 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.

The Company continues to account for compensation expense related to stock options granted to non-employees in accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services (“EITF 96-18”). According to the provisions of EITF 96-18, the Company determines the fair value of options granted to non-employees using the Black-Scholes option-pricing model on the measurement date which is either the date a commitment for performance is reached, or when performance has been completed, depending upon the facts and circumstances of the option. The fair value of the options valued at the measurement date is expensed over the vesting period of the options. This method approximates the same periods the expense would be recognized had the Company paid cash for the services. The Company does not account for the fair value of options granted, in which the quantity and terms are known up front, prior to the measurement date, as the services are not rendered prior to those dates. The Company accounts for the fair value of options granted, in which the quantity and terms are not known up front, when the services are performed.

In accordance with SFAS 123R and EITF 96-18, the Company recorded $136,754 and $380,603 of stock-based compensation expense in the statement of operations for the three and nine months ended December 31, 2006, respectively in the following expense categories:

	Three Months Ended		Nine Months Ended
	December 31, 2006
Cost of Goods Sold	$	15,018	$	45,053
SG&A	97,044		288,498
R&D	24,692		47,052
Total	$	136,754	$	380,603

On December 31, 2006, the total unamortized stock-based compensation is approximately $932,000. The Company will expense that amount over the period ending December 31, 2010. The Company does 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 and nine months ended December 31, 2005, the Company recorded compensation expense of $288,947 and $388,316 for non-qualified stock options in the statement of operations in the following expense categories:

	Three Months Ended		Nine Months Ended
	December 31, 2005

SG&A	$	284,325	$	383,475
R&D	4,622		4,841
Total	$	288,947	$	388,316

Employees Options: In the nine months ended December 31, 2006(“9M 07”), the Company granted options to purchase 350,000 shares of the Company’s common stock to employees. The fair value of these options measured at the option grant dates was approximately $314,000, determined using the Black-Scholes option-pricing model, and is being recorded as an expense over the four year vesting period. The assumptions used in the Black-Scholes option-pricing model in the period by the Company were as follows:

	Nine Months Ended December 31, 2006
Risk-free interest rate	4.51%-4.96		%
Expected dividend yield	—
Expected life	6.25 years
Expected volatility	67%-69		%
Weighted average value grant per share	$	1.35

Non Employees Options: In August 2006, the Company granted options to purchase 100,000 shares of the Company’s common stock to a non-employee. The fair value of these options measured at the option grant dates was approximately $107,000, determined using the Black-Scholes option-pricing model, and is being recorded as an expense over the four year vesting period. The assumptions used in the Black-Scholes option-pricing model in the period by the Company were as follows:

	Nine Months Ended December 31, 2006
Risk-free interest rate	4.91		%
Expected dividend yield	—
Expected life	6.25 years
Expected volatility	69		%
Weighted average value grant per share	$	1.60

Directors Options: In August 2006, the Company granted options to purchase 16,000 shares of the Company’s common stock to outside members of the board of directors. The fair value of these options measured at the option grant dates was approximately $15,160, determined using the Black-Scholes option-pricing model, and was recorded as an expense in the three months ended September 30, 2006, as the options were 100% vested upon grant. The assumptions used in the Black-Scholes option-pricing model in the period by the Company were as follows:

	Nine Months Ended December 31, 2006
Risk-free interest rate	4.91		%
Expected dividend yield	—
Expected life	5.50 years
Expected volatility	69		%
Weighted average value grant per share	$	1.49

We account for options issued in accordance with the provisions of SFAS 123R. We grant options with vesting periods ranging from immediate to four years. For options granted to employees in the current year, we have chosen to employ the simplified method of calculating the expected option term, which averages an award’s weighted average vesting period and its contractual term. The contractual term of our options is ten years. The risk-free rate is based upon the daily Treasury yield curve for a period approximately equal 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 and on the fact that we are prohibited from paying dividends under our bank agreement.

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

	Three Months Ended December 31, 2005			Nine Months Ended December 31, 2005
Net loss – as reported	$	(1,002,369	)	$	(2,912,013	)
Stock-based employee compensation – as reported	242,559			249,153
Pro forma stock-based employee compensation	(494,452		)	(760,114		)
Net loss - pro forma	$	(1,254,262	)	$	(3,422,974	)

Net loss per share – as reported	$	(.03	)	$	(.08	)
Stock-based employee compensation – as reported	—			—
Pro forma stock-based employee compensation	(.01		)	(.02		)
Net loss per share - pro forma	$	(.04	)	$	(.10	)

In the nine months ended December 31, 2005, the Company granted options to purchase 1,031,500 shares of the Company’s common stock. The fair value of these options measured at the option grant dates were approximately $1,476,000, determined using the Black-Scholes option-pricing model, and were not recorded as an expense over the vesting period, as the Company was not accounting for options under SFAS 123R.

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

	Nine Months Ended December 31, 2005
Risk-free interest rate	3.33-4.07		%
Expected dividend yield	—
Expected life	5 years
Expected volatility	66%-72		%
Weighted average value grant per share	$	1.36

j. Recently Issued Accounting Standards

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

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

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

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

In September 2006, the FASB issued SFAS 157 Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged. The Company has not yet determined the effect the adoption of SFAS 157 will have on its financial position and results of operations.

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

3. Stock Option Plans

The Company had a stock option plan (the “1990 Plan��) under which it could grant employees and non-employees stock options at the fair value of the stock on the date of grant. The Board of Directors had authorized the issuance of options for the purchase of up to 4,375,000 shares of common stock under the 1990 Plan, of which 872,087 were retired as of the expiration of the 1990 Plan. Options for the purchase of 1,435,750 shares of common stock under the 1990 Plan remain outstanding at December 31, 2006.

The Company has a stock option plan (the “2000 Plan”) under which it grants key employees and consultants stock options at the fair value of the stock on the date of grant. Options become exercisable at varying dates ranging up to five years from the date of grant. The Board of Directors and shareholders have authorized the issuance of options for the purchase of up to 4,500,000 shares of common stock under the 2000 Plan, of which 798,358 shares remain available for future grant. Options for the purchase of 3,049,300 shares of common stock under the 2000 Plan remain outstanding at December 31, 2006. The Company grants options to both employees and non-employee consultants.

A summary of the stock option activity for 9M 07 is as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)

Outstanding March 31, 2006	4,367,351		$	1.52	6.08
Granted	450,000		1.41
Exercised	(18,051	)	1.08
Canceled	(314,250	)	2.14
Outstanding December 31, 2006	4,485,050		$	1.47	5.71
Exercisable December 31, 2006	3,527,050		$	1.44

The total intrinsic value of options exercised in 9M 07 was $11,882.

The following table summarizes information about stock options outstanding and exercisable on December 31, 2006:

			Outstanding			Exercisable
Range of Exercise Prices		Number of Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price

$	0.79-1.05	1,151,050	6.21	$	1.02	1,148,550	$	1.02
1.06-1.32		1,227,750	5.57	1.15		902,750	1.14
1.34-1.67		1,502,750	4.62	1.57		1,138,000	1.61
1.73-2.25		300,000	8.24	1.90		90,000	1.89
2.28-2.90		73,500	7.39	2.44		57,750	2.35
3.25-4.30		230,000	7.34	3.95		190,000	3.89
		4,485,050	5.71	$	1.47	3,527,050	$	1.44

The aggregate intrinsic value of all outstanding and exercisable options at December 31, 2006 is negative, as the closing price of the Company’s common stock on December 31, 2006 is less than the weighted average price of the outstanding and exercisable options.

The Company has a 2003 Director Option Plan (the “2003 Plan”) under which it may grant up to 200,000 non-statutory stock options to non-employee directors of the Company at the fair value of the stock on the grant date. The terms of the 2003 Plan include automatic grants of 4,000 shares to each outside director ``on each date on which an annual meeting of the stockholders of the Company is held, provided that such outside director does not hold on such date any outstanding options to purchase common stock of the Company’s 1993 Plan, which options are not fully exercisable. Options granted under the 2003 Plan are 100% vested on the date of grant. The Company granted options to purchase 16,000 shares to the outside directors on August 3, 2006. The Company expects to make similar grants at the annual meetings in each of 2007, 2008 and 2009.

A summary of the 2003 Plan activity is as follows:

	Number of Shares	Exercise Price Range		Weighted Average Exercise Price
Outstanding March 31, 2006	72,000	$	1.0 - $2.10	$	1.39
Granted	16,000	1.49		1.49
Exercised	—	—		—
Canceled	—	—		—
Outstanding December 31, 2006	88,000	1.00 - 2.10		1.41
Exercisable December 31, 2006	88,000	1.00 - 2.10		1.41

The following table summarizes information about director stock options outstanding and exercisable on December 31, 2006:

			Outstanding			Exercisable
Range of Exercise Prices		Number of Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price

$	1.00 – 1.30	40,000	4.44	$	1.15	40,000	$	1.15
1.49 – 1.92		40,000	5.01	1.54		40,000	1.54
2.06 – 2.10		8,000	8.65	2.08		8,000	2.08
		88,000	5.08	$	1.41	88,000	1.41

4. Segment Information

The Company has three reportable segments – medical, industrial and corporate. The medical segment designs, manufactures and sells disposable Slide-On® EndoSheaths® (“EndoSheaths”) and sells endoscopes to users in the healthcare industry. The industrial segment designs, manufactures and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. In addition, the industrial segment manufactures and repairs endoscopes for the medical segment. The corporate segment consists of certain administrative and business development activities applicable to the Company as a whole.

All segments follow the accounting policies described in the summary of significant accounting policies. The Company evaluates segment performance based upon operating income. Identifiable assets are those used directly in the operations of each segment. Corporate assets include cash, marketable securities and the assets of Vision-Sciences, Ltd. Data regarding management’s view of the Company’s segments are provided in the following tables ($000’s):

Three months ended December 31,	Medical			Industrial			Corporate			Adjustments			Total
2006
Sales to external customers	$	1,535		$	681		$	—		$	—		$	2,216
Intersegment sales	—			357			—			(357		)	—
Operating income (loss)	(716		)	(314		)	(400		)	—			(1,430		)
Interest income (expense), net	—			—			28			—			28
Depreciation and amortization	102			9			—			—			111
Other significant non-cash items:
Stock-based compensation	47			31			59			—			137
Expenditures for fixed assets	105			16			—			—			121

2005
Sales to external customers	$	2,531		$	799		$	—		$	—		$	3,330
Intersegment sales	—			831			—			(831		)	—
Operating income (loss)	(581		)	21			(497		)	—			(1,057		)
Interest income (expense), net	—			—			56			—			56
Depreciation and amortization	118			4			—			—			122
Other significant non-cash items:
Stock-based compensation	61						228			—			289
Expenditures for fixed assets	109			10			—			—			119

Nine months ended December 31,
2006
Sales to external customers	$	4,474		$	2,040		$	—		$	—		$	6,514
Intersegment sales	—			1,271			—			(1,271		)	—
Operating income (loss)	(2,258		)	(571		)	(1,191		)	—			(4,020		)
Interest income (expense), net	—			—			118			—			118
Depreciation and amortization	301			22			—			—			323
Other significant non-cash items:
Stock-based compensation	114			75			192			—			381
Expenditures for fixed assets	384			66			—			—			450
Total assets	4,496			1,777			2,589			(1,148		)	7,714

2005
Sales to external customers	$	6,147		$	2,018		$	—		$	—		$	8,165
Intersegment sales	—			2,247			—			(2,247		)	—
Operating income (loss)	(1,929		)	(6		)	(1,121		)	—			(3,056		)
Interest income (expense), net	—			—			141			—			141
Depreciation and amortization	300			28			—			—			328
Other significant non-cash items:
Stock-based compensation	154			—			234			—			388
Expenditures for fixed assets	292			26			—			—			318
Total assets	3,832			2,058			7,019			(402		)	12,507

Note 5 Subsequent Events

a) Sale of a business line to Medtronic Xomed Inc.

On January 16, 2007, we entered into an Asset Purchase Agreement (the “Agreement”) with Medtronic Xomed, Inc., a wholly-owned subsidiary of Medtronic, Inc. (“Medtronic”). Pursuant to the Agreement, the Company will sell to Medtronic its two (2) existing manufacturing lines for the production of EndoSheath® products (“the assets”), free and clear of all liens.

Under the terms of the Agreement, Medtronic will pay us up to $34.0 million, of which $27.0 million will be payable at closing, plus up to an additional $4.0 million will be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to Medtronic, and an additional $3.0 million will be payable approximately 15 months after closing, assuming we have complied with its obligations under the Asset Purchase Agreement, and that Medtronic has not made any claims based on our representations and warranties under the Asset Purchase Agreement. Based on the sale price, we expect to record a gain on the sale of these assets.

Since the assets are not available for immediate sale in its present condition, the Company has entered into a Transition Services Agreement. The agreement provides, among other things, that within the first 90 days after the closing of the transaction, we have to modify and then validate the 2 manufacturing lines.

In addition, as part of this transaction, Medtronic and Vision-Sciences amended their existing distribution relationship pursuant to which Medtronic has been distributing Vision-Sciences’ ENT Endoscope and EndoSheath® products in the US and Canada since 2004. Under the amended Distribution Agreement, Medtronic will have the right to distribute, market and sell EndoSheath® Products on a worldwide basis. The EndoSheath® products will initially be supplied by Vision-Sciences until Medtronic has established its own manufacturing capacity for EndoSheath® products. In addition, Medtronic will now distribute, market and sell Vision-Sciences’ ENT endoscope products worldwide, on a co-branded basis, through Medtronic’s dedicated sales force.

b) Termination of our bank agreement.

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

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

We develop, manufacture and sell flexible endoscope and sheath products for the medical and industrial markets. We operate in three reporting segments, medical, industrial and corporate.

Medical Segment

The medical segment supplies flexible endoscopes and disposable Slide-On® EndoSheath® systems (“EndoSheaths”) to the ENT, urology, GI and pulmonary markets. Healthcare providers use EndoSheaths to cover the insertion tube of flexible endoscopes, such as ENT endoscopes, Trans-Nasal Esophagoscopes (“TNE”), cystoscopes, sigmoidoscopes and bronchoscopes. We have designed the EndoSheaths to allow the health-care providers to process patients economically by permitting the providers to minimize reprocessing the endoscopes between procedures. In addition, the EndoSheaths ensure a sterile insertion tube for each patient procedure.

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

Sales Distribution

Since September 19, 2003, we have been distributing all of our products for the ENT market in the United States and Canada through MENT, as part of the Medtronic Agreement. Under the Medtronic Agreement, we have granted MENT exclusive distribution rights in the United States and Canada to market and sell our ENT and TNE EndoSheaths and endoscopes to ENT practitioners. MENT fulfilled certain minimum purchase requirements for the initial twelve-month period of the term.

The initial term of the Medtronic Agreement was three years. Thereafter, it provided for an automatic renewal for successive one-year periods, unless terminated by either party upon advance written notice. Neither party provided such notice, so in September 2006, the Medtronic Agreement was renewed for an additional year (for additional information, please refer to Note 5, paragraph a).

We believe the marketing and sales capabilities of MENT have facilitated and will continue to facilitate the introduction of new products to the ENT market by allowing quicker market acceptance of these products than if we marketed them ourselves. As a result of this agreement, the success of our endoscopes ENT product line is substantially dependent upon the success of the marketing and sales activities of MENT, over which we have limited control.

In December 2004, we signed the MGU Agreement with MGU, granting MGU the exclusive right to distribute our new cystoscope with Slide-On® EndoSheath® system to urologists in the United States and Canada. The term of the MGU Agreement was through March 31, 2006, renewable for successive one-year periods unless either party notified the other party in writing at least 90 days prior to the end of any term that it did not want to renew. In May 2006, we and MGU mutually terminated the MGU Agreement, due to lower sales than we expected, and a change in strategy by MGU. MGU decided to put greater focus on therapy products and narrow its overall uro-diagnostics product offerings, which included our products. We then decided to explore other forms of distribution for our flexible cystoscope and Slide-On® EndoSheath® system, including through a network of independent sales representatives. We have retained our own international network of distributors for all our medical product lines. We are in the process of establishing a network of independent sales representatives for the domestic urology market, and we are also increasing our international network of independent distributors. We expect developing this network will take between nine and twelve months. We will continually assess our progress in this area, and could amend or abandon our efforts if they do not prove to be successful during that time frame.

Cost Reduction

During this fiscal year ended March 31, 2007 (“FY 07”), we are continuing the efforts begun in the previous fiscal year to reduce the cost of materials and labor across our endoscope and EndoSheath product lines.

New Products

In November 2006, we released to market our new cystoscope, the CST-2000A, addressing improvements requested by our customers. During the fourth quarter of FY 07, we will be releasing our redesigned cystoscope sheath, which incorporates improvements making the product easier to use. Our product development efforts for our new family of videoscopes, with a miniature digital camera mounted at the distal end of the insertion tube, continue on track. We expect to release the first of this product family during the fiscal year ended March 31, 2008 (“FY 08”). In addition, we are continuing our efforts in the areas of design and cost improvements to our disposable sheaths for our TNE and urology endoscopes.

Industrial Segment

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

Corporate Segment

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

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 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 and EITF 00-21, Revenue Arrangements with Multiple Deliverables. These pronouncements require 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 rendered; (3) the fee is fixed and determinable; (4) collectibility is reasonably assured and (5) the fair value of undelivered elements, if any, exists. Determination of criterion (4) is based on management’s judgment regarding the collectibility of invoices for products and services delivered to customers. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Options Issued

We account for options issued to non-employees and employees in accordance with the provisions of SFAS 123R. We use the Black-Scholes option-pricing model for determining the value of options issued, and we expense that value over the vesting period of the options. We grant options with vesting periods ranging from immediate to four years. For the first three quarters of fiscal 07, we have chosen to employ the simplified method of calculating the expected option term, which averages an award’s weighted average vesting period and its contractual term. The contractual term of our options is ten years. The options granted to employees and consultants in the first three quarters of fiscal 07 vest at a rate of 25% per year for the first four years. The options granted to members of the board of directors are 100% vested upon grant. 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.

Income Taxes

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

Results of Operations

Net Sales

Three-month Period Ended December 31, 2006 (“Q3 07”) Compared to the Three-month Period Ended December 31, 2005 (“Q3 06”) ($000’s)

Net sales for Q3 07 were $2,216, a decrease of $1,114, or 33%, compared to Q3 06. During Q3 07, net sales of the medical segment decreased by $996, or 39%, to $1,535, and net sales of the industrial segment decreased by $118 or 15%, to $681, compared to Q3 06. In the medical segment, we track sales of endoscopes and EndoSheaths by market. We also track sales of peripheral items that can be sold to more than one market. Sales of other products include sales to the GI and pulmonary markets and sales of repairs and accessories. Sales by segment and category in Q3 07 and Q3 06 were as follows ($000’s):

Category	Q3 07		Q3 06		Increase (Decrease)			Percent
ENT	$	1,255	$	1,650	$	(395	)	(24	)%
Urology	92		457		(365		)	(80	)%
Peripherals	21		268		(247		)	(92	)%
Other	167		156		11			7	%
Total medical	$	1,535	$	2,531	$	(996	)	(39	)%
Total industrial	681		799		(118		)	(15	)%
Total Company	$	2,216	$	3,330	$	(1,114	)	(33	)%

Medical Sales – ENT Market

Net sales to the ENT market include products for domestic and international customers as follows ($000’s):

ENT Market	Q3 07		Q3 06		Increase (Decrease)			Percent
Domestic	$	625	$	790	$	(165	)	(21	)%
International	630		860		(230		)	(27	)%
Total ENT	$	1,255	$	1,650	$	(395	)	(24	)%

We further delineate products sold to the domestic ENT market as follows ($000’s):

Products	Q3 07		Q3 06		Increase (Decrease)			Percent
Slide-On EndoSheaths	$	377	$	384	$	(7	)	(2	)%
Endoscopes	248		406		(158		)	(39	)%
Total Domestic ENT	$	625	$	790	$	(165	)	(21	)%

The primary reason for the decrease in sales to the domestic ENT market was lower demand for our scopes from MENT. Sales of our ENT Slide-On Endo Sheath (“ENT SOS”) decreased slightly in Q3 07 compared to Q3 06 by $7, sheath products are being ordered as a result of having more of our endoscopes in the market.

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

We further delineate products sold to the international ENT market as follows ($000’s):

Products	Q3 07		Q3 06		Increase (Decrease)			Percent
Slide-On EndoSheaths	$	507	$	559	$	(52	)	(9	)%
Endoscopes	123		301		(178		)	(59	)%
Total International ENT	$	630	$	860	$	(230	)	(27	)%

The decrease in net sales to international distributors is primarily due to the fact that in Q3 07, we lost the services of our Director of International Sales and have replaced our Vice President of Sales and Marketing. Since we have anticipated the new distribution agreement announced on January 16, 2007, we did not rebuild our international sales force. As announced on January 16, 2007, all international sales of our ENT products will be handled by Medtronic as soon as the announced transaction closes (see Note 5, subsequent events, paragraph a).

Medical Sales – Urology

The decrease in sales of urology products reflects our new efforts to build an independent sales representative organization after the cancellation of the MGU Agreement. In May 2006, we and MGU mutually terminated the MGU Agreement, due to lower sales than we expected, and a change in strategy by MGU. MGU decided to put greater focus on therapy products and narrow its overall uro-diagnostics product offerings, which included our products. We then decided to explore other forms of distribution for our flexible cystoscope and Slide-On EndoSheath system. We are still in the process of establishing a network of independent sales representatives for the domestic urology market, and we are also increasing our network of independent distributors for the international urology market. We expect developing these networks will take between nine and twelve months. We will continually assess our progress in this area, and could modify or abandon our efforts if they do not prove to be successful during that time frame.

Medical Sales – Peripherals and Other

Sales of peripheral and other products declined substantially in Q3 07, compared to Q3 06, due primarily to lower demand for our GI and pulmonary EndoSheaths. We have a small installed base of users of these products, and we plan to continue to supply them with EndoSheaths in FY 07. However, we do not plan to promote these products. As a result, we expect sale of these products will continue to decline during FY 07, compared to the fiscal year ended March 31, 2006 (“FY 06”). In addition, we experienced lower demand for light sources and other accessories.

Industrial Segment

The decrease in net sales of the industrial segment was due to lower demand in the market for our fiberscopes.

9M 07 Compared to the Nine Months Ended December 31, 2005 (“9M 06”) (000’s)

Sales

Net sales for 9M 07 were $6,514, a decrease of $1,651, or 20%, compared to net sales of $8,165 in 9M 06. In 9M 07, sales of the medical segment were $4,474, a decrease of $1,673 or 27%, compared to net sales of $6,147 in 9M 06. In 9M 07, sales of the industrial segment were $2,040, an increase of $22, or 1%, compared to net sales of $2,018 in 9M 06. Net sales by category were as follows ($000’s):

Category	9M 07		9M 06		Increase (Decrease)			Percent
ENT	$	3,550	$	4,093	$	(543	)	(13	)%
Urology	308		959		(651		)	(68	)%
Peripherals	111		339		(228		)	(67	)%
Other	505		756		(251		)	(33	)%
Total medical	$	4,474	$	6,147	$	(1,673	)	(27	)%
Total industrial	2,040		2,018		22			1	%
Total Company	$	6,514	$	8,165	$	(1,651	)	(20	)%

Sales to the ENT market include products for the domestic and international customers as follows ($000’s):

ENT Market	9M 07		9M 06		Increase (Decrease)			Percent
Domestic	$	1,907	$	1,984	$	(77	)	(4	)%
International	1,643		2,109		(466		)	(22	)%
Total ENT	$	3,550	$	4,093	$	(543	)	(13	)%

We further delineate products sold to the domestic ENT market as follows ($000’s):

Products	9M 07		9M 06		Increase (Decrease)			Percent
Slide-On EndoSheaths	$	1,275	$	813	$	462		57	%
Endoscopes	632		1,171		(539		)	(46	)%
Total Domestic ENT	$	1,907	$	1,984	$	(77	)	(4	)%

The primary reason for the increase in sales of ENT EndoSheaths to the domestic market was higher demand from MENT, offset partially by lower demand for ENT and TNE endoscopes.

We further delineate products sold to the international ENT market as follows ($000’s):

Products	9M 07		9M 06		Increase (Decrease)			Percent
Slide-On EndoSheaths	$	1,359	$	1,501	$	(142	)	(9	)%
Endoscopes	284		608		(324		)	(53	)%
Total International ENT	$	1,643	$	2,109	$	(466	)	(22	)%

The primary cause for the lower sales of both EndoSheaths and endoscopes in the 9M 07, compared to 9M 06 was lower demand from our foreign distributors, mainly as a result of our Director of International Sales leaving the Company. Due to the more unpredictable nature of the sales cycle of endoscopes we cannot expect demand will recover fully in FY 07 to where it was in FY 06. However, the new distribution agreement with Medtronic announces on January 16, 2007 should help in increasing our sales of our ENT endoscopes during FY 08.

Medical Sales – Urology Market

The decrease in sales of urology products reflects the cancellation of the MGU Agreement, which required us to build and train a network of independent sales representatives in the domestic market. We believe we will continue to show progress in the domestic and international markets from the distributors who are selling the urology line and from additional distributors with whom we intend to establish agreements. However, there can be no assurance that we will be able to establish these agreements on terms satisfactory to us.

Industrial Segment

The increase in sales to the industrial market in 9M 07 was due primarily to higher demand for new borescopes. However, this will continue to be a difficult market for us until we are able to provide a more competitive product line to this market.

Gross Profit

Q3 07 Compared to Q3 06

Gross profit was $294 in Q3 07, a decrease of $591, compared to gross profit in Q3 06. Gross profit decreased by $267 in the medical segment, and decreased by $324 in the industrial segment. Gross profit in the medical segment decreased due to higher fixed costs based on the drop in sales volume. In the industrial segment, the decrease in gross profit was due primarily to an increase in overhead costs associated with production problems and improving our manufacturing and quality control of endoscopes.

9M 07 Compared to 9M 06

Gross profit was $1,178 in 9M 07, a decrease of $811, compared to gross profit in 9M 06. Gross profit decreased by $177 in the medical segment and decreased by $634 in the industrial segment. The causes of the changes were the same as noted above.

Operating Expenses

Selling, General and Administrative Expenses

Q3 07 Compared to Q3 06

The increase in selling, general and administrative (“SG&A”) expenses in Q3 07 of $150 was due primarily to higher spending for payroll, consulting fees, and professional fees related to moving corporate headquarters from Natick, MA to Orangeburg, NY.

9M 07 Compared to 9M 06

The increase in SG&A expenses in 9M 07 of $349 was due primarily to higher spending for payroll, consulting fees, and professional fees related to moving corporate headquarters from Natick, MA to Orangeburg, NY.

Research and Development Expenses

The increase in research and development (“R&D”) expenses in Q3 07, compared to Q3 06 and for 9M 07, compared to 9M 06 was due primarily to additional spending for materials and personnel hired to work on the development of our new videoscope line. We expect R&D expenses will continue to be higher in FY 07, compared to FY 06, as we accelerate our efforts to develop this new family of videoscopes.

Operating Income (Loss)

Operating loss by segment was as follows ($000’s):

Segment	Q3 07			Q3 06			Change			9M 07			9M 06			Change
Medical	$	(716	)	$	(581	)	$	(135	)	$	(2,258	)	$	(1,929	)	$	(329	)
Industrial	(314		)	21			(335		)	(571		)	(6		)	(565		)
Corporate	(400		)	(497		)	97			(1,191		)	(1,121		)	(70		)
Total	$	(1,430	)	$	(1,057	)	$	(373	)	$	(4,020	)	$	(3,056	)	$	(964	)

In the medical segment, higher spending for SG&A and R&D, and lower gross profit, resulted in an increased operating loss for Q3 07 and 9M 07. In the industrial segment, the lower gross profit caused an increase in the operating loss in Q3 07 and 9M 07. In the corporate segment, lower charges for stock compensation resulted in a decreased loss in Q3 07 and 9M 07.

Liquidity and Capital Resources

On December 31, 2006, our principal source of liquidity was working capital of $4,698, including $2,550 in cash and cash equivalents. On December 31, 2006, we had acceptances payable to a bank totaling $10. We have pledged $125 to support these acceptances.

In July 2006, we renewed our bank agreement, which is subject to renewal in July 2007. This bank agreement includes a revolving line of credit under which we may borrow up to $250,000, including any outstanding letters of credit and banker’s acceptances. Borrowings under these loan arrangements would bear interest at the prime rate, and would be collateralized by our assets. In addition, we have an equipment line with the bank, providing for us to borrow up to $750,000 for the purchase of new equipment until July 31, 2007. At that time, any borrowings under the equipment line would become payable as a note, over a three-year period, at the bank’s prime rate. Alternatively, we could arrange for other financing of the equipment at that time, and repay any amounts drawn down under that line. The agreement also stipulates that we have the greater of $2.0 million, or one-half of our cash and cash

equivalents, on deposit or invested at the bank. In 9M 07, we did not utilize the equipment line (please refer to Note 5, see subsequent events, paragraph b).

Our cash and cash equivalents decreased by $3,588 in the nine months ended December 31, 2006, due primarily to cash used for operations of $3,086, cash used for investing activities of $450, and cash used for financing of $52. We expect that our current balance of cash and cash equivalents and the definitive deal signed with Medtronic Xomed announced on January 16, 2007 (please refer to Note 5, paragraph a) will be sufficient to fund our operations for the next twelve months.

We have incurred losses since our inception, and losses are expected to continue at least during FY 08. We have funded the losses principally with the proceeds from public and private equity financings.

Contractual Obligations

We conduct our operations in certain leased facilities. These leases expire on various dates through August 31, 2010. In addition, we have operating leases for certain office equipment. These leases expire on various dates through June 2007. The following chart summarizes our contractual obligations as of September 30, 2006.

Contractual Obligation	Total		Due within 1 Year		Due in 1-3 years		Due in 3-5 Years
Operating leases	$	857,584	$	338,112	$	410,219	$	109,253
Capital lease	10,451		10,451		—		—

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

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

Interest and Market Risk

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

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

Foreign Currency Exchange

We face exposure, due to purchases of raw materials from foreign suppliers, to adverse movements in the value of foreign currencies against the US Dollar. This exposure may change over time, and could have a materially adverse effect on our financial results. We may attempt to limit this exposure by purchasing forward contracts. Most of our foreign exchange liabilities are settled within 90 days of receipt of materials. At December 31, 2006, our liabilities relating to foreign currencies were approximately $35,000.

Item 4. CONTROLS AND PROCEDURES

a) Evaluation of Disclosure Controls and Procedures.

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934), the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures as of the end of the quarter ended December 31, 2006, are effective.

b) Changes in Internal Controls Over Financial Reporting.

There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended December 31, 2006 that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.

PART II - - OTHER INFORMATION

Item 6. EXHIBITS

	Exhibits

	10.1		Employment Letter, dated September 22, 2006, between the Company and Yoav M. Cohen.

	31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/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)/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. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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: February 14, 2007		/s/ Ron Hadani
		Ron Hadani
		President, CEO (Duly Authorized Officer)


Date: February 14, 2007		/s/ Yoav M. Cohen
		Yoav M. Cohen
		Vice President, Chief Financial Officer (Principal
		Financial Officer and Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg


Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets

		Consolidated Statements of Operations

		Consolidated Statement of Stockholders’ Equity and Comprehensive Loss

		Consolidated Statements of Cash Flows

		Notes to Consolidated Financial Statements

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

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk

	Item 4.	Controls and Procedures

Part II.	Other Information

	Item 6.	Exhibits

	Signatures

	Exhibits

Cogentix Medical Inactive 10-Q2006 Q4 Quarterly report

Content analysis

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Medical Segment

Sales Distribution

Cost Reduction

New Products

Corporate Segment

Revenue Recognition

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Interest and Market Risk

Foreign Currency Exchange

Item 4. CONTROLS AND PROCEDURES

SIGNATURES

Cogentix Medical Inactive 10-Q2006 Q4 Quarterly report

Content analysis

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Medical Segment

Sales Distribution

Cost Reduction

New Products

Corporate Segment

Revenue Recognition

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

Interest and Market Risk

Foreign Currency Exchange

Item 4. CONTROLS AND PROCEDURES

SIGNATURES

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK