** **

**U. S.Securities and Exchange CommissionWashington, D.C.  20549**

## **Form10-QSB**

x                   **QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2006**

**For the transition period from               to                **

Commission file number     **0-28604**

**ENCISIONINC.**(Exact name of Registrant as specified in its charter)

| **Colorado**                     |   | **84-1162056**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

**6797 Winchester Circle, Boulder, Colorado**  **80301**(Address of principal executive offices)

**(303) 444-2600**(Registrant’s telephone number)

**Checkwhether the issuer (1) filed all reports required to be filed by Section 13 of15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.**

**Yes  ****x****   No  ****o**

**Indicateby checkmark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).**

**Yes  ****o****   No  ****x**

**State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:**

| **Common Stock, no par value** |   | **6,430,437  Shares**           |
|--------------------------------|--------|---------------------------------|
| Class                          |   | (outstanding at  July 31, 2006) |

 

**Transitional Small BusinessDisclosure Format**

**Yes****  ****o****   No  ****x**

 

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**ENCISIONINC.**

**FORM10-QSB**

**For theQuarter Ended June 30, 2006**

**INDEX**
| **PART I.**  | ** **    | **UNAUDITED FINANCIAL  INFORMATION** |                                                                                        |
|--------------|---------------|--------------------------------------|---------------------------------------------------------------------------------------------|
| ** **   | ** **    | ** **                           | ** **                                                                                  |   |
| ** **   | **ITEM 1**    | -                                    | Condensed  Interim Financial Statements:                                                    |   |
|         |          | -                                    | Condensed Balance Sheets  as of June 30, 2006 and March 31, 2006                            |   |
|         |          | -                                    | Condensed  Statements of Operations for the Three Months Ended June 30, 2006 and 2005       |   |
|         |          | -                                    | Condensed  Statements of Cash Flows for the Three Months Ended June 30, 2006 and 2005       |   |
|         |          | -                                    | Notes to  Condensed Interim Financial Statements                                            |   |
|         |          |                                 |                                                                                        |   |
| ** **   | **ITEM 2**    | -                                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|         |          |                                 |                                                                                        |   |
| ** **   | **ITEM 3**    | -                                    | Controls and  Procedures                                                                    |   |
| ** **   | ** **    |                                 |                                                                                        |   |
| **PART II.** | ** **    | **OTHER INFORMATION**                |                                                                                        |
| ** **   | ** **    | ** **                           | ** **                                                                                  |   |
| ** **   | **ITEM  6**   | -                                    | Exhibits                                                                                    |   |
| ** **   | ** **    |                                 |                                                                                        |   |
| ** **   | **SIGNATURE** |                                 |

 

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**PART I                  FINANCIAL INFORMATION**

**ITEM 1  ****-   CONDENSED INTERIM FINANCIAL STATEMENTS**

ENCISION INC.

CONDENSED BALANCE SHEETS
| ** **                                                                                                                              | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**          | ** ** | **2006**           | ** ** |
| ** **                                                                                                                              | ** ** | **(unaudited)**   | ** ** | **(audited)**      | ** ** |
| ASSETS                                                                                                                                  | ** ** | ** **        | ** ** | ** **         | ** ** |
| CURRENT ASSETS:                                                                                                                         |       |              |       |               |       |
| Cash and cash equivalents                                                                                                               |       | $                 | 1,098,539  |               | $          | 901,541 |   |
| Accounts receivable, net of allowance for doubtful accounts  of $23,500 and $38,000, respectively                                       |       | 1,073,552         |       | 942,494            |       |
| Inventory, net of reserve for obsolescence of  $75,000 and $70,000, respectively                                                        |       | 1,290,527         |       | 1,398,848          |       |
| Prepaid expenses                                                                                                                        |       | 214,467           |       | 81,828             |       |
| Total current  assets                                                                                                                   |       | 3,677,085         |       | 3,324,711          |       |
| EQUIPMENT, at cost:                                                                                                                     |       |              |       |               |       |
| Furniture, fixtures and equipment                                                                                                       |       | 973,559           |       | 935,899            |       |
| Customer-site equipment                                                                                                                 |       | 605,492           |       | 596,439            |       |
| Less - accumulated depreciation                                                                                                         |       | (1,261,469        | )          | (1,216,160         | )          |
| Equipment, net                                                                                                                          |       | 317,582           |       | 316,178            |       |
| PATENTS, net of  accumulated amortization of $95,379 and $92,339, respectively                                                          |       | 158,553           |       | 152,930            |       |
| OTHER ASSETS                                                                                                                            |       | 23,483            |       | 23,483             |       |
| Total assets                                                                                                                            |       | $                 | 4,176,703  |               | $          | 3,817,302 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                              |       |              |       |               |       |
| CURRENT LIABILITIES:                                                                                                                    |       |              |       |               |       |
| Accounts payable                                                                                                                        |       | $                 | 421,921    |               | $          | 299,766 |   |
| Accrued compensation                                                                                                                    |       | 207,176           |       | 228,913            |       |
| Other accrued liabilities                                                                                                               |       | 603,068           |       | 556,949            |       |
| Total current liabilities                                                                                                               |       | 1,232,165         |       | 1,085,628          |       |
| SHAREHOLDERS’ EQUITY:                                                                                                              |       |              |       |               |       |
| Preferred stock, no par value, 10,000,000 shares  authorized, no shares issued or outstanding                                           |       | —            |       | —             |       |
| Common stock, no par value, 100,000,000 shares  authorized, 6,430,437 (June 30, 2006) and 6,398,146 (Mar. 31, 2006) shares  outstanding |       | 19,030,160        |       | 18,920,885         |       |
| Accumulated (deficit)                                                                                                                   |       | (16,085,622       | )          | (16,189,211        | )          |
| Total shareholders’ equity                                                                                                         |       | 2,944,538         |       | 2,731,674          |       |
| Total  liabilities and shareholders’ equity                                                                                        |       | $                 | 4,176,703  |               | $          | 3,817,302 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

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ENCISION INC.

CONDENSED STATEMENTS OFOPERATIONS(Unaudited)
| ** **                                                                     | ** ** | **For the Three Months  Ended June 30, 2006** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                                    | ** ** | **2005** | ** ** |
| REVENUE, NET                                                                   |       | $                                                                           | 2,754,187  |   | $ | 2,288,628 |   |
| COST OF SALES                                                                  |       | 1,048,466                                                                   |       | 904,197 |   |
| Gross profit                                                                   |       | 1,705,721                                                                   |       | 1,384,431 |   |
| OPERATING EXPENSES:                                                            |       |                                                                        |       |   |   |
| Sales and marketing                                                            |       | 1,072,154                                                                   |       | 869,263 |   |
| General and administrative                                                     |       | 311,396                                                                     |       | 260,127 |   |
| Research and development                                                       |       | 225,109                                                                     |       | 240,792 |   |
| Total operating expenses                                                       |       | 1,608,659                                                                   |       | 1,370,182 |   |
| INCOME FROM  OPERATIONS                                                        |       | 97,062                                                                      |       | 14,249 |   |
| OTHER INCOME (EXPENSE):                                                        |       |                                                                        |       |   |   |
| Interest income                                                                |       | 8,410                                                                       |       | 6,408 |   |
| Other (expense), net                                                           |       | (1,883)                                                                     |       | (1,962) |   |
| NET INCOME                                                                     |       | $                                                                           | 103,589    |   | $ | 18,695 |   |
| NET INCOME PER SHARE:                                                          |       |                                                                        |       |   |   |
| Basic and diluted net income per common share                                  |       | $                                                                           | 0.02       |   | $ | 0.00 |   |
| Weighted average shares used in computing basic net  income per common share   |       | 6,399,744                                                                   |       | 6,316,605 |   |
| Weighted average  shares used in computing diluted net income per common share |       | 6,443,961                                                                   |       | 6,355,630 |   |

`

The accompanying notesare an integral part of these condensed financial statements.

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ENCISION INC.

CONDENSED STATEMENTS OFCASH FLOWS(Unaudited)
| ** **                                                                                    | ** ** | **For the Three Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                        |       |                                                              |       |   |   |
| Net income                                                                                    |       | $                                                                 | 103,589    |   | $ | 18,695 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities - |       |                                                              |       |   |   |
| Depreciation and amortization                                                                 |       | 48,349                                                            |       | 60,401 |   |
| Stock-based compensation expense related to stock  options                                    |       | 47,327                                                            |       | — |   |
| Provision for bad debts                                                                       |       | (14,500                                                           | )          | 6,000 |   |
| Inventory reserves                                                                            |       | 5,000                                                             |       | — |   |
| Changes in  operating assets and liabilities -                                                |       |                                                              |       |   |   |
| Accounts receivable                                                                           |       | (116,558                                                          | )          | (280,702 | ) |
| Inventory                                                                                     |       | 103,321                                                           |       | (154,977 | ) |
| Other assets                                                                                  |       | (132,639                                                          | )          | (31,252 | ) |
| Accounts payable                                                                              |       | 122,155                                                           |       | (40,460 | ) |
| Accrued compensation and other accrued liabilities                                            |       | 24,382                                                            |       | 117,718 |   |
| Net cash provided by (used in) operating activities                                           |       | 190,426                                                           |       | (304,577 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                        |       |                                                              |       |   |   |
| Investment in equipment                                                                       |       | (46,713                                                           | )          | (121,492 | ) |
| Patent costs                                                                                  |       | (8,663                                                            | )          | (7,398 | ) |
| Net cash (used in) investing activities                                                       |       | (55,376                                                           | )          | (128,890 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                        |       |                                                              |       |   |   |
| Proceeds from the exercise of stock options                                                   |       | 61,948                                                            |       | 75,791 |   |
| Net cash provided by financing activities                                                     |       | 61,948                                                            |       | 75,791 |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |       | 196,998                                                           |       | (357,676 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                                               |       | 901,541                                                           |       | 1,472,385 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                     |       | $                                                                 | 1,098,539  |   | $ | 1,114,709 |   |

 

The accompanying notesare an integral part of these financial statements.

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ENCISION INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

JUNE 30, 2006(Unaudited)

(1)    ORGANIZATION AND NATURE OF BUSINESS

Encision Inc. is amedical device company that designs, develops, manufactures and marketspatented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. We believe our patented AEM® surgical instrument technology is changing themarketplace for electrosurgical devices and instruments by providing a solutionto a patient safety risk in laparoscopic surgery. Our sales to date have beenmade principally in the United States.

We achievedprofitable operations in fiscal years 2004 and 2003. However, in each fiscalyear prior to 2003 and in fiscal years 2006 and 2005, we had incurred lossesand had an accumulated deficit of $16,085,622 at June 30, 2006. Operations havebeen financed primarily through issuance of common stock.

Our strategicmarketing and sales plan is designed to expand the use of our products insurgically active hospitals in the United States. We expect these efforts toresult in continued revenue increases for fiscal year 2007.

(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Thecondensed interim financial statements included herein have been prepared byus, without audit, pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to such rules andregulations, although we believe that the disclosures made are adequate to makethe information presented not misleading. The condensed interim financialstatements and notes thereto should be read in conjunction with the financialstatements and the notes thereto, included in our Annual Report to theSecurities and Exchange Commission for the fiscal year ended March 31, 2006,filed on Form 10-KSB on June 30, 2006.

Theaccompanying condensed interim financial statements have been prepared, in allmaterial respects, in conformity with the standards of accounting measurementsset forth in Accounting Principles Board Opinion No. 28 and reflect, in theopinion of management, all adjustments necessary to summarize fairly thefinancial position and results of operations for such periods in accordancewith accounting principles generally accepted in the United States ofAmerica.  All adjustments are of a normalrecurring nature. The results of operations for the most recent interim periodare not necessarily indicative of the results to be expected for the full year.

Useof Estimates in the Preparation of Financial Statements

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptions.Such estimates and assumptions affect the reported amounts of assets andliabilities as well as disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenue and expenseduring the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenuefrom product sales is recorded when we ship the product and title has passed tothe customer, provided that we have evidence of a customer arrangement and canconclude that collection is probable. Our shipping policy is FOB ShippingPoint. We recognize revenue from sales to stocking distributors when there isno right of return, other than for normal warranty claims. We have no ongoingobligations related to product sales, except for normal warranty.

Concentrationof Credit Risk

We have nosignificant off-balance sheet concentrations of credit risk such as foreignexchange contracts, options contracts or other foreign hedging arrangements. Wemaintain the majority of our cash balances with two financial institutions inthe form of demand deposits and money market funds.

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Accountsreceivable are typically unsecured and are derived from transactions with andfrom entities in the healthcare industry primarily located in the UnitedStates. Accordingly, we may be exposed to credit risk generally associated withthe healthcare industry. We maintain allowances for doubtful accounts forestimated losses resulting from the inability of our customers to make required payments.

The net accountsreceivable balance at June 30, 2006 of $1,073,552 included no more than 4% fromany one customer. The net accounts receivable balance at March 31, 2006 of$942,494 included no more than 4% from any one customer.

Inventories

Inventories arestated at the lower of cost (first-in, first-out basis) or market. We reduce inventory for estimated obsolete orunmarketable inventory equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions. If actual market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required. Inventoryconsisted of the following:

|                                  | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Raw materials                    |       | $                       | 874,549    |                     | $          | 869,571 |   |
| Finished goods                   |       | 490,978                 |       | 599,277                  |       |
|                             |       | 1,365,527               |       | 1,468,848                |       |
| Less - Reserve  for obsolescence |       | (75,000                 | )          | (70,000                  | )          |
|                             |       | $1,290,527              |       | $                        | 1,398,848  |   |
|                                  |            |                         |            |                          |            |  |  |

 

Accrued Liabilities

Wehave accrued $140,000 related to warranty claims, $127,242 related to salescommissions and $120,359 related to rent normalization and have included theseamounts in accrued liabilities in the accompanying balance sheets as of June30, 2006.

Research and Development Expenses

Weexpense research and development costs for products and processes as incurred.

Stock-Based Compensation Expense

OnApril 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options basedon estimated fair values. SFAS 123(R) supersedes our previous accounting underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”) for periods beginning in fiscal year 2007. In March 2005,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107(“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107in its adoption of SFAS 123(R).

Wehave adopted SFAS 123(R) using the modified prospective transition method,which requires the application of the accounting standard as of April 1, 2006,the first day of our fiscal year 2007. Our financial statements as of and forthe three months ended June 30, 2006 reflect the impact of SFAS 123(R). Inaccordance with the modified prospective transition method, our financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R). Stock-based compensation expense recognizedunder SFAS 123(R) for the three months ended June 30, 2006 was $47,327 whichconsisted of stock-based compensation expense related to employee stock options.There was no stock-based compensation expense related to employee stock optionsduring the three months ended June 30, 2006.

SFAS123(R) requires companies to estimate the fair value of share-based paymentawards on the date of grant using an option-pricing model. The value of theportion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in our Statement of Operations.Prior to the adoption of SFAS 123(R), we accounted for stock-based awards toemployees and directors using the intrinsic value method in accordance with APB25 as allowed under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method,no stock-based compensation expense had been recognized in our Statement ofOperations because the exercise price of our stock options granted to employeesand directors equaled the fair market value of the underlying stock at the dateof grant.

Stock-basedcompensation expense recognized during the period is based on the value of theportion of share-based payment awards that is ultimately expected to vestduring the period. Stock-based compensation expense recognized in our Statementof Operations 

7

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forthe first quarter of fiscal year 2007 included compensation expense forshare-based payment awards granted prior to, but not yet vested as of June 30,2006 based on the grant date fair value estimated in accordance with the proforma provisions of SFAS 123 and compensation expense for the share-basedpayment awards granted subsequent to July 30, 2005 based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123(R). Compensationexpense for all share-based payment is recognized using the straight-linesingle-option method. As stock-based compensation expense recognized in theStatement of Operations for the first quarter of fiscal year 2007 is based onawards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. In our pro forma information required under SFAS123 for the periods prior to fiscal year 2007, we accounted for forfeitures asthey occurred.

Uponadoption of SFAS 123(R), we continued to use the Black-Scholes option-pricingmodel (“Black-Scholes model”) which was previously used for our pro formainformation required under SFAS 123. Our determination of fair value ofshare-based payment awards on the date of grant using an option-pricing modelis affected by our stock price as well as assumptions regarding a number ofhighly complex and subjective variables. These variables include, but are not limitedto our expected stock price volatility over the term of the awards, and actualand projected employee stock option exercise behaviors. Although the fair valueof employee stock options is determined in accordance with SFAS 123(R) and SAB107 using an option-pricing model, that value may not be indicative of the fairvalue observed in a willing buyer/willing seller market transaction.

OnNovember 10, 2005, the Financial Accounting Standards Board (“FASB”) issuedFASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accountingfor Tax Effects of Share-Based Payment Awards.” We have elected to adopt thealternative transition method provided in the FASB Staff Position forcalculating the tax effects of stock-based compensation pursuant to SFAS123(R). The alternative transition method includes simplified methods toestablish the beginning balance of the additional paid-in capital pool (“APICpool”) related to the tax effects of employee stock-based compensation, and todetermine the subsequent impact on the APIC pool and Statements of Cash Flowsof the tax effects of employee stock-based compensation awards that areoutstanding upon adoption of SFAS 123(R).

Segment Reporting

We have concludedthat we have one operating segment.

Basic and Diluted Income and Loss per Common Share

Net income or lossper share is calculated in accordance with SFAS No. 128, “Earnings Per Share” (“SFASNo. 128”). Under the provisions of SFAS No. 128, basic net income or loss percommon share is computed by dividing net income or loss for the period by theweighted average number of common shares outstanding for the period. Dilutednet income or loss per common share is computed by dividing the net income orloss for the period by the weighted average number of common and potentialcommon shares outstanding during the period if the effect of the potentialcommon shares is dilutive.

For the threemonth period ended June 30, 2006, we had currently-exercisable stock optionsoutstanding that could create future dilution to our common shareholders andare not currently classified as our outstanding common shares. The common stocknumber is based on specific conversion or issuance assumptions pursuant to thecorresponding terms of each instrument. Potential stock issuance excluded fromearnings per share because their effect was anti-dilutive was 441,509 for thethree months ended June 30, 2006.

The following is atable that reconciles the numerators and denominators of the basic and dilutedearnings per share:
| ** **                                                                 | ** ** | **For the Three Months Ended:** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **June 30, 2006**                         | ** ** | **June 30, 2005** | ** ** |
| ** **                                                                 | ** ** | **Income  (Numerator)**                             | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
| Net income                                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic EPS Income  available to common stockholders                         |       | $                                                   | 103,589    |   | 6,399,744 |   | $ | 0.02 |   | $ | 18,695 |   | 6,316,605 |   | $ | 0.00 |   |
| Effect of  Dilutive Securities Stock Options                               |       | —                                              |       | 44,217 |   |   |   | — |   | 39,025 |   |   |   |
| Diluted EPS Income  available to common stockholders + dilutive securities |       | $                                                   | 103,589    |   | 6,443,961 |   | $ | 0.02 |   | $ | 18,695 |   | 6,355,630 |   | $ | 0.00 |   |

 

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(3)    COMMITMENTS AND CONTINGENCIES

We currently leaseour facilities under noncancelable lease agreements through August 14, 2009 at6797 Winchester Circle, Boulder, Colorado. The minimum future lease paymentswhich are as follows as of June 30, 2006:
| Year ended March 31, | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2007                                |       | 115,634    |       |
| 2008                                |       | 166,930    |       |
| 2009                                |       | 172,685    |       |
| 2010                                |       | 65,566     |       |
|                                |       | $520,815   |       |

 

Weare subject to regulation by the United States Food and Drug Administration (“FDA”).The FDA provides regulations governing the manufacture and sale of our productsand regularly inspects us and other manufacturers to determine their compliancewith these regulations. As of June 30, 2006 we believe we were in substantialcompliance with all known regulations. FDA inspections are conductedperiodically at the discretion of the FDA. We were last inspected in May 2004and were notified of six potential deficiencies from that inspection, none ofwhich we believe to be material.

Theresults of operations for the quarter ended June 30, 2006 should not be takenas an indication of the results of operations for all or any part of thebalance of the year.

(4)    VALUATION AND EXPENSE INFORMATION UNDER SFAS123(R)

On April 1, 2006, we adoptedSFAS 123(R), which requires the measurement and recognition of compensationexpense for all share-based payment awards made to our employees and directorsincluding employee stock options based on estimated fair values. The followingtable summarizes stock-based compensation expense related to employee stockoptions and employee stock purchases under SFAS 123(R) for the three monthsended June 30, 2006 which was allocated as follows:

|                                                                  | ** ** | **Three Months Ended  June 30, 2006** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Sales and  marketing                                             |       | $                                                         | 10,588     |   |
| General and  administrative                                      |       | 28,240                                                    |       |
| Research and  development                                        |       | 8,499                                                     |       |
| Stock-based  compensation expense included in operating expenses |       | $                                                         | 47,327     |   |

 

There was no stock-basedcompensation expense recognized for the three months ended June 30, 2005.

The table below reflects netincome and diluted net income per share for the three months ended June 30,2006 compared with the pro forma information for the three months ended June30, 2005 as follows:

|                                                                                                  | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Net income—as  reported for the prior period (1)                                            |       | N/A                                                 |       | $ | 18,695 |   |
| Stock-based  compensation expense related to employee stock options (2)                     |       | $                                                   | 47,327     |   | $ | 54,209 |   |
| Net income,  including the effect of stock-based compensation expense (3)                   |       | $                                                   | 103,589    |   | $ | (35,514 | ) |
| Diluted net  income per share—as reported for the prior period (1)                     |       | N/A                                                 |       | $ | 0.00 |   |
| Diluted net income per  share, including the effect of stock-based compensation expense (3) |       | $                                                   | 0.02       |   | $ | (0.01 | ) |

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(1)             Netincome and net income per share prior to fiscal year 2007 did not includestock-based compensation expense for employee stock options under SFAS 123because we did not adopt the recognition provisions of SFAS 123. 

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(2)             Stock-basedcompensation expense prior to fiscal year 2007 is calculated based on the proforma application of SFAS 123. 

(3)             Netincome and net income per share prior to fiscal year 2007 represents pro formainformation based on SFAS 123. 

Upon adoption of SFAS 123(R)and prior to the adoption of SFAS 123(R), the value of each employee stockoption was estimated on the date of grant using the Black-Scholes model for thepurpose of financial information in accordance with SFAS 123.

The use of a Black-Scholesmodel requires the use of actual employee exercise behavior data and the use ofa number of assumptions including expected volatility, risk-free interest rateand expected dividends. The weighted-average estimated value of employee stockoptions granted during the three months ended June 30, 2006 was $1.95 per shareusing the Black-Scholes model with the following weighted-average assumptions:
| Expected volatility      |   | 63.1 | % |
|--------------------------|--------|------|---|
| Risk-free  interest rate |   | 5.0  | % |
| Expected dividends       |   | 0.0  | % |

 

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**ITEM 2 - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

Certain statementscontained in this section on Management’s Discussion and Analysis are nothistorical facts, including statements about our strategies and expectationsabout new and existing products, market demand, acceptance of new and existingproducts, technologies and opportunities, market and industry segment growth,and return on investments in products and markets. These statements are forwardlooking statements within the meaning of the Private Securities LitigationReform Act of 1995 and involve substantial risks and uncertainties that maycause actual results to differ materially from those indicated by the forwardlooking statements. All forward looking statements in this section onManagement’s Discussion and Analysis are based on information available to uson the date of this document, and we assume no obligation to update suchforward looking statements. Readers of this Form 10-QSB are strongly encouragedto review the section entitled *“Risk Factors.”*

**General**

Encision Inc., amedical device company based in Boulder, Colorado, has developed and launchedinnovative technology that is emerging as a standard of care inminimally-invasive surgery. We believe our patented AEM® Surgical Instruments are changing themarketplace for electrosurgical devices and laparoscopic instruments byproviding a solution to a well documented patient safety risk in laparoscopicsurgery.

We were founded toaddress market opportunities created by the increase in minimally-invasivesurgery (“MIS”) and surgeons’ preference for using electrosurgery devices inthese procedures. The product opportunity was created by surgeons’ continuedwidespread demand for using monopolar electrosurgery instruments which, whenused in laparoscopic surgery, are susceptible to causing inadvertent collateraltissue damage outside the surgeon’s field of view. The risk of unintendedelectrosurgical burn injury to the patient in laparoscopic surgery has beenwell documented. This risk poses a threat to patient safety and createsliability exposure for surgeons and hospitals that do not adequately addressthe issue.

Our patented AEMtechnology provides surgeons with the desired tissue effects, while preventingstray electrosurgical energy that can cause unintended and unseen tissueinjury. AEM Laparoscopic Instruments are equivalent to conventional instrumentsin functionality but they incorporate “active electrode monitoring” technologyto dynamically and continuously monitor the flow of electrosurgical current,thereby helping to prevent patient injury. With our “shielded and monitored”instruments, surgeons are able to perform electrosurgical procedures moresafely and effectively than is possible using conventional instruments. Inaddition, our AEM instruments are cost competitive with conventional “non-shielded,non-monitored” instruments. The result is advanced patient safety at comparablecost and with no change in surgeon technique.

AEM technology hasbeen recommended and endorsed by sources from all groups involved inminimally-invasive surgery. Surgeons, nurses, biomedical engineers, themedicolegal community, malpractice insurance carriers and electrosurgicaldevice manufacturers advocate the use of AEM technology. Recommendations fromthe malpractice insurance and medicolegal communities complement the broadclinical endorsements AEM technology has garnered over the past few years.

Adding furthercredibility to the benefits of our AEM technology are our supplier agreementswith Novation and Premier, two of the largest Group Purchasing Organizations(GPO) in the United States. Together, Novation and Premier represent over 3,000hospitals which perform over 50% of all surgery in the U.S. We believe thatthese GPO supplier agreements give further indication that AEM technology isgaining broader acceptance in the market. We believe that having the nation’sleading medical purchasing groups recognize the value of our technologyreflects the potential impact that AEM products can have in the market and inadvancing patient safety in surgery nationwide. These agreements do not involvepurchase commitments, but we expect these relationships to expand the marketvisibility of AEM technology and smooth the procurement process for newhospital customers.

We have focusedour marketing strategies to date on expanding the market awareness of the AEMtechnology and our broad independent endorsements, and have continued effortsto improve and expand the AEM product line. Accordingly, we are currentlyfocusing on modernizing our accepted AEM instruments to include ergonomics anduser functionalities for which surgeons have been expressing a preference.During fiscal year 2006, we announced enTouchTM,an ergonomically-designed handle for our articulating instruments, and furthernew additions to the AEM product line are planned for introduction in fiscalyear 2007.

When a hospitalchanges to AEM technology it provides us recurring revenue from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital has changed. Thereplacement market of reusable and disposable AEM products in changed hospitalsrepresents over 90% of Encision’s revenue over the past three months and thisrevenue stream is expected to grow as the base of newly changed hospitalscontinues to grow. In addition, we intend to develop disposable versions ofmore of our AEM products in order to meet market demands and expand our revenueopportunities.

We achievedprofitable operations in fiscal years 2004 and 2003. However, in each fiscalyear prior to 2003 and in fiscal years 2006 and 2005, we incurred losses andhad an accumulated deficit of $16,085,622 at June 30, 2006. Operations have beenfinanced primarily through issuance of common stock.

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During the threemonths ended June 30, 2006, we provided $190,426 of cash from our operationsand used $46,713 for investments in equipment. As of June 30, 2006, we had$1,098,539 in cash and cash equivalents available to fund future operations, anincrease of $196,998 from March 31, 2006. Our working capital was $2,444,920 atJune 30, 2006.

**HistoricalPerspective**

We were organized in 1991 and spent several years developing the AEMmonitoring system and protective sheaths to adapt to conventionalelectrosurgical instruments. During this period, we conducted product trialsand applied for patents with the United States Patent Office and withinternational patent agencies. Patents were issued to us in 1994, 1996, 1997,1998 and 2002.

As we evolved, itbecame clear to us that our ‘active electrode monitoring’ technology needed tobe integrated into the standard laparoscopic instrument design. As thedevelopment program proceeded, it also became apparent that the merging ofelectrical and mechanical engineering skills in the instrument developmentprocess for our patented, integrated electrosurgical instruments was a complexand difficult task. As a result, instruments with integrated AEM technologywere not completed for several years. Prior to offering a full range oflaparoscopic electrosurgical instrumentation, it was difficult for hospitals tocommit to the AEM solution, as we did not have adequate comparable surgicalinstrument options to match what surgeons demanded. As of fiscal year 2001, asufficiently broad product line was available to provide hospital operatingrooms with AEM instruments in most of the designs common for laparoscopicsurgery.

The launch of anexpanded line of AEM instruments was accomplished over the past two years. Weare now turning our focus to developing next generation versions of our AEMinstruments to better meet market demands, particularly demand for improvedergonomics and simplified user functionalities. This coincides with theindependent endorsements for our AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements that AEM technology has garnered over the past few years. Duringfiscal year 2006, we announced the introduction of enTouch, anergonomically-designed handle for our articulating instruments, and further newadditions to the AEM product line are planned for introduction in fiscal year2007.

**Outlook**

*InstalledBase of AEM Monitoring Equipment*:  We believe that the installed base of AEMmonitors has the potential for increasing as the inherent risks associated withmonopolar laparoscopic electrosurgery become more widely acknowledged and as wefocus on increasing our sales efficiency. We expect that the replacement salesof electrosurgical instruments and accessories will increase as additionalhospitals adopt AEM technology. We anticipate that the efforts to improve thequality of sales representatives carrying the AEM product line, along withincreased marketing efforts and the introduction of next generation products,may provide the basis for increased revenue and returning to profitableoperations. However these measures, or any others that we may adopt, may notresult in either increased revenue or returning to profitable operations.Furthermore, most of our next generation products are in the early stages ofdevelopment. Further additions to theAEM product line are planned for introduction in fiscal year 2007.

Webelieve the unique performance of the AEM technology and our breadth ofindependent endorsements provides an opportunity for continued market sharegrowth. In our view, market awareness and clinical credibility of the AEMtechnology, as well as awareness of our endorsements are continually improving,and we expect that this will benefit our sales efforts for the remainder offiscal year 2007. Our objective in the remainder of fiscal year 2007 is tomaintain expense controls while optimizing sales execution in the field, expandmarket awareness of the AEM technology and maximize the number of additionalhospital accounts to AEM instruments, while retaining existing hospitalcustomers. In addition, acceptance of AEM products depends on surgeons’preference for our instruments, which depends on factors such as ergonomics andease of use in addition to the technological advantage of AEM products. Ifsurgeons prefer other instruments to our instruments, our business results willsuffer.

*Possibilityof Continued Operating Losses*:  We achieved profitable operations in fiscalyears 2004 and 2003. However, in fiscal years prior to 2003 and in fiscal years2006 and 2005 we incurred losses and had an accumulated deficit of $16,085,622at June 30, 2006. We have made strides toward improving our operating results.Due to the ongoing need to develop, optimize and train the direct salesmanagers and the independent sales representative network, the need to supportdevelopment of refinements to our product line and the need to increase sustainedrevenues to a level adequate to cover fixed and variable operating costs, wemay operate at a net loss from time to time. Sustained losses, or our inabilityto generate sufficient cash flow from operations to fund our obligations, mayresult in a need to raise additional capital.

*RevenueGrowth*:  We expect togenerate increased revenue in the U.S. from sales to new hospital customers andexpanded sales in existing hospitals as the network of direct and independentsales representatives become more efficient. We believe that the visibility andcredibility of the independent clinical endorsements for AEM technology willcontribute to new hospital accounts and increase revenues in fiscal year 2007. We also expect that supplier agreementswith Novation and Premier, which together represent over 3,000 U.S. hospitalswill expose more hospitals to the benefits of AEM technology and may stimulatenew hospital accounts and increased revenues. We also expect to increase marketshare through promotional programs of placing our AEM monitors at no chargeinto hospitals that commit to standardize on AEM instruments. However, all ofthese efforts to increase market share and grow revenues 

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will depend inpart on our ability to expand the efficiency and effective coverage range ofour direct and independent sales representatives.

We also havelonger term initiatives in place to improve our prospects.  We expect that development of next generationversions of our AEM products will better position our products in the marketplaceand improve our retention rate at hospitals that have changed to AEMtechnology, enabling us to grow our revenue. Wemay also explore overseas markets to assess opportunities for revenue growthinternationally. Finally, we intend to explore opportunities tocapitalize on our proven AEM technology via licensing arrangements andstrategic alliances. These efforts to generate additional revenue and furtherthe market penetration of our products are longer term in nature and may notmaterialize. Even if we are able to successfully develop next generationproducts or identify potential international markets or strategic partners, wemay not be able to capitalize on these opportunities.

*GrossProfit and Gross Margins*: Gross profit and gross margin can be expected to fluctuate from quarterto quarter, as a result of product sales mix and sales volume. Gross margins onproducts manufactured or assembled by us are expected to improve at higherlevels of production and sales.

*Sales andMarketing Expenses*: We continue our efforts to expanddomestic and international distribution capability, and we believe that sales and marketing expenses will decrease as apercentage of net revenue with increasing sales volume.

*Researchand Development Expenses*: Researchand development expenses are expected to increase modestly to supportdevelopment of refinements to our AEM product line, further expanding theinstrument options for surgeons. Further additions to the AEM productline are planned for introduction in fiscal year 2007.

**Resultsof Operations**

*For the three months ended June30, 2006 compared to the three months ended June 30, 2005.*

*Net revenue.*  Revenue for the quarter ended June 30, 2006,was $2,754,187 compared to $2,288,628 for the quarter ended June 30, 2005, anincrease of 20%. The increase is attributable to the addition of new hospitalaccounts, partially offset by business lost from hospitals that previouslychanged to AEM technology. We opened thirteen new hospital accounts to AEMtechnology in the three months ended June 30, 2006 versus twelve new hospitalaccounts for AEM technology in the three months ended June 30, 2005. Newhospital prospects remain strong and we have seen an increased rate of newhospital accounts during the past three months. We have changed and added newsales managers and independent sales representatives in an effort to capitalizeon identified market opportunities. It will take a number of months before newsales managers and new independent sales representatives generate new hospital accounts,but we expect that the combination of these new additions will provide thefocus that is needed to achieve market gains.

*Gross profit*.  Gross profit for the quarter endedJune 30, 2006 of $1,705,721 represented an increase of 23% from gross profit forthe quarter ended June 30, 2005 of $1,384,431. Gross profit as a percentage ofrevenue (gross margin) increased from 60.5% for the quarter ended June 30, 2005to 62% for the quarter ended June 30, 2006. Theincrease in gross margin was primarily the result of higher levels ofproduction, while the manufacturing process became more efficient compared withone year ago. For the three months ended June 30, 2006, we provided$9,053 in AEM monitors at no charge to newly changed hospitals as part of asales incentive program.

*Sales and marketing expenses*.  Sales and marketing expenses of $1,072,154for the quarter ended June 30, 2006 represented an increase of 23% from salesand marketing expenses of $869,263 for the quarter ended June 30, 2005. The increase was a result of  increased compensation for increased salesemployees, increased commissions as a result of higher revenue and increasedoutside services.

*Generaland administrative expenses*. General and administrative expenses of $311,396 for the quarter endedJune 30, 2006 represented an increase of 20% from general and administrativeexpenses of $260,127 for the quarter ended June 30, 2005. The increase wasprimarily the result of an increase instock-based compensation expense, which was not required to be recognized inthe prior year’s quarterly results, and increased compensation. The increasewas partially reduced by changes in the allowance for doubtful accounts.

*Researchand development expenses*. Research and development expenses of $225,109 for the quarter ended June30, 2006 represented a decrease of 18% compared to $240,792 for the quarterended June 30, 2005. The decrease was a result of decreased compensation anddecreased test and prototype materials cost.

*Netincome.  *Net incomewas $103,589 for the quarter ended June 30, 2006 compared to net income of$18,695 for the quarter ended June 30, 2005. The increase was a result ofincreased revenue and increased gross margin.

**Liquidityand Capital Resources**

To date, operatingfunds have been provided primarily by sales of common stock and warrants topurchase our common stock, which totaled $19,030,160 through June 30, 2006,and, to a lesser degree by funds provided by sales of our products.

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Our operationsprovided $190,426 of cash in the three months ended June 30, 2006 on sales of$2,754,187. Prior to fiscal year 2003 and in fiscal years 2006 and 2005, theuse of cash in our operations resulted primarily from the funding of annual netlosses. These amounts of cash generated from and used in operations are notindicative of the expected cash to be generated from or used in operations infiscal year 2007. As of June 30, 2006, we had $1,098,539 in cash and cashequivalents available to fund future operations. Working capital was $2,444,920at June 30, 2006 compared to $2,239,083 at March 31, 2006. Current liabilitieswere $1,232,165 at June 30, 2006, compared to $1,085,628 at March 31, 2006.

If we are notsuccessful in obtaining profitability and positive cash flow, additionalcapital may be required to maintain ongoing operations. We have explored andare continuing to explore options to provide additional financing to fundfuture operations as well as other possible courses of action. Such actionsinclude, but are not limited to, securing a line of credit, sales of debt orequity securities (which may result in dilution to existing shareholders),licensing of technology, strategic alliances and other similar actions. Therecan be no assurance that we will be able to obtain additional funding (if needed)through a sale of our common stock or loans from financial institutions orother third parties or through any of the actions discussed above. If we cannotsustain profitable operations and additional capital is unavailable, lack ofliquidity could have a material adverse effect on our business viability,financial position, results of operations and cash flows.

We lease ourfacilities under a noncancelable lease agreement, the minimum future leasepayments which are as follows as of June 30, 2006:
| Year ended March 31, | ** ** | ** ** | ** **  |
|-------------------------------------|------------|------------|-------------|
| 2007                                |       | 115,634    |        |
| 2008                                |       | 166,930    |        |
| 2009                                |       | 172,685    |        |
| 2010                                |       | 65,566     |        |
| ** **                          | ** ** | **$**      | **520,815** | ** ** |
|                                     |            |            |             |  |

 

Capitalexpenditures in the three months ended June 30, 2006 ($46,713) include thecapitalization ($9,053) of AEM monitors placed in hospitals under variouspromotional programs. Placing Company-owned AEM monitors into hospitals at nocharge to facilitate their use of AEM instruments is an initiative toaccelerate new hospital accounts to AEM instruments. Under these promotionalprograms we maintain ownership of the AEM monitor and the cost is capitalizedand depreciated as cost of sales over the projected five year life of theasset.

Our fiscal year2007 operating plan is focused on increasing new hospital accounts to AEMproducts, retaining existing hospital customers, growing revenue, increasinggross profits and conserving cash. We also are investing in research anddevelopment efforts to develop next generation versions of the AEM productline. We can not predict with certainty the expected revenue, gross profit, netincome or loss and usage of cash and cash equivalents for fiscal year 2007.However, we believe that our cash resources will be sufficient to fund ouroperations for at least the next twelve months. If we are unable to manage ourbusiness operations in line with budget expectations, it could have a materialadverse effect on our business viability, financial position, results ofoperations and cash flows. If we are not successful in achieving profitabilityand positive cash flow, additional capital may be required to maintain ongoingoperations.

**Income Taxes**

As of March 31,2006, net operating loss carryforwards totaling approximately $16,500,000 areavailable to reduce taxable income in the future. The net operating loss carryforwardsexpire, if not previously utilized, at various dates beginning in the fiscalyear ended March 31, 2008. We have not paid income taxes since our inception.The Tax Reform Act of 1986 and other income tax regulations contain provisionswhich may limit the net operating loss carryforwards available to be used inany given year, if certain events occur, including changes in ownershipinterests. We have established a valuation allowance for the entire amount ofour deferred tax asset since inception due to our history of losses. Should weachieve sufficient, sustained income in the future, we may conclude that someor all of the valuation allowance should be reversed. If some or all of thevaluation allowance were reversed, then, to the extent of the reversal, a taxbenefit would be recognized which would result in an increase to income.

## **CriticalAccounting Policies and Estimates**

Our discussion and analysis of our financial condition and results ofoperations are based upon our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to baddebts, inventories, sales returns, warranty, contingencies and litigation. Webase our estimates on historical experience and on various other 

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assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accountingpolicies affect the more significant judgments and estimates used in thepreparation of our financial statements.

We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances would berequired, which would increase our expenses during the periods in which anysuch allowances were made. The amount recorded as a provision for bad debts ineach period is based upon our assessment of the likelihood that we will be paidon our outstanding receivables, based on customer-specific as well as generalconsiderations. To the extent that our estimates prove to be too high, and weultimately collect a receivable previously determined to be impaired, we mayrecord a reversal of the provision in the period of such determination.

We provide for the estimated cost of product warranties at the timerevenue is recognized. While we engage in extensive product quality programsand processes, including actively monitoring and evaluating the quality of ourcomponent suppliers, we have experienced some costs related to warranty. Thewarranty accrual is based upon historical experience and is adjusted based oncurrent experience. Should actual warranty experience differ from ourestimates, revisions to the estimated warranty liability would be required.

We reduce inventory for estimated obsolete or unmarketable inventoryequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions. Ifactual market conditions are less favorable than those projected by management,additional inventory write-downs may be required. Any write-downs of inventorywould reduce our reported net income during the period in which suchwrite-downs were applied. To the extent that our estimates prove to be toohigh, and we ultimately utilize or sell inventory previously determined to beimpaired, we may record a reversal of the provision in the period of suchdetermination.

We recognizedeferred income tax assets and liabilities for the expected future income taxconsequences, based on enacted tax laws, of temporary differences between thefinancial reporting and tax bases of assets and liabilities. Deferred taxassets are then reduced, if deemed necessary, by a valuation allowance for theamount of any tax benefits which, more likely than not based on currentcircumstances, are not expected to be realized. Should we achieve sufficient,sustained income in the future, we may conclude that all or some of thevaluation allowance should be reversed.

We depreciate ourproperty and equipment primarily on a double-declining basis over the estimateduseful life of the asset, generally three to five years. Our owned,customer-site AEM Monitors are depreciated on a double-declining basis for aperiod of 5 years. Leasehold improvements are depreciated over the shorter ofthe remaining lease term or the estimated useful life of the asset. Maintenanceand repairs are expensed as incurred and major additions, replacements andimprovements are capitalized.

We amortize our patent costs over their estimated useful lives, which istypically the remaining statutory life. From time to time, we may be requiredto adjust these lives based on advances in technology, competitor actions, andthe like. We review the recorded amounts of patents at each period end todetermine if their carrying amount is still recoverable based on ourexpectations regarding sales of related products. Such an assessment, in thefuture, may result in a conclusion that the assets are impaired, with acorresponding charge against earnings.

**Risk Factors**

We wish to caution you that there are risks anduncertainties that could cause our actual results to be materially differentfrom those indicated by forward-looking statements that we make from time totime in filings with the Securities and Exchange Commission, news releases,reports, proxy statements, registration statements and other writtencommunications, as well as oral forward-looking statements made from time totime by our representatives. These risks and uncertainties include, but are notlimited to, those listed in our Annual Report on Form 10-KSB for the year endedMarch 31, 2006. These risks and uncertainties and additional risks anduncertainties not presently known to us or that we currently deem immaterialmay cause our business, financial condition, operating results and cash flowsto be materially adversely affected. Except for the historical informationcontained herein, the matters discussed in this analysis are forward lookingstatements that involve risks and uncertainties, including but not limited togeneral business conditions and other factors which are often beyond ourcontrol. We do not undertake any obligation to update forward-lookingstatements except as required by law.

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**ITEM 3  ****-   CONTROLS AND PROCEDURES**

(a) We havecarried out an evaluation under the supervision and with the participation ofour management, including our Chief Executive Officer and Principal Accountingand Financial Officer, of the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-14(c) and 15d-14c of the Securities andExchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, theChief Executive Officer and the Principal Accounting and Financial Officerconcluded as of June 30, 2006 that our disclosure controls and procedures wereeffective in ensuring that information required to be disclosed by our underthe Exchange Act was recorded, processed, summarized and reported within thetime periods specified under the Exchange Act rules and forms.

(b) During thequarter ended June 30, 2006, there were no changes in our internal control overfinancial reporting or in other factors that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting, nor were there any significant deficiencies or material weaknessesin such disclosure controls and procedures or internal control over financialreporting requiring corrective actions. As a result no corrective actions weretaken.

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**PART II.           OTHERINFORMATION**

**ITEM****6**   -         EXHIBITS

31.1  Certificationof Chief Executive Officer under Rule 13a-14(a)

31.2  Certificationof Principal Financial and Accounting Officer under Rule 13a-14(a)

32.1  Certificationof Periodic Reports pursuant to Sarbanes-Oxley Act of 2002

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**SIGNATURE**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon our behalf by the undersigned thereunto duly authorized.

 
| Name                | ** ** | **Title**                                                        | ** ** | **Date**        |
|---------------------|------------|------------------------------------------------------------------|------------|-----------------|
|                |       |                                                             |       |            |
| /s/ Marcia McHaffie |       | Controller                                                       |       |            |
| Marcia McHaffie     |       | Principal Accounting  Officer &  Principal Financial Officer |       | August 11, 2006 |
|                |       |                                                             |       |            |
|                |       |                                                             |       |            |

 

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