UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ~~June~~September 30, 2012
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

COMMISSION FILE NUMBER: 000-20970

VISION-SCIENCES, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-3430173
(State of incorporation)	(I.R.S. 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)

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 has submitted electronically and posted on its corporate website, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x 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 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 ~~August 8, 2012~~November 1, 2012:

Common Stock, par value of $0.01 per share	~~46,165,718~~46,217,441
(Title of Class)	(Number of Shares)

VISION-SCIENCES, INC.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Balance Sheets	5
		Condensed Consolidated Statement of Stockholders’ Deficit	6
		Condensed Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1617
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2224
	Item 4.	Controls and Procedures	2224

Part II.	Other Information
	Item 1.	Legal Proceedings	2325
	Item 1A.	Risk Factors	2325
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2325
	Item 3.	Defaults Upon Senior Securities	2326
	Item 4.	Submission of Matters to Vote of Security Holders	2326
	Item 5.	Other Information	2326
	Item 6.	Exhibits	2326
	Signatures		2427

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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. 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”,~~“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, among others, the availability of capital resources; the availability and adequacy of third-party reimbursement; government regulation; the availability of raw material components; our dependence on certain distributors and customers; our ability to effect expected sales; competition; technological difficulties; product recalls; general economic conditions and other risks detailed in this Quarterly Report on Form 10-Q and any subsequent periodic filings we make with the Securities and Exchange Commission (“SEC”). While we believe the assumptions underlying such forward-looking statements are reasonable, there can be no assurance that future events or developments will not cause such statements to be inaccurate. All forward-looking statements contained in this report are qualified in their entirety by this cautionary note.

We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances, except as may be required by law.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Three Months Ended September 30,						Six Months Ended September 30,
	2012			2011			2012			2011			2012			2011

Net sales	$	3,396		$	3,756		$	3,739		$	4,025		$	7,135		$	7,781
Cost of sales		2,483			2,628			2,669			2,628			5,152			5,256
Gross profit		913			1,128			1,070			1,397			1,983			2,525

Selling, general, and administrative expenses		2,730			2,927			3,164			3,463			5,894			6,389
Research and development expenses		487			692			527			739			1,014			1,431
Operating loss		(2,304	)		(2,491	)		(2,621	)		(2,805	)		(4,925	)		(5,295	)

Interest income		1			5			1			2			2			7
Interest expense		(194	)		(99	)		(237	)		(99	)		(431	)		(198	)
Debt cost expense		(144	)		(41	)		(128	)		(43	)		(272	)		(84	)
Loss on extinguishment of debt								(1,244	)		-			(1,244	)		-
Other, net		(5	)		(1	)		(35	)		(10	)		(40	)		(11	)
Loss before provision for income taxes		(2,646	)		(2,627	)		(4,264	)		(2,955	)		(6,910	)		(5,581	)
Income tax provision		1			3			-			(2	)		1			2
Net loss	$	(2,647	)	$	(2,630	)	$	(4,264	)	$	(2,953	)	$	(6,911	)	$	(5,583	)

Net loss per common share - basic and diluted	$	(0.06	)	$	(0.06	)	$	(0.09	)	$	(0.07	)	$	(0.15	)	$	(0.13	)

Weighted average shares used in computing net loss per common share - basic and diluted		45,678			44,027			45,974			44,204			45,827			44,116

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

							September 30, 2012			March 31, 2012
	June 30, 2012			March 31, 2012			(unaudited)			(audited)
ASSETS	(unaudited)			(audited)
Current assets:
Cash and cash equivalents	$	1,144		$	2,674		$	3,063		$	2,674
Accounts receivable, less allowances of $74 and $58, respectively		2,195			2,132
Accounts receivable, less allowances of $30 and $58, respectively								2,739			2,132
Inventories, net		4,223			3,970			4,631			3,970
Prepaid expenses and other current assets		267			197			296			197
Total current assets		7,829			8,973			10,729			8,973

Machinery and equipment		3,550			3,516			3,451			3,516
Demo equipment		1,086			1,070			1,072			1,070
Furniture and fixtures		224			224			224			224
Leasehold improvements		372			372			372			372
Property and equipment, at cost		5,232			5,182			5,119			5,182
Less—accumulated depreciation and amortization		3,322			3,149			3,395			3,149
Total property and equipment, net		1,910			2,033			1,724			2,033
Deferred debt cost, net								-			1,516
Other assets, net		77			77			77			77
Deferred debt cost, net		1,372			1,516
Total assets	$	11,188		$	12,599		$	12,530		$	12,599

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable							$	1,175		$	587
Accrued compensation								847			657
Accrued expenses								641			944
Deferred revenue								93			-
Capital lease obligations	$	86		$	91			81			91
Accounts payable		828			587
Accrued expenses		834			944
Accrued compensation		800			657
Deferred revenue		170			-
Advances from customers		161			672			-			672
Total current liabilities		2,879			2,951			2,837			2,951

Convertible debt—related party								15,000			-
Line of credit—related party		10,000			10,000			-			10,000
Capital lease obligations, net of current portion		78			97			59			97
Deferred revenue, net of current portion								43			-
Total liabilities		12,957			13,048			17,939			13,048

Commitments and Contingencies
Stockholders’ deficit:
Preferred stock, $0.01 par value Authorized—5,000 shares; issued and outstanding—none		-			-			-			-
Common stock, $0.01 par value Authorized—75,000 shares; issued and outstanding—46,143 shares and 45,396 shares, respectively		462			454
Common stock, $0.01 par value Authorized—75,000 shares; issued and outstanding—46,241 shares and 45,396 shares, respectively								463			454
Additional paid-in capital		99,701			98,382			100,348			98,382
Treasury stock at cost, 7 shares of common stock		(14	)		(14	)
Treasury stock at cost, 24 shares and 7 shares of common stock, respectively								(38	)		(14	)
Accumulated deficit		(101,918	)		(99,271	)		(106,182	)		(99,271	)
Total stockholders’ deficit		(1,769	)		(449	)		(5,409	)		(449	)
Total liabilities and stockholders’ deficit	$	11,188		$	12,599		$	12,530		$	12,599

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands, except per share amounts)

(Unaudited)

	Common Stock					Additional			Treasury Stock								Total
	Number of Shares			Par Value		Paid-in Capital			Number of Shares		Cost			Accumulated Deficit			Stockholders’ Deficit
Balance at March 31, 2012		45,396		$	454	$	98,382			7	$	(14	)	$	(99,271	)	$	(449	)
Exercise of stock options		74			1		84			-		-			-			85
Issuance of restricted stock awards		40			-		-			-		-			-			-
Cancellation of restricted stock awards		(44	)		-		-			-		-			-			-
Sale of common stock, net of fees of $122		600			6		872			-		-			-			878
Issuance of commitment shares		175			2		(2	)		-		-			-			-
Common stock repurchased		-			-		-			17		(24	)		-			(24	)
Stock-based compensation expense		-			-		1,012			-		-			-			1,012
Net loss		-			-		-			-		-			(6,911	)		(6,911	)
Balance at September 30, 2012		46,241		$	463	$	100,348			24	$	(38	)	$	(106,182	)	$	(5,409	)

Common Stock Treasury Stock

Number
of Shares
Par Value
Additional
Paid-in
Capital

Number
of Shares
Cost
Accumulated
Deficit

Total
Stockholders’
Deficit

Balance at March 31, 2012 45,396 $ 454 $ 98,382 7 $ (14 ) $ (99,271 ) $ (449 )
Exercise of stock options 5 - 6 - - - 6
Cancellation of restricted stock awards (33 ) - - - - - -
Sale of common stock, net of fees of $122 600 8 870 - - - 878
Issuance of commitment shares 175 - - - - - -
Stock-based compensation expense - - 443 - - - 443
Net loss - - - - - (2,647 ) (2,647 )
Balance at June 30, 2012 46,143 $ 462 $ 99,701 7 $ (14 ) $ (101,918 ) $ (1,769 )

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(6,911	)	$	(5,583	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		1,012			1,387
Depreciation and amortization		406			402
(Recovery of) provision for bad debt expenses		(7	)		17
Debt cost expense		272			84
Loss on extinguishment of debt		1,244			-
Loss on disposal of fixed assets		44			6
Changes in assets and liabilities:
Accounts receivable		(600	)		(97	)
Inventories		(752	)		(429	)
Prepaid expenses and other current assets		(99	)		(44	)
Accounts payable		588			(173	)
Accrued expenses		(303	)		(245	)
Accrued compensation		190			55
Deferred revenue		(7	)		-
Advances from customers		(529	)		(2,846	)
Net cash used in operating activities		(5,452	)		(7,466	)
Cash flows from investing activities:
Purchases of property and equipment		(55	)		(106	)
Proceeds from disposal of fixed assets		5			3
Net cash used in investing activities		(50	)		(103	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt—related party		5,000			-
Advance on line of credit—related party		-			1,000
Payment of costs related to line of credit—related party		-			(5	)
Net proceeds from sale of common stock		878			-
Proceeds from exercise of stock options		85			302
Common stock repurchased		(24	)		(7	)
Payments of capital leases		(48	)		(35	)
Net cash provided by financing activities		5,891			1,255
Net increase (decrease) in cash and cash equivalents		389			(6,314	)
Cash and cash equivalents at beginning of period	$	2,674		$	9,180
Cash and cash equivalents at end of period	$	3,063		$	2,866

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	585		$	196
Income taxes	$	7		$	3

Non-cash financing activities:
Net transfers of inventory to fixed assets for use as demonstration equipment	$	91		$	218
Capital lease entered into for equipment purchase	$	-		$	135
Issuance of stock warrants with line of credit—related party	$	-		$	1,611

Three Months Ended
June 30,

2012 2011
Cash flows from operating activities:
Net loss $ (2,647 ) $ (2,630 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 204 189
Stock-based compensation expense 443 476
(Recovery of) provision for bad debt expenses (9 ) 17
Debt cost expense 144 41
Loss on disposal of fixed assets 6 1
Changes in assets and liabilities:
Accounts receivable (54 ) 405
Inventories (310 ) (777 )
Prepaid expenses and other current assets (70 ) (94 )
Accounts payable 241 (73 )
Accrued expenses (110 ) (158 )
Accrued compensation 143 166
Deferred revenue 27 -
Advances from customers (368 ) (1,661 )
Net cash used in operating activities (2,360 ) (4,098 )
Cash flows from investing activities:
Purchases of property and equipment (36 ) (76 )
Proceeds from disposal of fixed assets 6 -
Net cash used in investing activities (30 ) (76 )
Cash flows from financing activities:
Proceeds from exercise of stock options 6 207
Net proceeds from sale of common stock 878 -
Common stock repurchased - (4 )
Payments of capital leases (24 ) (18 )
Net cash provided by financing activities 860 185
Net decrease in cash and cash equivalents (1,530 ) (3,989 )
Cash and cash equivalents at beginning of period $ 2,674 $ 9,180
Cash and cash equivalents at end of period $ 1,144 $ 5,191

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 157 $ 98
Income taxes $ 7 $ 3

Non-cash financing activities:
Net transfers of inventory to fixed assets for use as demonstration equipment $ 57 $ 110
Capital lease entered into for equipment purchase $ - $ 135

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited, in thousands except number of shares and per share amounts)

Note 1. Summary of Significant Accounting Policies

Vision-Sciences, Inc. and its subsidiaries (the “Company,” or “our”, “us” or “we”) designs, develops, manufactures, and markets 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. Our products are sold throughout the world through direct sales representatives in the United States (“U.S.”) and independent distributors for the rest of the world. With respect to our urology products, we are the exclusive supplier to the Endoscopy Division of Stryker Corporation (“Stryker”). Our largest geographic markets are the U.S. and Europe.

We are incorporated in Delaware, and are the successor to operations begun in 1987. In December 1990, Machida Incorporated (“Machida”) became our wholly-owned subsidiary. We own the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.

Basis of Presentation and Preparation

We have prepared the condensed consolidated financial statements included herein according to generally accepted accounting principles in the United States of America (“U.S. GAAP”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments that we consider necessary for a fair presentation of such information. We have condensed or omitted certain information and footnote disclosures normally included in financial statements pursuant to those rules and regulations. We believe, however, that our disclosures are adequate to make the information presented not misleading.

The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. Please read these condensed consolidated financial statements in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Liquidity and Capital Resources

We have incurred substantial operating losses since our inception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future. We anticipate negative cash flows from operations during the remainder of fiscal 2013, driven by continued investment in a direct sales force for the U.S. market, spending for ~~research~~marketing, and ~~development, spending for marketing,~~ general business ~~operations, and capital expenditures.~~operations. As of ~~June~~September 30, 2012, we had cash and cash equivalents totaling approximately ~~$1.1~~$3.1 million. We expect that our cash at ~~June~~September 30, 2012, together with the $5 million of capital ~~received~~available under a ~~promissory~~convertible note dated ~~July 25,~~September 19, 2012 ~~and $3 million of capital to be made available to us, subject to certain conditions, under a letter agreement dated August 14, 2012 from~~with Lewis C. Pell, our Chairman (see Note ~~10. Subsequent Event~~5. Long-Term Debt – Related Party for additional information), should be sufficient to fund our operations through at least ~~June~~September 30, 2013. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, we will need to secure additional financing and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

Summary of Significant Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are any differences (other than nominal differences) between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions and ~~which~~that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

• Revenue recognition;

• Stock-based compensation expense;

• Allowances for doubtful accounts;

• Inventory obsolescence and realization;

• Obligations under warranties; and

• Other contingencies.

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

Fair Value Measurements

The carrying amounts reflected in our consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, accrued compensation, and capital lease obligations approximate fair value due to their short-term nature. ~~The~~

In determining the fair value of the ~~line~~convertible debt, we compared the coupon rate of ~~credit is based on its~~0.84%, the conversion premium of 0%, and the percentage of market cap the face value ~~which is~~of the debt instrument was prior to the announcement of the debt on September 19, 2012 (34.5%) to public company convertible debt issuances over the past sixteen (16) months in the healthcare industry. We determined the fair value of the convertible debt to be equal to its ~~carrying~~face (carrying) value.

Note 2. Basic and Diluted Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding. For all periods presented, 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, warrants, and ~~warrants~~convertible debt would be anti-dilutive. ~~Stock options, warrants, and restricted stock of 7,999,031 shares and 7,706,165 shares as of June 30, 2012 and 2011, respectively,~~The following table summarizes equity securities that were excluded from the calculation of fully diluted loss per ~~share.~~share as of September 30, 2012 and 2011.

	September 30,
	2012		2011
Convertible debt		12,500,000		-
Stock options		6,291,179		7,549,017
Warrants		1,880,620		1,880,620
Restricted stock		177,150		426,089
Total anti-dilutive securities		20,848,949		9,855,726

Note 3. 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, 2012		March 31, 2012		September 30, 2012		March 31, 2012
Raw materials	$	3,325	$	3,271	$	3,563	$	3,271
Work in process		279		432		291		432
Finished goods		619		267		777		267
Inventories, net	$	4,223	$	3,970	$	4,631	$	3,970

Raw materials include components purchased from independent suppliers. Most purchased components are available from multiple sources, with the exception of certain key components which are supplied to us by key suppliers, with whom we have long-term supply arrangements, but no long-term supply agreements.

Note 4. Advances from Customers

We currently have a three-year agreement with Stryker under which we are the exclusive supplier of Stryker-branded flexible video and fiber cystoscopes. These cystoscopes employ our patented EndoSheath technology, which are co-branded Stryker and Vision-Sciences. We also supply Stryker with flexible ureteroscopes. Stryker ~~initially~~ has the exclusive rights to distribute products we manufacture, including cystoscopes, urology EndoSheath technology, and ureteroscopes, in North ~~and Latin~~ America, South America, Latin America, China, and ~~Japan and 12 months post-launch, throughout~~Japan. Although Stryker was to receive the exclusive rights for the rest of the world ~~although~~in April 2012, we reached an agreement with Stryker to delay ~~the rest of the world~~this launch until at least December 2012. The agreement expires in April 2014 unless otherwise renewed.

We also have a development and supply agreement with SpineView, Inc. (“SpineView”) under which we developed and supply a charge-coupled device (CCD) based video surgical endoscope for use with SpineView’s products.

We received advances from Stryker for future orders of our scopes and EndoSheath technology and from SpineView for the initial stocking order of 50 SpineView surgical endoscope systems. The following table summarizes the activity related to these and other customer advances related to service contracts for the three and six months ended ~~June~~September 30, 2012 and 2011:

Three months ended September 30, 2012	Stryker		SpineView			Other		Total
Beginning balance at July 1	$	-	$	161		$	-	$	161
Additional advances received		-		-			-		-
Revenue recognized		-		(161	)		-		(161	)
Ending balance at September 30	$	-	$	-		$	-	$	-

Three months ended September 30, 2011	Stryker			SpineView			Other			Total
Beginning balance at July 1	$	2,840		$	1,179		$	13		$	4,032
Additional advances received		-			-			35			35
Revenue recognized		(864	)		(348	)		(1	)		(1,213	)
Adjustments		(6	)		(1	)		-			(7	)
Ending balance at September 30	$	1,970		$	830		$	47		$	2,847

Three months ended June 30, 2012	Stryker			SpineView			Other			Total
Six months ended September 30, 2012													Stryker			SpineView			Other			Total
Beginning balance at April 1	$	117		$	420		$	135		$	672		$	117		$	420		$	135		$	672
Additional advances received		-			-			8			8			-			-			8			8
Revenue recognized		(117	)		(259	)		-			(376	)		(117	)		(420	)		-			(537	)
Adjustments (1)		-			-			(143	)		(143	)		-			-			(143	)		(143	)
Ending balance at June 30	$	-		$	161		$	-		$	161
Ending balance at September 30													$	-		$	-		$	-		$	-

Three months ended June 30, 2011	Stryker			SpineView			Other		Total
Six months ended September 30, 2011												Stryker			SpineView			Other			Total
Beginning balance at April 1	$	4,433		$	1,255		$	5	$	5,693		$	4,433		$	1,255		$	5		$	5,693
Additional advances received		-			-			8		8			-			-			44			44
Revenue recognized		(1,590	)		(78	)		-		(1,668	)		(2,453	)		(426	)		(2	)		(2,881	)
Adjustments		(3	)		2			-		(1	)		(10	)		1			-			(9	)
Ending balance at June 30	$	2,840		$	1,179		$	13	$	4,032
Ending balance at September 30												$	1,970		$	830		$	47		$	2,847

(1)

Amount reclassified to deferred revenue

Note 5. ~~Line of Credit~~Long-Term Debt – Related Party

~~In the second quarter of fiscal~~On September 19, 2012 (the “Effective Date”), we entered into ~~an amended and restated~~a new $20.0 million revolving ~~loan agreement~~convertible promissory note (the “Replacement Note”) with our ~~Chairman, Lewis C. Pell~~chairman (the “Lender”) ~~providing~~. The Replacement Note consolidated and restructured the $15.0 million in aggregate borrowings collectively outstanding under the Original Agreement (as defined below) and the Supplemental Note (as defined below) and provided for an additional $5.0 million in available ~~loans~~to us. As we draw upon the remaining $5.0 million, a beneficial conversion feature will be recorded if the market price of our common stock increases after the Effective Date. We also terminated the letter agreement dated August 14, 2012, pursuant to which the Lender had agreed to provide financial assistance to us in ~~addition to $5.0 million previously borrowed under an original revolving loan agreement (collectively,~~ the ~~“Loan Agreement”), for an aggregate loan~~amount of up to $3.0 million.

The Replacement Note accrues annual interest, payable annually, at the rate of 0.84%. The Replacement Note must be repaid in full on or before its fifth anniversary (the “Maturity Date”), but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.

The outstanding principal amount of the Replacement Note is convertible at any time prior to the Maturity Date, at the Lender’s option, into shares of our common stock at a price of $1.20 per share, the closing price of our common stock on the Effective Date.

The Replacement Note replaces the original loan agreement between us and the Lender dated September 30, 2011 (the “Original Agreement”) pursuant to which we borrowed $10.0 million, and the promissory note of $5.0 million dated July 25, 2012 (the ~~“Loan Amount”~~“Supplemental Note”)~~. Amounts drawn~~ pursuant to which we borrowed $5.0 million. The amounts borrowed against the ~~Loan~~Original Agreement ~~accrue~~and Supplemental Note accrued interest at an annual rate of 7.5%. The Lender ~~will receive~~also had received an availability fee equal to an annual rate of 0.5% ~~on the unused portion of the Loan Amount calculated based~~ on the difference between the average annual principal amount of the outstanding balance under the ~~Loan~~Original Agreement and the maximum amount of $10.0 million.

At June 30, 2012, we had $10.0 million in outstanding borrowings under the Loan Agreement, which is reflected as line of credit – related party on our condensed consolidated balance sheet. The $10.0 million revolving loan expires in November 2014, at which time we must repay all outstanding borrowings and interest and fees under the Loan Agreement.

In connection with the ~~Loan~~Original Agreement, the Lender received warrants to purchase an aggregate of 1,880,620 shares of our common stock at a weighted average exercise price of $1.86 per share. All of the warrants are vested and ~~expire on the later~~outstanding as of September 30, ~~2016 or one year after the termination of the Loan Agreement~~2012 and ~~repayment of all amounts due and payable under the Loan Agreement.~~expire on September 30, 2016.

We estimated the fair value of all of the stock warrants issued on the date of vesting using a Black-Scholes valuation model that used the weighted average assumptions for the risk-free interest rate, expected life (in years), and expected volatility. We recorded the transaction as a deferred debt cost and amortize to expense over the term of the loan. The following table summarizes amounts drawn against the ~~Loan~~Original Agreement and warrant ~~issuances as of June 30, 2012:~~issuances:

Month	Amount of Advance		Number of Warrant Shares Vested		Fair Value of Warrant Shares on Date Vested			Exercise Price		Risk-Free Interest Rate			Expected Life (In Years)		Expected Volatility
March 2012	$	2,000		--	$	-			--		--			--		--
December 2011		2,000		--		-			--		--			--		--
September 2011		1,000		1,229,105		1,611	(1)	$	2.034		0.96	%		5.00		86	%
December 2010		500		37,879		30		$	1.650		1.56	%		3.90		91	%
June 2010		2,000		151,515		87		$	1.650		1.58	%		4.37		93	%
March 2010		2,500		189,394		106		$	1.650		2.36	%		4.62		91	%
November 2009		-		272,727		221		$	1.375		2.31	%		5.00		89	%
Total	$	10,000		1,880,620	$	2,055

(1)

Includes the incremental fair value of $73 thousand arising from the extension of the maturity date of the original (previously issued) warrants.

In connection with the termination of the Original Agreement, we determined that the transaction should be classified as an extinguishment of debt. Accordingly, we wrote-off the remaining deferred debt cost balance of $1.2 million at September 19, 2012.

Debt cost expense and interest expense related to the stock warrants and availability fee and accrued interest on outstanding borrowings, respectively, for the three and six months ended ~~June~~September 30, 2012 and 2011 was recorded in our condensed consolidated statement of operations as follows:

	Three Months Ended June 30,				Three Months Ended September 30,				Six Months Ended September 30,
	2012		2011		2012		2011		2012		2011
Debt cost expense(1)	$	144	$	41	$	128	$	43	$	272	$	84
Interest expense		190		95		233		96		422		191

(1)

Expense through September 19, 2012.

At ~~June~~September 30, 2012, ~~unrecognized debt cost expense related to~~we had $15.0 million in outstanding borrowings under the ~~stock warrants was approximately $1.4 million,~~Replacement Note, which is ~~expected to be recognized over a weighted average period of approximately 2.4 years.~~reflected as convertible debt – related party on our condensed consolidated balance sheet. We had ~~$0.2 million~~$4 thousand in accrued interest related to the ~~Loan Agreement,~~Replacement Note, which is included in accrued expenses on our condensed consolidated balance sheet at ~~June~~September 30, 2012.

~~In July 2012 and August 2012, we entered into additional agreements with the Lender (see~~ ~~Note 10. Subsequent Events)~~.

Note 6. Common Stock

On April 27, 2012, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we have the right to sell to LPC up to ~~$15~~$15.0 million in shares of our common stock from time-to-time over a period of up to three years, subject to certain limitations and conditions set forth in the Purchase Agreement. This total maximum amount of ~~$15~~$15.0 million would increase to ~~$21~~$21.0 million if the aggregate market value of shares of our common stock held by non-affiliates reached at least ~~$75~~$75.0 million during the ~~36-month~~three-year term of the Purchase Agreement. The Purchase Agreement contains customary representations, warranties and agreements between us and LPC, limitations (market price of our common stock and LPC’s ownership limit) and conditions to completing future sale transactions, indemnification rights and other obligations of the parties. In connection with the initial purchase under the Purchase Agreement, and any future sales under the Purchase Agreement, the Lender waived the repayment requirement under the Loan Agreement. On July 26, 2012, we amended the Purchase Agreement with LPC to, among other things, create a threshold price of $3.00 for the sale of our common stock to LPC, as calculated pursuant to the formula provided in the Purchase Agreement.

As consideration for entering into the Purchase Agreement and for their initial purchase of $1.0 million of our common stock in April 2012, we issued to LPC 175,333 shares of our common stock. As consideration for remaining future purchases under the Purchase Agreement, we also will issue to LPC, on a pro rata basis in connection with each purchase of shares by LPC, up to a total of approximately 215,000 additional shares of our common stock. We did not receive any cash proceeds from the issuance of 175,333 shares and will not receive any proceeds upon the issuance of any of the remaining 215,000 shares.

The following table summarizes the common stock issued and cash received in connection with the Purchase Agreement:

Month	Description	Number of Shares of Common Stock Issued		Share Price		Gross Proceeds		Description	Number of Shares of Common Stock Issued		Share Price		Gross Proceeds
April 2012	Initial purchase shares		599,880	$	1.667	$	1,000	Initial purchase shares		599,880	$	1.667	$	1,000
April 2012	Initial commitment shares		160,000		-		-	Initial commitment shares		160,000		-		-
April 2012	Initial additional commitment shares		15,333		-		-	Initial additional commitment shares (1)		15,333		-		-
			775,213			$	1,000			775,213			$	1,000

(1)

Calculated as follows: ($1.0 million stock purchase divided by $15.0 million total maximum amount) multiplied by 230,000 additional commitment shares.

In connection with the Purchase Agreement, we incurred $122 thousand of costs associated with investment banking fees, legal fees, and expense reimbursement to LPC. Our net proceeds from the sale of the initial purchase shares were $878 thousand.

~~In July 2012, we amended the Purchase Agreement (see~~ ~~Note 10. Subsequent Events)~~.

Note 7. Stock-Based Awards

We maintain the following stockholder-approved equity incentive plans:

●

The 2000 Stock Incentive Plan (the “2000 Plan”) authorized the issuance of up to 4,500,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and performance shares.

●

The 2007 Stock Incentive Plan (the “2007 ~~Plan~~Plan”) authorized the issuance of up to 5,000,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and other stock-based awards. On July 26, 2012, our stockholders approved an amendment to the 2007 Plan further increasing the number of authorized shares issuable under the plan to 7,000,000 shares of common stock.

●

The 2003 Director Option Plan (the “2003 Plan”) authorized the issuance of up to 450,000 shares of common stock covering the annual automatic grant of 10,000 stock options per outside director per year. The 2003 Plan also provides for granting newly elected or appointed outside directors a one-time grant of 10,000 stock options.

The stock option plans provide that options may be granted at an exercise price of 100% of fair market value of our common stock on the date of grant, may be exercised in full or in installments, at the discretion of our Board or its Compensation Committee, and must be exercised within ten years from date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period based on fair values, generally four years. We use historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of stock-based compensation expense as of the grant date.

Stock Options

The following table summarizes stock options activity for the ~~three~~six months ended ~~June~~September 30, 2012:

	Number of Shares			Exercise Price Range			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Number of Shares			Exercise Price Range				Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
Outstanding at March 31, 2012		6,007,661		$0.79	–	$4.88	$	2.23		6.9		6,007,661			$0.79	–	$4.88		$2.23		6.9
Granted		67,750		$1.30	–	$1.69		1.55				862,750			$1.24	–	$1.69		1.28
Exercised		(4,885	)	$0.97	–	$1.28		1.17				(74,337	)		$0.97	–	$1.35		1.14
Canceled		(152,446	)	$1.28	–	$3.73		1.51				(504,895	)		$0.79	–	$3.73		2.42
Outstanding at June 30, 2012		5,918,080		$0.79	–	$4.88	$	2.25		6.8
Vested and expected to vest at June 30, 2012		5,533,867		$0.79	–	$4.88	$	2.22		6.8
Exercisable at June 30, 2012		3,650,763		$0.79	–	$4.88	$	2.24		5.7
Outstanding at September 30, 2012												6,291,179			$0.85	–	$4.88		$2.10		6.5
Vested and expected to vest at September 30, 2012												6,107,563			$0.85	–	$4.88		$2.11		6.4
Exercisable at September 30, 2012												3,935,994			$0.85	–	$4.88		$2.32		4.8

The weighted average fair value of options granted during the three months ended ~~June~~September 30, 2012 and 2011 was ~~$1.13~~$0.91 and ~~$1.94~~$1.60 per share, respectively.

The weighted average fair value of options granted during the six months ended September 30, 2012 and 2011 was $0.93 and $1.70 per share, respectively.

The total intrinsic value (the excess of the market price over the exercise price) was approximately ~~$0.6 million~~$341 thousand for stock options outstanding, ~~$0.5 million~~$241 thousand for stock options exercisable, and ~~$0.6 million~~$328 thousand for stock options vested and expected to vest as of ~~June~~September 30, 2012. The total intrinsic value for stock options exercised during the three months ended ~~June~~September 30, 2012 and 2011 was approximately $2$21 thousand and ~~$0.2 million,~~$77 thousand, respectively. The total intrinsic value for stock options exercised during the six months ended September 30, 2012 and 2011 was approximately $23 thousand and $281 thousand, respectively.

We do not expect to realize any tax benefits from future disqualifying dispositions, if any, because we currently have a full valuation allowance against our deferred tax assets.

Restricted Stock

The following table summarizes restricted stock activity for the ~~three~~six months ended ~~June~~September 30, 2012:

	Number of Shares			Weighted Average Grant Price		Number of Shares			Weighted Average Grant Price
Nonvested at March 31, 2012		306,606		$	2.50		306,606			$2.50
Granted		-			-		40,000			1.40
Vested		(73,436	)		2.46		(124,723	)		2.46
Forfeited		(32,839	)		2.61		(44,733	)		2.65
Nonvested at June 30, 2012		200,331		$	2.50
Nonvested at September 30, 2012							177,150			$2.25

~~The~~

At March 31, 2012, the balance of 306,606 shares of nonvested restricted stock ~~at March 31, 2012 includes~~included 286,606 shares of restricted stock granted to management as part of our fiscal 2012 performance incentive plan (the “2012 PIP”). The 2012 PIP included two separate performance measures: (1) ~~company~~Company revenue and operating loss performance (the “Company Component”), which accounted for 75% of the target incentive opportunity, and (2) individual executive performance milestones (the “Individual Component”), which accounted for the remaining 25%.

For the Company Component of the 2012 PIP, management achieved 80% of our target revenue and specified operating loss level for fiscal 2012, and participants received 80% of their Company Component (equal to a total of 144,808 shares of restricted stock). For the Individual Component, management determined the level of payout for each participant based on the achievement of the individual’s executive performance milestones (with awards totaling 108,959 shares of restricted stock). For the 253,767 shares of restricted stock that were achieved, restrictions on such shares will lapse over a four-year period. The restrictions on the first one-fourth of the shares (equal to 48,656 shares) lapsed in April 2012. The balance of the restricted stock for the 2012 PIP (equal to ~~32,839~~44,733 shares) was forfeited as a result of missed ~~milestones.~~milestones and employee terminations.

Stock-Based Compensation Expense

We account for stock-based awards issued to employees in accordance with the provisions of ASC 718 (Topic 718, Compensation – Stock Compensation). We recognize stock-based compensation expense on a straight-line uniform basis over the service period of the award, which is generally four years for employees. Stock-based awards issued to consultants are accounted for in accordance with the provisions of ASC 718 and ASC 505-50 (Subtopic 50 “Equity-Based Payments to Non-Employees” of Topic 505, Equity). Options granted to consultants are periodically revalued as the options vest, and are recognized as an expense over the related period of service or the vesting period, whichever is longer. Under the provisions of ASC 718, members of the Board are considered employees for calculation of stock-based compensation expense.

We estimated the fair value of the stock options granted on the date of grant using a Black-Scholes valuation model that used the weighted average assumptions noted in the following table. The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. The expected life (estimated period of time that we expect employees, consultants and directors to hold their stock options) was estimated based on historical rates for two group classifications, (i) employees and consultants and (ii) outside directors. Expected volatility was based on historical volatility of our stock price for a period equal to the stock option’s expected life and calculated on a daily basis. The expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.

Three Months Ended
June 30,

2012 2011
Risk-free interest rate 1.13 % 2.02 %
Expected life (in years) 6.7 7.1
Expected volatility 83 % 85 %
Expected dividend yield -- --

	Three Months Ended September 30,				Six Months Ended September 30,
	2012		2011		2012		2011
Risk-free interest rate		1.02%		1.17%		1.03%		1.44%
Expected life (in years)		6.4		5.5		6.4		6.0
Expected volatility		85%		88%		84%		87%
Expected dividend yield		--		--		--		--

We determine stock-based compensation expense for performance based restricted stock based upon the fair value of our common stock at the date of grant and recognize expense based upon the most probable outcome as to whether the performance targets will be achieved and the stock-based compensation being earned.

Stock-based compensation expense for the three and six months ended ~~June~~September 30, 2012 and 2011 was recorded in our condensed consolidated statement of operations as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
	2012		2011		2012		2011
Cost of sales	$	22	$	41	$	69	$	81
Selling, general, and administrative expenses		538		857		907		1,277
Research and development expenses		9		13		36		29
Total stock-based compensation expense	$	569	$	911	$	1,012	$	1,387

Three Months Ended
June 30,

2012 2011
Cost of sales $ 47 $ 40
Selling, general, and administrative expenses 369 420
Research and development expenses 27 16
Total stock-based compensation expense $ 443 $ 476

At ~~June~~September 30, 2012, unrecognized stock-based compensation expense related to stock options was approximately ~~$2.4~~$2.5 million and is expected to be recognized over a weighted average period of approximately ~~2.7~~3.0 years. At ~~June~~September 30, 2012, unrecognized stock-based compensation expense related to nonvested (restricted stock) awards was approximately ~~$0.4~~$0.3 million, which is expected to be recognized over a weighted average period of approximately ~~2.3~~1.9 years.

Note 8. Treasury Stock

The following table summarizes treasury stock activity for the three and six months ended ~~June~~September 30, 2012 and 2011:

Three Months Ended	Number of Shares Repurchased		Cost		Weighted Average Purchase Price
September 30, 2012		17,417	$	24		$1.36

September 30, 2011		1,634	$	3		$1.92

Six Months Ended
September 30, 2012		17,417	$	24		$1.36

September 30, 2011		3,268	$	7		$2.22

Three Months Ended
Number
of Shares
Repurchased
Cost
Weighted
Average
Purchase Price

June 30, 2012 - - -

June 30, 2011 1,634 $ 4 $ 2.52

The shares were purchased from management employees to cover income tax withholdings upon the lapse of restrictions on their restricted stock awards. Although not required to under our equity incentive plans, we anticipate repurchasing shares in a similar arrangement in fiscal 2013.

Note 9. Segment Information

We have two reportable segments, medical and industrial. Each of these operating segments has unique characteristics.

Our medical segment designs, develops, manufactures, and ~~sells~~markets our advanced line of endoscopy-based products, including our state-of-the-art flexible endoscopes, and our EndoSheath technology (referred to as a sheath or EndoSheath disposable) for a variety of specialties and markets.

Our industrial segment, through our wholly-owned subsidiary Machida, 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. Our borescopes are used to inspect aircraft engines, casting parts and ground turbines, among other items.

Management evaluates the revenue and profitability performance of each of our product lines to make operating and strategic decisions. We have no intersegment revenue.

The following table presents key financial highlights, by reportable segments:

Three Months Ended	Medical			Industrial			Adjustments *			Consolidated			Medical			Industrial			Adjustments *			Consolidated
June 30, 2012
September 30, 2012
Net sales	$	2,496		$	900		$	-		$	3,396		$	2,724		$	1,015		$	-		$	3,739
Gross profit		594			319			-			913			746			324			-			1,070
Operating (loss) income		(2,344	)		40			-			(2,304	)		(2,688	)		67			-			(2,621	)
Interest expense, net		193			-			-			193			(236	)		-			-			(236	)
Depreciation and amortization		197			7			-			204			196			6			-			202
Stock-based compensation expense		400			43			-			443			560			9			-			569
Total assets		11,558			1,646			(2,016	)		11,188			12,751			1,753			(1,974	)		12,530
Expenditures for fixed assets		36			-			-			36			19			-			-			19

June 30, 2011
September 30, 2011
Net sales	$	3,105		$	651		$	-		$	3,756		$	3,384		$	641		$	-		$	4,025
Gross profit		900			228			-			1,128			1,143			254			-			1,397
Operating loss		(2,362	)		(129	)		-			(2,491	)		(2,739	)		(66	)		-			(2,805	)
Interest expense, net		(94	)		-			-			(94	)		(97	)		-			-			(97	)
Depreciation and amortization		178			11			-			189			201			12			-			213
Stock-based compensation expense		435			41			-			476			892			19			-			911
Total assets		16,684			1,344			(1,822	)		16,206			15,901			1,329			(1,863	)		15,367
Expenditures for fixed assets		76			-			-			76			30			-			-			30

Six Months Ended
September 30, 2012
Net sales													$	5,220		$	1,915		$	-		$	7,135
Gross profit														1,341			642			-			1,983
Operating (loss) income														(5,032	)		107			-			(4,925	)
Interest expense, net														(429	)		-			-			(429	)
Depreciation and amortization														393			13			-			406
Stock-based compensation expense														960			52			-			1,012
Expenditures for fixed assets														55			-			-			55

September 30, 2011
Net sales													$	6,489		$	1,292		$	-		$	7,781
Gross profit														2,043			482			-			2,525
Operating loss														(5,100	)		(195	)		-			(5,295	)
Interest expense, net														(191	)		-			-			(191	)
Depreciation and amortization														379			23			-			402
Stock-based compensation expense														1,327			60			-			1,387
Expenditures for fixed assets														106			-			-			106

	June 30,						September 30,
* Adjustments		2012			2011		2012			2011
Intercompany eliminations	$	(1,330	)	$	(1,136	)	$	(1,288	)	$	(1,177	)
Investment in subsidiaries		(686	)		(686	)		(686	)		(686	)
Total adjustments	$	(2,016	)	$	(1,822	)	$	(1,974	)	$	(1,863	)

The following table presents the reconciliation to loss before provision for income taxes for the three and six months ended ~~June~~September 30, 2012 and 2011:

	Three Months Ended June 30,						Three Months Ended September 30,		Six Months Ended September 30,
Reconciliation to loss before provision for income taxes:	2012			2011			2012	2011	2012	2011
Operating loss	$	(2,304	)	$	(2,491	)	$ (2,621)	$ (2,805)	$ (4,925)	$ (5,295)
Interest expense, net		(193	)		(94	)	(236)	(97)	(429)	(191)
Debt cost expense		(144	)		(41	)	(128)	(43)	(272)	(84)
Loss on extinguishment of debt							(1,244)	-	(1,244)	-
Other, net		(5	)		(1	)	(35)	(10)	(40)	(11)
Loss before provision for income taxes	$	(2,646	)	$	(2,627	)	$ (4,264)	$ (2,955)	$ (6,910)	$ (5,581)

1416

~~Note 10. Subsequent Event~~

On July 25, 2012, the Lender lent us an additional $5 million pursuant to the terms of a new promissory note. This note is repayable on or before November 9, 2014. We may elect to cause the Lender to convert and exchange any outstanding principal amount under the note prior to November 9, 2014 into shares of our equity capital stock as part of any future sale of our equity capital stock to third parties, at the same price and on the same other terms and conditions that such equity capital stock is sold to third parties. No warrants were issued to the Lender as part of this note.

Pursuant to a letter agreement dated August 14, 2012, the Lender also has agreed to provide financial assistance to us in the amount of up to $3 million, if necessary to support our operations, for a period ending on the earlier of (i) 12 months or (ii) our raising debt or equity capital in the amount of $3 million or more. This financial assistance, if drawn by us, would be on the same terms as one of our existing loans with the Lender.

On July 25, 2012, we amended the Purchase Agreement with LPC to, among other things, create a threshold price of $3.00 for the sale of our common stock to LPC, as calculated pursuant to the formula provided in the Purchase Agreement.

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

Executive Summary

Vision-Sciences, Inc. and its subsidiaries (the “Company,” or “our”, “us”, or “we”) designs, develops, manufactures, and markets products for endoscopy – the science of using an instrument, known as an endoscope, to provide minimally invasive access to areas not readily visible to the human eye. We operate in two segments: medical and industrial. Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets.

Our industrial segment, through our wholly-owned subsidiary, Machida, Inc. (“Machida”), 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.

~~Registered Trademarks, Trademarks and Service Marks~~

~~Vision-Sciences, Inc. owns the registered trademarks Vision Sciences~~®~~, Slide-On~~®~~, EndoSheath~~®~~, EndoWipe® and The Vision System~~®~~. Not all products referenced in this quarterly report on Form 10-Q are approved or cleared for sale, distribution, or use.~~

Medical Business Segment

Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets. Our flexible endoscopes are unlike conventional endoscopes, and when utilized with our EndoSheath technology, offer a multitude of benefits and advantages to the healthcare practitioner and patient.

We target six market spaces for our endoscopes and our EndoSheath technology:

●

Urology – we supply our cystoscopes, ureteroscopes, and EndoSheath technology to the Endoscopy Division of Stryker Corporation (“Stryker”) in North and Latin America, South America, China and ~~Japan and 12 months post-launch, throughout~~Japan. Although Stryker was to receive the exclusive rights for the rest of the world ~~although~~in April 2012, we reached an agreement with Stryker to delay ~~the rest of the world~~this launch until at least December 2012. Until ~~the end of calendar 2012,~~that time, we ~~expect to continue to~~ manufacture and sell our cystoscopes and EndoSheath technology to our independent distributors for the rest of the world.

●

Pulmonology (Critical Care) – we manufacture, market, and sell our bronchoscope (an endoscope that allows detailed viewing of the lungs) and EndoSheath technology to intensivists, pulmonologists, thoracic surgeons, and other airway-related physicians.

●

Surgery – we manufacture, market, and sell our TNE (trans-nasal esophagoscopy) endoscope and EndoSheath technology to general surgeons, primarily bariatric and gastroesophageal reflux disease (“GERD”) surgeons.

●

Gastroenterology – we manufacture, market, and sell our TNE endoscopes and EndoSheath technology to gastroenterology (“GI”) physicians, ear, nose, and throat (“ENT”) physicians and others with a GI focus as part of their practice.

●

ENT (ear, nose, and throat) – we manufacture, market, and sell our ENT endoscopes to ENT physicians.

●

Spine – we supply to SpineView our flexible video surgical endoscope systems for use with SpineView’s products.

1617

The following table summarizes the products we sell in each market space and the distribution network we use to market and sell those products:

Market	Products	Distribution Network
Urology	URT-7000 Video Ureteroscope	Stryker*
	CST-5000 Video Cystoscope	Stryker*; international distributors
	CST-4000 Fiber Cystoscope	Stryker*; international distributors
	DPU-5050 Digital Processing Unit	International distributors
	EndoSheath technology (cystoscopy only)	Stryker*; international distributors
	Peripherals and accessories	Stryker*; international distributors


ENT	ENT-5000 Video Endoscope	U.S. sales force; international distributors
	ENT-4500 Fiber Endoscope	U.S. sales force; international distributors
	ENT-4000 Fiber Endoscope	U.S. sales force; international distributors
	DPU-5050 Digital Processing Unit	U.S. sales force; international distributors
	Peripherals and accessories	U.S. sales force; international distributors


Surgery / GI	TNE-5000 Video Endoscope	U.S. sales force; international distributors
	DPU-5050 Digital Processing Unit	U.S. sales force; international distributors
	EndoSheath technology	U.S. sales force; international distributors
	Peripherals and accessories	U.S. sales force; international distributors


Pulmonology (Critical Care)	BRS-5000 Video Bronchoscope	U.S. sales force; international distributors
	BRS-4000 Fiber Bronchoscope	U.S. sales force; international distributors
	DPU-5050 Digital Processing Unit	U.S. sales force; international distributors
	EndoSheath technology	U.S. sales force; international distributors
	Peripherals and accessories	U.S. sales force; international distributors


Spine	SPV-7000 Video Endoscope	SpineView
	DPU-5050 Digital Processing Unit	SpineView
	Peripherals and accessories	SpineView

* North America, South America, Latin America, China, and Japan

Our proprietary reusable flexible endoscope is combined with a single-use, sterile protective EndoSheath disposable, which is placed over the patient contact area of the scope. Our “always sterile” EndoSheath technology reduces the risks of cross-contamination associated with the reuse (or “reprocessing”) of conventional endoscopes, which are difficult, costly, and time consuming to clean and disinfect or ~~sterilize, a practice known as reprocessing.~~sterilize. In November 2011, the ECRI Institute listed cross-contamination from flexible endoscopes as the fourth most dangerous hazard on its list of the top-ten health technology hazards for 2012. The use of our EndoSheath technology allows healthcare providers to perform a rapid, simplified reprocessing routine after use, avoiding the elaborate high level disinfection/sterilization routines required by the U.S. Food and Drug Administration (the “FDA”) for conventional endoscopes. The FDA requires that all conventional flexible endoscopes be reprocessed according to FDA-cleared manufacturers’ regulations and organizational guidelines, whether they are used in hospitals, clinics or office settings. With our EndoSheath technology we are able to reduce the steps to reprocess flexible endoscopes from approximately 27 to three, thereby lowering costs and saving time. This design of “always ready” equipment, which allows for a rapid and less damaging cleaning process, provides a multitude of benefits to healthcare practitioners, such as lower capital equipment investment, less service and maintenance costs of capital equipment, less staff exposure to toxic chemicals, increased patient scheduling flexibility and throughput, improved staff productivity and a more practical implementation of endoscopy.

We believe our technology delivers significant value to our customers – doctors, clinics and hospitals – through reduced capital, staff and service costs, and increased patient throughput, practice revenue, and profitability. Our goal is to become a customer-centric organization with a focus on enhancing shareholder value. We are doing this by:

Growing our sales force in the U.S. by adding proven MedSurg device sales professionals;

Targeting acute care facilities and office-based clinics that recognize patient safety and the patient experience as a primary value position;

Capitalizing on our extensive and relevant library of published clinical studies on the efficacy and safety of our EndoSheath technology; and

Enhancing our professional educational programs to allow healthcare professionals to teach other healthcare professionals.

During the first quarter of fiscal 2013, we began to exclusively supply to Stryker our first charge-coupled device (CCD) based flexible ureteroscope under our existing agreement. This ureteroscope expands our new 7000 Series video endoscopy platform and is the smallest CCD-based video endoscope in the marketplace today. Ureteroscopes are used for diagnostic and therapeutic procedures in the ureter and the kidney, typically done in a hospital operating room setting.

Industrial Business Segment

~~Business Strategy~~

●

~~Growing our sales force in the U.S. by adding proven MedSurg device sales professionals;~~

●

~~Targeting acute care facilities and office-based clinics that recognize patient safety and the patient experience as a primary value position;~~

●

~~Capitalizing on our extensive and relevant library of published clinical studies on the efficacy and safety of our EndoSheath technology; and~~

●

~~Enhancing our professional educational programs to allow healthcare professionals to teach other healthcare professionals.~~

~~New Product Releases~~

~~Line of Credit~~Long-Term Debt – Related Party

~~In the second quarter of fiscal~~On September 19, 2012 (the “Effective Date”), we entered into ~~an amended and restated~~a new $20.0 million revolving ~~loan agreement~~promissory note (the “Replacement Note”) with our ~~Chairman, Lewis C. Pell~~chairman (the “Lender”) ~~providing~~. The Replacement Note consolidates and restructures the $15.0 million in aggregate borrowings collectively outstanding under the Original Agreement (as defined below) and the Supplemental Note (as defined below) and provides for an additional $5.0 million in available ~~loans~~to us, for an aggregate of up to $20.0 million. We also terminated the letter agreement dated August 14, 2012, pursuant to which the Lender had agreed to provide financial assistance to us in ~~addition to $5.0 million previously borrowed under an original revolving loan agreement (collectively,~~ the ~~“Loan Agreement”), for an aggregate loan~~amount of up to $3.0 million.

The Replacement Note accrues annual interest, payable annually, and is set at the “applicable federal rate” in effect on the date of the Replacement Note (as defined in the Replacement Note; equal to 0.84%). The Replacement Note must be repaid in full on or before its fifth anniversary (the “Maturity Date”), but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.

The Replacement Note replaces the original loan agreement between us and the Lender dated September 30, 2011 (the “Original Agreement”) pursuant to which we borrowed $10.0 million, and the promissory note of $5.0 million dated July 25, 2012 (the ~~“Loan Amount”~~“Supplemental Note”)~~. Any~~ pursuant to which we borrowed $5.0 million. The amounts ~~drawn~~borrowed against the ~~Loan~~Original Agreement ~~accrue~~and Supplemental Note accrued interest at an annual rate of 7.5%. The Lender ~~will receive~~also had received an availability fee equal to an annual rate of 0.5% ~~on the unused portion of the Loan Amount calculated based~~ on the difference between the average annual principal amount of the outstanding balance under the ~~Loan~~Original Agreement and the maximum amount of $10.0 million.

At ~~June~~September 30, 2012, we had ~~$10.0~~$15.0 million in outstanding borrowings and $5.0 million available under the ~~Loan Agreement, which~~Replacement Note.The outstanding balance is reflected as ~~line of credit~~convertible debt – related party on our condensed consolidated balance sheet. ~~The $10.0 million revolving loan expires in November 2014, at which time we must repay all outstanding borrowings and interest and fees under the Loan Agreement.~~

Equity Purchase Agreement

On April 27, 2012, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we have the right to sell to LPC up to $15 million in shares of our common stock from time-to-time over a period of up to three years, subject to certain limitations and conditions set forth in the Purchase Agreement. This total maximum amount of $15 million would increase to $21 million if the aggregate market value of shares of our common stock held by non-affiliates reached at least $75 million during the 36-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, we issued to LPC 160,000 shares of our common stock. We received $1 million of the $15 million upon signing of the Purchase Agreement for the sale to LPC of 599,880 shares of our common stock at a price of $1.667 per share. In connection with that sale, we also issued to LPC 15,333 additional shares of our common stock, for which we received no cash proceeds. We incurred $122 thousand of costs associated with investment banking fees, legal fees, and expense reimbursement to LPC. Our net proceeds from the sale of the initial purchase shares were $878 thousand.

The Purchase Agreement contains customary representations, warranties and agreements between us and LPC, limitations (market price of our common stock and LPC’s ownership limit) and conditions to completing future sale transactions, indemnification rights and other obligations of the parties. In connection with the initial purchase under the Purchase Agreement, and any future sales under the Purchase Agreement, the Lender waived the repayment requirement under the Loan Agreement.

On July ~~25,~~26, 2012, we amended the Purchase Agreement with LPC to, among other things, create a threshold price of $3.00 for the sale of our common stock to LPC, as calculated pursuant to the formula provided in the Purchase Agreement.

As consideration for entering into the Purchase Agreement and for their initial purchase of $1.0 million of our common stock, we issued to LPC 175,333 shares of our common stock. As consideration for remaining future purchases under the Purchase Agreement, we also will also issue to LPC, on a pro rata basis in connection with each purchase of shares by LPC, up to a total of 215,000 additional shares of our common stock. We did not receive any cash proceeds from the issuance of 175,333 shares and will not receive any proceeds upon the issuance of any of the remaining 215,000 shares.

Registered Trademarks, Trademarks and Service Marks

Vision-Sciences, Inc. owns the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this quarterly report on Form 10-Q are approved or cleared for sale, distribution, or use.

Results of Operations (in thousands, except percentages)

Net Sales

In the medical segment, we track sales of our endoscopes and EndoSheath technology by market. We also track sales of peripherals and accessories which can be sold to more than one market. Net sales by operating segment and by market/category for the three and six months ended ~~June~~September 30, 2012 and 2011 were as follows:

Three Months Ended
June 30,
Market/Category 2012 2011 Change
Urology $ 1,056 $ 1,908 -45 %
ENT /TNE 608 477 27 %
Pulmonology 125 107 17 %
Spine 259 78 232 %
Repairs, peripherals, and accessories 448 535 -16 %
Total medical sales 2,496 3,105 -20 %
Borescopes 631 508 24 %
Repairs 269 143 88 %
Total industrial sales 900 651 38 %
Net sales $ 3,396 $ 3,756 -10 %

	Three Months Ended September 30,							Six Months Ended September 30,
Market/Category	2012		2011		Change			2012		2011		Change
Urology	$	888	$	1,503		-41	%	$	1,944	$	3,412		-43	%
ENT		587		572		3	%		1,019		930		10	%
Surgery / GI		334		306		9	%		510		425		20	%
Pulmonology (Critical Care)		162		203		-20	%		287		310		-7	%
Spine		181		348		-48	%		440		426		3	%
Repairs, peripherals, and accessories		572		452		27	%		1,020		986		3	%
Total medical sales		2,724		3,384		-20	%		5,220		6,489		-20	%
Borescopes		842		451		87	%		1,473		959		54	%
Repairs		173		190		-9	%		442		333		33	%
Total industrial sales		1,015		641		58	%		1,915		1,292		48	%
Net sales	$	3,739	$	4,025		-7	%	$	7,135	$	7,781		-8	%

Net sales decreased ~~$0.4~~$0.3 million, or ~~10%~~7%, in the ~~first~~second quarter of fiscal 2013 to ~~$3.4~~$3.7 million compared to ~~$3.8~~$4.0 million in the ~~first~~second quarter of fiscal 2012. During the ~~first~~second quarter of fiscal 2013, our medical segment’s net sales of ~~$2.5~~$2.7 million decreased by ~~$0.6~~$0.7 million, or 20%, primarily attributable to lower sales of our endoscopes ~~and EndoSheath disposables~~ in the urology market. Our industrial segment’s net sales of ~~$0.9~~$1.0 million increased by ~~$0.2~~$0.4 million, or ~~38%~~58%, primarily attributable to higher demand of our engine turning tools, which are being used with our 2mm video-based ~~borescopes and strong growth in our repair business.~~borescopes. Although we achieved year-over-year growth in our industrial segment, we expect the level of future sales to remain relatively flat as this operating segment’s products are mature.

Net sales decreased $0.6 million, or 8%, in the first half of fiscal 2013 to $7.1 million compared to $7.8 million in the first half of fiscal 2012. During the first half of fiscal 2013, our medical segment’s net sales of $5.2 million decreased by $1.3 million, or 20%, primarily attributable to lower sales of our endoscopes in the urology market. Our industrial segment’s net sales of $1.9 million increased by $0.6 million, or 48%, primarily attributable to higher demand of our 2mm video-based borescopes and engine turning tools.

1820

The following table summarizes net sales by market/category and by product for our medical operating segment for the three and six months ended ~~June~~September 30, 2012 and 2011:

	Three Months Ended
	June 30,							Three Months Ended September 30,							Six Months Ended September 30,
Market/Category	2012		2011		Change			2012		2011		Change			2012		2011		Change
Urology
Endoscopes		575		1,162		-51	%		361		860		-58	%		936		2,022		-54	%
EndoSheath technology		481		746		-36	%		527		643		-18	%		1,008		1,390		-27	%
Total urology market		1,056		1,908		-45	%		888		1,503		-41	%		1,944		3,412		-43	%

ENT / TNE
ENT
Endoscopes									587		572		3	%		1,019		930		10	%

Surgery / GI
Endoscopes	$	578	$	462		25	%	$	288	$	278		4	%	$	433	$	382		13	%
EndoSheath technology		30		15		100	%		46		28		64	%		77		43		79	%
Total ENT/TNE market		608		477		27	%
Total surgery / GI market									334		306		9	%		510		425		20	%

Pulmonology
Pulmonology (Critical Care)
Endoscopes		81		81		0	%		126		178		-29	%		206		259		-20	%
EndoSheath technology		44		26		69	%		36		25		44	%		81		51		59	%
Total pulmonology market		125		107		17	%		162		203		-20	%		287		310		-7	%

Spine
Endoscopes		259		78		232	%		181		348		-48	%		440		426		3	%

Repairs, peripherals, and accessories		448		535		-16	%		572		452		27	%		1,020		986		3	%
Total medical sales	$	2,496	$	3,105		-20	%	$	2,724	$	3,384		-20	%	$	5,220	$	6,489		-20	%

Product
Endoscopes	$	1,493	$	1,783		-16	%	$	1,543	$	2,236		-31	%	$	3,034	$	4,019		-25	%
EndoSheath technology		555		787		-29	%		609		696		-13	%		1,166		1,484		-21	%
Repairs, peripherals, and accessories		448		535		-16	%		572		452		27	%		1,020		986		3	%
Total medical sales	$	2,496	$	3,105		-20	%	$	2,724	$	3,384		-20	%	$	5,220	$	6,489		-20	%

Net sales to the urology market ~~were $1.1 million in~~during the second quarter and first ~~quarter~~half of fiscal 2013 ~~representing a decrease of $0.9~~decreased by $0.6 million ~~(45%~~(41%) ~~over~~and $1.5 million (43%), respectively, compared to the same ~~period~~periods in fiscal 2012. The year-over-year decline was primarily attributable to the lower sales of our flexible video and fiber cystoscopes and related EndoSheath technology products to ~~Stryker. The~~Stryker due in large part to initial stocking by Stryker in the first ~~quarter~~half of fiscal 2012 ~~benefited from~~to support the ~~initial stocking orders from~~April 2011 commencement of their marketing and sales efforts. Net sales to Stryker ~~as they launched their domestic efforts~~were down $0.5 million (54%) and $1.4 million (59%) in ~~April 2011.~~the second quarter and first half of fiscal 2013, respectively.

Net sales to the ENT market during the second quarter and ~~TNE markets were $0.6 million in the~~ first ~~quarter~~half of fiscal 2013 ~~representing an increase of $0.1 million (27%~~increased by $15 thousand (3%) ~~over~~and $89 thousand (10%), respectively, compared to the same ~~period~~periods in fiscal 2012. ~~Growth~~Higher demand of our ENT ~~endoscopes~~fiberscopes in the international markets, ~~and continued expansion~~primarily in Israel where our unit volume increased threefold, was the ~~GI market contributed to~~driver behind the year-over-year growth.

Net sales to the ~~pulmonology market were $0.1 million in~~surgery and GI markets during the second quarter and first ~~quarter~~half of fiscal 2013 ~~representing~~increased by $28 thousand (9%) and $85 thousand (20%), respectively, compared to the same periods in fiscal 2012. Higher average selling prices of our surgical endoscopic platform (TNE-5000 videoscope and digital processing unit) and an increase in demand for our EndoSheath technology contributed to the year-over-year growth. Our EndoSheath technology unit volume increased 70% during the first half of ~~$18 thousand (17%) over~~fiscal 2013 compared to the same period in fiscal 2012.

Net sales to the pulmonology (critical care) market during the second quarter and first half of fiscal 2013 decreased by $41 thousand (20%) and $23 thousand (7%), respectively, compared to the same periods in fiscal 2012. The decreases were primarily attributable to lower sales of our fiber bronchoscopes in the international markets. We are encouraged, however, by the increase in usage of our EndoSheath technology as evidenced by the year-over-year sales growth and higher volume of sheaths sold during the first half of fiscal 2013. We continue to ~~increase~~focus our efforts on increasing our installed base to drive further adoption of our EndoSheath technology.

Net sales to SpineView ~~were $0.3 million~~during the second quarter and first half of fiscal 2013 decreased by $167 thousand (48%) and increased by $14 thousand (3%), respectively, compared to the same periods in fiscal 2012. Earlier in the ~~first~~second quarter of fiscal 2013, ~~representing an increase of $0.2 million (232%~~SpineView filed a traditional 510(k) with the Food and Drug Administration (“FDA”) ~~over the same period in fiscal 2012.~~for clearance to use our 2mm video-based endoscope for spine applications. We continue to ~~fulfill~~supply endoscopes for clinical use to support SpineView in its effort to build awareness for the ~~initial stocking order of 50 video surgical endoscope systems to SpineView.~~product in the minimally invasive spine surgery market until FDA approval is received.

Net sales of repairs, peripherals, and accessories ~~were $0.4 million in~~during the second quarter and first ~~quarter~~half of fiscal 2013 ~~representing a decrease of $0.1 million (16%~~increased by $120 thousand (27%) ~~over~~and $34 thousand (3%), respectively, compared to the same ~~period~~periods in fiscal 2012. The year-over-year ~~decline~~growth was primarily attributable to ~~lower demand~~an increase in our repairs business, which increased 22% and 27% during the second quarter and first half of ~~peripherals and accessories for our urology endoscopes for Stryker’s initial stocking orders.~~

fiscal 2013, respectively.

Gross Profit (Net Sales Less Cost of Sales)

Gross profit by operating segment for the three and six months ended ~~June~~September 30, 2012 and 2011 was as follows:

	Three Months Ended
	June 30,									Three Months Ended September 30,									Six Months Ended September 30,
Gross Profit	2012			2011			Change			2012			2011			Change			2012			2011			Change
Medical	$	594		$	900			-34	%	$	746		$	1,143			-35	%	$	1,341		$	2,043			-34	%
As percentage of net sales		24	%		29	%		-5	%		27	%		34	%		-7	%		26	%		31	%		-5	%
Industrial		319			228			40	%		324			254			28	%		642			482			33	%
As percentage of net sales		35	%		35	%		0	%		32	%		40	%		-8	%		34	%		37	%		-3	%
Gross profit	$	913		$	1,128			-19	%	$	1,070		$	1,397			-23	%	$	1,983		$	2,525			-21	%
Gross margin percentage		27	%		30	%		-3	%		29	%		35	%		-6	%		28	%		32	%		-4	%

~~Gross profit~~The gross margin percentage was ~~$0.9 million~~29% in the ~~first~~second quarter of fiscal 2013 ~~representing a decrease~~compared to 35% in the second quarter of ~~$0.2 million (19%) over the same period in~~ fiscal 2012. ~~Gross~~The year-over-year decline was primarily attributable to a reduction in the allocation of manufacturing expenses to support research and development activities (4% gross margin percentage points). The gross margin percentage was ~~27%~~28% in the first ~~quarter~~half of fiscal 2013 ~~representing a decrease~~compared to 32% in the first half of ~~3% over the same period in~~ fiscal 2012. ~~Last year we benefited from favorable~~The decrease was primarily attributable to a decline in our manufacturing ~~absorption as a result~~build of ~~higher production volume of our urology~~ endoscopes and EndoSheath technology ~~primarily related~~and reduced leverage of our fixed manufacturing costs due to ~~Stryker’s~~the lower net sales during the first half of fiscal 2013. Our production volume was down 35% and 39% for our endoscopes and EndoSheath technology, respectively, in the current fiscal year. Last year’s production benefited from the initial stocking ~~orders. Adjusting for the lower absorption rate, we would have achieved the same level of gross margin for the first quarter of fiscal 2013 as we did in the same period last year (30%).~~orders from Stryker.

Operating Expenses

Operating expenses by operating segment for the three and six months ended ~~June~~September 30, 2012 and 2011 were as follows:

Three Months Ended
June 30,
Operating Expenses 2012 2011 Change
SG&A expenses
Medical $ 2,451 $ 2,570 -5 %
Industrial 279 357 -22 %
Total SG&A expenses 2,730 2,927 -7 %
R&D expenses
Medical 487 692 -30 %
Industrial - - -
Total R&D expenses 487 692 -30 %
Total operating expenses $ 3,217 $ 3,619 -11 %

	Three Months Ended September 30,							Six Months Ended September 30,
Operating Expenses	2012		2011		Change			2012		2011		Change
SG&A expenses
Medical	$	2,907	$	3,143		-8	%	$	5,359	$	5,712		-6	%
Industrial		257		320		-20	%		535		677		-21	%
Total SG&A expenses		3,164		3,463		-9	%		5,894		6,389		-8	%
R&D expenses
Medical		527		739		-29	%		1,014		1,431		-29	%
Industrial		-		-		-			-		-		-
Total R&D expenses		527		739		-29	%		1,014		1,431		-29	%
Total operating expenses	$	3,691	$	4,202		-12	%	$	6,908	$	7,820		-12	%

Selling, General, & Administrative (“SG&A”) Expenses

SG&A expenses ~~were $2.7 million in~~during the second quarter and first ~~quarter~~half of fiscal 2013 ~~representing a decrease of $0.2 million (7%~~decreased by $299 thousand (9%) ~~over~~and $495 thousand (8%), respectively, compared to the same ~~period~~periods in fiscal 2012. The decrease was primarily attributable to lower stock-based compensation ~~expense and a reduction in vacation pay expense as employees began taking time off earlier in the fiscal year.~~expense.

Research & Development (“R&D”) Expenses

R&D expenses were $0.5 million in the ~~first~~second quarter of fiscal 2013, representing a decrease of $0.2 million (30%) over the same period in fiscal 2012. The decrease was primarily attributable to a reduction in manufacturing efforts to support product development activities and lower product development costs associated with our next generation digital processing unit, the DPU-7000. This new 7000 Series video endoscopy platform has several new features, including audio and video recording and playback. We expect to launch the DPU-7000 this fiscal year.

2022

Other (Expense) Income

Other (expense) income for the three and six months ended ~~June~~September 30, 2012 and 2011 was as follows:

Three Months Ended
June 30,
Other (Expense) Income 2012 2011 Change
Interest income $ 1 $ 5 -80 %
Interest expense (194 ) (99 ) 96 %
Debt cost expense (144 ) (41 ) 251 %
Other, net (5 ) (1 ) 400 %
Other expense $ (342 ) $ (136 ) 151 %

	Three Months Ended September 30,									Six Months Ended September 30,
Other (Expense) Income	2012			2011			Change			2012			2011			Change
Interest income	$	1		$	2			-50	%	$	2		$	7			-71	%
Interest expense		(237	)		(99	)		139	%		(431	)		(198	)		118	%
Debt cost expense		(128	)		(43	)		198	%		(272	)		(84	)		224	%
Loss on extinguishment of debt		(1,244	)		-			n/a			(1,244	)		-			n/a
Other, net		(35	)		(10	)		250	%		(40	)		(11	)		264	%
Other expense	$	(1,643	)	$	(150	)		995	%	$	(1,985	)	$	(286	)		594	%

Other expense ~~was $0.3 million in~~during the second quarter and first ~~quarter~~half of fiscal 2013 ~~representing an increase of $0.2~~increased by $1.5 million ~~(151%~~(995%) ~~over~~and $1.7 million (594%), respectively, compared to the same ~~period~~periods in fiscal 2012. The ~~increase was~~year-over-year increases were primarily attributable to ~~additional interest expenses associated with higher levels~~the loss on the extinguishment of ~~indebtedness and additional amortization expense~~debt as a result of the ~~deferred~~new convertible debt ~~cost associated~~ with our Chairman and the ~~fair value~~termination of ~~warrant shares issued in connection~~the previous debt arrangements with ~~the line of credit – related party.~~him.

Net Loss

Net loss for the three and six months ended ~~June~~September 30, 2012 and 2011 was as follows:

Three Months Ended
June 30,
Net Loss 2012 2011 Change
Loss before provision for income taxes $ (2,646 ) $ (2,627 ) 1 %
Income tax provision 1 3 -67 %
Net loss $ (2,647 ) $ (2,630 ) 1 %

	Three Months Ended September 30,									Six Months Ended September 30,
Net Loss	2012			2011			Change			2012			2011			Change
Loss before provision for income taxes	$	(4,264	)	$	(2,955	)		44	%	$	(6,910	)	$	(5,581	)		24	%
Income tax (benefit) provision		-			(2	)		-100	%		1			2			-50	%
Net loss	$	(4,264	)	$	(2,953	)		44	%	$	(6,911	)	$	(5,583	)		24	%

Net loss ~~was $2.6 million in~~during the second quarter and first ~~quarter~~half of fiscal 2013 ~~representing a decrease of $17 thousand (-1%) over~~increased by $1.3 million compared to the same ~~period~~periods in fiscal 2012. ~~The decrease was primarily attributable to lower operating expenses.~~Lower gross profit and the loss on the extinguishment of debt were the primary drivers for the increase in net loss during the fiscal 2013 periods.

Liquidity, Capital Resources, and Outlook

The following table summarizes selected financial information and statistics as of ~~June~~September 30, 2012 and March 31, 2012:

June 30, March 31,
2012 2012
Cash and cash equivalents $ 1,144 $ 2,674
Accounts receivable, net $ 2,195 $ 2,132
Inventories, net $ 4,223 $ 3,970
Working capital $ 4,950 $ 6,022

	September 30, 2012		March 31, 2012
Cash and cash equivalents	$	3,063	$	2,674
Accounts receivable, net	$	2,739	$	2,132
Inventories, net	$	4,631	$	3,970
Working capital	$	7,892	$	6,022

At ~~June~~September 30, 2012, our principal source of liquidity was working capital of approximately ~~$5.0~~$7.9 million, including ~~$1.1~~$3.1 million in cash and cash equivalents. Our cash and cash equivalents ~~decreased $1.5~~increased $0.4 million during the first ~~quarter~~half of fiscal 2013. The ~~decrease~~increase was primarily attributable to net proceeds from the issuance of long-term debt to our Chairman and the sale of common stock to LPC under the Purchase Agreement, partially offset by cash used to fund our operations and cover the net loss sustained during the period.

In the first ~~quarter~~half of fiscal 2013, we used ~~$2.4~~$5.5 million of net cash in our operating activities compared to ~~$4.1~~$7.5 million in the first ~~quarter~~half of fiscal 2012. The decrease in cash used in operations was primarily attributable to a lower reduction of advances from customers (i.e., sales of products to customers who already prepaid for such products in fiscal 2011) as we fulfilled orders to complete the ~~advance~~advances from Stryker and SpineView during the first ~~quarter~~half of fiscal 2013.

In the first ~~quarter~~half of fiscal 2013, we used ~~$30~~$50 thousand of net cash in our investing activities compared to ~~the $76~~$103 thousand ~~provided by such activities~~ in the first ~~quarter~~half of fiscal 2012. The decrease was primarily attributable to lower capital expenditures during the period.

In the first ~~quarter~~half of fiscal 2013, we provided ~~$0.9~~$5.9 million of net cash from our financing activities compared to ~~$0.2~~$1.3 million in the first ~~quarter~~half of fiscal 2012. The increase was primarily attributable to the net proceeds from the issuance of long-term debt (related party) and the sale of common stock to LPC ~~under~~during the ~~Purchase Agreement.~~period.

2123

We have incurred substantial operating losses since our inception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future. We anticipate negative cash flows from operations during the remainder of fiscal 2013, ~~because of~~driven by continued investment in a direct sales force for the U.S. market, spending for ~~research~~marketing, and ~~development, spending for marketing,~~ general business ~~operations, and capital expenditures.~~operations. As of ~~June~~September 30, 2012, we had cash and cash equivalents totaling approximately ~~$1.1~~$3.1 million. ~~On July 25, 2012, the Lender lent us an additional $5 million pursuant to the terms of a new promissory note that is repayable on or before November 9, 2014.~~ We expect that our cash at ~~June~~September 30, 2012, ~~and~~together with the $5 million of capital ~~received under the new promissory note and the $3 million of capital to be made~~ available ~~to us, subject to certain conditions,~~ under a ~~letter agreement~~convertible note dated ~~August 14,~~September 19, 2012 ~~from the Lender~~with Lewis C. Pell, our Chairman (see ~~Line of Credit -~~Note 5. Long-Term Debt – Related Party ~~above)~~of the notes to our unaudited condensed consolidated financial statements for additional information), should be sufficient to fund our operations through at least ~~June~~September 30, 2013. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, we will need to ~~either~~ secure additional financing and/or reduce our expenses ~~or a combination thereof.~~to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated ~~external~~additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

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.

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

For the quarterly period ended ~~June~~September 30, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our ~~Chief~~Principal Financial ~~Officer (the principal financial~~ and ~~accounting officer),~~Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.

Our management, including our Chief Executive Officer and our ~~Chief~~Principal Financial and Accounting Officer, does not expect that our disclosure controls and procedures will prevent all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met and our disclosure controls and procedures are designed to provide this reasonable assurance. Based upon the evaluation discussed above, our Chief Executive Officer and our ~~Chief~~Principal Financial and Accounting Officer concluded that, as of ~~June~~September 30, 2012, our disclosure controls and procedures were effective at providing such reasonable assurance.

Changes in ~~Internal~~Internal Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the ~~three~~six months ended ~~June~~September 30, 2012 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

2224

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes from the information discussed in Part I, Item 1A. Risk Factors, on page 17 of our Annual Report on Form 10-K for the year ended March 31, 2012, except for the information discussed below. You should carefully consider the risks and uncertainties we discussed in our Form 10-K and the risks described below in this quarterly report 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 and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future. We anticipate negative cash flows during the remainder of fiscal 2013, ~~because of~~driven by continued investment in a direct sales force for the U.S. market, spending for ~~research~~marketing, and ~~development, spending for marketing,~~ general business ~~operations, and capital expenditures.~~operations. As of ~~June~~September 30, 2012, we had cash and cash equivalents totaling approximately ~~$1.1~~$3.1 million. We expect that our cash at ~~June~~September 30, 2012, ~~and~~together with the $5 million of capital ~~received~~available under ~~the promissory~~a convertible note dated ~~July 25,~~September 19, 2012 ~~and the $3 million of capital to be made available to us, subject to certain conditions, under a letter agreement dated August 14, 2012 from~~with Lewis C. Pell, our ~~Chariman,~~Chairman (see Note 5. Long-Term Debt – Related Party of the notes to our unaudited condensed consolidated financial statements for additional information), should be sufficient to fund our operations through at least ~~June~~September 30, 2013. However, if our performance expectations fall short (including failure to generate expected sales) or our expenses exceed expectations, we will need to ~~either~~ secure additional financing and/or reduce expenses ~~or a combination thereof.~~to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated ~~external~~additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

Our officers and directors have the ability to exercise significant control over the Company

As of September 30, 2012, our officers and directors owned an aggregate of approximately 38% of our outstanding common stock. Under a convertible note dated September 19, 2012, our Chairman, at his option, has the right to convert the unpaid principal balance of $15.0 million into 12,500,000 shares of our common stock. The conversion of this note would increase the aggregate ownership of our officers and directors to approximately 51% of our common stock. As such, our directors and officers exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company or forcing management to change its operating strategies, which may be to the benefit of management but not in the interest of the stockholders.

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

~~None~~The following table sets forth information on repurchases by us of our common stock during the three months ended September 30, 2012:

	Total		Average		Total Number of		Maximum Number of
	Number of		Price		Shares Purchased as		Shares that May Yet
	Shares		Paid		Part of Publicly		Be Purchased Under
Fiscal Period	Purchased		Per Share		Announced Programs		the Programs
07/01/12 - 07/31/12		17,417	$	1.36		-		-
08/01/12 - 08/31/12		-		-		-		-
09/01/12 - 09/30/12		-		-		-		-
Total		17,417	$	1.36		-		-

The shares were purchased from management employees to cover income tax withholdings as a result of the lapsing of restrictions on restricted stock awards. Although not required to under our equity incentive plans, we anticipate repurchasing shares in a similar arrangement during the remainder of fiscal 2013.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibits
10.1		Convertible Promissory Note made by Vision-Sciences, Inc. in favor of Lewis C. Pell, dated as of September 19, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on September 20, 2012).
10.2*	†	Employment Letter dated August 4, 2009 between the Company and Keith Darragh.
10.3*	†	Amended Employment Letter dated August 28, 2012 between the Company and Keith Darragh.
10.4*	†	Separation and Release Agreement dated August 28, 2012 between the Company and Katherine Wolf.
10.5		Modification Agreement, dated July 26, 2012, by and between Vision-Sciences, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 26, 2012).
31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of ~~Chief~~Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and ~~Chief~~Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
~~10.1~~		~~Promissory Note between Vision-Sciences, Inc. and Lewis C. Pell dated July 25, 2012.~~
~~10.2~~		~~Letter Agreement between Vision-Sciences, Inc. and Lewis C. Pell dated August 14, 2012.~~
~~10.3~~		~~Waiver from Lewis C. Pell under the Revolving Loan Agreement dated April 27, 2012.~~
101.INS**		XBRL Instance
101.SCH**		XBRL Taxonomy Extension Schema
101.CAL**		XBRL Taxonomy Extension Calculation
101.DEF**		XBRL Taxonomy Extension Definition
101.LAB**		XBRL Taxonomy Extension Labels
101.PRE**		XBRL Taxonomy Extension Presentation

*		Filed herewith.
**		XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
†		Management contract or compensatory plan or arrangement.

2326

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,~~November 5, 2012	/s/ Cynthia Ansari
	Cynthia Ansari
	President and Chief Executive Officer (Duly Authorized Officer)


Date: ~~August 14,~~November 5, 2012	/s/ ~~Katherine L. Wolf~~	Keith J. C. Darragh
	~~Katherine L. Wolf~~
	~~Chief Financial Officer and EVP, Corporate Development~~ ~~(Principal Financial Officer~~Keith J. C. Darragh VP, Finance and Principal Financial and Accounting ~~Officer)~~Officer

	June 30,		March 31,
	2012		2012
Cash and cash equivalents	$	1,144	$	2,674
Accounts receivable, net	$	2,195	$	2,132
Inventories, net	$	4,223	$	3,970
Working capital	$	4,950	$	6,022