Vision-Sciences (VSCI)

Income Taxes

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

Income Taxes

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

19

Income Taxes

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

21

(i)    Income Taxes

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

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Operations and Significant Accounting Policies (Continued)

(i)    Income Taxes

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

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Operations and Significant Accounting Policies (Continued)

Income Taxes

                Under our income tax policy, we record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts recorded in the accompanying consolidated balance sheets, as well as operating losses 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 provided valuation allowances for all our deferred tax assets to date. During Q2 08, we recorded a recovery of income taxes in the amount of $180, in anticipation of filing a certain state annual return during the last quarter of our FY 08.  We have now filed our tax returns for all jurisdictions, and we have recorded the following adjustments: (i) We reversed the above mentioned tax recovery and booked a total of $188 in tax liability; (ii) we booked an additional $31 tax liability for other state jurisdictions; (iii) for federal taxes, we recorded a recovery of income tax of $39. Total net change to our valuation allowance is $180. These tax liabilities stem from our FY 07 net income of $20 million, resulting from our sale of certain assets to Medtronic.

20

Income Taxes

        Under our income tax policy, we record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts recorded in the accompanying consolidated balance sheets, as well as operating loss and tax credit 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. During Q2 08, the Company has determined that it had overpaid $180 of its estimated state tax for fiscal 07. The Company recorded a recovery of income taxes in anticipation of filing of its annual state returns later this year.

Income Taxes

Under our income tax policy, we record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts recorded in the accompanying consolidated balance sheets, as well as operating loss and tax credit 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.

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.

Income Taxes

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

Income Taxes

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

Income Taxes

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

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 carryforwards. The evaluation of the recoverability of any tax assets recorded on the balance sheet is subject to significant judgment. We have provided valuation allowances for all our deferred tax assets to date.

Income Taxes

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

Income Taxes

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

Income Taxes

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

(3) Income Taxes

        The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates.

        The components of the net deferred tax asset recognized in the accompanying consolidated balance sheets with the approximate income tax effect of each type of temporary difference are as follows:

        The Company has recorded a valuation allowance equal to its net deferred tax asset due to the uncertainty of realizing the benefit of this asset. The uncertainty is due to current and projected net losses.

        At March 31, 2005, the Company had operating loss carryforwards available to offset future federal taxable income of approximately $51,000,000. These operating loss carryforwards expire at various dates through 2024 and are subject to review and possible adjustment by the Internal Revenue Service. At March 31, 2005, the Company had research and development tax credit carryforwards of approximately $402,000. These tax credits expire at various times through 2013 and are subject to review and possible adjustment by the Internal Revenue Service.

F-14

VISION-SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2005

(3) Income Taxes (Continued)

        The Internal Revenue Code limits the amount of net operating loss carryforwards that companies may use in any one year in the event of certain cumulative changes in ownership over a three-year period.

Income Taxes

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

Note 15—Income Taxes

A.

The Israeli tax is computed on the basis of the Company's results in nominal NIS determined for statutory purposes.

The Company is assessed for tax purposes under the Income Tax Law (Inflationary Adjustments 1985), the purpose of which is to prevent taxation on inflationary profits.

Tax benefits under the Law for the Encouragement of Capital Investments (1959):

The Company was awarded "Approved Enterprise" status by the government under the Law for the Encouragement of Capital Investments (1959) (hereinafter—the "Law").

The main benefits to which the Company will be entitled, if it meets all the requirements of the approved program, are tax exemption for a period of 10 years, commencing on the date taxable income is first generated by the Approved Enterprise (limited to the earlier of a maximum period of 12 years from commencing operations or 14 years from the date the approval letter was received). The Company would also be entitled to reduced taxes on income deriving from the Approved Enterprise in Yoqneam, and reduced tax rates on dividends originating from this income.

Dividend distributions originating from the income of the Approved Enterprise will be subject to tax at the rate of 15%, provided that the dividend is distributed during the period stipulated by the Law.

In the event of a dividend distribution (including withdrawals and charges that are deemed to be dividends) out of the income originating from the Approved Enterprise, and on which the Company received a tax exemption, income from which the dividend is distributed will be subject to corporate taxes at rates varying from 10%—25% depending on the percentage of foreign investment holding in the Company as defined by the Law.

Should the Company derive income from sources other than the Approved Enterprise during the relevant period of benefits, such income will be taxable at regular corporate tax rates (36%).

22

        3DV Systems Ltd.
(A development stage company)

Notes to the Consolidated Financial Statements (Continued)

Note 15—Income Taxes (Continued)

Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:

The Company is an "industrial company", as defined by this law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Inflationary Adjustments Law, the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes.

B.

As of the balance sheet date the Company accumulated losses for tax purposes are approximately US$ 19 million. These losses are linked to the Israeli Consumer Price Index and may be utilized against future taxable income.

Due to the Company's "Approved Enterprise" status and tax exemption as mentioned above, the Company established a 100% valuation allowance.

C.

The subsidiary is taxed under United States Federal and State tax rules.

In the year ended December 31, 2001, the subsidiary incurred income tax expense of US$ 6 thousand.

Income Taxes

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

Income Taxes

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