**U. S. Securities and Exchange Commission**

**Washington, D.C.  20549**

 

## **Form 10-QSB**

## ** **

**ý****   QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2004**

 

**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  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

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

(Addressof principal executive offices)

 

**(303)444-2600**

(Registrant’stelephone 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   ****ý****    No   **o

 

**Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:**

 
| **Common Stock, No par** **value** |   | **6,258,595 Shares**              |
|-----------------------------------------|--------|-----------------------------------|
| Class                                   |   | (outstanding at October 31, 2004) |

 

**TransitionalSmall Business Disclosure Format**

 

**Yes   ****o****    No   ****ý**

 

 

----

 

**ENCISIONINC.**

 

**FORM10-QSB**

 

**For theQuarter Ended September 30, 2004**

 

**INDEX**

 
| **PART I.**  | ** **      | **UNAUDITED FINANCIAL INFORMATION** |                                                                                        |
|--------------|-----------------|------------------------------------------|---------------------------------------------------------------------------------------------|
|         |            |                                     |                                                                                        |   |
|         | **ITEM 1** | -                                        | Condensed  Interim Financial Statements:                                                    |   |
|         |            | -                                        | Condensed Balance Sheets as of  September 30, 2004 and March 31, 2004                       |   |
|         |            | -                                        | Condensed Statements  of Operations for  the Three Months Ended September 30, 2004 and 2003 |   |
|         |            | -                                        | Condensed Statements of  Operations for  the Six Months Ended September 30, 2004 and 2003   |   |
|         |            | -                                        | Condensed Statements  of Cash Flows for  the Six Months Ended September 30, 2004 and 2003   |   |
|         |            | -                                        | 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 and Reports  on Form 8-K                                                           |   |
|         |            |                                     |                                                                                        |   |
|         | **SIGNATURE**   |                                     |                                                                                        |

 

2

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

 

**ITEM 1  ****-**** CONDENSED INTERIM FINANCIALSTATEMENTS**

 

ENCISIONINC.

 

CONDENSED BALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                                                    | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ASSETS                                                                                                                                        |       |                    |       |                |       |
| CURRENT ASSETS:                                                                                                                               |       |                    |       |                |       |
| Cash and cash equivalents                                                                                                                     |       | $                       | 1,422,054  |                | $          | 1,356,607 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $78,000 and $62,000, respectively                                             |       | 1,060,001               |       | 947,692             |       |
| Inventory, net of reserve for obsolescence  of $70,000 and $90,000, respectively                                                              |       | 1,081,277               |       | 1,060,251           |       |
| Prepaid expenses                                                                                                                              |       | 122,761                 |       | 67,120              |       |
|                                                                                                                                          |       |                    |       |                |       |
| Total current assets                                                                                                                          |       | 3,686,093               |       | 3,431,670           |       |
|                                                                                                                                          |       |                    |       |                |       |
| EQUIPMENT, at cost:                                                                                                                           |       |                    |       |                |       |
| Furniture, fixtures and equipment                                                                                                             |       | 819,887                 |       | 771,916             |       |
| Customer-site equipment                                                                                                                       |       | 471,020                 |       | 436,550             |       |
| Less - accumulated depreciation                                                                                                               |       | (971,800                | )          | (886,674            | )          |
|                                                                                                                                          |       |                    |       |                |       |
| Equipment, net                                                                                                                                |       | 319,107                 |       | 321,792             |       |
|                                                                                                                                          |       |                    |       |                |       |
| PATENTS, net of accumulated amortization of  $74,105 and $68,027, respectively                                                                |       | 111,682                 |       | 117,760             |       |
| OTHER ASSETS                                                                                                                                  |       | 30,337                  |       | 12,972              |       |
|                                                                                                                                          |       |                    |       |                |       |
| Total assets                                                                                                                                  |       | $                       | 4,147,219  |                | $          | 3,884,194 |   |
|                                                                                                                                          |       |                    |       |                |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                    |       |                    |       |                |       |
|                                                                                                                                          |       |                    |       |                |       |
| CURRENT LIABILITIES:                                                                                                                          |       |                    |       |                |       |
| Accounts payable                                                                                                                              |       | $                       | 499,009    |                | $          | 430,600 |   |
| Accrued compensation                                                                                                                          |       | 123,366                 |       | 107,266             |       |
| Other accrued liabilities                                                                                                                     |       | 334,897                 |       | 285,232             |       |
| Capitalized lease obligation, current  portion                                                                                                |       | 15,690                  |       | 15,690              |       |
|                                                                                                                                          |       |                    |       |                |       |
| Total current liabilities                                                                                                                     |       | 972,962                 |       | 838,788             |       |
|                                                                                                                                          |       |                    |       |                |       |
|                                                                                                                                          |       |                    |       |                |       |
| LONG-TERM LIABILITIES:                                                                                                                        |       |                    |       |                |       |
| Capitalized lease obligation, less current  portion                                                                                           |       | 7,845                   |       | 15,690              |       |
|                                                                                                                                          |       |                    |       |                |       |
| 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, 6,258,595 (September 30, 2004) and 5,845,526 (March 31,  2004) shares outstanding |       | 18,770,038              |       | 18,285,991          |       |
| Accumulated (deficit)                                                                                                                         |       | (15,603,626             | )          | (15,256,275         | )          |
|                                                                                                                                          |       |                    |       |                |       |
| Total shareholders’ equity                                                                                                               |       | 3,166,412               |       | 3,029,716           |       |
|                                                                                                                                          |       |                    |       |                |       |
| Total liabilities and shareholders’ equity                                                                                               |       | $                       | 4,147,219  |                | $          | 3,884,194 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

3

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ENCISIONINC.

 

CONDENSEDSTATEMENTS OF OPERATIONS

(Unaudited)

 

 
| ** **                                                                            | ** ** | **For the Three Months   Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                       | ** ** | **2003** | ** ** |
|                                                                                  |       |                                           |       |   |   |
| REVENUE, NET                                                                          |       | $                                              | 2,065,949  |   | $ | 1,880,019 |   |
|                                                                                  |       |                                           |       |   |   |
| COST OF SALES                                                                         |       | 870,547                                        |       | 772,711 |   |
|                                                                                  |       |                                           |       |   |   |
| Gross profit                                                                          |       | 1,195,402                                      |       | 1,107,308 |   |
|                                                                                  |       |                                           |       |   |   |
| OPERATING EXPENSES:                                                                   |       |                                           |       |   |   |
| Sales and marketing                                                                   |       | 718,550                                        |       | 648,793 |   |
| General and administrative                                                            |       | 337,441                                        |       | 231,327 |   |
| Research and development                                                              |       | 196,554                                        |       | 191,851 |   |
|                                                                                  |       |                                           |       |   |   |
| Total operating expenses                                                              |       | 1,252,545                                      |       | 1,071,971 |   |
|                                                                                  |       |                                           |       |   |   |
| INCOME (LOSS) FROM OPERATIONS                                                         |       | (57,143                                        | )          | 35,337 |   |
|                                                                                  |       |                                           |       |   |   |
| OTHER INCOME (EXPENSE):                                                               |       |                                           |       |   |   |
| Interest income                                                                       |       | 2,728                                          |       | 824 |   |
| Other (expense), net                                                                  |       | (2,001                                         | )          | (4,416 | ) |
|                                                                                  |       |                                           |       |   |   |
| NET INCOME (LOSS)                                                                     |       | $                                              | (56,416    | ) | $ | 31,745 |   |
|                                                                                  |       |                                           |       |   |   |
| NET INCOME (LOSS) PER SHARE:                                                          |       |                                           |       |   |   |
| Basic and diluted net income (loss) per common share                                  |       | $                                              | (0.01      | ) | $ | 0.01 |   |
|                                                                                  |       |                                           |       |   |   |
| Weighted average shares used in computing basic net income (loss) per  common share   |       | 6,123,166                                      |       | 5,422,532 |   |
|                                                                                  |       |                                           |       |   |   |
| Weighted average shares used in computing diluted net income (loss)  per common share |       | 6,123,166                                      |       | 5,871,989 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

4

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ENCISIONINC.

 

CONDENSED STATEMENTSOF OPERATIONS

(Unaudited)

 
| ** **                                                                            | ** ** | **For the Six Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                                                  |       |                                        |       |   |   |
| REVENUE, NET                                                                          |       | $                                           | 3,829,213  |   | $ | 3,581,959 |   |
|                                                                                  |       |                                        |       |   |   |
| COST OF SALES                                                                         |       | 1,617,847                                   |       | 1,504,718 |   |
|                                                                                  |       |                                        |       |   |   |
| Gross profit                                                                          |       | 2,211,366                                   |       | 2,077,241 |   |
|                                                                                  |       |                                        |       |   |   |
| OPERATING EXPENSES:                                                                   |       |                                        |       |   |   |
| Sales and marketing                                                                   |       | 1,478,932                                   |       | 1,167,197 |   |
| General and administrative                                                            |       | 690,286                                     |       | 457,621 |   |
| Research and development                                                              |       | 390,411                                     |       | 380,424 |   |
|                                                                                  |       |                                        |       |   |   |
| Total operating expenses                                                              |       | 2,559,629                                   |       | 2,005,242 |   |
|                                                                                  |       |                                        |       |   |   |
| INCOME (LOSS) FROM OPERATIONS                                                         |       | (348,263                                    | )          | 71,999 |   |
|                                                                                  |       |                                        |       |   |   |
| OTHER INCOME (EXPENSE):                                                               |       |                                        |       |   |   |
| Interest income                                                                       |       | 4,395                                       |       | 1,301 |   |
| Other (expense), net                                                                  |       | (3,483                                      | )          | (6,560 | ) |
|                                                                                  |       |                                        |       |   |   |
| NET INCOME (LOSS)                                                                     |       | $                                           | (347,351   | ) | $ | 66,740 |   |
|                                                                                  |       |                                        |       |   |   |
| NET INCOME (LOSS) PER SHARE:                                                          |       |                                        |       |   |   |
| Basic and diluted net income (loss) per common share                                  |       | $                                           | (0.06      | ) | $ | 0.01 |   |
|                                                                                  |       |                                        |       |   |   |
| Weighted average shares used in computing basic net income (loss) per  common share   |       | 5,989,241                                   |       | 5,546,909 |   |
|                                                                                  |       |                                        |       |   |   |
| Weighted average shares used in computing diluted net income (loss)  per common share |       | 5,989,241                                   |       | 6,026,857 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

5

----

 

ENCISIONINC.

 

CONDENSED STATEMENTS OF CASHFLOWS

(Unaudited)

 
| ** **                                                                                          | ** ** | **For the Six Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                                                                |       |                                        |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                                        |       |   |   |
| Net income (loss)                                                                                   |       | $                                           | (347,351   | ) | $ | 66,740 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities- |       |                                        |       |   |   |
| Depreciation and amortization                                                                       |       | 91,204                                      |       | 86,535 |   |
| Provision for bad debts                                                                             |       | 16,000                                      |       | (6,000 | ) |
| Inventory reserves                                                                                  |       | (20,000                                     | )          | 7,000 |   |
| Changes in operating assets and  liabilities-                                                       |       |                                        |       |   |   |
| Accounts receivable                                                                                 |       | (128,309                                    | )          | 127,857 |   |
| Inventory                                                                                           |       | (1,026                                      | )          | (145,554 | ) |
| Other assets                                                                                        |       | (73,006                                     | )          | (75,331 | ) |
| Accounts payable                                                                                    |       | 68,409                                      |       | (15,404 | ) |
| Accrued compensation and other accrued liabilities                                                  |       | 57,920                                      |       | (49,397 | ) |
|                                                                                                |       |                                        |       |   |   |
| Net cash (used in) operating activities                                                             |       | (336,159                                    | )          | (3,554 | ) |
|                                                                                                |       |                                        |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                                        |       |   |   |
| Investment in equipment                                                                             |       | (82,441                                     | )          | (189,712 | ) |
|                                                                                                |       |                                        |       |   |   |
| Net cash (used in) investing activities                                                             |       | (82,441                                     | )          | (189,712 | ) |
|                                                                                                |       |                                        |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |                                        |       |   |   |
| Proceeds from the exercise of stock options                                                         |       | 484,047                                     |       | 23,151 |   |
| Proceeds from the issuance of common stock                                                          |       | —                                      |       | 1,000,002 |   |
| Cost of the issuance of common stock                                                                |       | —                                      |       | (36,786 | ) |
|                                                                                                |       |                                        |       |   |   |
| Net cash provided by financing activities                                                           |       | 484,047                                     |       | 986,367 |   |
|                                                                                                |       |                                        |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                           |       | 65,447                                      |       | 793,101 |   |
|                                                                                                |       |                                        |       |   |   |
| CASH AND CASH EQUIVALENTS, beginning of  period                                                     |       | 1,356,607                                   |       | 585,552 |   |
|                                                                                                |       |                                        |       |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                                            |       | $                                           | 1,422,054  |   | $ | 1,378,653 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

6

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ENCISIONINC.

 

NOTESTO CONDENSED INTERIM FINANCIAL STATEMENTS

 

SEPTEMBER30, 2004

(Unaudited)

 

(1)                                  ORGANIZATIONAND NATURE OF BUSINESS

 

EncisionInc. (the “Company”) is a medical device company that designs, develops,manufactures and markets patented surgical instruments that provide greatersafety to patients undergoing minimally-invasive surgery. The Company believesits patented AEM® surgical instrument technology is changing themarketplace for electrosurgical devices and instruments by providing a solutionto a patient safety risk in laparoscopic surgery. The Company’s sales to datehave been made principally in the United States.

 

TheCompany achieved profitable operations in fiscal 2004 and 2003, but prior tothat and in the six months ended September 30, 2004, had incurred losses sinceits inception and has an accumulated (deficit) of ($15,603,626) at September30, 2004. Operations have been financed primarily through issuance of commonstock.

 

Duringfiscal years 2004 and 2003, the Company achieved annual net income for thefirst time in its history. The Company’s strategic marketing and sales plan isdesigned to expand the use of the Company’s products in surgically activehospitals in the United States. Management expects these efforts to result incontinued revenue increases for fiscal 2005.

 

OnJuly 30, 2003 the Company issued a total of 333,334 shares of its common stockto the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for grossproceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares ofthe Company’s common stock, constituting less than 5% of the issued andoutstanding shares of its common stock, prior to that transaction.

 

(2)                                  SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates in the Preparation of Financial Statements

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions.  Such estimates andassumptions affect the reported amounts of assets and liabilities as well asdisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expense during the reportingperiod. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Forpurposes of reporting cash flows, the Company considers all cash and highlyliquid investments with an original maturity of three months or less to be cashequivalents.

 

Fair Value of Financial Instruments

 

TheCompany’s financial instruments consist of cash and cash equivalents and short-termtrade receivables and payables.  Thecarrying values of cash and cash equivalents and short-term receivables andpayables approximate their fair value due to their short maturities.

 

Concentration of Credit Risk

 

TheCompany has no significant off-balance sheet concentrations of credit risk suchas foreign exchange contracts, options contracts or other foreign hedgingarrangements. The Company maintains the majority of its cash balances with twofinancial institutions in the form of demand deposits and money market funds.

 

Accountsreceivables are typically unsecured and are derived from transactions with andfrom entities in the healthcare industry primarily located in the UnitedStates. Accordingly, the Company may be exposed to credit risk generally associatedwith the healthcare industry. The Company maintains allowances for doubtfulaccounts for estimated losses resulting from the inability of its customers tomake required payments.

 

7

----

 

Thenet accounts receivable balance at September 30, 2004 of $1,060,001 included$39,450, or approximately 4%, from one distributor. The net accounts receivablebalance at March 31, 2004 of $947,692 included $48,212, or approximately 5%,from one distributor.

 

WarrantyAccrual

 

TheCompany provides for the estimated cost of product warranties at the timerevenue is recognized. While the Company engages in extensive product qualityprograms and processes, including actively monitoring and evaluating thequality of its component suppliers, the Company’s warranty obligation is basedupon historical experience and is also affected by product failure rates andmaterial usage incurred in correcting a product failure. Should actual productfailure rates or material usage costs differ from the Company’s estimates,revisions to the estimated warranty liability would be required.

 

Inventories

 

Inventoriesare stated at the lower of cost (first-in, first-out basis) or market. TheCompany reduces 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. Inventory consisted of thefollowing:

 
| ** **                      | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** |
|---------------------------------|------------|-------------------------|------------|---------------------|------------|
|                            |       |                    |       |                |       |
| Raw materials                   |       | $                       | 728,798    |                | $          | 724,553 |   |
| Finished goods                  |       | 422,479                 |       | 425,698             |       |
|                            |       |                    |       |                |       |
|                            |       | 1,151,277               |       | 1,150,251           |       |
| Less - Reserve for obsolescence |       | (70,000                 | )          | (90,000             | )          |
|                            |       | $                       | 1,081,277  |                | $          | 1,060,251 |   |

 

Property and Equipment

 

Propertyand equipment are stated at cost, with depreciation computed primarily on adouble-declining basis over the estimated useful life of the asset, generallythree to five years. Company-owned AEM Monitors at customer sites aredepreciated on a double-declining basis for a period of 5 years. Leaseholdimprovements are depreciated over the shorter of the remaining lease term orthe estimated useful life of the asset. Maintenance and repairs are expensed asincurred and major additions, replacements and improvements are capitalized.

 

Long-Lived Assets 

 

Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Along-lived asset is considered impaired when estimated future cash flowsrelated to the asset, undiscounted and without interest, are insufficient torecover the carrying amount of the asset. If deemed impaired, the long-livedasset is reduced to its estimated fair value. Long-lived assets to be disposedof are reported at the lower of their carrying amount or estimated fair valueless cost to sell.

 

Patents

 

Thecosts of applying for patents are capitalized and amortized on a straight-linebasis over the lesser of the patent’s economic or legal life (17 years in theUnited States). Capitalized costs are expensed if patents are not granted. TheCompany reviews the carrying value of its patents periodically to determinewhether the patents have continuing value and such reviews could result in theconclusion that the recorded amounts have been impaired.

 

AccruedLiabilities

 

TheCompany has accrued $117,730 related to warranty claims and $78,487 related tosales commissions and has included these amounts in accrued liabilities in theaccompanying balance sheets as of September 30, 2004.

 

Income Taxes 

 

TheCompany accounts for income taxes under the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”(“SFAS No. 109”). SFAS No. 109 requires recognition of deferred income taxassets and liabilities

 

8

----

 

forthe expected future income tax consequences, based on enacted tax laws, oftemporary differences between the financial reporting and tax bases of assetsand liabilities. SFAS No. 109 also requires recognition of deferred tax assetsfor the expected future tax effects of all deductible temporary differences,loss carryforwards and tax credit carryforwards. Deferred tax assets are thenreduced, if deemed necessary, by a valuation allowance for the amount of anytax benefits which, more likely than not based on current circumstances, arenot expected to be realized. Should the Company achieve sufficient, sustainedincome in the future, the Company may conclude that some or all of thevaluation allowance should be reversed.

 

RevenueRecognition

 

Revenuefrom product sales is recorded when the Company ships the product and title haspassed to the customer, provided that the Company has evidence of a customerarrangement and can conclude that collection is probable. The Company’sshipping policy is FOB Shipping Point. The Company recognizes revenue fromsales to stocking distributors when there is no right of return, other than fornormal warranty claims. The Company has no ongoing obligations related toproduct sales, except for normal warranty.

 

Research and Development Expenses

 

TheCompany expenses research and development costs for products and processes asincurred.

 

Stock-BasedCompensation  

 

TheCompany has adopted the disclosure-only provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation” (“SFAS No. 123”), and applies AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No.25”), and related interpretations in accounting for stock options granted toemployees.  If the Company had accountedfor its stock-based compensation plans in accordance with SFAS 123, the Company’snet income or loss and pro forma net income or loss per basic and dilutedcommon share for the three months ended September 30, 2004 would have beenreported as follows:

 
| Three months ended September 30, 2004                           |   |    |    |
|-----------------------------------------------------------------|--------|---------|---------|
| Net (Loss)                                                      |   |    |    |
| As Reported                                                     |   | $       | (56,416 | ) |
| Stock-based compensation based upon  estimated fair values      |   | (36,548 | )       |
| Pro forma                                                       |   | $       | (92,964 | ) |
| Pro Forma  Net Income (Loss) Per Basic and Diluted Common Share |   |    |    |
| As Reported                                                     |   | $       | (0.01   | ) |
| Pro Forma                                                       |   | $       | (0.02   | ) |

 

Segment Reporting

 

TheCompany has concluded that it has one operating segment.

 

Basic and Diluted Income and Loss per Common Share

 

Netincome or loss per share is calculated in accordance with SFAS No. 128, “EarningsPer Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic netincome or loss per common share is computed by dividing net income or loss forthe period by the weighted average number of common shares outstanding for theperiod. Diluted net income or loss per common share is computed by dividing thenet income 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. As a result of the Company’s net loss forthe three month period ended September 30, 2004, all potentially dilutivesecurities would be anti-dilutive and thus, are excluded from diluted earningsper share.

 

Forthe three month period ended September 30, 2004, the Company had financialinstruments that could create future dilution to the Company’s commonshareholders and are not currently classified as outstanding common shares ofthe Company. The common stock number is based on specific conversion orissuance assumptions pursuant to the corresponding terms of each instrument.Potential stock issuance excluded from earnings per share because their effectwas anti-dilutive are 642,516 for the three months ended September 30, 2004.

 

(3)                                  COMMITMENTS AND CONTINGENCIES

 

TheCompany currently leases its facilities under noncancelable lease agreementsthrough October 31, 2004. The minimum future lease payments are $9,565 for thefiscal year ended March 31, 2005. The Company has entered a new lease for itsfacilities under

 

9

----

 

noncancelablelease agreements through August 14, 2009 at 6797 Winchester Circle, Boulder,Colorado. The minimum future lease payments are as follows:

 
| Year ended March 31, | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2005                 |       | —     |       |
| 2006                 |       | 86,826     |       |
| 2007                 |       | 154,179    |       |
| 2008                 |       | 166,930    |       |
| 2009                 |       | 172,685    |       |
| 2010                 |       | 65,566     |       |
|                 | ** ** | $          | 646,186    | ** ** |
|                      |            |            |            |  |

 

TheCompany had notified one of its distributors that it was in breach of itsDistributor Agreement with the Company in several respects, and that if thedistributor did not cure the breaches the Agreement may be terminated. Thedistributor had informed the Company that it believed the Company’sinterpretations of the Agreement were incorrect. The distributor disputed theCompany’s position and asserted that the Company had breached the Agreement.The dispute was proceeding in arbitration pursuant to the terms of theAgreement. On July 23, 2004, the dispute was resolved. During the first quarterended June 30, 2004, the Company had expensed approximately $201,000, and as ofSeptember 30, 2004, there was no balance in other accrued liabilities for thisdispute.

 

TheCompany is subject to regulation by the United States Food and DrugAdministration (“FDA”). The FDA provides regulations governing the manufactureand sale of the Company’s products and regularly inspects the Company and othermanufacturers to determine their compliance with these regulations. As ofSeptember 30, 2004 the Company believes it was in substantial compliance withall known regulations. FDA inspections are conducted periodically at thediscretion of the FDA. The Company was last inspected in May 2004 and wasnotified of six potential deficiencies from that inspection, none of which theCompany believes to be material.

 

Theresults of operations for the quarter ended September 30, 2004 should not betaken as an indication of the results of operations for all or any part of thebalance of the year.

 

Thenet accounts receivable balance at September 30, 2004 of $1,060,001 included$67,898 (6%) from international customers.

 

(4)                                  MANAGEMENT’S REPRESENTATIONS

 

Thecondensed interim financial statements included herein have been prepared bythe Company, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omittedpursuant to such rules and regulations, although the Company believes that thedisclosures made are adequate to make the information presented not misleading.The condensed interim financial statements and notes thereto should be read inconjunction with the financial statements and the notes thereto, included inthe Company’s Annual Report to the Securities and Exchange Commission for thefiscal year ended March 31, 2004, filed on Form 10-KSB on June 29, 2004.

 

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 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.

 

10

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**ITEM 2****  –  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Certain statementscontained in this section on Management’s Discussion and Analysis are nothistorical facts, including statements about the Company’s strategies andexpectations about new and existing products, market demand, acceptance of newand existing products, technologies and opportunities, market and industrysegment growth, and return on investments in products and markets. Thesestatements are forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 and involve substantial risks anduncertainties 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 the Company on the date of this document, and the Company assumesno obligation to update such forward looking statements. Readers of this Form10-QSB are strongly encouraged to review the section entitled *“Factors Which May Affect Future Performance and Financial Condition.”*

 

**General**

 

Encision Inc. (“Encision” or “theCompany”), a medical device company based in Boulder, Colorado, has developedand launched innovative technology that is emerging as a standard of care inminimally-invasive surgery. The Company believes its patented AEM®Surgical Instruments are changing the marketplace for electrosurgical devicesand laparoscopic instruments by providing a solution to a well documentedpatient safety risk in laparoscopic surgery.

 

Encisionwas 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.

 

Encision’spatented 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 Encision’s “shielded and monitored” instruments, surgeons are able toperform electrosurgical procedures more safely and effectively than is possibleusing conventional instruments. In addition, the AEM instruments are costcompetitive with conventional “non-shielded, non-monitored” instruments. Theresult is advanced patient safety at comparable cost and with no change insurgeon technique.

 

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. The breadth ofendorsements continues to expand with the recognition of active electrodemonitoring technology as an *AORN Recommended Practice*by the Association of periOperative Registered Nurses and with insurance andmedicolegal endorsements.

 

TheCompany has focused its marketing strategies to date on expanding the marketawareness of the AEM technology and its broad independent endorsements, and hascontinued efforts to expand the AEM product line. During the three months endedSeptember 30, 2004, the Company evaluated its ongoing product developmentefforts and determined that the optimum allocation of development resourceswould be towards improving existing products to better address marketopportunities, rather than expanding the Company’s product line.  Accordingly, the Company is currentlyfocusing on modernizing its accepted AEM instruments to include ergonomics anduser functionalities for which surgeons have been expressing a preference. Thiscoincides with the endorsements for AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements AEM technology has garnered over the past few years.

 

Addingfurther credibility to the benefits of Encision’s AEM technology are theCompany’s supplier agreements with Novation and Premier, two of the largestGroup Purchasing Organizations (GPO) in the United States. Together, Novationand Premier represent over 3,000 hospitals and over 50% of all surgery in theU.S. Management believes that these GPO supplier agreements give furtherindication that AEM technology is gaining broader acceptance in the market.Management believes that having the nation’s leading medical purchasing groupsrecognize the value of the Company’s technology reflects the potential impactthat AEM instruments products can have in the market and in advancing patientsafety in surgery nationwide. These agreements do not involve purchasecommitments but the Company expects these relationships to expand the marketvisibility of AEM technology and smooth the procurement and conversion processfor new hospital customers. . The Company is currently in negotiations with anadditional GPO that the Company believes could facilitate the Company’s accessto a significant number of additional U.S. hospitals, although no definitiveagreement with this GPO has been reached.

 

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Whena hospital converts to AEM technology it provides recurring revenue to theCompany from sales of replacement instruments. Management believes that thereis no directly competing technology to supplant AEM products once the hospitalhas converted. The replacement market of reusable and disposable AEM productsin converted hospitals represents over 90% of Encision’s revenue over the pastthree months and this revenue stream is expected to grow as the base of newlyconverted hospitals continues to grow. . In addition, the Company intends to develop disposable versions of moreof its AEM products in order to meet market demands and expand the Company’srevenue opportunities.

 

Untilfiscal 2003, the Company incurred annual losses since its inception, and has anaccumulated (deficit) of ($15,603,626) at September 30, 2004. Operations havebeen financed primarily through issuance of equity. The Company’s liquidity hasstabilized after a history of operating losses. On July 30, 2003 the Companyissued 333,334 shares of its common stock to the Wasatch Micro Cap Fund and theWasatch Micro Cap Value Fund, for gross proceeds of $1,000,002. Funds managedby Wasatch Advisors, Inc. held shares of the Company’s common stock,constituting less than 5% of the issued and outstanding shares of its commonstock, prior to that transaction.

 

Duringthe six months ended September 30, 2004, the Company used $336,159 of cash inits operations and used $82,441 for investments in equipment (primarily capitalequipment owned by the Company at customer locations). As of September 30,2004, the Company had $1,422,054 in cash and cash equivalents available to fundfuture operations, an increase of $65,447 from March 31, 2004. The Company’sworking capital is $2,713,131 at September 30, 2004.

 

**HistoricalPerspective**

 

TheCompany was organized in 1991 and spent several years developing the AEMmonitoring system and protective sheaths to adapt to conventionalelectrosurgical instruments. During this period, the Company conducted producttrials and applied for patents with the United States Patent Office and withthe International patent agencies. Patents were issued in 1994, 1996, 1997,1998 and 2002.

 

Asthe Company evolved, it was clear to the Company that its ‘active electrodemonitoring’ technology needed to be integrated into the standard laparoscopicinstrument design. As the development program proceeded, it also becameapparent that the merging of electrical and mechanical engineering skills inthe instrument development process for the Company’s patented, integratedelectrosurgical instruments was a complex and difficult task. As a result,instruments with integrated AEM technology were not completed for severalyears. Prior to offering a full range of laparoscopic electrosurgicalinstrumentation, it was difficult for hospitals to commit to the AEM solution,as the Company did not have adequate comparable surgical instrument options tomatch what the surgeon demanded. As of fiscal 2001, a sufficiently broadproduct line was available to provide hospital operating rooms with AEMInstruments in most of the designs common for laparoscopic surgery.

 

Thelaunch of an expanded line of AEM Laparoscopic Instruments was accomplishedover the past two years. Because conversion to AEM technology is transparent tothe surgeon, hospitals can now universally convert to AEM technology, thusproviding their laparoscopic surgery patients a higher level of safety. TheCompany is now turning its focus to developing next generation versions of itsaccepted AEM instruments to better meet market demands, particularly demand forimproved ergonomics and simplified user functionalities. This coincides withthe independent endorsements for AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements AEM technology has garnered over the past few years.

 

**Outlook**

 

*InstalledBase of AEM Monitoring Equipment*:  The Company believes that theinstalled base of AEM monitors has the potential for increasing as the inherentrisks associated with monopolar laparoscopic electrosurgery become more widelyacknowledged and as the network of independent sales representatives becomesmore adept at selling the AEM products to our customers. The Company expectsthat the replacement sales of electrosurgical instruments and accessories willincrease as additional hospitals are converted to AEM technology. During thequarter ended September 30, 2004, the Company hired one direct sales manager.The Company believes that the efforts to improve the quality of salesrepresentatives carrying the AEM product line, along with increased marketingefforts and the introduction of next generation products, may provide the basisfor increased revenue and returning to profitable operations. However thesemeasures, or any others that the Company may adopt, may not result in eitherincreased revenue or returning to profitable operations. Furthermore, theCompany’s next generation products are in the early stages of development andwill not be available for sale until at least fiscal 2006.

 

*Possibilityof Continued Operating Losses: *Until fiscal 2003, the Company had incurredlosses from operations since inception and has an accumulated (deficit) of($15,603,626) as of September 30, 2004. The Company has made significantstrides toward improving its operating results. Approximately $247,000 of cashwas used in the Company’s activities in fiscal 2004. Due to the ongoing need todevelop, optimize and train the independent sales rep network and the need toincrease sustained revenues to a level adequate to cover fixed and variableoperating costs, the Company may operate at a net loss from time to time. OnJuly 30, 2003 the Company issued a total of 333,334 shares of its common stockto the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for gross

 

12

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proceedsof $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of theCompany’s common stock, constituting less than 5% of the issued and outstandingshares of its common stock, prior to that transaction.

 

*RevenueGrowth*:  The Company expects to generate increasedrevenue in the U.S. from sales to new hospital customers and expanded sales inexisting hospitals as the network of direct and independent salesrepresentatives become more proficient. The Company believes that thevisibility and credibility of the independent clinical endorsements for AEMtechnology will contribute to new hospital conversions and increased revenuesin fiscal 2005. The Company also expects that supplier agreements with Novationand Premier, which together represent over 3,000 U.S. hospitals, and with apotential additional supplier agreement that the Company is currently pursuing,will expose more hospitals to the benefits of AEM technology and may stimulatenew hospital conversions and increased revenues. The Company also expects toincrease market share gains through promotional programs of placingCompany-owned AEM monitors at no charge into hospitals that commit tostandardize on AEM instruments. However all of these efforts to increase marketshare and grow revenues will depend in part on the Company’s ability to expandthe efficiency and effective coverage range of its direct and independent salesrepresentatives. During the quarter ended September 30, 2004, the Company hiredone direct sales manager.

 

TheCompany also has longer term initiatives in place to improve the Company’sprospects.  The Company expects thatdevelopment of next generation versions of its AEM products will betterposition the products in the marketplace and improve the Company’s retentionrate at converted hospitals, enabling the Company to grow its revenue. TheCompany may also explore overseas markets to assess opportunities for revenuegrowth internationally. Finally, the Company intends to explore opportunitiesto capitalize on its proven AEM technology via licensing arrangements andstrategic alliances. These efforts to generate additional revenue and furtherthe market penetration of the Company’s products are longer term in nature andmay not materialize.  Even if the Companyis able to successfully develop next generation products or identify potentialinternational markets or strategic partners, the Company may not be able tocapitalize on these opportunities.

 

*GrossProfit and Gross Margins*:  Gross profit and gross margin can be expectedto fluctuate from quarter to quarter, as a result of product sales mix andsales volume. Gross margins on products manufactured or assembled by theCompany are expected to improve at higher levels of production and sales.

 

*Salesand Marketing Expenses*:The Company continues its efforts to expand domestic and international distributioncapability and it believes that sales and marketing expenses will decrease as apercentage of net revenue with increasing sales volume.

 

*Researchand Development Expenses*:Research and development expenses are expected to increase modestly to supportdevelopment of refinements to our AEM product line, further expanding theinstrument options for the surgeon. New additions to the AEM product line areplanned for introduction in fiscal year 2005.

 

**Resultsof Operations**

 

*For thethree months ended September 30, 2004 compared to the three months endedSeptember 30, 2003.*

 

*Net revenue*.  Revenue for the quarter ended September 30,2004, was $2,065,949, compared to $1,880,019 for the quarter ended September30, 2003, an increase of 10%. The increase isattributable to the conversion of new hospitals and favorable trends in the mixof disposable products using our AEM technology, partially offset by businesslost from hospitals that previously converted to AEM technology. The Companyconverted eight new hospitals to AEM technology in the three months endedSeptember 30, 2004 versus fifteen new hospitals that converted to AEMtechnology in the three months ended September 30, 2003. New hospitalprospects remain strong; however, progress has slowed and we have seen a lowerrate of new hospital conversions during the past three months. This is due tothe Company having encountered a higher turnover in its direct and independentsales representatives and the resulting time needed to train their replacements. While it will take a number of months before newindependent sales representatives generate new hospital conversions, thecombination of the new representative additions and an expanded salesmanagement team is intended to provide the field focus necessary to achievemarket gains.

 

*GrossProfit*.  The gross profit for the quarter endedSeptember 30, 2004 of $1,195,402 increased by 8% from the quarter endedSeptember 30, 2003 gross profit of $1,107,308. Gross profit as a percentage ofrevenue (gross margin) decreased from 59% for the quarter ended September 30,2003 to 58% in the quarter ended September 30, 2004. The decrease in grossmargin was primarily the result of additional inventory costs compared with oneyear ago. For the three months ended September 30, 2004, the Company provided$20,482 in AEM monitors at no charge to newly converted hospitals as part of asales incentive program.

 

*Salesand marketing expenses*.  Sales and marketing expenses of $718,550 forthe quarter ended September 30, 2004 increased by 11% compared to $648,793 forthe quarter ended September 30, 2003. The increase was a result of compensationfor increased sales employees.

 

*General and administrative expenses*. General and administrative expenses of $337,441 for the quarter endedSeptember 30, 2004 increased by 46% compared to $231,327 for the quarter endedSeptember 30, 2003. The increase is the result of increasesin compensation and legal fees compared with one year ago.

 

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*Research and development expenses*. Research and development expenses of $196,554 for the quarter endedSeptember 30, 2004 increased by 2% compared to $191,851 for the quarter endedSeptember 30, 2003. The increase is a result of increases in compensation.

 

*For thesix months ended September 30, 2004 compared to the six months ended September30, 2003.*

 

*Net revenue*.  Revenue for the six months ended September30, 2004, was $3,829,213, compared to $3,581,959 for the six months endedSeptember 30, 2003, an increase of 7%. Theincrease is attributable to the conversion of new hospitals and favorabletrends in the mix of disposable products using our AEM technology, partiallyoffset by business lost from hospitals that previously converted to AEMtechnology. The Company converted fifteen new hospitals to AEM technology inthe six months ended September 30, 2004 versus twenty-five new hospitals thatconverted to AEM technology in the six months ended September 30, 2003. Newhospital prospects remain strong; however, progress has slowed and we have seena lower rate of new hospital conversions during the past six months. This isdue to the Company having encountered a higher turnover in its direct andindependent sales representatives and the resulting time needed to train theirreplacements. While it will take a number ofmonths before new direct and independent sales representatives generate newhospital conversions, the combination of the new representative additions andan expanded sales management team is intended to provide the field focusnecessary to achieve market gains.

 

*GrossProfit*.  The gross profit for the six months endedSeptember 30, 2004 of $2,211,366 increased by 6% from the six months endedSeptember 30, 2003 gross profit of $2,077,241. Gross profit as a percentage ofrevenue (gross margin) remained at 58% for the six months ended September 30,2004 compared to 58% in the six months ended September 30, 2003. The increasein gross margin was primarily the result of purchasing efficiencies comparedwith one year ago. For the six months ended September 30, 2004, the Companyprovided $34,470 in AEM monitors at no charge to newly converted hospitals aspart of a sales incentive program.

 

*Salesand marketing expenses*.  Sales and marketing expenses of $1,478,932for the six months ended September 30, 2004 increased by 27% compared to$1,167,197 for the six months ended September 30, 2003. The increase was aresult of compensation for increased sales employees and resolution of anarbitration dispute. The Company had notified one of its distributors that itwas in breach of its Distributor Agreement with the Company in severalrespects, and that if the distributor did not cure the breaches the Agreementmay be terminated. The distributor had informed the Company that it believedthe Company’s interpretations of the Agreement were incorrect. The distributordisputed the Company’s position and asserted that the Company had breached theAgreement. The dispute was proceeding in arbitration pursuant to the terms ofthe Agreement. On July 23, 2004, the dispute was resolved. During the firstquarter ended June 30, 2004, the Company had accrued approximately $201,000.

 

*General and administrative expenses*. General and administrative expenses of $690,286 for the six months endedSeptember 30, 2004 increased by 51% compared to $457,621 for the six monthsended September 30, 2003. The increase is the result of increases in compensation, legal fees and use taxes compared with oneyear ago.

 

*Research and development expenses*. Research and development expenses of $390,411 for the six months endedSeptember 30, 2004 increased by 3% compared to $380,424 for the six monthsended September 30, 2003. The increase is a result of increases incompensation.

 

**Liquidityand Capital Resources**

 

Todate, operating funds have been provided primarily by sales of common stock andwarrants to purchase the Company’s common stock, which totaled $18,770,038through September 30, 2004, and, to a lesser degree, funds provided by sales ofthe Company’s products. On July 30, 2003 the Company issued a total of 333,334shares of its common stock to the Wasatch Micro Cap Fund and the Wasatch MicroCap Value Fund, for gross proceeds of $1,000,002. Funds managed by WasatchAdvisors, Inc. held shares of the Company’s common stock, constituting lessthan 5% of the issued and outstanding shares of its common stock, prior to thattransaction.

 

TheCompany’s operations used $336,159 of cash in the six months ended September30, 2004 on sales of $3,829,213 and used $3,554 of cash in the six months endedSeptember 30, 2003 on sales of $3,581,959. Prior to fiscal 2003, the use ofcash in our operations resulted primarily from the funding of the Company’sannual net losses. These amounts of cash generated from and used in operationsare not indicative of the expected cash to be generated from or used inoperations in FY 05. As of September 30, 2004, the Company had $1,422,054 incash and cash equivalents available to fund future operations. Working capitalwas $2,713,131 at September 30, 2004 compared to $2,592,882 at March 31, 2004.Current liabilities were $972,962 at September 30, 2004, compared to $838,788at March 31, 2004.

 

TheCompany has entered a new lease for its facilities under noncancelable leaseagreements through August 14, 2009 at 6797 Winchester Circle, Boulder,Colorado. The minimum future lease payments are as follows:

 

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| Year ended March 31, | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2005                 |       | —     |       |
| 2006                 |       | 86,826     |       |
| 2007                 |       | 154,179    |       |
| 2008                 |       | 166,930    |       |
| 2009                 |       | 172,685    |       |
| 2010                 |       | 65,566     |       |
|                 | ** ** | $          | 646,186    | ** ** |
|                      |            |            |            |  |

 

Capitalexpenditures in the six months ended September 30, 2004 ($82,441) resultprimarily from the capitalization of AEM monitors placed in hospitals undervarious promotional programs. Placing Company-owned AEM monitors into hospitalsat no charge to facilitate their use of AEM instruments is an initiative toaccelerate new hospital conversions to AEM instruments. Under these promotionalprograms the Company maintains ownership of the AEM monitor and the cost is capitalizedand depreciated as cost of sales over the projected five year life of theasset.

 

TheCompany’s fiscal year 2005 (“FY 05”) operating plan is focused on increasinghospital conversions to AEM products, retaining existing hospital customers,growing revenue, increasing gross profits and conserving cash. The Company alsois investing in research and development efforts to develop next generationversions of the AEM product line.. The Company can not predict with certaintythe expected revenue, gross profit, net income or loss and usage of cash andcash equivalents for FY 05. However, management believes that its cashresources will be sufficient to fund its operations for at least the nexttwelve months under its current operating plan. If management is unable tomanage the Company’s business operations in line with budget expectations, itcould have a material adverse effect on the Company’s business viability,financial position, results of operations and cash flows. Further, if theCompany is not successful in sustaining profitability and remaining at leastcash flow break-even, additional capital may be required to maintain ongoingoperations.

 

TheCompany believes the unique performance of the AEM technology and its breadthof independent endorsements provides an opportunity for continued market sharegrowth. The Company believes that the market awareness of the AEM technologyand its endorsements is continually improving and that this will benefit thesales efforts in FY 05. The Company believes that the Company entered FY 05having achieved improvements in the clinical credibility of its technology. TheCompany’s objective in the remainder of FY 05 is to maintain expense controlswhile optimizing sales execution in the field, expand market awareness of theAEM technology and maximize the number of additional hospital conversions toAEM instruments, 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 ourtechnological advantage. If surgeons prefer other instruments to ours due tothese factors, our business results will suffer.

 

**IncomeTaxes**

 

Asof March 31, 2004, net operating loss carryforwards totaling approximately$15,300,000 are available to reduce taxable income in the future. The netoperating loss carryforwards expire, if not previously utilized, at variousdates beginning in the year 2006. The Company has not paid income taxes since itsinception. The Tax Reform Act of 1986 and other income tax regulations containprovisions which may limit the net operating loss carryforwards available to beused in any given year, if certain events occur, including changes in ownershipinterests. The Company has established a valuation allowance for the entireamount of its deferred tax asset since inception due to its history of losses.Should the Company achieve sufficient, sustained income in the future, theCompany may conclude that some or all of the valuation allowance should bereversed.

 

## **Contractual Obligations**

## ** **

Asidefrom the operating lease commitments, the Company does not have any materialcontractual commitments requiring settlement in the future.

 

## **AtSeptember 30, 2004, the Company’s commitments under these obligations were asfollows:**

## ** **

| ** **           | ** ** | **Operating Leases** | ** ** |
|----------------------|------------|----------------------|------------|
| Year ended March 31, | ** ** | ** **           | ** ** |
| 2005                 |       | 9,565                |       |
| 2006                 |       | 86,826               |       |
| 2007                 |       | 154,179              |       |
| 2008                 |       | 166,930              |       |
| 2009                 |       | 172,685              |       |
| 2010                 |       | 65,566               |       |
|                 | ** ** | $                    | 655,751    | ** ** |
|                      |            |                      |            |  |

 

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## **Critical Accounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation 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 assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies involve ourmore significant judgments and estimates used in the preparation of ourfinancial statements.

 

Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of its customers to make required payments. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required, whichwould increase our expenses during the periods in which any such allowanceswere made. The amount recorded as a provision for bad debt in each period isbased upon our assessment of the likelihood that we will be paid on ouroutstanding 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.

 

Weprovide for the estimated cost of product warranties at the time revenue isrecognized. While we engage in extensive product quality programs andprocesses, including actively monitoring and evaluating the quality of itscomponent 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.

 

Wereduce inventory for estimated obsolete or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions. If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required. Any write-downs of inventory wouldreduce our reported net income during the period in which such write-downs wereapplied. To the extent that our estimates prove to be too high, and weultimately utilize or sell inventory previously determined to be impaired, wemay record a reversal of the provision in the period of such determination.

 

Werecognize deferred income tax assets and liabilities for the expected futureincome tax consequences, based on enacted tax laws, of temporary differencesbetween the financial reporting and tax bases of assets and liabilities.Deferred tax assets are then reduced, if deemed necessary, by a valuationallowance for the amount of any tax benefits which, more likely than not basedon current circumstances, are not expected to be realized. Should we achievesufficient, sustained income in the future, we may conclude that all or some ofthe valuation allowance should be reversed

 

Wedepreciate our property and equipment primarily on a double-declining basisover the estimated useful life of the asset, generally three to five years. Ourowned, consignment AEM Monitors are depreciated on a double-declining basis fora period 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.

 

Weamortize our patent costs over their estimated useful lives, which is typicallythe remaining statutory life. From time to time, we may be required to adjustthese lives based on advances in technology, competitor actions, and the like.We review the recorded amounts of patents at each period end to determine iftheir carrying amount is still recoverable based on our expectations regardingsales of related products. Such an assessment, in the future, may result in aconclusion that the assets are impaired, with a corresponding charge againstearnings.

 

**FactorsWhich May Affect Future Performance and Financial Condition**:

 

Youshould carefully consider the risk factors described below. If any of thefollowing risk factors actually occur, the Company’s business, prospects,financial condition or results of operations would likely suffer. In such case,the trading price of the Company’s common stock could fall resulting in theloss of all or part of your investment. You should look at all these risk factorsin total. Some risk factors may stand on their own. Some risk factors mayaffect (or be affected by) other risk factors. You should not assume theCompany has identified these connections. You should not assume that theCompany will always update these and future risk factors in a timely manner.The Company is not undertaking any obligation to update these risk factors toreflect events or circumstances after the date of this report or to reflect theoccurrence of unanticipated events.

 

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Amongthe factors that could cause future results and financial condition to bematerially different from expectations are:

 

*1.**                                     **Our products may not be acceptedby the market*.  The success of our products and our financialcondition depends on the acceptance of AEM products by the medical community incommercially viable quantities during fiscal year 2005 and beyond. We cannotpredict how quickly or how broadly AEM products will be accepted by the medicalcommunity. We need to continually educate the marketplace about the**potential hazards involved in the use of conventionalelectrosurgical products during minimally-invasive surgical procedures and theexpected benefits associated with the use of AEM products. If we are unsuccessfulin educating the marketplace about our technology and the hazards ofconventional instruments, we will not create sufficient demand by hospitals andsurgeons for AEM products and our financial condition, results of operationsand cash flows could be adversely affected.

 

*2.**                                     **We need to continually developand train our network of independent sales representatives and expand ourdistribution efforts in order to be successful.* Our attempts to develop and train a networkof independent sales representatives in the U.S. and to expand ourinternational distribution efforts may take longer than expected and may resultin considerable amounts of retraining effort as the independent sales repschange their product lines, product focus and personnel. We may not be able toobtain full coverage of the U.S. by independent sales representatives asquickly as anticipated. The independent sales representative network hasinherent flaws and inefficiencies, which can include conflicts of interest andcompeting products.  Optimizing thequality of the network and the performance of independent sales representativesin the U.S. is an ongoing challenge. We may also encounter difficulties indeveloping our international presence due to regulatory issues and our abilityto successfully develop international distribution options. Our inability toexpand our network of independent sales representatives and optimize theirperformance could adversely affect our financial results.

 

*3.**                                     **We may need additional funding tosupport our operations.* Wewere**formed in 1991 and have incurred lossesof over $15 million since that date. We have primarily financed research,development, and operational activities with sales of our common stock. AtSeptember 30, 2004, we had $1,422,054 in cash available to fund futureoperations. During FY 2004, we issued a total of 333,334 shares of our commonstock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, forgross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held sharesof our common stock, constituting less than 5% of the issued and outstandingshares of common stock, prior to that transaction. We may have profitableoperations in FY 2005 but there is no guarantee we will do so. We may find thatinvestment in sales and marketing initiatives, merited by market opportunity,may result in the Company operating at a net loss from quarter to quarter.  We may also find ourselves at a competitivedisadvantage due to our constrained liquidity.

 

*4.**                                     **We may not be able to competesuccessfully against current manufacturers of conventional (“unshielded,unmonitored”) electrosurgical instruments or against competitors whomanufacture products that are based on surgical technologies that arealternatives to monopolar electrosurgery. *The electrosurgicalproducts market is intensely competitive. We expect that manufacturers of “unshielded,unmonitored” electrosurgical instruments will resist any loss of market sharethat might result from the presence of our “shielded and monitored” instrumentsin the marketplace. We also believe that manufacturers of products that arebased upon surgical technologies that are alternatives to monopolarelectrosurgery are our competitors. These technologies include bipolarelectrosurgery, the harmonic scalpel and lasers. The alternative technologiesmay gain market share and new competitive technologies may be developed andintroduced. Most of our competitors and potential competitors havesignificantly greater financial, technical, product development, marketing andother resources than we do. Most of our competitors also currently havesubstantial installed customer bases in the medical products market and havesignificantly greater market recognition. As a result of these factors, ourcompetitors may be able to respond more quickly to new or emerging technologiesand changes in customer requirements or to devote greater resources to thedevelopment, promotion and sale of their products. It is possible that newcompetitors or new alliances among competitors may emerge and rapidly acquiresignificant market share. The competitive pressures we face may materiallyadversely affect our financial position, results of operations and cash flows,and this may hinder our ability to respond to competitive threats.

 

*5.**                                     **If we do not continually enhanceour products and keep pace with rapid technological changes, we may not be ableto attract and retain customers.*****Our future success andfinancial performance will depend in part on our ability to meet theincreasingly sophisticated needs of customers through the timely developmentand successful introduction of product upgrades, enhancements and new products.These upgrades, enhancements and new products are subject to significanttechnical risks. The medical device market is subject to rapid technologicalchange, resulting in frequent new product introductions and enhancements ofexisting products, as well as the risk of product obsolescence. While we arecurrently developing new products and enhancing our existing product lines, wemay not be successful in completing the development of the new products orenhancements. In addition, we must respond effectively to technological changesby continuing to enhance our existing products to incorporate emerging orevolving standards. We may not be successful in developing and marketingproduct enhancements or new products that respond to technological changes orevolving industry standards. We may experience difficulties that could delay orprevent the successful development, introduction and marketing of thoseproducts, and our new products and product enhancements may not adequately meetthe requirements of the marketplace and achieve commercially viable levels ofmarket acceptance. If any potential new products, upgrades, or enhancements aredelayed, or if any potential new products, upgrades, or enhancements experiencequality problems or do not achieve such market acceptance, or if new productsmake our existing products obsolete, our financial position, results of operationsand cash flows would be materially adversely affected.

 

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*6.**                                     **If government regulations changeor if we fail to comply with existing and/or new regulations, we might missmarket opportunities and experience increased costs and limited growth.*  Theresearch, manufacturing, marketing and distribution of our products in theUnited States and other countries are subject to extensive regulation bynumerous governmental authorities including, but not limited to, the U. S. Foodand Drug Administration. Under the Federal Food, Drug and Cosmetic Act, medicaldevices must receive clearance from the U. S. Food and Drug Administrationthrough the Section 510(k) pre-market notification process or through the morelengthy pre-market approval process before they can be sold in the UnitedStates. The process of obtaining required regulatory approvals is lengthy andhas required the expenditure of substantial resources. There can be noassurance that we will be able to continue to obtain the necessary approvals.As part of our strategy, we also intend to pursue commercialization of ourproducts in international markets. Our products are subject to regulations thatvary from country to country. The process of obtaining foreign regulatoryapprovals in certain countries can be lengthy and require the expenditure ofsubstantial resources. We may not be able to obtain necessary regulatoryapprovals or clearances on a timely basis or at all, and delays in receipt ofor failure to receive such approvals or clearances, or failure to comply withexisting or future regulatory requirements would have a material adverse effecton our financial position, results of operations and cash flows.

 

*7.**                                     **If we fail to comply with theextensive regulatory requirements governing the manufacturing of our products,we could be subject to fines, suspensions or withdrawals of regulatoryapprovals, product recalls, suspension of manufacturing, operating restrictionsand/or criminal prosecution.*The manufacturing of our products is subject to extensive regulatoryrequirements administered by the Food and Drug Administration and otherregulatory bodies. Inspection of our manufacturing facilities and processes canbe conducted at any time, without prior notice, by the agencies. . The FDAinspected our facilities in May, 2004 and identified six potentialdeficiencies, which we are in the process of addressing. In addition, futurechanges in regulations or interpretations made by the Food and DrugAdministration or other regulatory bodies, with possible retroactive effect,could adversely affect us. Changes in existing regulations or adoption of newregulations or policies could prevent us from obtaining, or affect the timingof, future regulatory approvals or clearances. We may not be able to obtainnecessary regulatory approvals or clearances on a timely basis in the future,or at all. Delays in receipt of, failure to receive such approvals orclearances and/or failure to comply with existing or future regulatory requirementswould have a material adverse effect on our financial position, results ofoperations and cash flows.

 

*8.**                                     **Our current patents, tradesecrets and know-how may not provide a competitive advantage, the pendingapplications may not result in patents being issued, and our competitors maydesign around any patents issued to us.* Our success will continue to depend in part on our ability to maintainpatent protection for our products and processes, to preserve our trade secretsand to operate without infringing the proprietary rights of third parties. Wehave four issued U.S. patents on several technologies embodied in our AEMMonitoring System, AEM Instruments and related accessories and we have appliedfor additional U.S. patents. In addition, we have four issued foreign patents.The validity and breadth of claims coverage in medical technology patentsinvolve complex legal and factual questions and may be highly uncertain. Also,patents may not protect our proprietary information and know-how or provideadequate remedies for us in the event of unauthorized use or disclosure of suchinformation, and others may be able to develop, independently, suchinformation. There has been substantial litigation regarding patent and otherintellectual property rights in the medical device industry. Litigation may benecessary to enforce patents issued to us, to protect trade secrets or know-howowned by us, to defend us against claimed infringement of the rights of othersor to determine the ownership, scope or validity of our proprietary rights orthose of others. Any such claims may require us to incur substantial litigationexpenses and to divert substantial time and effort of management personnel andcould substantially decrease the amount of capital available for ouroperations. An adverse determination in litigation involving the proprietaryrights of others could subject us to significant liabilities to third parties,could require us to seek licenses from third parties, and could prevent us frommanufacturing, selling or using our products. The occurrence of any such actualor threatened litigation or the effect on our business of such litigation maymaterially adversely affect our financial position, results of operations andcash flows. Additionally, our assessment that a patent is no longer of valuecould result in a significant charge against our earnings.

 

*9.**                                     **We depend on single sourcesuppliers for certain of the key components and sub-contractors to provide muchof our products used in the manufacturing of our products.  The loss of a supplier or limitation insupply from existing suppliers could have a material adverse effect on ourability to manufacture our products until a new source of supply is located.* Although we believe that there arealternative suppliers, any interruption in the supply of key components couldhave a material adverse effect on us. A sudden increase in customer demand maycreate a backorder situation as lead times for some of our critical materialsare in excess of 12 weeks.****We rely onsubcontractors to provide products, either in the form of finished goods orsub-assemblies that we then assemble and test. While these sub-contractorsreduce our total cost of manufacturing, they may not be as responsive toincreased demand as we would be if we had our manufacturing capacity entirelyin-house, which may limit our growth strategy and revenues.

 

*10.**                              **The potential fluctuation infuture quarterly results may cause our stock price to fluctuate.*  Weexpect that our operating results could fluctuate significantly from quarter toquarter in the future and will depend upon a number of factors, many of whichare outside our control. These factors include the extent to which our AEMtechnology and related accessories gain market acceptance; our investments inmarketing, sales, research and development and administrative personnelnecessary to support growth; our ability to expand our market share; actions ofcompetitors and general economic conditions. The market value of our commonstock has dramatically fluctuated in the past and is likely to fluctuate in thefuture. Any deviation could have an immediate and significant negative impacton the market price of our stock.

 

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*11.**                              **Our common stock is thinlytraded, the prices at which it trades are volatile and the buying or sellingactions of a few shareholders may adversely affect our stock price. *At September 30, 2004, we had a public float of 3,423,119 shares or 55%of the outstanding common stock. The average number of shares traded in anygiven day over the past year has been relatively small compared to the publicfloat. Thus, the actions of a few shareholders either buying or selling sharesof our common stock may adversely affect the price of the shares. Historically,thinly traded securities such as our common stock have experienced extremeprice and volume fluctuations that do not necessarily relate to operatingperformance.

 

*12.**                              **Our insurance coverage forproduct liability claims is up to $5,000,000.* We**face an inherent business risk ofexposure to product liability claims in the event that the use of our productsis alleged to have resulted in adverse effects to a patient. We maintain ageneral liability insurance policy up to the amount of $5,000,000 that includescoverage for product liability claims. Liability claims may be excluded fromthe policy, may exceed the coverage limits of the policy, or the insurance maynot continue to be available on commercially reasonable terms or at all. Consequently,a product liability claim or other claim with respect to uninsured liabilitiesor in excess of insured liabilities could have a material adverse effect on ourfinancial position, results of operations and cash flows.

 

*13.**                              **We depend on revenue from somemajor customers*.  We depend on revenue that is generated fromhospitals’ ongoing usage of the AEM surgical instruments. In FY 2004, wegenerated revenue from over 350 hospitals that have converted to AEM products,but no hospital customer contributed more than 2% to the total revenues. Weutilize a small number of stocking distributors, which sell AEM products tomultiple hospital customers. In FY 2004, we generated revenue of $437,307 (6%)from one of these distributors.  While itis infrequent that a hospital customer stops using AEM instruments after theyconvert, a loss of ongoing revenue from a hospital customer could have amaterial adverse effect on our revenues and cash flows.

 

*14.**                              **We depend on certain keypersonnel.* We are highlydependent on a limited number of key management personnel, particularly our CEOand President, John R. Serino, and our Chairman of the Board and Vice Presidentof Business Development, Roger C. Odell. Our loss of key personnel to death,disability or termination, or our inability to hire and retain qualifiedpersonnel, could have a material adverse effect on our financial position,results of operations and cash flow.

 

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**ITEM 3****  –  CONTROLSAND PROCEDURES**

 

(a)The Company has carried out an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Principal Accounting Officer, of the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rules 13a-14(c) and15d-14c of the Securities and Exchange Act of 1934 (the “Exchange Act”)). Basedupon that evaluation, the Chief Executive Officer and the Principal AccountingOfficer concluded as of September 30, 2004 that the Company’s disclosurecontrols and procedures were effective in ensuring that information required tobe disclosed by the Company under the Exchange Act was recorded, processed,summarized and reported within the time periods specified under the ExchangeAct rules and forms.

 

(b)There were no significant changes in the Company’s internal controls or inother factors that could significantly affect the Company’s disclosure controlsand procedures subsequent to the date of the evaluation discussed above, nor anysignificant deficiencies or material weaknesses in such disclosure controls,internal controls and procedures requiring corrective actions. As a result nocorrective actions were taken.

 

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**Item 4**

 

 

**Investor Services**

 
|   | Computershare Trust Company, Inc |   |
|--------|----------------------------------|--------|
|   | 350 Indiana Street Suite 800     |   |
|   | Golden Colorado 80401            |   |
|   | Telephone 303 262 0600           |   |
|   | Facsimile 303 262 0700           |   |
|   | www.computershare.com            |   |

 
| August 16, 2004       | USA             |
|-----------------------|-----------------|
|                  | Australia       |
|                  | Canada          |
| Encision Inc          | Channel Islands |
| Attn: Marcia McHaffie | Germany         |
| 4828 Sterling Drive   | Hong Kong       |
| Boulder CO 80301      | Ireland         |
|                  | New Zealand     |
|                  | South Africa    |
|                  | United Kingdom  |

 

Sir/Madam:

 

Computershare Investor Services in connection with your request for aproxy count of all outstanding votable shares, reports the following finaltotals for all the proposals voted at the Annual Meeting held August 16, 2004.

 

Proposal #1

 

| **ELECTION OF DIRECTORS** | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|---------------------------|------------|-----------|------------|--------------|------------|
| VERN D. KOMELSEN          |       | 4,646,000 |       | 406,877      |       |
| ROBERT H. FRIES           |       | 4,658,995 |       | 393,882      |       |
| JOHN R. SERINO            |       | 4,659,495 |       | 393,382      |       |
| DAVID W. NEWTON           |       | 4,659,000 |       | 393,877      |       |
| ROGER C. ODELL            |       | 4,654,826 |       | 398,051      |       |

 

Proposal #2                                           TOAPPROVE THE AMENDMENT OF THE ENCISION INC. 1997 STOCK OPTION PLAN.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Not Voted** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------|------------|
| 2,851,257 |       | 441,341     |       | 9,485       |       | 1,750,794     |       |

 

Proposal #3                                           TOAPPROVE OF THE APPOINTMENT OF GORDON, HUGHES & BANKS, LLP AS THE COMPANY’SINDEPENDENT PUBLIC ACCOUNTANTS.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 5,035,092 |       | 17,000      |       | 785         |       |

 

Proposal #4                                           TOTRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR ANYADJUOURNMENT THEREOF.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 4,627,960 |       | 354,978     |       | 69,939      |       |

 

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Total voted shares represented by proxy and in person: 5,052,877 

Percentage of the outstanding votable shares: 86.23% 

Outstanding votable shares: 5,859,709

 
| Sincerely,           |
|----------------------|
|                 |
| /s/ Kathy Kinard     |   |
| Kathy Kinard         |
| Relationship Manager |

 
| STATE OF COLORADO   | ) |
|---------------------|---|
|                |
| COUNTY OF JEFFERSON | ) |

 

Theforegoing instrument was subscribed to before me this 16th day of August, 2004.

 
|   | /s/ MONA C. HILLSTEN                     |
|--------|------------------------------------------|
|   | Notary Public                            |
|   | My Commission Expires September 29, 2004 |

 

 

 

 

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

 

**ITEM 1****                                                       ****LEGAL PROCEEDINGS**

 

TheCompany was involved in one legal proceeding (described below). The Company maybecome involved in litigation in the future in the normal course of business.

 

TheCompany had notified one of its distributors that it was in breach of itsDistributor Agreement with the Company in several respects, and that if thedistributor did not cure the breaches the Agreement may be terminated. Thedistributor had informed the Company that it believed the Company’sinterpretations of the Agreement were incorrect. The distributor disputed theCompany’s position and asserted that the Company had breached the Agreement.The dispute was proceeding in arbitration pursuant to the terms of theAgreement. On July 23, 2004, this dispute was resolved for approximately$201,000, including legal and arbitrator fees. The distributor’s purchasesrepresented approximately 6% of the Company’s revenue in FY2004 and 10% of theCompany’s revenue in FY2003. During the first quarter ended June 30, 2004, theCompany had expensed approximately $201,000, and as of September 30, 2004,there was no balance in other accrued liabilities for this dispute.

 

**ITEM 2****                                                       **Not Applicable

 

**ITEM 3****       **                                                Not Applicable

 

**ITEM 4****       **-                                         Exhibit – Proxy Count

 

**ITEM 5****       **-                                         Not Applicable

 

**ITEM****6**        -                                         EXHIBITS AND REPORTS ON FORM 8-K

 

(a)        Exhibits

 

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

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

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

 

(b)       Reportson Form 8-K

 

On July 2, 2004, the Company furnished a press releaseunder Item 5 of Form 8-K.

 

On July 2, 2004, the Company furnished a pressrelease under Item 5 of Form 8-K.

 

On August 4, 2004, the Company furnished a pressrelease under Item 12 of Form 8-K.

 

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**SIGNATURE**

 

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, Encision has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| **Name**            | ** ** | **Title**                       | ** ** | **Date** |
|---------------------|------------|---------------------------------|------------|----------|
|                |       |                            |       |     |
|                |       |                            |       |     |
| /s/ Marcia McHaffie |       |                            | Controller |     | November 5, 2004 |
| Marcia McHaffie     |       | (Principal  Accounting Officer) |       |     |
|                     |            |                                 |            |          |  |

 

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