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 the rest of the world, although we reached an agreement with Stryker to delay the rest of the world launch until at least December 2012. Until the end of calendar 2012, 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.

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 of conventional endoscopes, which are difficult, costly, and time consuming to clean and disinfect or sterilize, a practice known as reprocessing. 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.

Industrial Business Segment

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. Machida's quality line of borescopes includes a number of advanced standard features normally found only in custom designed instruments.

Business Strategy

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.

New Product Releases

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.

Line of Credit - Related Party

In the second quarter of fiscal 2012, we entered into an amended and restated revolving loan agreement with our Chairman, Lewis C. Pell (the "Lender") providing for an additional $5.0 million in available loans to us, in addition to $5.0 million previously borrowed under an original revolving loan agreement (collectively, the "Loan Agreement"), for an aggregate loan of up to $10.0 million (the "Loan Amount"). Any amounts drawn against the Loan Agreement accrue interest at an annual rate of 7.5%. The Lender will receive 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 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.

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.

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 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, 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.

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 months ended June 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 %

Net sales decreased $0.4 million, or 10%, in the first quarter of fiscal 2013 to $3.4 million compared to $3.8 million in the first quarter of fiscal 2012. During the first quarter of fiscal 2013, our medical segment's net sales of $2.5 million decreased by $0.6 million, or 20%, primarily attributable to lower sales our endoscopes and EndoSheath disposables in the urology market. Our industrial segment's net sales of $0.9 million increased by $0.2 million, or 38%, primarily attributable to higher demand of our 2mm video-based borescopes and strong growth in our repair business. Although we achieved year-over-year growth in our industrial segment, we expect future sales to remain relatively flat as this operating segment's products are mature.

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

                                          Three Months Ended
                                               June 30,
Market/Category                            2012          2011        Change
Urology
Endoscopes                                     575        1,162          -51 %
EndoSheath technology                          481          746          -36 %
Total urology market                         1,056        1,908          -45 %

ENT / TNE
Endoscopes                              $      578      $   462           25 %
EndoSheath technology                           30           15          100 %
Total ENT/TNE market                           608          477           27 %

Pulmonology
Endoscopes                                      81           81            0 %
EndoSheath technology                           44           26           69 %
Total pulmonology market                       125          107           17 %

Spine
Endoscopes                                     259           78          232 %
Repairs, peripherals, and accessories          448          535          -16 %
Total medical sales                     $    2,496      $ 3,105          -20 %

Product
Endoscopes                              $    1,493      $ 1,783          -16 %
EndoSheath technology                          555          787          -29 %
Repairs, peripherals, and accessories          448          535          -16 %
Total medical sales                     $    2,496      $ 3,105          -20 %

Net sales to the urology market were $1.1 million in the first quarter of fiscal 2013, representing a decrease of $0.9 million (45%) over the same period 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 products to Stryker. The first quarter of fiscal 2012 benefited from the initial stocking orders from Stryker as they launched their domestic efforts in April 2011.

Net sales to the ENT and TNE markets were $0.6 million in the first quarter of fiscal 2013, representing an increase of $0.1 million (27%) over the same period in fiscal 2012. Growth of our ENT endoscopes in the international markets and continued expansion in the GI market contributed to the year-over-year growth.

Net sales to the pulmonology market were $0.1 million in the first quarter of fiscal 2013, representing an increase of $18 thousand (17%) over the same period in fiscal 2012. We continue to increase our installed base to drive further adoption of our EndoSheath technology.

Net sales to SpineView were $0.3 million in the first quarter of fiscal 2013, representing an increase of $0.2 million (232%) over the same period in fiscal 2012. We continue to fulfill the initial stocking order of 50 video surgical endoscope systems to SpineView.

Net sales of repairs, peripherals, and accessories were $0.4 million in the first quarter of fiscal 2013, representing a decrease of $0.1 million (16%) over the same period in fiscal 2012. The year-over-year decline was primarily attributable to lower demand of peripherals and accessories for our urology endoscopes for Stryker's initial stocking orders.

Gross Profit (Net Sales Less Cost of Sales)

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

                               Three Months Ended
                                    June 30,
Gross Profit                   2012           2011        Change
Medical                      $    594       $    900          -34 %
As percentage of net sales         24 %           29 %         -5 %
Industrial                        319            228           40 %
As percentage of net sales         35 %           35 %          0 %
Gross profit                 $    913       $  1,128          -19 %
Gross margin percentage            27 %           30 %         -3 %

Gross profit was $0.9 million in the first quarter of fiscal 2013, representing a decrease of $0.2 million (19%) over the same period in fiscal 2012. Gross margin percentage was 27% in the first quarter of fiscal 2013, representing a decrease of 3% over the same period in fiscal 2012. Last year we benefited from favorable manufacturing absorption as a result of higher production volume of our urology endoscopes and EndoSheath technology primarily related to Stryker's 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%).

Operating Expenses

Operating expenses by operating segment for the three months ended June 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 %

Selling, General, & Administrative ("SG&A") Expenses

SG&A expenses were $2.7 million in the first quarter of fiscal 2013, representing a decrease of $0.2 million (7%) over the same period 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.

Research & Development ("R&D") Expenses

R&D expenses were $0.5 million in the first 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 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.

Other (Expense) Income

Other (expense) income for the three months ended June 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 %

Other expense was $0.3 million in the first quarter of fiscal 2013, representing an increase of $0.2 million (151%) over the same period in fiscal 2012. The increase was primarily attributable to additional interest expenses associated with higher levels of indebtedness and additional amortization expense of the deferred debt cost associated with the fair value of warrant shares issued in connection with the line of credit - related party.

Net Loss

Net loss for the three months ended June 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 %

Net loss was $2.6 million in the first quarter of fiscal 2013, representing a decrease of $17 thousand (-1%) over the same period in fiscal 2012. The decrease was primarily attributable to lower operating expenses.

Liquidity, Capital Resources, and Outlook

The following table summarizes selected financial information and statistics as
of June 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

At June 30, 2012, our principal source of liquidity was working capital of approximately $5.0 million, including $1.1 million in cash and cash equivalents. Our cash and cash equivalents decreased $1.5 million during the first quarter of fiscal 2013. The decrease was primarily attributable to cash used to fund our operations and cover the net loss sustained during the period.

In the first quarter of fiscal 2013, we used $2.4 million of net cash in our operating activities compared to $4.1 million in the first quarter 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 from Stryker during the first quarter of fiscal 2013.

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

In the first quarter of fiscal 2013, we provided $0.9 million of net cash from our financing activities compared to $0.2 million in the first quarter of fiscal 2012. The increase was primarily attributable to the net proceeds from the sale of common stock to LPC under the Purchase Agreement.

We have incurred substantial operating losses since our inception and there can be no assurance that we will achieve or sustain a profitable level of operations in the future. We anticipate negative cash flows during the remainder of fiscal 2013, because of continued investment in a direct sales force for the U.S. market, spending for research and development, spending for marketing, general business operations, and capital expenditures. As of June 30, 2012, we had cash and cash equivalents totaling approximately $1.1 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 30, 2012 and 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 dated August 14, 2012 from the Lender (see Line of Credit - Related Party above) should be sufficient to fund our operations through at least June 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 or reduce expenses or a combination thereof. 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 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.