This Annual Report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the availability of capital resources, the availability of third-party reimbursement, government regulation, the availability of supplies, competition, technological difficulties, the completion of obligations under our contract with Medtronic Xomed, Inc., general economic conditions and other risks detailed in this Annual Report on Form 10-K and any subsequent periodic filings made with the Securities and Exchange Commission. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.

Executive Summary

We develop, manufacture and sell flexible endoscopes and disposable EndoSheaths for the medical device market, and flexible borescopes for the industrial device markets. We operate in three reporting segments: medical, industrial and corporate.

All amounts in the financial notes, except for share and per share data, are reported in ($000's), unless otherwise indicated.

Medical Segment

The medical segment supplies flexible endoscopes and disposable EndoSheaths to the ENT, urology, GI and pulmonary markets. Health-care providers use EndoSheaths to cover the insertion tube of flexible endoscopes, such as ENT endoscopes, TNE endoscopes, cystoscopes, sigmoidoscopes and bronchoscopes. The EndoSheaths allow the health-care providers to process patients economically by permitting the providers to minimize reprocessing the endoscopes between procedures. In addition, the EndoSheaths ensure a sterile insertion tube for each patient procedure.

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

In March 2007, the Company closed the sale of certain assets with respect to its ENT EndoSheath business to Medtronic Xomed, Inc. ("Medtronic"), a wholly-owned subsidiary of Medtronic, Inc. (NYSE:MDT). The closing took place after the transaction was approved by a majority vote of our shareholders during a special shareholders meeting convened on March 20, 2007. As part of the transaction, Vision-Sciences has granted Medtronic an exclusive, royalty-free worldwide license to certain Vision-Sciences intellectual property, for use in making and selling sheath products solely within the field of ENT (otorhinolaryngology). Under the terms of the agreement, Medtronic will pay Vision-Sciences up to $34 million, of which $27 million was paid at the closing. Up to an additional $4 million will be paid upon the achievement of certain post-closing milestones related to the transition of manufacturing capability to Medtronic, and an additional $3 million will be payable 15 months after closing, assuming Vision-Sciences has complied with its obligations under the asset purchase agreement, and that Medtronic has not made any indemnification claims based on the Company's representations and warranties under the agreement. As part of this transaction, Vision-Sciences is transferring its existing ENT production lines

for the EndoSheath ENT products from its Natick, MA facility to Medtronic in Jacksonville, FL. Medtronic will also now distribute, market and sell Vision-Sciences' ENT endoscope products worldwide, on a co-branded basis, through Medtronic's dedicated sales force. Sales of our EndoSheaths within the field of ENT were $3.7 million or 39% of total sales in FY 07 and $3.3 million or 30% of total sales in FY 06. These sales will not be made after the transition milestones have been met, which we anticipate will occur in the second half of FY 08. In addition to providing liquidity, we believe that this transaction will allow us to focus on sales of our existing products and our new videoscope product family to the TNE, ENT, urology and GI markets, and the patented EndoSheath product to the TNE, urology and GI markets.

Sales Distribution

Since September 2003, we have been distributing all of our products for the ENT market in the United States and Canada through Medtronic ENT ("MENT") under the Medtronic Agreement. The initial term of the Medtronic Agreement was three years. Under the Medtronic Agreement, we granted MENT exclusive distribution rights in the United States and Canada to market and sell our ENT and TNE EndoSheaths and endoscopes to ENT practitioners. The Medtronic Agreement resulted in an increase in sales of our ENT EndoSheaths and ENT endoscopes due to the quantities of endoscopes and EndoSheaths purchased by Medtronic in the initial twelve-month period. In the second year ("Year 2") of the Medtronic Agreement, MENT purchased fewer units of ENT endoscopes and ENT EndoSheaths than in the initial period, due to the build up of inventory that resulted from the purchases in the initial period. During Year 2, to expedite depletion of the inventory, we and MENT began a rebate program, whereby we agreed to pay MENT a cash rebate for ENT EndoSheaths they sold to new users who committed to a large annual purchase. The rebate program was designed to run for one year, ending September 2005. During that period, we recorded deferred revenue of approximately $60 for the rebate program. As of December 31, 2005, the inventory of ENT SOS at MENT had declined to a level where MENT re-commenced ordering, allowing us to terminate the rebate program. We recognized the deferred revenue in sales for the three months ended December 31, 2005.

As part of the sale of certain assets our ENT EndoSheath business to Medtronic, the Medtronic Agreement was amended and restated. Under terms of the amended and restated Medtronic Agreement, Medtronic will now distribute, market and sell Vision-Sciences' ENT endoscope products worldwide, on a co-branded basis, through Medtronic's dedicated sales force. The terms of the amended and restated Medtronic Agreement is through December 31, 2008, subject to automatic one year renewals thereafter, unless terminated by either party on 90 day notice prior to the end of the initial term or renewal term as applicable.

In December 2004, we signed an agreement (the "MGU Agreement") with Medtronic USA, Inc., the gastroenterology/urology division of Medtronic, Inc. ("MGU"), granting MGU the exclusive right to distribute our new cystoscope with Slide-On EndoSheath System to urologists in the United States and Canada. The term of the MGU Agreement was through March 31, 2006, renewable for successive one-year periods unless either party notified the other party in writing at least 90 days prior to the end of any term that it did not want to renew. In May 2006, we and MGU mutually terminated the MGU Agreement, due to lower sales than we expected, and a change in strategy by MGU. MGU has decided to put greater focus on therapies and narrow its overall uro-diagnostics product offerings, which included our products. We decided to distribute our flexible cystoscope and Slide-On EndoSheath System through a network of independent sales representatives.

We have a domestic network of independent sales representatives for the GI and pulmonary product lines. Also, we have our own international network of distributors for all our medical product lines.

Cost Reduction

Throughout FY 07 the Company reviewed its various cost structures in an effort to implement reductions in the cost of materials, labor and other expenses across our various business segments.

New Products

In November 2006, we released to the market our new cystoscope, the CST-2000A, which included improvements requested by our customers to our CST-2000 cystoscope. In addition, during the last quarter of FY 07, we released our redesigned cystoscope sheath, which incorporates improvements making the product easier to use. In May 2005, we received approval from the FDA to market the ENT-3000 endoscope with battery powered LED light source. In FY 05, we received approval from the FDA to market our TNE-Bx endoscope with Slide-On EndoSheath system, and our cystoscope with Slide-On EndoSheath System. In addition, we released a line of peripheral products for ENT and urology physicians' offices.

Our plans for product development in FY 08 include the design of a new family of videoscopes with a miniature digital camera mounted on the distal end of the insertion tube, and design and cost improvements to our existing family of fiberscopes for the medical segment. In addition, we intend to release a new line of video borescopes for the industrial market. We also plan to work on improvements to our manufacturing processes that should result in lower costs to produce our endoscopes and EndoSheaths.

In April 2007, we announced that we had executed a definitive investment agreement under which Vision-Sciences acquired a strategic interest in Minos Medical, Inc. ("Minos''). Minos is a privately held California based development stage medical device company concentrating in the emerging field of N.O.T.E.S. (Natural Orifice Trans-luminal Endoscopy Surgery). N.O.T.E.S. is a new frontier in surgery, focusing on using natural orifices to enter the body to facilitate incision-less surgical procedures. We invested $1 million in cash in the common stock of Minos in exchange for 30% of their issued and outstanding capital stock. We have also agreed to expend $165 in development costs in collaboration with Minos to exploit a specific common surgical procedure.

Vision-Sciences is focusing on the development of new products and technologies, looking to acquire related technologies, and to enter new markets which the Company has identified. N.O.T.E.S. is one of our targeted fields, and this investment is our Company's first publicly announced step towards positioning us in the forefront of this new field. N.O.T.E.S. represents the next generation of surgical procedures, going beyond minimally invasive laparoscopic surgery to achieve incision-less surgery. We are confident that Minos will be a valuable strategic partner for Vision-Sciences as we pursue a leading position in the emerging N.O.T.E.S. field.

Industrial Segment

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

Corporate Segment

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

During FY 07, we sold our ENT products in the United States and Canada through MENT, according to the terms of the Medtronic Agreement. During FY 06, we sold our urology products in the United States and Canada through MGU, according to the terms of the MGU Agreement. Neither of these agreements provide for any terms related to product acceptance, warranty or contingencies, such as rights of return, that are different than the normal terms we grant to other customers. Both agreements provided for a discount for payment within 10 days of invoice for all products shipped under these agreements.

During the fiscal year ended March 31, 2005, the Company and MENT modified the Medtronic Agreement to provide for a rebate to MENT for sales of ENT EndoSheaths to new customers who commit to large purchases. The rebate program was designed to run for one year, ending September 30, 2005. The Company accounted for this modification under Emerging Issues Task Force ("EITF") 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products). During that period, we recorded deferred revenue of approximately $60 for the rebate program. We recognized the deferred revenue in sales when the rebate program was terminated in the three months ended December 31, 2005.

Non-qualified Options Issued to Non-employees

Effective March 31, 2004, we amended the non-qualified option agreements previously granted to non-employees. This amendment provides that we may settle our obligation to the holder by delivering unregistered shares to the holder. As a result of this amendment, we now account for these non-qualified options as equity instruments, and the fair market value of these options was transferred to the equity section of our balance sheet. Effective April 1, 2004, we account for options issued to non-employees in accordance with the provisions of EITF 96-18.

Income Taxes

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

Results of Operations

Fiscal Year Ended March 31, 2007 Compared to the Fiscal Year Ended March 31, 2006

Sales

Net sales in FY 07 were $9,487, a decrease of $1,663, or 15%, compared to net sales in FY 06. Sales in the medical segment decreased by $1,560, or 19%, to $6,776, while sales of the industrial segment decreased by $103, or 4%, to $2,711. In the medical segment, we track sales of endoscopes and EndoSheaths by market. We also track sales of peripheral items that can be sold to more than one market. Sales of other products include sales of GI products, repairs and accessories. Sales by segment and by category in FY 07 and FY 06 were as follows:

         Category              FY 07     FY 06       Increase (Decrease)      Percent
         ENT                  $ 5,126   $  5,809       $            (683 )      (12 )%
         Urology                  495      1,010                    (515 )      (51 )%
         Peripherals              300        549                    (249 )      (45 )%
         Other                    855        968                    (113 )      (12 )%
         Total medical        $ 6,776   $  8,336       $          (1,560 )      (19 )%
         Total industrial     $ 2,711   $  2,814       $            (103 )       (4 )%
         Total Sales          $ 9,487   $ 11,150       $          (1,663 )      (15 )%

Medical Segment-ENT Market

Sales to the ENT market include products for the domestic and international
markets as follows:

           ENT Market         FY 07     FY 06      Increase (Decrease)      Percent
           Domestic          $ 2,615   $ 2,734       $          (119 )         (4 )%
           International       2,511     3,075                  (564 )        (18 )%
           Total ENT         $ 5,126   $ 5,809       $          (683 )        (12 )%

We further delineate the products sold to the domestic market, as follows:

        Products                  FY 07     FY 06      Increase (Decrease)      Percent
        Slide-On EndoSheaths     $ 1,647   $ 1,199       $           448           37 %
        Endoscopes                   968     1,535                  (567 )        (37 )%
        Total Domestic ENT       $ 2,615   $ 2,734       $          (119 )         (4 )%

The primary reason for the decrease in sales of products to the domestic ENT market was the lower demand for our scopes, while sales of our EndoSheaths increased $448, or 37%, compared to FY 06. MENT is our exclusive distributor of ENT products in the United States. The success of our ENT product lines is substantially dependent upon the success of the marketing and sales activities of MENT, over which we have limited control. Total sales to MENT were $3.4 million in FY 07 and FY 06. Total sales to MENT include sales in the Other category, which includes accessories and repair services. Usage of TNE endoscopes by ENT physicians allows them to perform procedures in their offices, which are currently performed by GI physicians in hospitals. Educating this market on the advantages of these procedures has proven more difficult than we or MENT had anticipated. We expect these procedures will be more popular among ENT physicians in the future to diagnose and treat gastroesophageal reflux disease ("GERD"), especially as the population ages. A TNE (Trans Nasal Esophagoscopy) procedure allows patients to receive procedures in a physician's office using only a topical anesthetic, as opposed to the more common Trans Oral Esophagoscopy procedure, which requires a patient to be consciously sedated in a hospital. A patient who undergoes a TNE procedure can recover more quickly than one who is consciously sedated. In addition, physicians can receive higher reimbursement rates and treat more patients in a given day, by performing these procedures in their offices, than by performing them in hospitals. It is our view that these procedures will increase in the future because the inconvenience to the patient is less, and the total cost is lower when done in an office, compared to in a hospital. However, it will take time to educate and train the physicians and educate the patient population on the advantages of this approach.

During FY 07, we increased our ENT SOS (Slide-On EndoSheaths) sales to MENT, an increase of approximately 37% as compared to FY 06.

We further delineate the products sold to the international market as follows:

      Products                     FY 07     FY 06      Increase (Decrease)      Percent
      Slide-On EndoSheaths        $ 2,091   $ 2,134       $           (43 )         (2 )%
      Endoscopes                      420       941                  (521 )        (55 )%
      Total International ENT     $ 2,511   $ 3,075       $          (564 )        (18 )%

Sales of ENT products to the international market decreased 18%, compared to sales in FY 06. The sales decrease was due primarily to transition within our international sales organization and our lack of success in fully staffing this area.

Medical Segment-Urology Market

Sales to the urology market in FY 07 (including sales of our flexible cystoscope and Slide-On Cystoscope EndoSheath System to MGU) were $495, a decrease of $515, or 51%. During FY 06, MGU modified its strategy to place greater focus on therapies, and to narrow its overall uro-diagnostics product offering, which included our system. As a result, we and MGU terminated the MGU Agreement on May 1, 2006. We currently market and sell our flexible cystoscope and Slide-On EndoSheath System through a network of independent sales representatives.

The lower sales of urology products to our international distributors in FY 07 were primarily due to our distributor in the U.K. acquiring a major urology company that manufactures and sells conventional cystoscopy products, in which they decided to concentrate their efforts. We mutually terminated our relationship with that U.K. distributor for our urology products, and have entered into a distribution agreement for urology products with another company in the U.K. In addition, regulatory authorities in Australia required physicians to reprocess cystoscopes after each use, regardless of whether an EndoSheath was used in the procedure. This regulatory requirement reduced the economic benefits of our system, resulting in lower sales in that market. We plan to continue selling through our current

international distributor network, and to expand this network to include distributors in countries where we do not presently sell our urology products.

Medical Segment-Peripherals and Other

Sales of peripheral products in FY 07 were $300, a decrease of $249, or 45%, compared to $549 in FY 06. Sales of other products, which also include sales to the GI and pulmonary markets in FY 07, decreased $113, or 12%, compared to sales of $968 in FY 06. We are currently not promoting products in the GI and pulmonary markets because we believe that colonoscopies, a more thorough examination of a person's colon, are more common than sigmoidoscopies in the GI market.

Industrial Segment

Sales in FY 07 of products in this segment decreased as demand for our borescopes declined from FY 06. The lower demand reflects the market's desire for videoscopes, as opposed to fiber-optic scopes. We expect our sales of this product line will remain flat until we release our own line of video borescopes in the later part of FY 08.

Gross Profit

The company's gross profit was $1,952, a decrease of $684, or 26%, from FY 06. The gross profit decrease was mainly caused by significant sales decreases in the more profitable endoscope markets, along with a high proportion of fixed costs associated with endoscope production.

Medical Segment

The decrease in the gross profit of the medical segment was primarily due to the lower unit volume of ENT endoscopes sold to the domestic and international markets, offset partially by higher sales of EndoSheaths.

During the first fiscal quarter of FY 06, it became apparent that by utilizing a sub-contractor for our EndoSheaths products, we were not able to maintain sufficient control over the manufacturing processes to have the confidence level we believe necessary for our product quality. In addition, we realized that the costs savings we had planned on by manufacturing our EndoSheaths in Israel were not going to be what we had expected. Thus, we decided to move the production of our EndoSheaths back to our Natick, MA facility. In October 2005, we entered into a termination agreement with this sub-contractor, resulting in the purchase of 180,000 units of our ENT SOS over a six-month period. This purchase was completed in May 2006, after which we brought the equipment used in Israel to our Natick, MA facility.

Industrial Segment

The lower gross profit in the industrial segment was due primarily to the lower volume of new product sold to customers and to higher repair income which has lower profit margins.

Operating Expenses

Operating expenses increased by $693, or 10%, in FY 07 as compared to FY 06.
Selling, general and administrative expenses ("SG&A") increased by $549, or 12%,
and research and development ("R&D") increased by $144, or 6%, as compared to FY
06. Operating expenses by segment were as follows.

             Expense Category        FY 07     FY 06     Increase (Decrease)
             S,G& A
             Medical                $ 2,459   $ 2,142        $           317
             Industrial                 850       869                    (19 )
             Corporate                1,875     1,624                    251
             Total S,G &A           $ 5,184   $ 4,635        $           549
             R&D
             Medical                $ 2,372   $ 2,228        $           144

In the medical segment, the increase in SG&A expenses of $317, or 15%, was primarily due to an increase in consulting and professional fees of $162, and an increase in computer related expenses of $70, both related to the continued support and expansion of our sales and reporting systems. We also had an increase in spending for trade shows and travel & entertainment of approximately $73, as part of the costs of creating our own direct sales force, following the termination of the marketing agreement with MGU.

In the industrial segment, the decrease in SG&A costs of $19, or 2%,was primarily due to a decrease in bad debt expense of $73 incurred during the year, offset by an increase in advertising expense of $14, and computer expense of $21, related to our sales and reporting systems.

In the corporate segment, SG&A costs increased by approximately $251, or 15%, primarily due to higher employee compensation expenses of $143, resulting from the expansion and upgrade of our management team. In addition, our legal and professional charges increased $68 compared to FY 06. This increase was related primarily to our decision to transfer our corporate headquarters from Natick, MA to Orangeburg, NY.

R&D expenses increased in the medical segment by approximately $144, or 6%. This increase was driven by an additional investment of $423 during FY 07 in . . .