**U. S. Securities and ExchangeCommission**

**Washington,D.C.  20549**

## **Form 10-QSB**

| **x****  QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                        |
| **For the  quarterly period ended June 30, 2007**                                                                                                                                                                 |
|                                                                                                                                                                                                              |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934.**                                                                                                   |
| ** **                                                                                                                                                                                                        |
| **For the  transition period from                 to               ** |
| ** **                                                                                                                                                                                                        |
| **Commission  file number 0-28604**                                                                                                                                                                               |

 

**ENCISION INC.**

(Exact name of small business issuer as specified in its charter)

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

 

**6797Winchester Circle, Boulder, Colorado**  **80301**

(Address of principal executive offices)

**(303) 444-2600**

(Issuer’s telephone number)

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 of 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes     x     No     o

Indicate by checkmark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     o     No     x

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date:

|       | **Common Stock, no par  value** | ** **                      | ** ** | ** ** | **6,435,437 Shares** | ** ** |
|-------|---------------------------------|---------------------------------|------------|------------|----------------------|------------|
| Class |                            | (outstanding at  July 31, 2007) |

 

Transitional SmallBusiness Disclosure Format

Yes     o     No     x

 

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**ENCISION INC.**

**FORM 10-QSB**

**For the Quarter Ended June 30, 2007**

**INDEX**
| **PART I.**  | ** **            | **UNAUDITED FINANCIAL  INFORMATION** |                                                                                       |
|--------------|-----------------------|--------------------------------------|--------------------------------------------------------------------------------------------|
| ** **   | ** **            | ** **                           |                                                                                       |
| ** **   | **ITEM 1**            | -                                    | Condensed  Interim Financial Statements :                                                  |   |
|         |                  | -                                    | Condensed Balance Sheets  as of June 30, 2007 and March 31, 2007                           |   |
|         |                  | -                                    | Condensed  Statements of Operations for the Three Months Ended June 30, 2007 and 2006      |   |
|         |                  | -                                    | Condensed  Statements of Cash Flows for the Three Months Ended June 30, 2007 and 2006      |   |
|         |                  | -                                    | Notes to  Condensed Interim Financial Statements                                           |   |
|         |                  |                                 |                                                                                       |   |
| ** **   | **ITEM 2**            | -                                    | Management’s  Discussion and Analysisof Financial Condition and Results of Operations |   |
|         |                  |                                 |                                                                                       |   |
| ** **   | **ITEM 3**            | -                                    | Controls and  Procedures                                                                   |   |
| ** **   | ** **            |                                 |                                                                                       |   |
| ** **   | ** **            |                                 |                                                                                       |   |
| **PART II.** | **OTHER INFORMATION** |                                 |
| ** **   | ** **            |                                 |
| ** **   | **ITEM  6**           | -                                    | Exhibits                                                                                   |   |
| ** **   | ** **            |                                 |                                                                                       |   |
| ** **   | **SIGNATURE**         |                                 |

 

2

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**PART I****                  FINANCIAL INFORMATION**

**ITEM 1    –    CONDENSEDINTERIM FINANCIAL STATEMENTS**

**Encision Inc.**

**Condensed Balance Sheets**
| ** **                                                                                                                                                                                           | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(unaudited)**             | ** ** | **(audited)**                | ** ** |
| **ASSETS**                                                                                                                                                                                           | ** ** |                        | ** ** |                         | ** ** |
| Current assets:                                                                                                                                                                                      |       |                        |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                                           |       | $                           | 88,444     |                         | $          | 436,403 |   |
| Accounts  receivable, net of allowance for doubtful account of $34,000 at June 30, 2007  and $23,500 at March 31, 2007                                                                               |       | 1,113,324                   |       | 1,194,373                    |       |
| Inventories, net  of reserve for obsolescence of $80,000 at June 30, 2007 and March 31, 2007                                                                                                         |       | 1,934,983                   |       | 1,764,227                    |       |
| Prepaid expenses                                                                                                                                                                                     |       | 149,001                     |       | 241,872                      |       |
| Total current  assets                                                                                                                                                                                |       | 3,285,752                   |       | 3,636,875                    |       |
| Equipment, at cost:                                                                                                                                                                                  |       |                        |       |                         |       |
| Furniture,  fixtures and equipment                                                                                                                                                                   |       | 1,146,814                   |       | 1,084,260                    |       |
| Customer-site  equipment                                                                                                                                                                             |       | 613,836                     |       | 612,553                      |       |
| Equipment-in-progress                                                                                                                                                                                |       | 398,323                     |       | 233,357                      |       |
| Accumulated  depreciation                                                                                                                                                                            |       | (1,453,416                  | )          | (1,413,656                   | )          |
| Equipment, net                                                                                                                                                                                       |       | 705,557                     |       | 516,514                      |       |
| Patents, net of  accumulated amortization of $107,535 at June 30, 2007 and $104,496 at March  31, 2007                                                                                               |       | 177,024                     |       | 153,066                      |       |
| Other assets                                                                                                                                                                                         |       | 74,632                      |       | 81,195                       |       |
| **TOTAL  ASSETS**                                                                                                                                                                                    |       | $                           | 4,242,965  |                         | $          | 4,387,650 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                       | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Current liabilities:                                                                                                                                                                                 |       |                        |       |                         |       |
| Accounts payable                                                                                                                                                                                     |       | $                           | 772,210    |                         | $          | 620,814 |   |
| Accrued  compensation                                                                                                                                                                                |       | 191,780                     |       | 295,994                      |       |
| Other accrued  liabilities                                                                                                                                                                           |       | 597,713                     |       | 547,345                      |       |
| Total current  liabilities                                                                                                                                                                           |       | 1,561,703                   |       | 1,464,153                    |       |
| **Commitments and contingencies**                                                                                                                                                                    | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Shareholders’ equity:                                                                                                                                                                           |       |                        |       |                         |       |
| Preferred stock,  no par value: 10,000,000 shares authorized; none issued and outstanding                                                                                                            |       | —                      |       | —                       |       |
| Common stock and  additional paid-in capital, no par value: 100,000,000 shares authorized;  6,435,437 and 6,430,437 shares issued and outstanding at June 30, 2007 and  March 31, 2007, respectively |       | 19,255,909                  |       | 19,202,785                   |       |
| Accumulated  (deficit)                                                                                                                                                                               |       | (16,574,647                 | )          | (16,279,288                  | )          |
| Total  shareholders’ equity                                                                                                                                                                     |       | 2,681,262                   |       | 2,923,497                    |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                 |       | $                           | 4,242,965  |                         | $          | 4,387,650 |   |

 

Theaccompanying notes to financial statements are an integral part of thesecondensed statements.

3

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**Encision Inc.**

**Condensed Statements ofOperationsUnaudited**
| **Three Months Ended**                     | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **NET  SALES**                                       |       | $                           | 2,659,271  |                        | $          | 2,754,187 |   |
| **COST OF  SALES**                                   |       | 1,030,952                   |       | 1,048,466                   |       |
| **GROSS  PROFIT**                                    |       | 1,628,319                   |       | 1,705,721                   |       |
| **OPERATING  EXPENSES:**                             | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Sales and marketing                                  |       | 1,213,857                   |       | 1,072,154                   |       |
| General and administrative                           |       | 372,438                     |       | 311,396                     |       |
| Research and development                             |       | 330,171                     |       | 225,109                     |       |
| Total operating expenses                             |       | 1,916,466                   |       | 1,608,659                   |       |
| **OPERATING  INCOME (LOSS)**                         |       | (288,147                    | )          | 97,062                      |       |
| Interest income (expense), net                       |       | (4,861                      | )          | 8,410                       |       |
| Other expense, net                                   |       | (2,351                      | )          | (1,883                      | )          |
| Interest and other income (expense), net             |       | (7,212                      | )          | 6,527                       |       |
| **INCOME  (LOSS) BEFORE PROVISION FOR INCOME TAXES** |       | (295,359                    | )          | 103,589                     |       |
| Provision for  income taxes                          |       | —                      |       | —                      |       |
| **NET  INCOME (LOSS)**                               |       | $                           | (295,359   | )                           | $          | 103,589 |   |
| Net income  (loss) per share—basic and diluted  |       | $                           | (0.05      | )                           | $          | 0.02 |   |
| Weighted average  shares—basic                  |       | 6,432,096                   |       | 6,399,744                   |       |
| Weighted average  shares—diluted                |       | 6,432,096                   |       | 6,443,961                   |       |

 

Theaccompanying notes to financial statements are an integral part of thesecondensed statements.

4

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**Encision Inc.**

**Condensed Statements ofCash FlowsUnaudited**
| **Three months ended**                                                      | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Cash flows from  operating activities:                                                |       |                        |       |                        |       |
| Net income (loss)                                                                     |       | $                           | (295,359   | )                           | $          | 103,589 |   |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                        |       |                        |       |
| Depreciation and amortization                                                         |       | 42,799                      |       | 48,349                      |       |
| Stock-based compensation expense related to stock  options                            |       | 38,874                      |       | 47,327                      |       |
| Stock-based interest expense related to warrants                                      |       | 3,127                       |       | —                      |       |
| Provision for doubtful accounts, net                                                  |       | 10,500                      |       | (14,500                     | )          |
| Provision for inventory obsolescence                                                  |       | —                      |       | 5,000                       |       |
| Change in operating assets and liabilities:                                           |       |                        |       |                        |       |
| Accounts receivable                                                                   |       | 70,549                      |       | (116,558                    | )          |
| Inventories                                                                           |       | (170,756                    | )          | 103,321                     |       |
| Prepaid expenses and other assets                                                     |       | 96,306                      |       | (132,639                    | )          |
| Accounts payable                                                                      |       | 151,396                     |       | 122,155                     |       |
| Accrued compensation and other accrued liabilities                                    |       | (53,846                     | )          | 24,382                      |       |
| Net cash provided by (used in) operating activities                                   |       | (106,410                    | )          | 190,426                     |       |
| Cash flows from  investing activities:                                                |       |                        |       |                        |       |
| Acquisition of property and equipment                                                 |       | (228,803                    | )          | (46,713                     | )          |
| Patent costs                                                                          |       | (26,996                     | )          | (8,663                      | )          |
| Net cash used in investing activities                                                 |       | (255,799                    | )          | (55,376                     | )          |
| Cash flows from  financing activities:                                                |       |                        |       |                        |       |
| Proceeds from the exercise of stock options                                           |       | 14,250                      |       | 61,948                      |       |
| Net cash provided by financing activities                                             |       | 14,250                      |       | 61,948                      |       |
| Net increase  (decrease) in cash and cash equivalents                                 |       | (347,959                    | )          | 196,998                     |       |
| Cash and cash  equivalents, beginning of fiscal year                                  |       | 436,403                     |       | 901,541                     |       |
| Cash and cash  equivalents, end of fiscal year                                        |       | $                           | 88,444     |                        | $          | 1,098,539 |   |

 

Theaccompanying notes to financial statements are an integral part of thesecondensed statements.

5

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ENCISION INC.

NOTES TO CONDENSED INTERIMFINANCIAL STATEMENTS

JUNE30, 2007

(Unaudited)

(1)       ORGANIZATIONAND NATURE OF BUSINESS

EncisionInc. is a medical device company that designs, develops, manufactures andmarkets patented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. We believe that our patented AEM® surgical instrument technology ischanging the marketplace for electrosurgical devices and instruments byproviding a solution to a patient safety risk in laparoscopic surgery. Oursales to date have been made principally in the United States.

Weachieved profitable operations in fiscal years 2004 and 2003. However, in eachfiscal year prior to 2003 and in fiscal years 2005, 2006 and 2007, we incurredlosses and had an accumulated deficit of $16,574,647 at June 30, 2007.Operations have been financed primarily through the issuance of our commonstock.

Ourstrategic marketing and sales plan is designed to expand the use of ourproducts in surgically active hospitals in the United States. We expect theseefforts to result in continued sales increases for fiscal year 2008.

(2)       SUMMARYOF 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, 2007,filed on Form 10-KSB on June 28, 2007.

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 28 and reflect, in the opinionof management, all adjustments necessary to summarize fairly the financialposition and results of operations for such periods in accordance withaccounting principles generally accepted in the United States of America.  All adjustments are of a normal recurringnature. The results of operations for the most recent interim period are notnecessarily indicative of the results to be expected for the full year.

Use of Estimates in the Preparation of FinancialStatements

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires us to make estimates andassumptions. Such estimates and assumptions affect the reported amounts ofassets and liabilities as well as disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofsales and expense during the reporting period. Actual results could differ fromthose estimates.

Sales Recognition

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

Concentration of Credit Risk

Wehave no significant off-balance sheet concentrations of credit risk such asforeign exchange contracts, options contracts or other foreign hedgingarrangements. We maintain the majority of our cash balances with two financialinstitutions in the form of demand deposits and money market funds.

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 

6

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industry.We maintain allowances for doubtful accounts and for estimated losses resultingfrom the inability of our customers to makerequired payments.

Thenet accounts receivable balance at June 30, 2007 of $1,113,324 included no morethan 5% from any one customer. The net accounts receivable balance at March 31,2007 of $1,194,373 included no more than 3% from any one customer.

Inventories

Inventoriesare stated 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,  2007** | ** ** | **March 31,  2007** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | ** **               | ** ** |
| Raw materials                    |       | $                       | 1,151,285  |                     | $          | 1,166,607 |   |
| Finished goods                   |       | 863,698                 |       | 677,620                  |       |
|                             |       | 2,014,983               |       | 1,844,227                |       |
| Less - Reserve  for obsolescence |       | (80,000                 | )          | (80,000                  | )          |
|                             |       | $                       | 1,934,983  |                     | $          | 1,764,227 |   |

AccruedLiabilities

Wehave accrued $100,000 related to warranty claims, $94,968 related to salescommissions and $88,298 related to rent normalization and have included theseamounts in accrued liabilities in the accompanying condensed balance sheet asof June 30, 2007. We have accrued $100,000 related to warranty claims, $136,128related to sales commissions and $96,822 related to rent normalization and haveincluded these amounts in accrued liabilities in the accompanying condensedbalance sheet as of March 31, 2007.

Property and Equipment

Propertyand equipment are stated at cost, with depreciation computed over the estimateduseful lives of the assets, generally three to seven years. Prior to fiscalyear 2008, we utilized the double-declining method of depreciation for propertyand equipment due to the expected usage of the property and equipment overtime. This method is expected to continue throughout the life of the equipment.Manufacturing and production equipment acquired, but not depreciated, in fiscalyear 2007 and manufacturing and production equipment acquired after fiscal 2007is a different technology and we will utilize the straight-line method ofdepreciation for this and other property and equipment starting April 1, 2007.This difference in depreciation methods utilized for manufacturing andproduction equipment is based on the technological differences of the equipmentand does not constitute a change in accounting principle.

Income Taxes 

Theprovision for income taxes is based on our estimated annualized effective taxrate for the year. Effective April 1, 2007, we adopted the provisions ofFASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109.” FIN 48provides detailed guidance for the financial statement recognition, measurementand disclosure of uncertain tax positions recognized in the financialstatements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not”recognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. Upon the adoption of FIN 48, we had nounrecognized tax benefits. During the first quarter of 2007, we recognized noadjustments for uncertain tax benefits.

Deferredincome tax assets are adjusted by a valuation allowance, if necessary, torecognize future tax benefits only to the extent, based on available evidence,it is more likely than not such benefits will be realized. We recognizeinterest and penalties, if any, related to uncertain tax positions in generaland administrative expenses. No interest and penalties related touncertain tax positions were accrued at June 30, 2007. We expect nomaterial changes to unrecognized tax positions within the next twelve months.

Research and DevelopmentExpenses

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

Stock-BasedCompensation Expense

OnApril 1, 2006, we adopted Statement of Financial Accounting Standards 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 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 107 (“SAB107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in ouradoption of SFAS 123(R).

7

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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, 2007 and 2006 reflect the impact of SFAS123(R). In accordance with the modified prospective transition method, ourfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R). Stock-based compensation expenserecognized under SFAS 123(R) for the three months ended June 30, 2007 was$38,874 which consisted of stock-based compensation expense related to employeestock options. Stock-based compensation expense related to employee stockoptions during the three months ended June 30, 2006 was $47,327.

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 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method wedid not recognize stock-based compensation expense 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. The stock-based compensation expense recognized in ourStatement of Operations for the first quarter of fiscal year 2007 includedcompensation expense for share-based payment awards granted prior to, but notyet vested as of June 30, 2007, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS 123 and the compensationexpense for the share-based payment awards granted subsequent to July 30, 2005,which are also based on the grant date fair value estimated in accordance withthe provisions of SFAS 123(R). Compensation expense for all share-based paymentis recognized using the straight-line, single-option method. As stock-basedcompensation expense recognized in the Statement of Operations for the thirdquarter of fiscal year 2007 is based on awards ultimately expected to vest, ithas been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. In our pro formainformation required under SFAS 123 for the periods prior to fiscal year 2007,we accounted for forfeitures as they occurred.

Uponadoption of SFAS 123(R), we continued to use the Black-Scholes option-pricingmodel (“Black-Scholes model”) which we 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 notlimited to, our expected stock price volatility over the term of the awards andactual and projected employee stock option exercise behaviors. Although thefair value of employee stock options is determined in accordance with SFAS123(R) and SAB 107 using an option-pricing model, that value may not beindicative of the fair value observed in a willing buyer/willing seller markettransaction.

OnNovember 10, 2005, the Financial Accounting Standards Board (“FASB”) issuedFASB Staff Position FAS 123(R)-3 “Transition Election Related to Accounting forTax 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

Wehave concluded that we have one operating segment.

Basic and Diluted Income andLoss per Common Share

Netincome or loss per share is calculated in accordance with SFAS 128, “EarningsPer Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net income orloss per common share is computed by dividing net income or loss for the periodby the weighted average number of common shares outstanding for the period.Diluted net income or loss per common share is computed by dividing the netincome or loss for the period by the weighted average number of common andpotential common shares outstanding during the period, if the effect of thepotential common shares is dilutive.

Forthe three month period ended June 30, 2007, we had currently-exercisable stockoptions outstanding that could create future dilution to our commonshareholders and are not currently classified as outstanding common shares. Ourcommon stock number is based on specific conversion or issuance assumptionspursuant to the corresponding terms of each instrument. Potential stockissuance is excluded from earnings per share because its effect isanti-dilutive was 415,000 and 441,509 for the three months ended June 30, 2007and 2006, respectively.

Thefollowing is a table that reconciles the numerators and denominators of thebasic and diluted earnings per share:

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| ** **                                                                        | ** ** | **For the Three Months Ended:** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **June 30, 2007**                         | ** ** | **June 30, 2006** | ** ** |
| ** **                                                                        | ** ** | **Income   (Loss)  (Numerator)**               | ** ** | ** Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** | **Income   (Loss)  (Numerator)** | ** ** | ** Shares  (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
| Net income  (loss)                                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic EPS Income  (loss) available to common stockholders                         |       | $                                                   | (295,359   | ) | 6,432,096 |   | $ | (0.05 | ) | $ | 103,589 |   | 6,399,744 |   | $ | 0.02 |   |
| Effect of  Dilutive Securities Stock Options                                      |       | —                                              |       | — |   |   |   | — |   | 44,217 |   |   |   |
| Diluted EPS Income (loss)  available to common stockholders + dilutive securities |       | $                                                   | (295,359   | ) | 6,432,096 |   | $ | (0.05 | ) | $ | 103,589 |   | 6,443,961 |   | $ | 0.02 |   |

 

(3)       COMMITMENTS AND CONTINGENCIES

Wecurrently lease our facilities located at 6797 Winchester Circle, Boulder,Colorado under noncancelable lease agreements through August 14, 2009. Theminimum future lease payments as of June 30, 2007 were as follows:
| Year ended March 31, | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | 181,027    |       |
| 2009                                |       | 249,691    |       |
| 2010                                |       | 94,804     |       |
|                                |       | $          | 525,522    |   |
|                                     |            |            |            |  |

InMay 2007, we entered into an equipment lease with General Electric CapitalCorporation. The minimum future lease payments by fiscal year are as follows:
| Year ended March 31, | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 76,405     |   |
| 2009                                |       | 101,873    |       |
| 2010                                |       | 101,873    |       |
| 2011                                |       | 101,873    |       |
| 2012                                |       | 101,873    |       |
| 2013                                |       | 101,873    |       |
| 2014                                |       | 8,488      |       |
|                                |       | $          | 594,258    |   |

 

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 compliance withthese regulations. We believe that we were in substantial compliance with allknown regulations as of June 30, 2007. FDA inspections are conductedperiodically at the discretion of the FDA.

Theresults of operations for the quarter ended June 30, 2007 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 INFORMATIONUNDER SFAS 123(R)

On April 1, 2006, we adopted SFAS 123(R), whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to our employees and directors includingemployee stock options based on estimated fair values. The following tablesummarizes stock-based compensation expense related to employee stock optionsand employee stock purchases under SFAS 123(R) for the three months ended June30, 2007 which was allocated as follows:
|                                                                 | ** ** | **Three Months Ended  June 30, 2007** | ** ** | **Three Months Ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Sales and  marketing                                            |       | $                                                         | 9,944      |                                                      | $          | 10,588 |   |
| General and  administrative                                     |       | 24,806                                                    |       | 28,240                                                    |       |
| Research and  development                                       |       | 4,124                                                     |       | 8,499                                                     |       |
| Stock-based  compensation expense included inoperating expenses |       | $                                                         | 38,874     |                                                      | $          | 47,327 |   |

 

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The Black-Scholes modelrequires the use of actual employee exercise behavior data and the applicationof a number of assumptions, including expected volatility, risk-free interestrate and expected dividends. No employee stock options were granted during thethree months ended June 30, 2007.

Asof June 30, 2007, $361,000 of total unrecognized compensation costs related tononvested stock is expected to be recognized over a weighted-average period ofthree years.

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**ITEM 2****       ****-****         ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Certain statements contained in this section on Management’s Discussionand Analysis are not historical facts, including statements about ourstrategies and expectations about new and existing products, market demand,acceptance of new and existing products, technologies and opportunities, marketand industry segment growth, and return on investments in products and markets.These statements are forward looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and involve substantial risksand uncertainties that may cause actual results to differ materially from thoseindicated by the forward looking statements. All forward looking statements inthis section on Management’s Discussion and Analysis are based on informationavailable to us on the date of this document, and we assume no obligation toupdate such forward looking statements. Readers of this Form 10-QSB arestrongly encouraged to review the section entitled *“RiskFactors”*in our Form 10-KSB for the year ended March 31, 2007.

**General**

EncisionInc., a medical device company based in Boulder, Colorado, has developed andlaunched innovative technology that is emerging as a standard of care inminimally-invasive surgery. We believe that our patented AEM® Surgical Instruments are changingthe marketplace for electrosurgical devices and laparoscopic instruments byproviding a solution to a well documented patient safety risk in laparoscopicsurgery.

Wewere founded to address market opportunities created by the increase inminimally-invasive surgery (“MIS”) and surgeons’ preference for usingelectrosurgery devices in these procedures. The product opportunity was createdby surgeons’ continued widespread demand for using monopolar electrosurgeryinstruments, which, when used in laparoscopic surgery, are susceptible tocausing inadvertent collateral tissue damage outside the surgeon’s field ofview. The risk of unintended electrosurgical burn injury to the patient inlaparoscopic surgery has been well documented. This risk poses a threat topatient safety and creates liability exposure for surgeons and hospitals thatdo not adequately address the issue.

Ourpatented AEM technology provides surgeons with the desired tissue effects,while preventing stray electrosurgical energy that can cause unintended andunseen tissue injury. AEM Laparoscopic Instruments are equivalent toconventional instruments in functionality, but they incorporate “activeelectrode monitoring” technology to dynamically and continuously monitor theflow of electrosurgical current, thereby helping to prevent patient injury.With our “shielded and monitored” instruments, surgeons are able to performelectrosurgical procedures more safely and effectively than when usingconventional instruments. In addition, our AEM instruments are cost competitivewith conventional “non-shielded, non-monitored” instruments. The result isadvanced patient safety at comparable cost and with no change in surgeontechnique.

AEMtechnology has been recommended and endorsed by sources from all groupsinvolved in minimally-invasive surgery. Surgeons, nurses, biomedical engineers,the medicolegal 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.

Addingfurther credibility to the benefits of our AEM technology are our supplieragreements with Novation and Premier, two of the largest Group PurchasingOrganizations (GPOs) in the United States. Together, Novation and Premierrepresent over 3,000 hospitals which perform over 50% of all surgery in theU.S. We believe that these GPO supplier agreements give further indication thatAEM technology is gaining broader acceptance in the market. We believe thathaving the nation’s leading medical purchasing groups recognize the value ofour technology reflects the potential impact that AEM products can have in themarket and in advancing patient safety in surgery nationwide. These agreementsdo not involve purchase commitments, but we expect these relationships toexpand the market visibility of AEM technology and to ease the procurementprocess for new hospital customers.

Wehave focused our marketing strategies to date on expanding the market awarenessof the AEM technology and our broad independent endorsements and have continuedefforts to improve and expand the AEM product line. Accordingly, we arecurrently focusing on modernizing our accepted AEM instruments to includeergonomics and user functionalities for which surgeons have been expressing apreference. During fiscal year 2006, we announced enTouchTM, an ergonomically-designed handle for our articulatinginstruments, and we plan to introduce new additions to the AEM product line infiscal year 2008.

Whena hospital changes to AEM technology, we receive recurring sales from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital switches to our products.The replacement market of reusable and disposable AEM products in hospitalsthat use our AEM technology represents over 90% of Encision’s sales over thepast three months. This sales stream is expected to grow as the base ofhospitals that switch to AEM technology continues to grow. In addition, weintend to develop disposable versions of more of our AEM products in order tomeet market demands and expand our sales opportunities.

Weachieved profitable operations in fiscal years 2004 and 2003. However, in eachfiscal year prior to 2003 and in fiscal years 2005, 2006 and 2007, we incurredlosses and had an accumulated deficit of $16,574,647 at June 30, 2007.Operations have been financed primarily through the issuance of our commonstock.

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Duringthe three months ended June 30, 2007, we used $106,410 of cash in ouroperations and used $228,803 for investments in equipment. As of June 30, 2007,we had $88,444 in cash and cash equivalents available to fund futureoperations, a decrease of $347,959 from March 31, 2007. Our working capital was$1,724,049 at June 30, 2007.

**Historical Perspective**

We were organized in 1991 and spent several yearsdeveloping the AEM monitoring system and protective sheaths to adapt toconventional electrosurgical instruments. During this period, we conductedproduct trials and applied for patents with the United States Patent Office andinternational patent agencies. Patents were issued to us in 1994, 1996, 1997,1998 and 2002.

Aswe evolved, it became clear to us that our AEM technology needed to beintegrated into the standard laparoscopic instrument design. As the developmentprogram proceeded, it also became apparent that the merging of electrical andmechanical engineering skills in the instrument development process for ourpatented, integrated electrosurgical instruments was a complex and difficulttask. As a result, instruments with integrated AEM technology were notcompleted for several years. Prior to offering a full range of laparoscopicelectrosurgical instrumentation, it was difficult for hospitals to commit tothe AEM solution, as we did not have adequate comparable surgical instrument optionsto match what surgeons demanded. As of fiscal year 2001, a sufficiently broadproduct line was available to provide hospital operating rooms with AEMinstruments in most of the designs common for laparoscopic surgery.

The launch of an expanded line of AEM instruments was accomplished overthe past two years. We are now turning our focus to developing next generationversions of our AEM instruments to better meet market demands, particularly thedemand for improved ergonomics and simplified user functionalities. Thisstrategy coincides with the independent endorsements of our AEM technology.Recommendations from the malpractice insurance and medicolegal communitiescomplement the broad clinical endorsements that AEM technology has garneredover the past few years.

**Outlook**

*InstalledBase of AEM Monitoring Equipment*:  We believe that the installedbase of AEM monitors has the potential for increasing sales as the inherentrisks associated with monopolar laparoscopic electrosurgery become more widelyacknowledged and as we focus on increasing our sales efficiency. We expect thatthe replacement sales of electrosurgical instruments and accessories willincrease as additional hospitals adopt AEM technology. We anticipate that theefforts to improve the quality of sales representatives carrying the AEMproduct line, along with increased marketing efforts and the introduction ofnext generation products, may provide the basis for increased sales andmaintaining profitable operations. However, these measures, or any others thatwe may adopt, may not result in either increased sales or maintainingprofitable operations. Furthermore, most of our next generation products are inthe early stages of development. Furtheradditions to the AEM product line are planned for introduction in fiscal year2008.

Webelieve that 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 awareness to the clinical credibilityof the AEM technology, as well as awareness of our endorsements, arecontinually improving, and we expect this awareness to benefit our salesefforts for the remainder of fiscal year 2008. Our objective in the remainderof fiscal year 2008 is to maintain expense controls while optimizing salesexecution in the field, to expand market awareness of the AEM technology and tomaximize the number of additional hospital accounts switching to AEMinstruments while retaining existing hospital customers. In addition,acceptance of AEM products depends on surgeons’ preference for our instruments,which depends on factors such as ergonomics and ease of use in addition to thetechnological advantage of AEM products. If surgeons prefer other instrumentsto our instruments, our business results will suffer.

*Possibilityof Operating Losses*:  We achieved profitable operations in fiscalyears 2004 and 2003. However, in each fiscal year prior to 2003 and in fiscalyears 2005, 2006 and 2007, we incurred losses and had an accumulated deficit of$16,574,647 at June 30, 2007. We have made strides toward improving ouroperating results. Due to the ongoing need to develop, optimize and train thedirect sales managers and the independent sales representative network, theneed to support the development of refinements to our product line, and theneed to increase sustained sales to a level adequate to cover fixed andvariable operating costs, we may operate at a net loss from time to time.Sustained losses, or our inability to generate sufficient cash flow fromoperations to fund our obligations, may result in a need to raise additionalcapital.

*SalesGrowth*:  We expect to generate increased sales in theU.S. from sales to new hospital customers and from expanded sales in existinghospitals as our network of direct and independent sales representativesbecomes more efficient. We believe that the visibility and credibility of theindependent clinical endorsements for AEM technology will contribute to newhospital accounts and increase sales in fiscal year 2008. We also expect that supplier agreements with Novation andPremier, which together represent over 3,000 U.S. hospitals, will expose morehospitals to the benefits of AEM technology and may stimulate new hospitalaccounts. We also expect to increase market share through promotional programsof placing our AEM monitors at no charge into hospitals that commit tostandardize AEM instruments. However, all of these efforts to increase marketshare and grow sales will depend in part on our ability to expand theefficiency and effective coverage range of our direct and independent salesrepresentatives.

Wealso have longer 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 themarketplace and improve our retention rate at hospitals that have changed toAEM technology, enabling us to grow our sales. We may also explore overseas markets to assess opportunities for sales growthinternationally. Finally, we intend to explore opportunities tocapitalize on our proven AEM technology via licensing 

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arrangementsand strategic alliances. These efforts to generate additional sales 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 margins can beexpected to fluctuate from quarter to quarter, as a result of product sales mixand sales volume. Gross margins on products manufactured or assembled by us areexpected to improve at higher levels of production and sales.

*Salesand Marketing Expenses*:We continue our efforts to expand domestic and international distributioncapability, and we believe that sales andmarketing expenses will decrease as a percentage of net sales with increasingsales volume.

*Researchand Development Expenses*:Research and development expenses areexpected to increase modestly to support development of refinements to our AEMproduct line, which will further expand the instrument options for surgeons.

**Results of Operations**

*For thethree months ended June 30, 2007 compared to the three months ended June 30,2006.*

*Net sales.*  Net sales for thequarter ended June 30, 2007, was $2,659,271 compared to $2,754,187 for thequarter ended June 30, 2006, a decrease of 3%. The decrease is attributable tothe decrease in hospitals orders for reusable instruments compared to ordersplaced one year ago and the addition of new hospital accounts, partially offsetby business lost from hospitals that previously changed to AEM technology. Weopened twelve new hospital accounts for AEM technology in the three monthsended June 30, 2007 versus thirteen new hospital accounts for AEM technology inthe three months ended June 30, 2006. We have changed and added new salesmanagers and independent sales representatives in an effort to capitalize onidentified market opportunities. It will take a number of months before newsales managers and new independent sales representatives generate new hospitalaccounts, but we expect that the combination of these new additions willprovide the focus that is needed to achieve market gains.

*Gross profit*.  Gross profit for the quarter ended June 30, 2007 of $1,628,319represented a decrease of 5% from gross profit of $1,705,721 for the quarterended June 30, 2006. Gross profit as a percentage of sales (gross margins)decreased from 62% for the quarter ended June 30, 2006 to 61% for the quarterended June 30, 2007. The decrease in grossmargins was primarily the result of higher overhead costs.

*Sales and marketing expenses*.  Sales and marketing expenses of$1,213,857 for the quarter ended June 30, 2007 represented an increase of 13%from sales and marketing expenses of $1,072,154 for the quarter ended June 30,2006. The increase was a result of increasedcompensation for additional sales employees and increases in training andtravel expenses. The increase in such cost was partially offset by decreasedcommissions for independent sales representatives.

*General and administrative expenses*. General and administrative expenses of $372,438 for the quarter endedJune 30, 2007 represented an increase of 20% from general and administrativeexpenses of $311,396 for the quarter ended June 30, 2006. The increase wasprimarily the result of an increase in the allowance for doubtful accounts andlegal fees.

*Research and development expenses*. Research and development expenses of $330,171 for the quarter ended June30, 2007 represented an increase of 47% compared to $225,109 for the quarterended June 30, 2006. The increase was a result of employing additionalengineers and outside services.

*Netincome (loss).  *Net loss was $295,359 for the quarter endedJune 30, 2007 compared to net income of $103,589 for the quarter ended June 30,2006. The loss was a result of a slight decrease in sales and increasedoperating expenses.

**Liquidity and Capital Resources**

Todate, operating funds have been provided primarily by sales of our common stockand of warrants to purchase our common stock, which together totaled$19,255,909 through June 30, 2007, and, to a lesser degree, by funds providedby sales of our products.

OnNovember 10, 2006, we entered into a credit facility agreement with SiliconValley Bank. The terms of the credit facility include a line of credit for$2,000,000 for three years at an interest rate calculated at prime rate plus1.25%. In connection with the credit facility, we issued warrants to SiliconValley Bank to purchase 28,000 shares of our common stock at a per share priceof $2.75. Our borrowing under the credit facility is limited by our eligiblereceivables and inventory at the time of borrowing. As of June 30, 2007, nofunds have been borrowed from this facility.

Ouroperations used $106,410 of cash in the threemonths ended June 30, 2007 on net sales of $2,659,271. Prior to fiscalyear 2003 and in fiscal years 2005, 2006 and 2007, the use of cash in ouroperations resulted primarily from the funding of annual net losses. Theseamounts of cash generated from and used in operations are not indicative of theexpected cash to be generated from or used in operations in fiscal year 2008.For the three months ended June 30, 2007, we invested $228,803 in theacquisition of property and equipment, of which $164,966 was for manufacturingequipment and associated costs (equipment-in-progress). As of June 30, 2007, wehad $88,444 in cash and cash equivalents available to fund future operations.Working 

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capitalwas $1,724,049 at June 30, 2007 compared to $2,172,722 at March 31, 2007.Current liabilities were $1,561,703 at June 30, 2007, compared to $1,464,153 atMarch 31, 2007.

Ifwe are not successful in obtaining profitability and positive cash flow,additional capital may be required to maintain ongoing operations. We haveexplored and are continuing to explore options to provide additional financingto fund future operations as well as other possible courses of action. Suchactions include, but are not limited to, securing further lines of credit,sales of debt or equity securities (which may result in dilution to existingshareholders), licensing of technology, strategic alliances and other similaractions. There can be no assurance that we will be able to obtain additionalfunding (if needed) through a sale of our common stock, loans from financialinstitutions or other third parties, or any of the actions discussed above. Ifwe cannot sustain profitable operations, and additional capital is unavailable,lack of liquidity could have a material adverse effect on our businessviability, financial position, results of operations and cash flows.

Welease our facilities under a noncancelable lease agreement with minimum futurelease payments as of June 30, 2007 as follows:
| Year ended March 31, | ** ** | ** **     | ** ** |
|-------------------------------------|------------|----------------|------------|
| 2007                                |       | 38,545         |       |
| 2008                                |       | 166,930        |       |
| 2009                                |       | 172,685        |       |
| 2010                                |       | 65,566         |       |
|                                |       | $ 443,726 |       |

 

In May 2007, we entered into an equipment lease withGeneral Electric Capital Corporation. The minimum future lease payments byfiscal year are as follows:
| Year ended March 31, | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 76,405     |   |
| 2009                                |       | 101,873    |       |
| 2010                                |       | 101,873    |       |
| 2011                                |       | 101,873    |       |
| 2012                                |       | 101,873    |       |
| 2013                                |       | 101,873    |       |
| 2014                                |       | 8,488      |       |
|                                |       | $          | 594,258    |   |

 

Ourfiscal year 2008 operating plan is focused on increasing new hospital accounts,retaining existing hospital customers, growing sales, increasing gross profitsand conserving cash. We are investing in research and development efforts todevelop next generation versions of the AEM product line. We are also investingin manufacturing property and equipment to manufacture disposable scissorsinserts internally and reduce our cost of sales. We cannot predict withcertainty the expected sales, gross profit, net income or loss and usage ofcash and cash equivalents for fiscal year 2008. However, we believe that ourcash resources and credit facility will be sufficient to fund our operationsfor at least the next twelve months. If we are unable to manage our businessoperations in line with budget expectations, it could have a material adverseeffect on our business viability, financial position, results of operations andcash flows. If we are not successful in achieving profitability and positivecash flow, additional capital may be required to maintain ongoing operations.

**Income Taxes**

Asof March 31, 2007, net operating loss carryforwards totaling approximately$16,400,000 are available to reduce taxable income in the future. The netoperating loss carryforwards expire, if not previously utilized, at variousdates beginning in the fiscal year ended March 31, 2008. We have not paidincome taxes since our inception. The Tax Reform Act of 1986 and other incometax regulations contain provisions which may limit the net operating losscarryforwards available to be used in any given year if certain events occur,including changes in ownership interests. We have established a valuationallowance for the entire amount of our deferred tax asset since inception dueto our history of losses. Should we achieve sufficient, sustained income in thefuture, we may conclude that some or all of the valuation allowance should bereversed. If some or all of the valuation allowance were reversed, then, to theextent of the reversal, a tax benefit would be recognized which would result inan increase to income.

## **CriticalAccounting Policies and Estimates**

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, sales and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to bad debts, inventories, sales returns, warranty, contingenciesand litigation. We base our estimates on historical experience and on variousother 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.

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We maintain allowances for doubtful accounts forestimated losses resulting from the inability of our customers to make requiredpayments. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances would be required, which would increase our expenses during theperiods in which any such allowances were made. The amount recorded as aprovision for bad debts in each period is based upon our assessment of thelikelihood that we will be paid on our outstanding receivables, based oncustomer-specific as well as general considerations. To the extent that ourestimates prove to be too high, and we ultimately collect a receivablepreviously determined to be impaired, we may record a reversal of the provisionin the period of such determination.

We provide for the estimated cost of product warrantiesat the time sales is recognized. While we engage in extensive product qualityprograms and processes, including actively monitoring and evaluating thequality of our component suppliers, we have experienced some costs related towarranty. The warranty accrual is based upon historical experience and isadjusted based on current experience. Should actual warranty experience differfrom our estimates, revisions to the estimated warranty liability would berequired.

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. Anywrite-downs of inventory would reduce our reported net income during the periodin which such write-downs were applied. To the extent that our estimates proveto be too high, and we ultimately utilize or sell inventory previously determinedto be impaired, we may record a reversal of the provision in the period of suchdetermination.

Werecognize deferred income tax assets and liabilities for the expected futureincome tax consequences, based on enacted tax laws, of temporary differences betweenthe financial 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.

Propertyand equipment are stated at cost, with depreciation computed over the estimateduseful lives of the assets, generally three to seven years. Prior to fiscalyear 2008, we utilized the double-declining method of depreciation for propertyand equipment due to the expected usage of the property and equipment overtime. This method is expected to continue throughout the life of the equipment.Manufacturing and production equipment acquired, but not depreciated, in fiscalyear 2007 and manufacturing and production equipment acquired after fiscal 2007is a different technology and we will utilize the straight-line method ofdepreciation for this and other property and equipment starting April 1, 2007.This difference in depreciation methods utilized for manufacturing andproduction equipment is based on the technological differences of the equipmentand does not constitute a change in accounting principle.Maintenance and repairs are expensed asincurred and major additions, replacements and improvements are capitalized.

We amortize our patent costs over their estimated usefullives, which is typically the remaining statutory life. From time to time, wemay be required to adjust these lives based on advances in technology,competitor actions, and the like. We review the recorded amounts of patents ateach period end to determine if their carrying amount is still recoverablebased on our expectations regarding sales of related products. Such anassessment, in the future, may result in a conclusion that the assets areimpaired, with a corresponding charge against earnings.

We currently estimate forfeitures for stock-basedcompensation expense related to employee stock options at 7% and evaluate theforfeiture rate quarterly.

**Recent Developments**

On July 16, 2007, we received a notice letter from theAmerican Stock Exchange (the “Amex”) that we did not satisfy a rule forcontinued listing on the Amex. The notice letter asserts that we must submit aplan to the Amex by August 15, 2007 advising the Amex of the action that wehave taken, or that we will take, to bring us into compliance with all of thecontinued listing standards of the Amex by January 9, 2009. The notice letterserves as a warning letter and asserts that we failed to comply with therequirements of Section 1003(a)(ii) of the Amex Company Guide (the “Amex Guide”),which failure could jeopardize our continued listing on the Amex. Section1003(a)(ii) of the Amex Guide requires, among other things, that an issuer havestockholders’ equity of not less than $4,000,000 if such issuer has sustainedlosses from continuing operations and/or net losses in three out of its fourmost recent fiscal years. As of June 30, 2007, our shareholders’ equity was$2,681,262 and we have sustained operating and net losses in our last threefiscal years. We intend to submit such plan to the Amex, by August 15, 2007.

**Risk Factors**

Wewish to caution you that there are risks and uncertainties that could cause ouractual results to be materially different from those indicated by forwardlooking statements that we make from time to time in filings with theSecurities and Exchange Commission, news releases, reports, proxy statements,registration statements and other written communications, as well as oralforward looking statements made from time to time by our representatives. Theserisks and uncertainties include, but are not limited to, those listed in ourAnnual Report on Form 10-KSB for the year ended March 31, 2007. These risks anduncertainties and additional risks and uncertainties not presently known to usor that we currently deem immaterial may cause our business, financialcondition, operating results and cash flows to be materially adverselyaffected. Except for the historical information contained herein, the mattersdiscussed in this analysis are forward looking statements that involve risksand uncertainties, including but not limited to general business conditions andother factors which are often beyond our control. We do not undertake anyobligation to update forward looking statements except as required by law.

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

(a)We have carried out an evaluation under the supervision and with theparticipation of our management, including our Chief Executive Officer andPrincipal Accounting and Financial Officer, of the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15eof the Securities and Exchange Act of 1934 (the “Exchange Act”)). Based uponthat evaluation, the Chief Executive Officer and the Principal Accounting andFinancial Officer concluded, that as of June 30, 2007, our disclosure controlsand procedures were effective in ensuring that information required to bedisclosed by us under the Exchange Act was recorded, processed, summarized andreported within the time periods specified under the Exchange Act rules andforms.

(b)During the quarter ended June 30, 2007, there were no changes in our internalcontrol over financial reporting or in other factors that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting, nor were there any significant deficiencies ormaterial weaknesses in such disclosure controls and procedures or internalcontrol over financial reporting requiring corrective actions. As a result, nocorrective actions were taken.

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**PART II.**                                                **OTHER INFORMATION**

**ITEM****6**                                                     EXHIBITS

Thefollowing exhibits are attached to this report on Form 10-QSB or areincorporated by reference:

3.1              Articles of Incorporation of the Company, asamended (incorporated by reference from Registration Statement #333-4118-Ddated June 25, 1996).

3.2              Bylaws of the Company (incorporated byreference from Registration Statement #333-4118-D dated June 25, 1996).

4.1              Form of certificate for shares of Common Stock(incorporated by reference from Registration Statement #333-4118-D dated June 25,1996).

10.1        Lease Agreement dated June 3, 2004 between Encision Inc. and DaPuzzoInvestment Group, LLC (incorporated by reference from Quarterly Report on Form10-QSB filed on August 12, 2004).

10.2        Encision Inc. 1991 Stock Option Plan, as amended (incorporated byreference from Registration Statement #333-4118-D dated June 25, 1996).

10.3        Encision Inc. 1997 Stock Option Plan (incorporated by reference fromProxy Statement dated July 15, 1997).

10.4        Loan and Security Agreement dated November 10, 2006 between EncisionInc. and Silicon Valley Bank (incorporated by reference from Current Report onForm 8-K dated November 16, 2006).

31.1        Certification of Chief Executive Officer under Rule 13a-14(a).

31.2        Certification of Principal Financial and Accounting Officer under Rule13a-14(a).

32.1        Certification of Periodic Reports pursuant to Sarbanes-Oxley Act of2002.

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**SIGNATURE**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Name                                  | ** **      | **Title**                    | ** **                         | **Date** |
|---------------------------------------|-----------------|------------------------------|------------------------------------|----------|
|                                  |            |                         |                               |     |
|                                  |            |                         |                               |     |
| Encision Inc.                         |            |                         |                               |     |
|                                  |            |                         |                               |     |
|                                  |            |                         |                               |     |
|   /s/  Marcia McHaffie |            |                         | Controller                         |     | August 13, 2007 |
|                                  | Marcia McHaffie |                         | Principal Accounting Officer & |     |   |
|                                  |            | Principal  Financial Officer |                               |     |
|                                       |                 |                              |                                    |          |  |  |

 

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