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

**Washington,D.C.  20549**

 

## **Form 10-QSB**

 

ý                      **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES****EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended September 30, 2003**

 

**Forthe transition period from                to               **

 

**Commissionfile number    0-28604**

 

**ENCISION INC.**

(Exact name of small business issuer as specified inits charter)

 

| **Colorado**                                                     |   | **84-1162056**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **4828 Sterling Drive, Boulder,  Colorado**  **80301**      |
| (Address of  principal executive offices)                        |
|                                                             |
| **(303) 444-2600**                                               |
| (Registrant’s  telephone number)                            |

 

**State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:**

 

| **Common Stock, No par****value** |   | **5,776,126****Shares**            |
|-----------------------------------|--------|------------------------------------|
| Class                             |   | (outstanding at  October 15, 2003) |

 

**Transitional Small Business Disclosure Format**

 

**Yes        ****o   No       ****ý**

 

 

----

 

**ENCISION INC.**

 

**FORM 10-QSB**

 

**For the Quarter Ended September 30,2003**

 

 

**INDEX**

 

 
| **PART I.**  | **UNAUDITEDFINANCIAL INFORMATION** |
|--------------|------------------------------------|
|         |                               |   |
|         | **ITEM1**                          | - | Condensed Interim Financial Statements: |
|         |                               | - | Condensed  Balance Sheets as of  September 30, 2003 and March 31, 2003 |
|         |                               | - | Condensed Statements  of Operations for  the Three Months Ended September 30, 2003 and 2002 |
|         |                               | - | Condensed  Statements of Operations for  the Six Months Ended September 30, 2003 and 2002 |
|         |                               | - | Condensed Statements  of Cash Flows for  the Six Months Ended September 30, 2003 and 2002 |
|         |                               | - | 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

----

 

**PART I****                                                       FINANCIALINFORMATION**

 

**ITEM 1****   –  CONDENSED INTERIM FINANCIAL STATEMENTS**

 

ENCISION INC.

 

CONDENSED BALANCE SHEETS

(Unaudited)

 
|                                                                                               |   | **September  30,  2003** |      | **March 31,  2003** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|---------------------|--------|
| ASSETS                                                                                             |   |                     |      |                |   |
|                                                                                               |   |                     |      |                |   |
| CURRENT  ASSETS:                                                                                   |   |                     |      |                |   |
| Cash  and cash equivalents                                                                         |   | $                        | 1,378,653 |                | $      | 585,552 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $19,000 and $25,000,  respectively |   | 837,951                  |      | 959,808             |   |
| Inventory,  net of reserve for obsolescence of $75,000 and $68,000, respectively                   |   | 1,069,877                |      | 931,323             |   |
| Prepaid  expenses                                                                                  |   | 122,260                  |      | 46,929              |   |
|                                                                                               |   |                     |      |                |   |
| Total  current assets                                                                              |   | 3,408,741                |      | 2,523,612           |   |
|                                                                                               |   |                     |      |                |   |
| EQUIPMENT,  at cost:                                                                               |   |                     |      |                |   |
| Furniture,  fixtures and equipment                                                                 |   | 918,917                  |      | 818,392             |   |
| Customer-site  equipment                                                                           |   | 395,568                  |      | 306,381             |   |
| Less  - accumulated depreciation                                                                   |   | (938,601                 | )         | (858,144            | )      |
|                                                                                               |   |                     |      |                |   |
| Equipment,  net                                                                                    |   | 375,884                  |      | 266,629             |   |
|                                                                                               |   |                     |      |                |   |
| PATENTS,  net of accumulated amortization of $61,949 and $55,871, respectively                     |   | 123,838                  |      | 129,916             |   |
| OTHER  ASSETS                                                                                      |   | 12,972                   |      | 12,972              |   |
|                                                                                               |   |                     |      |                |   |
| Total  assets                                                                                      |   | $                        | 3,921,435 |                | $      | 2,933,129 |   |
|                                                                                               |   |                     |      |                |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                         |   |                     |      |                |   |
|                                                                                               |   |                     |      |                |   |
| CURRENT  LIABILITIES:                                                                              |   |                     |      |                |   |
| Accounts  payable                                                                                  |   | $                        | 401,444   |                | $      | 416,848 |   |
| Accrued  compensation                                                                              |   | 97,658                   |      | 150,607             |   |
| Other  accrued liabilities                                                                         |   | 339,343                  |      | 359,326             |   |
|                                                                                               |   |                     |      |                |   |
| Total  current liabilities                                                                         |   | 838,445                  |      | 926,781             |   |
|                                                                                               |   |                     |      |                |   |
| LONG-TERM  LIABILITIES:                                                                            |   |                     |      |                |   |
| Lease  payable                                                                                     |   | 23,535                   |      | —              |   |
|                                                                                               |   |                     |      |                |   |
| 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, 5,776,126 shares  outstanding          |   | 18,254,051               |      | 17,267,684          |   |
| Accumulated  deficit                                                                               |   | (15,194,596              | )         | (15,261,336         | )      |
|                                                                                               |   |                     |      |                |   |
| Total  shareholders’ equity                                                                   |   | 3,059,455                |      | 2,006,348           |   |
|                                                                                               |   |                     |      |                |   |
| Total  liabilities and shareholders’ equity                                                   |   | $                        | 3,921,435 |                | $      | 2,933,129 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

3

----

 

ENCISION INC.

 

CONDENSED STATEMENTS OFOPERATIONS

(Unaudited)

 
|                                                                           |   | **For the  Three Months  Ended September 30,** |      |
|--------------------------------------------------------------------------------|--------|------------------------------------------------|-----------|
|                                                                           |   | **2003**                                       |      | **2002** |   |
|                                                                           |   |                                           |      |   |   |
| REVENUE,  NET                                                                  |   | $                                              | 1,880,019 |   | $ | 1,753,873 |   |
|                                                                           |   |                                           |      |   |   |
| COST  OF SALES                                                                 |   | 772,711                                        |      | 685,796 |   |
|                                                                           |   |                                           |      |   |   |
| Gross  profit                                                                  |   | 1,107,308                                      |      | 1,068,077 |   |
|                                                                           |   |                                           |      |   |   |
| OPERATING  EXPENSES:                                                           |   |                                           |      |   |   |
| Sales  and marketing                                                           |   | 648,793                                        |      | 622,075 |   |
| General  and administrative                                                    |   | 231,327                                        |      | 241,290 |   |
| Research  and development                                                      |   | 191,851                                        |      | 115,089 |   |
|                                                                           |   |                                           |      |   |   |
| Total  operating expenses                                                      |   | 1,071,971                                      |      | 978,454 |   |
|                                                                           |   |                                           |      |   |   |
| INCOME  FROM OPERATIONS                                                        |   | 35,337                                         |      | 89,623 |   |
|                                                                           |   |                                           |      |   |   |
| OTHER  INCOME (EXPENSE):                                                       |   |                                           |      |   |   |
| Interest  income                                                               |   | 824                                            |      | 1,157 |   |
| Other  (expense) income, net                                                   |   | (4,416                                         | )         | 4,490 |   |
|                                                                           |   |                                           |      |   |   |
| NET  INCOME                                                                    |   | $                                              | 31,745    |   | $ | 95,270 |   |
|                                                                           |   |                                           |      |   |   |
| NET  INCOME PER SHARE:                                                         |   |                                           |      |   |   |
| Basic  and diluted net income per common share                                 |   | $                                              | 0.01      |   | $ | 0.02 |   |
|                                                                           |   |                                           |      |   |   |
| Diluted  net income per common share                                           |   | $                                              | 0.01      |   | $ | 0.02 |   |
|                                                                           |   |                                           |      |   |   |
| Weighted  average shares used in computing basic net income per common share   |   | 5,662,522                                      |      | 5,422,532 |   |
|                                                                           |   |                                           |      |   |   |
| Weighted  average shares used in computing diluted net income per common share |   | 6,174,862                                      |      | 5,871,989 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

4

----

 

ENCISION INC.

 

CONDENSED STATEMENTS OFOPERATIONS

(Unaudited)

 
|                                                                           |   | **For the  Six Months  Ended September 30,** |      |
|--------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|
|                                                                           |   | **2003**                                     |      | **2002** |   |
|                                                                           |   |                                         |      |   |   |
| REVENUE,  NET                                                                  |   | $                                            | 3,581,959 |   | $ | 3,096,265 |   |
|                                                                           |   |                                         |      |   |   |
| COST  OF SALES                                                                 |   | 1,504,718                                    |      | 1,198,856 |   |
|                                                                           |   |                                         |      |   |   |
| Gross  profit                                                                  |   | 2,077,241                                    |      | 1,897,409 |   |
|                                                                           |   |                                         |      |   |   |
| OPERATING  EXPENSES:                                                           |   |                                         |      |   |   |
| Sales  and marketing                                                           |   | 1,167,197                                    |      | 1,183,115 |   |
| General  and administrative                                                    |   | 457,621                                      |      | 473,590 |   |
| Research  and development                                                      |   | 380,424                                      |      | 239,868 |   |
|                                                                           |   |                                         |      |   |   |
| Total  operating expenses                                                      |   | 2,005,242                                    |      | 1,896,573 |   |
|                                                                           |   |                                         |      |   |   |
| INCOME  FROM OPERATIONS                                                        |   | 71,999                                       |      | 836 |   |
|                                                                           |   |                                         |      |   |   |
| OTHER  INCOME (EXPENSE):                                                       |   |                                         |      |   |   |
| Interest  income                                                               |   | 1,301                                        |      | 2,213 |   |
| Other  (expense) income, net                                                   |   | (6,560                                       | )         | 1,570 |   |
|                                                                           |   |                                         |      |   |   |
| NET  INCOME                                                                    |   | $                                            | 66,740    |   | $ | 4,619 |   |
|                                                                           |   |                                         |      |   |   |
| NET  INCOME PER SHARE:                                                         |   |                                         |      |   |   |
| Basic  and diluted net income per common share                                 |   | $                                            | 0.01      |   | $ | 0.00 |   |
|                                                                           |   |                                         |      |   |   |
| Diluted  net income per common share                                           |   | $                                            | 0.01      |   | $ | 0.00 |   |
|                                                                           |   |                                         |      |   |   |
| Weighted  average shares used in computing basic net income per common share   |   | 5,546,909                                    |      | 5,421,527 |   |
|                                                                           |   |                                         |      |   |   |
| Weighted  average shares used in computing diluted net income per common share |   | 6,026,857                                    |      | 5,910,638 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

5

----

 

ENCISION INC.

 

CONDENSED STATEMENTS OFCASH FLOWS

(Unaudited)

 
|                                                                                                 |   | **For the  Six Months  Ended September 30,** |      |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|
|                                                                                                 |   | **2003**                                     |      | **2002** |   |
|                                                                                                 |   |                                         |      |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                               |   |                                         |      |   |   |
| Net  income (loss)                                                                                   |   | $                                            | 66,740    |   | $ | 4,619 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities- |   |                                         |      |   |   |
| Depreciation  and amortization                                                                       |   | 86,535                                       |      | 43,685 |   |
| Provision  for bad debts                                                                             |   | (6,000                                       | )         | 12,000 |   |
| Inventory  reserves                                                                                  |   | 7,000                                        |      | 8,000 |   |
| Non-cash,  stock-based, compensation charge                                                          |   | —                                       |      | 12,000 |   |
| Changes  in operating assets and liabilities-                                                        |   |                                         |      |   |   |
| Accounts  receivable                                                                                 |   | 127,857                                      |      | (30,002 | ) |
| Inventory                                                                                            |   | (145,554                                     | )         | 50,966 |   |
| Other  assets                                                                                        |   | (75,331                                      | )         | (22,846 | ) |
| Accounts  payable                                                                                    |   | (15,404                                      | )         | 195,569 |   |
| Accrued  compensation and other accrued liabilities                                                  |   | (49,397                                      | )         | 6,561 |   |
|                                                                                                 |   |                                         |      |   |   |
| Net  cash provided by (used) in operating activities                                                 |   | (3,554                                       | )         | 280,552 |   |
|                                                                                                 |   |                                         |      |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                               |   |                                         |      |   |   |
| Investment  in equipment                                                                             |   | (189,712                                     | )         | (176,789 | ) |
| Patent  costs                                                                                        |   | —                                       |      | (10,976 | ) |
|                                                                                                 |   |                                         |      |   |   |
| Net  cash used in investing activities                                                               |   | (189,712                                     | )         | (187,765 | ) |
|                                                                                                 |   |                                         |      |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                               |   |                                         |      |   |   |
| Proceeds  from the exercise of stock options                                                         |   | 23,151                                       |      | 3,950 |   |
| 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                                                           |   | 986,367                                      |      | 3,950 |   |
|                                                                                                 |   |                                         |      |   |   |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                |   | 793,101                                      |      | 96,737 |   |
|                                                                                                 |   |                                         |      |   |   |
| CASH  AND CASH EQUIVALENTS, beginning of period                                                      |   | 585,552                                      |      | 500,988 |   |
|                                                                                                 |   |                                         |      |   |   |
| CASH  AND CASH EQUIVALENTS, end of period                                                            |   | $                                            | 1,378,653 |   | $ | 597,725 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

6

----

 

ENCISION INC.

 

 

NOTES TO CONDENSEDINTERIM FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2003

(Unaudited)

 

(1)                                  ORGANIZATIONAND NATURE OF BUSINESS

 

Encision Inc. (the“Company”) is a medical device company that designs, develops, manufactures andmarkets patented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. The Company believes its patented AEM® surgical instrumenttechnology is changing the marketplace for electrosurgical devices andinstruments by providing a solution to a well-documented risk in laparoscopicsurgery.  The Company’s sales to datehave been made principally in the United States.

 

The Company achievedprofitable operations in fiscal 2003 but prior to that had incurred lossessince its inception and has an accumulated deficit of $15,194,596 at March 31,2003. Operations have been financed primarily through issuance of common stock.The Company’s liquidity has substantially diminished because of such continuingoperating losses and the Company may be required to seek additional capital inthe future.

 

During fiscal year 2003,the Company achieved annual net income and positive cash flow for the firsttime in its history.  The Company’sstrategic marketing and sales plan is designed to expand the use of theCompany’s products in surgically active hospitals in the United States.  Management expects these efforts to resultin continued revenue increases for fiscal 2004 which, combined with plannedcontrolled operating expenses and consistent gross profit margins, are expectedto maintain profitable operations and conserve the Company’s cash resources.

 

On July 30, 2003 theCompany issued a total of 333,334 shares of its common stock to the WasatchMicro Cap Fund and the Wasatch Micro Cap 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.

 

(2)                                SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates in thePreparation of Financial Statements

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptions.  Such estimates and assumptions affect thereported amounts of assets and liabilities as well as disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expense during the reporting period.  Actual results could differ from thoseestimates.

 

Cash and Cash Equivalents

 

For purposes of reportingcash flows, the Company considers all cash and highly liquid investments withan original maturity of three months or less to be cash equivalents.

 

Fair Value of FinancialInstruments

 

The Company’s financialinstruments consist of cash and cash equivalents and short-term tradereceivables and payables.  The carryingvalues of cash and cash equivalents and short-term receivables and payablesapproximate their fair value due to their short maturities.

 

Concentration of CreditRisk

 

The Company has nosignificant off-balance sheet concentrations of credit risk such as foreignexchange contracts, options contracts or other foreign hedging arrangements.The Company maintains the majority of its cash balances with two financialinstitutions in the form of demand deposits and money market funds.

 

Accounts receivables aretypically unsecured and are derived from transactions with and from entities inthe healthcare industry primarily located in the United States. Accordingly,the Company may be exposed to credit risk generally associated with thehealthcare industry. The Company maintains allowances for doubtful accounts forestimated losses resulting from the inability of its customers to make required payments.

 

7

----

 

A summary of theCompany’s bad debt activity for the three months ended September 30, 2003 is asfollows:

 
| Balance,  as of June 30, 2003      |   | $      | 19,000 |   |
|------------------------------------|--------|--------|--------|--------|
| Expense                            |   | — |   |
| Write-offs                         |   | — |   |
| Balance,  as of September 30, 2003 |   | $      | 19,000 |   |

 

The net accountsreceivable balance at September 30, 2003 of $837,951 included $31,428, orapproximately 4%, from one distributor. The net accounts receivable balance atMarch 31, 2003 of $959,808 included $227,178, or approximately 24%, from onedistributor.

 

Warranty Accrual

 

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. Asummary of the Company’s warranty claims activity for the three months ended30, 2003 is as follows:

 
| Balance,  as of June 30, 2003      |   | $      | 125,000 |   |
|------------------------------------|--------|--------|---------|--------|
| Expense                            |   | 209    |    |
| Claims                             |   | (5,209 | )       |
| Balance,  as of September 30, 2003 |   | $      | 120,000 |   |

 

Inventories

 

Inventories are stated atthe lower of cost (first-in, first-out basis) or market. The Company reduces inventory for estimatedobsolete or unmarketable inventory equal to the difference between the cost ofinventory and the estimated market value based upon assumptions about futuredemand and market conditions. If actual market conditions are less favorablethan those projected by management, additional inventory write-downs may berequired. Inventory consisted of the following:

 
|                             |   | **September  30,  2003** |      | **March 31,  2003** |   |
|----------------------------------|--------|--------------------------|-----------|---------------------|--------|
|                             |   |                     |      |                |   |
| Raw  materials                   |   | $                        | 823,918   |                | $      | 627,243 |   |
| Finished  goods                  |   | 320,959                  |      | 372,080             |   |
|                             |   | 1,144,877                |      | 999,323             |   |
| Less  - Reserve for obsolescence |   | (75,000                  | )         | (68,000             | )      |
|                             |   |                     |      |                |   |   |   |
|                             |   | $                        | 1,069,877 |                | $      | 931,323 |   |

 

A summary of theCompany’s inventory reserve for obsolescence activity for the three monthsended September 30, 2003 is as follows:

 
| Balance,  as of June 30, 2003      |   | $     | 68,000 |   |
|------------------------------------|--------|-------|--------|--------|
| Expense                            |   | 7,000 |   |
| Write-offs                         |   | 0     |   |
| Balance,  as of September 30, 2003 |   | $     | 75,000 |   |

 

Property and Equipment

 

Property and equipmentare stated at cost, with depreciation computed primarily on a double-decliningbasis over the estimated useful life of the asset, generally three to fiveyears. Company-owned AEM Monitors at customer sites are depreciated on adouble-declining basis for a period of 5 years. Leasehold improvements aredepreciated over the shorter of the remaining lease term or the estimateduseful life of the asset. Maintenance and repairs are expensed as incurred andmajor additions, replacements and improvements are capitalized.

 

8

----

 

Long-Lived Assets 

 

Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. A long-lived assetis considered impaired when estimated future cash flows related to the asset,undiscounted and without interest, are insufficient to recover the carryingamount of the asset. If deemed impaired, the long-lived asset is reduced to itsestimated fair value. Long-lived assets to be disposed of are reported at thelower of their carrying amount or estimated fair value less cost to sell.

 

Patents

 

The costs of applying forpatents are capitalized and amortized on a straight-line basis over the lesserof the patent’s economic or legal life (17 years in the United States).Capitalized costs are expensed if patents are not granted. The Company reviewsthe carrying value of its patents periodically to determine whether the patentshave continuing value and such reviews could result in the conclusion that therecorded amounts have been impaired.

 

Accrued Liabilities

 

The Company has accrued$120,000 related to warranty claims and $103,326 related to sales commissionsand has included these amounts in accrued liabilities in the accompanyingbalance sheets as of September 30, 2003.

 

Income Taxes 

 

The Company accounts forincome taxes under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No.109”). SFAS No. 109 requires recognition of deferred income tax assets andliabilities for the expected future income tax consequences, based on enactedtax laws, of temporary differences between the financial reporting and taxbases of assets and liabilities. SFAS No. 109 also requires recognition ofdeferred tax assets for the expected future tax effects of all deductibletemporary differences, loss carryforwards and tax credit carryforwards.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. For the six monthsended September 30, 2003, the Company utilized net operating loss carryforwardsto entirely offset its tax liability. As a result, no tax provision is reflectedin the accompanying statements of operations. Should the Company achieve sufficient, sustained income in the future,the Company may conclude that some or all of the valuation allowance should bereversed.

 

Revenue Recognition

 

Revenue from productsales is recorded when the Company ships the product and title has passed tothe customer, provided that the Company has evidence of a customer arrangementand can conclude that collection is probable. The Company’s shipping policy isFOB Shipping Point.  The Companyrecognizes revenue from sales to stocking distributors when there is no rightof return, other than for normal warranty claims.  The Company has no ongoing obligations related to product sales,except for normal warranty.

 

Research and DevelopmentExpenses

 

The Company expensesresearch and development costs for products and processes as incurred.

 

Stock-BasedCompensation  

 

The Company has adoptedthe disclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), and applies Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), andrelated interpretations in accounting for stock options granted toemployees.  If the Company had accountedfor its stock-based compensation plans in accordance with SFAS 123, theCompany’s net income or loss and pro forma net income or loss per basic anddiluted common share for the three and six months ended September 30, 2003would have been reported as follows:

 
| Three  months ended September 30, 2003                          |   |    |   |
|-----------------------------------------------------------------|--------|---------|--------|
| Net  Income (Loss)                                              |   |    |   |
| As  Reported                                                    |   | $       | 31,745 |   |
| Stock-based  compensation based upon estimated fair values      |   | (41,106 | )      |
| Pro  forma                                                      |   | $       | (9,361 | ) |
| Pro  Forma Net Income (Loss) Per Basic and Diluted Common Share |   |    |   |
| As  Reported                                                    |   | $       | 0.01   |   |
| Pro  Forma                                                      |   | $       | 0.00   |   |

 

9

----

 
| Six  months ended September 30, 2003                            |   |    |    |
|-----------------------------------------------------------------|--------|---------|---------|
| Net  Income (Loss)                                              |   |    |    |
| As  Reported                                                    |   | $       | 66,740  |   |
| Stock-based  compensation based upon estimated fair values      |   | (80,464 | )       |
| Pro  forma                                                      |   | $       | (13,724 | ) |
| Pro  Forma Net Income (Loss) Per Basic and Diluted Common Share |   |    |    |
| As  Reported                                                    |   | $       | 0.01    |   |
| Pro  Forma                                                      |   | $       | 0.00    |   |

 

Segment Reporting

 

The Company has concludedthat it has one operating segment.

 

Basic and Diluted Incomeand Loss per Common Share

 

Net income or loss pershare is calculated in accordance with SFAS No. 128, “Earnings Per Share”(“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net income orloss per common share is computed by dividing net income or loss for the periodby the weighted average number of common shares outstanding for the period.Diluted net income or loss per common share is computed by dividing the netincome or loss for the period by the weighted average number of common andpotential common shares outstanding during the period if the effect of thepotential common shares is dilutive. As a result of the Company’s net loss forthe three months ended September 30, 2002, all potentially dilutive securitiesin the loss years would be anti-dilutive and were excluded from the computationof diluted loss per share, and there are no differences between basic anddiluted per share amounts for all prior years presented.  The following is a table that reconciles thenumerators and denominators of the basic and diluted earnings per share:

 

 

 
|                                                                       |   | **For the  Three Months Ended September 30, 2003** |       |
|----------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                       |   | **Income  (Numerator)**                            |       | **Shares  (Denominator)** |   | **Per-Share  Amount** |   |
| Net income                                                                 |   |                                               | ** ** |   | ** ** |   | ** ** |
| Basic EPS Income available to common stockholders                          |   | $                                                  | 31,745     |   | 5,662,522 |   | $ | 0.01 |   |
|                                                                       |   |                                               |       |   |   |   |   |
| Effect  of Dilutive Securities Stock Options                               |   |                                               |       | 512,340 |   |   |   |
|                                                                       |   |                                               |       |   |   |   |   |
| Diluted  EPS Income available to common stockholders + dilutive securities |   | $                                                  | 31,745     |   | 6,174,862 |   | $ | 0.01 |   |

 
|                                                                       |   | **For the  Six Months Ended September 30, 2003** |   |
|----------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                                       |   | **Income  (Numerator)**                          |   | **Shares  (Denominator)** |   | **Per-Share  Amount** |   |
| Net  income                                                                |   |                                             |   |   |   |   |   |
| Basic  EPS Income available to common stockholders                         |   | $                                                | 66,740 |   | 5,546,909 |   | $ | 0.01 |   |
|                                                                       |   |                                             |   |   |   |   |   |
| Effect  of Dilutive Securities Stock Options                               |   |                                             |   | 479,948 |   |   |   |
|                                                                       |   |                                             |   |   |   |   |   |
| Diluted  EPS Income available to common stockholders + dilutive securities |   | $                                                | 66,740 |   | 6,026,857 |   | $ | 0.01 |   |

 

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Recently IssuedAccounting Standards

 

In August 2001, the FASBissued Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (SFAS No. 144). SFAS No. 144establishes a single accounting model for long- lived assets to be disposed ofby sale and requires that those long-lived assets be measured at the lower ofcarrying amount or fair value less cost to sell, whether reported in continuingoperations or in discontinued operations. SFAS No. 144 is effective for fiscalyears beginning after December 15, 2001. The Company adopted SFAS No. 144 onApril 1, 2002, and the adoption did not have a material impact on the Company’sfinancial position or results of operations.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure” (“SFAS No. 148”), which (i) amends SFAS No. 123, “Accountingfor Stock-Based Compensation,” to provide alternative methods of transition foran entity that voluntarily changes to the fair value based method of accountingfor stock-based compensation (ii) amends the disclosure provisions of SFAS No.123 to require prominent disclosure about the effects on reported net income ofan entity’s accounting policy decisions with respect to stock-based employeecompensation and (iii) amends APB Opinion No. 28, “Interim FinancialReporting,” to require disclosure about those effects in interim financialinformation. Items (ii) and (iii) of the new requirements in SFAS No. 148 areeffective for financial statements for fiscal years ending after December 15,2002. We have included the requirements of item (ii) in Note 2 in the Notes toFinancial Statements and will include the requirements of item (iii) beginningin our first quarter of 2004.

 

In November 2002, theFASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”), which requires that, for guarantees within the scope of FIN45 issued or amended after December 31, 2002, a liability for the fair value ofthe obligation undertaken in issuing the guarantee be recognized. FIN 45 doesnot apply to certain guarantee contracts, such as for a lessee’s residual valueguarantee embedded in a capital lease. FIN 45 also requires additionaldisclosures in financial statements for periods ending after December 15, 2002,which we have adopted. However, as of September 30, 2003, we believe that,other than product warranty, we have no material items subject to the newdisclosure requirements.

 

(3)                                  COMMITMENTSAND CONTINGENCIES

 

The Company currentlyleases its facilities under noncancelable lease agreements through October 31,2004. The minimum future lease payments are $55,786 for fiscal year ended March31, 2004 and $66,955 for fiscal year ended March 31, 2005.

 

The Company is subject toregulation by the United States Food and Drug Administration (“FDA”). The FDAprovides regulations governing the manufacture and sale of the Company’sproducts and regularly inspects the Company and other manufacturers todetermine their compliance with these regulations. As of September 30, 2003 theCompany believes it was in substantial compliance with all known regulations.The Company was last inspected in November 1998 and has not, at September 30,2003, been notified of any deficiencies from that inspection. FDA inspectionsare conducted approximately every two years or on a more frequent basis at thediscretion of the FDA.

 

The results of operationsfor the quarter ended September 30, 2003 should not be taken as an indicationof the results of operations for all or any part of the balance of the year.

 

The accounts receivablebalance at September 30, 2003 of $837,951 included $38,514 (5%) frominternational customers.

 

(4)                                  MANAGEMENT’SREPRESENTATIONS

 

The condensed interimfinancial statements included herein have been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading. The condensedinterim financial statements and notes thereto should be read in conjunctionwith the financial statements and the notes thereto, included in the Company’sAnnual Report to the Securities and Exchange Commission for the fiscal yearended March 31, 2003, filed on Form 10-KSB on June 12, 2003.

 

The accompanyingcondensed interim financial statements have been prepared, in all materialrespects, in conformity with the standards of accounting measurements set forthin Accounting Principles Board Opinion No. 28 and reflect, in the opinion of management,all adjustments necessary to summarize fairly the financial position andresults of operations for such periods in accordance with accounting principlesgenerally accepted in the United States of America.  All adjustments are of a normal recurring nature. The results ofoperations for the most recent interim period are not necessarily indicative ofthe results to be expected for the full year.

 

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**ITEM2****  –****                        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.  These statements are forward lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 and involve substantial risks and uncertainties that may cause actualresults to differ materially from those indicated by the forward lookingstatements.  All forward lookingstatements in this section on Outlook are based on information available to theCompany on the date of this document, and the Company assumes no obligation toupdate such forward looking statements. Readers of this Form 10-QSB are strongly encouraged to review thesection entitled *“Factors Which May Affect Future Performance and Financial Condition”*.

 

**General**

 

Encision Inc. (“Encision”or “the Company”), a medical device company based in Boulder, Colorado, hasdeveloped and launched innovative technology that is emerging as a standard ofcare in minimally-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.

 

Encision was founded toaddress market opportunities created by the increase in minimally-invasivesurgery (“MIS”) and the surgeons’ preference for using electrosurgery devicesin these procedures.  The product opportunitywas created by surgeons’ continued widespread demand for using monopolarelectrosurgery instruments which, when used in laparoscopic surgery, aresusceptible to causing inadvertent collateral tissue damage outside thesurgeon’s field of view. The risk of unintended electrosurgical burn injury tothe patient in laparoscopic surgery has been well documented. This risk poses asignificant threat to patient safety and creates liability exposure forsurgeons and hospitals that do not adequately address the issue.

 

Encision’s patented AEMtechnology provides surgeons with the desired tissue effects, while preventingstray electrosurgical energy that can cause unintended and unseen tissueinjury. AEM Laparoscopic Instruments are equivalent to conventional instrumentsin size, shape, ergonomics and 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 efficaciously than ispossible using conventional instruments. In addition, the AEM instruments arecost competitive with conventional “non-shielded, non-monitored” instruments.  The result is advanced patient safety atcomparable cost and with no change in surgeon technique.

 

AEM technology has beenrecommended and endorsed by sources from all groups involved inminimally-invasive surgery.  Surgeons,nurses, biomedical engineers, the medicolegal community, malpractice insurancecarriers and electrosurgical device manufacturers advocate the use of AEMtechnology. The breadth of endorsements continues to expand with therecognition of active electrode monitoring technology as an *AORNRecommended Practice* by the Association of periOperative RegisteredNurses and with insurance and medicolegal endorsements.

 

The Company has focusedits marketing strategies on expanding the market awareness of the AEMtechnology and its broad independent endorsements, and has continued efforts toexpand the AEM product line. With the broad array of AEM instruments nowavailable from the Company, the surgeon has a wide choice of instrument optionsand does not have to change surgical technique. This coincides with thecontinued expansion of independent endorsements for AEM technology. Newrecommendations from the malpractice insurance and medicolegal communitiescomplement the broad clinical endorsements AEM technology has garnered over thepast few years.

 

Adding furthercredibility to the benefits of Encision’s AEM technology are the Company’srecent supplier agreements with Novation and Premier, two of the largest GroupPurchasing Organizations (GPO) in the United States. Together, Novation and Premierrepresent over 3,000 hospitals and over 50% of all surgery in the U.S.Management believes that the launch of these GPO supplier agreements givesfurther indication that AEM technology is gaining broader acceptance in themarket. Management believes that having the nation’s leading medical purchasinggroups recognize the value of the Company’s technology reflects the potentialimpact that AEM instruments products can have in the market and in advancingpatient safety 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.

 

When a hospital convertsto AEM technology it provides recurring revenue to the Company from sales ofreplacement instruments. There is a strong retention rate of customers who haveconverted to AEM technology. Management believes this indicates strong customersatisfaction and is further supported by the fact that there is no directlycompeting technology to supplant AEM products once the hospital has converted.The replacement market of reusable and disposable AEM products in convertedhospitals represents

 

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over 65% of Encision’srevenue over the past twelve months and this revenue stream is expected to growas the base of newly converted hospitals continues to grow.

 

Until fiscal 2003, theCompany incurred annual losses since its inception, and has an accumulateddeficit of $15,194,596 at September 30, 2003. Operations have been financed primarily through issuance of equity. TheCompany’s liquidity has stabilized after a history of operating losses.  On July 30, 2003 the Company issued a totalof 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 managed by Wasatch Advisors, Inc. heldshares of the Company’s common stock, constituting less than 5% of the issuedand outstanding shares of its common stock, prior to that transaction.

 

During the six monthsended September 30, 2003, the Company used $3,554 in cash from operations andused $189,712 for investments in patents and equipment (primarily capital equipmentowned by the Company at customer locations). As of September 30, 2003, theCompany had $1,378,653 in cash and cash equivalents available to fund futureoperations, an increase of $793,101 from March 31, 2003.  The Company’s working capital is $2,570,296at September 30, 2003.

 

**Historical Perspective**

 

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, 1997, 1998 and2003.

 

As the Company evolved,it was clear to the Company that its ‘active electrode monitoring’ technologyneeded to be integrated into the standard laparoscopic instrument design. Asthe development program proceeded, it also became apparent that the merging ofelectrical and mechanical engineering skills in the instrument developmentprocess for the Company’s patented, integrated electrosurgical instruments wasa complex and difficult task. As a result, instruments with integrated AEMtechnology were not completed for several years. Prior to offering a full rangeof laparoscopic electrosurgical instrumentation, it was difficult for hospitalsto commit to the AEM solution, as the Company did not have adequate comparablesurgical instrument options to match what the surgeon demanded. As of fiscal2001, a sufficiently broad product line was available to provide hospitaloperating rooms with AEM Instruments in most of the designs common forlaparoscopic surgery.

 

The launch of an expandedline of AEM Laparoscopic Instruments was accomplished over the past two years. With the broad array of AEM instruments nowavailable, the surgeon has a wide choice of instrument options and does nothave to change surgical technique. Since conversion to AEM technology istransparent to the surgeon, hospitals cannow universally convert to AEM technology, thus providing all of theirlaparoscopic surgery patients a higher level of safety.  This coincides with the continuedexpansion of independent endorsements for AEM technology.  Recommendations from the malpracticeinsurance and medicolegal communities complement the broad clinicalendorsements AEM technology has garnered over the past few years.

 

**Outlook**

 

*Installed Base of AEM Monitoring Equipment*:  The Company believes that the installed baseof AEM monitors has the potential for increasing as the inherent risksassociated 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. The Companybelieves that the measures taken to improve the quality of salesrepresentatives carrying the AEM product line, along with increased marketingefforts and the introduction of new products, may provide the basis forincreased revenue and continuing profitable operations.  However these measures, or any others thatthe Company may adopt, may not result in either increased revenue or continuingprofitable operations.

 

*Possibility of Continued Operating Losses: *Until fiscal 2003, theCompany had incurred losses from operations since inception and has anaccumulated deficit of $15,194,596 as of September 30, 2003. The Company hasmade significant strides toward improving its operating results and $442,315 ofcash was provided by the Company’s operating activities in fiscal 2003.However, due to the ongoing need to develop, optimize and train the salesdistribution network and the need to increase sustained revenues to a leveladequate to cover fixed and variable operating costs, the Company may operateat a net loss from time to time. On July 30, 2003 the Company issued a total of333,334 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 managed by Wasatch Advisors, Inc. heldshares of the Company’s common stock, constituting less than 5% of the issuedand outstanding shares of its common stock, prior to that transaction.

 

*Revenue Growth*:  The Company expects to generate increased revenue in the U.S.from sales to new hospital customers as the network of independent salesrepresentatives becomes more proficient and expands the number of hospital conversionsto AEM Laparoscopic Instruments. The Company believes that the visibility andcredibility of the independent clinical endorsements for the AEM technologywill contribute to new hospital conversions and increased revenues in fiscal2004. The Company also expects that supplier agreements with Novationand Premier, which together represent over 3,000 U.S. hospitals, will exposemore hospitals to the benefits of AEM technology and may stimulate new hospitalconversions and increased revenues. The Company also expects to

 

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accelerate market sharegains through promotional programs of placing Company-owned AEM monitors at nocharge into hospitals that commit to standardize on AEM instruments.

 

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

 

*Sales and Marketing Expenses*: We continueour efforts to expand domestic and international distribution capability and we believe that sales and marketing expenses willdecrease as a percentage of net revenue with increasing sales volume.

 

*Research and Development Expenses*: Research and development expenses are expected toincrease modestly to support development of additions to our AEM product line,further expanding the instrument options for the surgeon. New additionsto the AEM product line are planned for introduction in fiscal year 2004.

 

**Results of Operations**

 

*For the three months ended September 30, 2003 compared tothe three months ended September 30, 2002.*

 

*Net revenue*.  Revenue for the quarter ended September 30,2003, was $1,880,019, compared to $1,753,873 for the quarter ended September30, 2002, an increase of 7%.  The increase is attributable to our increasingvisibility in the market which has resulted in the conversion of new hospitalsutilizing AEM technology. The increasing number of hospitals using AEMtechnology is also attributed to improving sales and marketing efforts, the GPOsupplier agreements with Novation and Premier, as well as our strategic plan toaccelerate market share gains through promotional programs of placingCompany-owned AEM Monitors at no-charge into hospitals that commit tostandardize on AEM instruments. The Company converted fifteen new hospitals toAEM technology in the three months ended September 30, 2003.  The pipeline of new hospital prospects remains strong, however, progressthrough the sales continuum has slowed and we have seen a lower rate of newhospital conversions during the past six months.  We believe this is due to a combination of factors, includinggeneral economic conditions.  However, we experienced a consistent level ofreplacement business from the installed base of users.  When a hospital converts to AEM technologythe Company earns revenue from replacement instrument purchases, which only theCompany can provide.

 

*Gross Profit*.  The gross profit for the quarter ended September 30, 2003 of$1,107,308 increased by 4% from the quarter ended September 30, 2002 grossprofit of $1,068,077. Gross profit as a percentage of revenue (gross margin)decreased from 61% for the quarter ended September 30, 2002 to 59% in thequarter ended September 30, 2003.  The decrease in gross margin was primarily theresult of increased depreciation expense for no-charge AEM monitors placed incustomer facilities, added headcount in operations department, a shift inrevenue mix (increased sales for a lower margin product family) and unfavorableforeign exchange rates compared with one year ago.  For the three months ended September 30, 2003, the Companyprovided $38,976 in AEM monitors to customers at no-charge to newly convertedhospitals as part of a sales incentive program.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $648,793 forthe quarter ended September 30, 2003 increased by 4% compared to $622,075 forthe quarter ended September 30, 2002.  The increase was a result of increased sales commissions on higher revenue.  The sales commission programs are based onrevenue goals which include incentives for the sales team to grow revenue vianew hospital conversions to the Company’s AEM products.  Sales expenses are under budget, thoughslightly increased versus one year ago. We have taken recent actions intended to lead to improved resultscommensurate with the special potential of our AEM technology.  These actions include adding personnel toour sales management team to more effectively manage the network of independentsales representatives and expand the effective coverage range.  A larger sales management team is focused ontraining, directing, motivating and managing the independent rep network toexpand our effective coverage range and increase the rate of new accountconversions.

 

*General and administrative expenses*.  General and administrative expenses of$231,327 for the quarter ended September 30, 2003 decreased by 4% compared to$241,290 for the quarter ended September 30, 2002. The decrease is the resultof reduced investor relations costs and legalfees.

 

*Research and development expenses*.  Research and development expenses of$191,851 for the quarter ended September 30, 2003 increased by 67% compared to$115,089 for the quarter ended September 30, 2002. The increase is a result ofadded headcount and expenses associated with initiatives to address design,manufacturing and cost improvements with three product lines.

 

*For the six months ended September30, 2003 compared to the six months ended September 30, 2002.*

 

*Net revenue.*    Revenue for the six months ended September30, 2003, were $3,581,959, compared to $3,096,265 for the six months endedSeptember 30, 2002, an increase of 16%. The increase is attributable to theCompany’s successful conversion of new hospitals utilizing AEM technology whilemaintaining strong ongoing business and customer retention from hospitals thathad previously converted to Encision’s technology. The Company has convertedtwenty five new hospitals to AEM technology during the six months endedSeptember 30, 2003.  The pipeline of newhospital prospects remains strong, however, progress through the salescontinuum has slowed and we have seen a lower rate of new hospital conversionsduring the past six months.  We believethis is due to a

 

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combination of factors,including general economic conditions. However, we experienced a consistent level of replacement business fromthe installed base of users.  When ahospital converts to AEM technology the Company earns revenue from replacementinstrument purchases, which only the Company can provide.

 

*Gross profit.*    The gross profit for the six months ended September 30, 2003 of$2,077,241 increased by 9% from the six months ended September 30, 2002 grossprofit of $1,897,409.  Gross profit as apercentage of revenue (gross margin) decreased from 61% for the six monthsended September 30, 2002 to 58% in the six months ended September 30, 2003. The decrease in gross margin was primarily theresult of increased depreciation expense for no-charge AEM monitors placed incustomer facilities, added headcount in operations department, a shift in revenuemix (increased sales for a lower margin product family) and unfavorable foreignexchange rates compared with one year ago. For the three months ended September 30, 2003, the Companyprovided $89,187 in AEM monitors to customers at no-charge to newly convertedhospitals as part of a sales incentive program.

 

*Sales and marketing expenses.*    Sales and marketing expenses of $1,167,197for the six months ended September 30, 2003 decreased by 1% compared to$1,183,115 for the six months ended September 30, 2002.  The salescommission programs are based on revenue goals which include incentives for thesales team to grow revenue via new hospital conversions to the Company’s AEMproducts.  Sales expenses are underbudget, though slightly increased versus one year ago.  Marketing expenses are decreased from oneyear ago due to the timing impact of various marketing programs andinitiatives.

 

*General and administrative expenses.*    General and administrative expenses of$457,621 for the six months ended September 30, 2003 decreased by 3% comparedto $473,590 for the six months ended September 30, 2002. The decrease is theresult of reduced investor relations costs andlegal fees.

 

*Research and development expenses.*    Research and development expenses of$380,424 for the six months ended September 30, 2003 increased by 59% comparedto $239,868 for the six months ended September 30, 2002. The increase is aresult of added headcount and expenses associated with initiatives to addressdesign, manufacturing and cost improvements with three product lines.

 

**Liquidity and Capital Resources**

 

To date, operating fundshave been provided primarily by sales of common stock and warrants to purchasethe Company’s common stock, which totaled $18,259,051 through September 30, 2003,and, to a lesser degree, funds provided by sales of the Company’s products. 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 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.

 

The Company’s operationsused $3,554 of cash in the six months ended September 30, 2003 on sales of$3,581,959 and generated $280,552 of cash in the six months ended September 30,2002 on sales of $3,096,265. Prior to fiscal 2003 the use of cash in ouroperations resulted primarily from the funding of the Company’s annual netlosses. These amounts of cash generated from and used in operations are notindicative of the expected cash to be generated from or used in operations inFY 04. As of September 30, 2003, the Company had $1,378,653 in cash and cashequivalents available to fund future operations. Working capital was $2,570,296at September 30, 2003 compared to $1,596,831 at March 31, 2003. Currentliabilities were $838,445 at September 30, 2003, compared to $926,781 at March31, 2003.

 

Capital expenditures inthe six months ended September 30, 2003 ($189,712) result primarily from thecapitalization of AEM monitors placed in hospitals under various promotionalprograms. Placing Company-owned AEM monitors into hospitals at no charge tofacilitate their use of AEM instruments is an initiative to accelerate newhospital conversions to AEM instruments. Under these promotional programs theCompany maintains ownership of the AEM monitor and the cost is capitalized anddepreciated as cost of sales over the projected five year life of the asset.

 

The Company’s fiscal year2004 (“FY 04”) operating plan is focused on growing revenue, increasing grossprofits and conserving cash. The Company can not predict with certainty theexpected revenue, gross profit, net income or loss and usage of cash and cashequivalents for FY 04. However, management believes that its cash resourceswill be sufficient to fund its operations for at least the next twelve monthsunder its current operating plan.  Ifmanagement is unable to manage the Company’s business operations in line withbudget expectations, it could have a material adverse effect on the Company’sbusiness viability, financial position, results of operations and cash flows.Further, if the Company is not successful in sustaining profitability andremaining at least cash flow break-even, additional capital may be required tomaintain ongoing operations.

 

The Company believes theunique performance of the AEM technology and its breadth of independentendorsements provides an opportunity for continued market share growth. TheCompany believes that the market awareness of the AEM technology and itsendorsements is continually improving and that this will benefit the salesefforts in FY 04. The Company believes that the Company entered FY 04 havingachieved improvements in the clinical credibility of its technology. TheCompany’s objective in FY 04 is to maintain expense controls while optimizingsales execution in the field, expand market awareness of the AEM technology andmaximize the number of additional hospital conversions to AEM instruments.

 

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**Income Taxes**

 

As of March 31, 2003, netoperating loss carryforwards totaling approximately $15,300,000 are availableto reduce taxable income in the future. The net operating loss carryforwardsexpire, if not previously utilized, at various dates beginning in the year2006. The Company has not paid income taxes since its inception. The Tax ReformAct of 1986 and other income tax regulations contain provisions which may limitthe net operating loss carryforwards available to be used in any given year, ifcertain events occur, including changes in ownership interests. The Company hasestablished a valuation allowance for the entire amount of its deferred taxasset since inception due to its history of losses. Should the Company achievesufficient, sustained income in the future, the Company may conclude that someor all of the valuation allowance should be reversed.

 

## **Contractual Obligations**

 

Aside from the operatinglease commitments, the Company does not have any material contractualcommitments requiring settlement in the future.

 

## **AtSeptember 30, 2003, the Company’s commitments under these obligations were asfollows:**

## ** **

|                     |   | **Operating Leases** |        |
|--------------------------|--------|----------------------|-------------|
|                     |   |                 | ** **  |
| **Year ended March 31,** |   |                 | ** **  |
| **2004**                 |   | **$**                | **55,786**  | ** ** |
| **2005**                 |   | **66,955**           | ** **  |
|                     |   | **$**                | **122,741** |   |

 

## **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 followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our financial statements.

 

TheCompany maintains allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired, which would increase our expenses during the periods in which anysuch allowances were made.  The amountrecorded as a provision for bad debt in each period is based upon ourassessment of the likelihood that we will be paid on our outstandingreceivables, based on customer-specific as well as general considerations.  To the extent that our estimates prove to betoo high, and we ultimately collect a receivable previously determined to be impaired,we may record 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.  The warranty accrual is based uponhistorical experience and is adjusted based on current experience. Shouldactual warranty experience differ from our estimates, revisions to theestimated 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 ourestimates prove to be too high, and we ultimately utilize or sell inventorypreviously determined to be impaired, we may record a reversal of the provisionin the period of such determination.

 

We recognize deferredincome tax assets and liabilities for the expected future income taxconsequences, based on enacted tax laws, of temporary differences between thefinancial reporting and tax bases of assets and liabilities. Deferred taxassets are then reduced, if deemed necessary, by a valuation allowance for theamount of any tax benefits which, more likely than not based on current

 

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circumstances, are notexpected to be realized. Should we achieve sufficient, sustained income in thefuture, we may conclude that all or some of the valuation allowance should bereversed

 

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

 

Weamortize our patent costs over their estimated useful lives, which is typicallythe remaining statutory life.  From timeto time, we may be required to adjust these lives based on advances intechnology, competitor actions, and the like. We review the recorded amounts of patents at each period end todetermine if their carrying amount is still recoverable based on ourexpectations regarding sales of related products.  Such an assessment, in the future, may result in a conclusionthat the assets are impaired, with a corresponding charge against earnings.

 

**Factors Which May Affect Future Performance and FinancialCondition**:

 

You should carefullyconsider the risk factors described below. If any of the following risk factorsactually occur, the Company’s business, prospects, financial condition orresults of operations would likely suffer. In such case, the trading price ofthe Company’s common stock could fall resulting in the loss of all or part ofyour investment. You should look at all these risk factors in total. Some riskfactors may stand on their own. Some risk factors may affect (or be affectedby) other risk factors. You should not assume the Company has identified theseconnections. You should not assume that the Company will always update theseand future risk factors in a timely manner. The Company is not undertaking anyobligation to update these risk factors to reflect events or circumstancesafter the date of this report or to reflect the occurrence of unanticipatedevents.

 

Among the factors thatcould cause future results and financial condition to be materially differentfrom expectations are:

 

*1.**                                      Ourproducts may not be accepted by the market*.  The success of our products and our financial condition dependson the acceptance of AEM products by the medical community in commerciallyviable quantities during fiscal year 2004 and beyond. We cannot predict howquickly or how broadly AEM products will be accepted by the medical community.We need to continually educate the marketplace about the**potential hazards involvedin the use of conventional electrosurgical products during minimally-invasivesurgical procedures and the expected benefits associated with the use of AEMproducts. If we are unsuccessful in educating the marketplace about ourtechnology and the hazards of conventional instruments, we will not createsufficient demand by hospitals and surgeons for AEM products and our financialcondition, results of operations and cash flows could be adversely affected.

 

*2.**                                      Weneed to continually develop and train our network of independent salesrepresentatives and expand our distribution efforts in order to be successful.*Our attempts to develop and train a network of independent salesrepresentatives in the U.S. and to expand our international distributionefforts may take longer than expected and may result in considerable amounts ofretraining effort as the independent sales organizations change their productlines and personnel. We may not be able to obtain full coverage of the U.S. byindependent sales representatives as quickly as anticipated. The independentsales representative network has inherent flaws and inefficiencies, which caninclude conflicts of interest and competing products. Optimizing the quality ofthe network and the performance of independent sales representatives in theU.S. is an ongoing challenge. We may also encounter difficulties in developingour international presence due to regulatory issues and our ability tosuccessfully develop international distribution options. Our inability toexpand our network of independent sales representatives and optimize theirperformance could adversely affect our financial results.

 

*3.**                                      Wemay need additional funding to support our operations.*  We were**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, 2003, we had $1,378,653 in cash available to fund futureoperations. We believe that we can maintain profitable operations in FY 2004but there is no guarantee of our ability to do so.  We may also find ourselves at a competitive disadvantage due toour constrained liquidity.

 

*4.**                                      Wemay not be able to compete successfully against current manufacturers ofconventional (“unshielded, unmonitored”) electrosurgical instruments or againstcompetitors who manufacture products that are based on surgical technologiesthat are alternatives to monopolar electrosurgery. *The electrosurgical products market is intensely competitive.We expect that manufacturers of “unshielded, unmonitored” electrosurgicalinstruments will resist any loss of market share that might result from thepresence of our “shielded and monitored” instruments in the marketplace. Wealso believe that manufacturers of products that are based upon surgicaltechnologies that are alternatives to monopolar electrosurgery are ourcompetitors. These technologies include bipolar electrosurgery, the harmonicscalpel and lasers. The alternative technologies may gain market share and newcompetitive technologies may be developed and introduced. Most of ourcompetitors and potential competitors have significantly greater financial,technical, product development, marketing and other resources. Most of ourcompetitors also currently have substantial installed customer bases in themedical products market and have significantly greater market recognition. As aresult of these factors, our competitors may be able to respond more quickly tonew or emerging technologies and changes in customer requirements or to devotegreater resources to the development, promotion and sale of their products. Itis possible that new competitors or new alliances among competitors may

 

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emerge and rapidlyacquire significant market share. The competitive pressures we face maymaterially adversely affect our financial position, results of operations andcash flows, and this may hinder our ability to respond to competitive threats.

 

*5.**                                      Ifwe do not continually enhance our products and keep pace with rapidtechnological changes, we may not be able to attract and retain customers.*****Ourfuture success and financial performance will depend in part on our ability tomeet the increasingly sophisticated needs of customers through the timelydevelopment and successful introduction of product upgrades, enhancements andnew products. These upgrades, enhancements and new products are subject tosignificant technical risks. The medical device market is subject to rapidtechnological change, resulting in frequent new product introductions andenhancements of existing products, as well as the risk of product obsolescence.While we are currently developing new products and enhancing our existingproduct lines, we may not be successful in completing the development of thenew products or enhancements. In addition, we must respond effectively totechnological changes by continuing to enhance our existing products toincorporate emerging or evolving standards. We may not be successful indeveloping and marketing product enhancements or new products that respond totechnological changes or evolving industry standards. We may experiencedifficulties that could delay or prevent the successful development,introduction and marketing of those products, and our new products and productenhancements may not adequately meet the requirements of the marketplace andachieve commercially viable levels of market acceptance. If any potential newproducts, upgrades, or enhancements are delayed, or if any potential newproducts, upgrades, or enhancements experience quality problems or do notachieve such market acceptance, or if new products make our existing productsobsolete, our financial position, results of operations and cash flows would bematerially adversely affected.

 

*6.**                                      Ifgovernment regulations change or if we fail to comply with existing and/or newregulations, we might miss market opportunities and experience increased costsand limited growth.*  The research,manufacturing, marketing and distribution of our products in the United Statesand other countries are subject to extensive regulation by numerousgovernmental authorities including, but not limited to, the Food and DrugAdministration. Under the Federal Food, Drug and Cosmetic Act, medical devicesmust receive clearance from the Food and Drug Administration through theSection 510(k) pre-market notification process or through the more lengthypre-market approval process before they can be sold in the United States. Theprocess of obtaining required regulatory approvals is lengthy and has required theexpenditure of substantial resources. There can be no assurance that we will beable to continue to obtain the necessary approvals. As part of our strategy, wealso intend to pursue commercialization of our products in internationalmarkets. Our products are subject to regulations that vary from country tocountry. The process of obtaining foreign regulatory approvals in certaincountries can be lengthy and require the expenditure of substantial resources.We may not be able to obtain necessary regulatory approvals or clearances on atimely basis or at all, and delays in receipt of or failure to receive suchapprovals or clearances, or failure to comply with existing or futureregulatory requirements would have a material adverse effect on our financial position,results of operations and cash flows.

 

*7.**                                      Ifwe fail to comply with the extensive regulatory requirements governing themanufacturing of our products, we could be subject to fines, suspensions orwithdrawals of regulatory approvals, product recalls, suspension ofmanufacturing, operating restrictions and/or criminal prosecution.* Themanufacturing of our products is subject to extensive regulatory requirementsadministered by the Food and Drug Administration and other regulatory bodies.Inspection of our manufacturing facilities and processes can be conducted atany time, without prior notice, by the agencies. In addition, future changes inregulations or interpretations made by the Food and Drug Administration orother regulatory bodies, with possible retroactive effect, could adverselyaffect us. Changes in existing regulations or adoption of new regulations orpolicies could prevent us from obtaining, or affect the timing of, futureregulatory approvals or clearances. We may not be able to obtain necessaryregulatory approvals or clearances on a timely basis in the future, or at all.Delays in receipt of, failure to receive such approvals or clearances and/orfailure to comply with existing or future regulatory requirements would have amaterial adverse effect on our financial position, results of operations andcash flows.

 

*8.**                                     **One of our directors controls an aggregate of approximately33% of our common stock and our executive management group owns a substantialpercentage of our common stock.* As of September 30, 2003, Vern D. Kornelsen, a director of the Company, and anentity controlled by Mr. Kornelsen own an aggregate of 1,884,443 shares of ourcommon stock.  As a result, Mr. Kornelsen may be able to exert substantialinfluence over matters requiring action by our shareholders.   Ourexecutive officers and directors as a group beneficially own 3,092,484 shares of our common stock and as a group may be able to substantiallyinfluence the election of our Board of Directors.  Such votingconcentration could exert substantial influence over other matters requiringaction by our shareholders.

 

*9.**                                      Ourcurrent patents, trade secrets and know-how may not provide a competitiveadvantage, the pending applications may not result in patents being issued, andour competitors may design around any patents issued to us.* Our successwill continue to depend in part on our ability to maintain patent protectionfor our products and processes, to preserve our trade secrets and to operatewithout infringing the proprietary rights of third parties. We have four issuedU.S. patents on several technologies embodied in our AEM Monitoring System, AEMInstruments and related accessories and we have applied for additional U.S.patents. In addition, we have four issued foreign patents. The validity andbreadth of claims coverage in medical technology patents involve complex legaland factual questions and may be highly uncertain. Also, patents may notprotect our proprietary information and know-how or provide adequate remedies forus in the event of unauthorized use or disclosure of such information, andothers may be able to develop, independently, such information. There has beensubstantial litigation regarding patent and other intellectual property rightsin the

 

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medical device industry.Litigation may be necessary to enforce patents issued to us, to protect tradesecrets or know-how owned by us, to defend us against claimed infringement ofthe rights of others or to determine the ownership, scope or validity of ourproprietary rights or those of others. Any such claims may require us to incursubstantial litigation expenses and to divert substantial time and effort ofmanagement personnel and could substantially decrease the amount of capitalavailable for our operations. An adverse determination in litigation involvingthe proprietary rights of others could subject us to significant liabilities tothird parties, could require us to seek licenses from third parties, and couldprevent us from manufacturing, selling or using our products. The occurrence ofany such actual or threatened litigation or the effect on our business of suchlitigation may materially adversely affect our financial position, results ofoperations and cash flows. Additionally, our assessment that a patent is no longer of value couldresult in a significant charge against our earnings.

 

*10.**                               Wedepend on single source suppliers for certain of the key components andsub-contractors to provide much of our products used in the manufacturing ofour products.  The loss of a supplier orlimitation in supply from existing suppliers could have a material adverseeffect on our ability to manufacture our products until a new source of supplyis located.* Although we believe that there are alternative suppliers, anyinterruption in the supply of key components could have a material adverseeffect on us. A sudden increase in customer demand may create a backordersituation as lead times for some of our critical materials are in excess of 12weeks.****Werely on subcontractors to provide products, either in the form of finishedgoods or sub-assemblies that we then assemble and test. While thesesub-contractors reduce our total cost of manufacturing, they may not be asresponsive to increased demand as we would be if we had our manufacturingcapacity entirely in-house, which may limit our growth strategy and revenues.

 

*11.**                               Thepotential fluctuation in future quarterly results may cause our stock price tofluctuate.* We expect that our operating results could fluctuatesignificantly from quarter to quarter in the future and will depend upon anumber of factors, many of which are outside our control. These factors includethe extent to which our AEM system and related accessories gain marketacceptance; our investments in marketing, sales, research and development andadministrative personnel necessary to support our anticipated growth; ourability to expand our market share; actions of competitors and general economicconditions. The market value of our stock has dramatically fluctuated in thepast and is likely to fluctuate in the future. Any deviation could have animmediate and significant negative impact on the market price of our stock.

 

*12.**                               Ourcommon stock is thinly traded, the prices at which it trades are volatile andthe buying or selling actions of a few shareholders may adversely affect ourstock price.  *At March 31, 2003 wehad a public float of 2,457,358 shares or 43% of the outstanding common stock.The average number of shares traded in any given day over the past year hasbeen relatively small compared to the public float. Thus, the actions of a fewshareholders either buying or selling shares of our common stock may adverselyaffect the price of the shares. Historically, the over-the-counter markets forsecurities such as our common stock have experienced extreme price and volumefluctuations that do not necessarily relate to operating performance.

 

*13.**                               Ourinsurance coverage for product liability claims is up to $5,000,000.* We**facean inherent business risk of exposure to product liability claims in the eventthat the use of our products is alleged to have resulted in adverse effects toa patient. We maintain a general liability insurance policy up to the amount of$5,000,000 that includes coverage for product liability claims. Liabilityclaims may be excluded from the policy may exceed the coverage limits of thepolicy, or the insurance may not continue to be available on commerciallyreasonable terms or at all. Consequently, a product liability claim or otherclaim with respect to uninsured liabilities or in excess of insured liabilitiescould have a material adverse effect on our financial position, results ofoperations and cash flows.

 

*14.**                               Wedepend on revenue from some major customers*.  We depend on revenue that is generated from hospitals’ ongoingusage of the AEM surgical instruments. In FY 2003, we generated revenue fromover 300 hospitals that have converted to AEM products, but no hospital customercontributed more than 3% to the total revenues. We utilize a small number ofstocking distributors, which sell AEM products to multiple hospitalcustomers.  In FY 2003, we generatedrevenue of $721,687 (11%) and $701,689 (10%) from two of thesedistributors.  While it is infrequentthat a hospital customer stops using AEM instruments after they convert, a lossof ongoing revenue from a hospital customer could have a material adverseeffect on our revenues and cash flows.

 

*15.**                               Wedepend on certain key personnel.* We arehighly dependent on a limited number of key management personnel, particularlyour President and Chief Executive Officer, James A. Bowman. Our loss of keypersonnel to death, disability or termination, or our inability to hire andretain qualified personnel, could have a material adverse effect on our financialposition, results of operations and cash flows.

 

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**ITEM3****  ****-   CONTROLS AND PROCEDURES**

 

(a) The Company hascarried out an evaluation under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andPrincipal Accounting Officer, of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14c of theSecurities and Exchange Act of 1934 (the “Exchange Act”)). Based upon thatevaluation, the Chief Executive Officer and the Principal Accounting Officerconcluded as of September 30, 2003 that the Company’s disclosure controls andprocedures were effective in ensuring that information required to be disclosedby the Company under the Exchange Act was recorded, processed, summarized andreported within the time periods specified under the Exchange Act rules andforms.

 

(b) There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and proceduressubsequent to the date of the evaluation discussed above, nor any significantdeficiencies or material weaknesses in such disclosure controls, internalcontrols and procedures requiring corrective actions. As a result no correctiveactions were taken.

 

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**PART II****.**                                                **OTHERINFORMATION**

 

**ITEM 1****                                                        LEGALPROCEEDINGS**

 

The Company is not currentlyengaged in any legal proceedings.  TheCompany may become involved in litigation in the future in the normal course ofbusiness.

 

The Company has notified oneof its distributors that it is in breach of its Distributor Agreement with theCompany in several respects, and that if the distributor does not cure thebreaches the Agreement may be terminated. The distributor has informed the Company that it believes the Company’sinterpretations of the Agreement are incorrect.  If the parties are not able to resolve the dispute or negotiate asettlement to the dispute, the Distributor Agreement provides for bindingarbitration in Boulder, Colorado.  Ifthe dispute is not resolved in a timely manner or is resolved in a manneradverse to the Company, it will likely affect sales activity in thedistributor’s territory.  While theCompany believes the existing on-going revenues from the installed base ofcustomers will not be affected, potential new sales to new hospitals in thatdistributor’s territory could be hindered. The distributor’s purchases represented approximately 10% of theCompany’s revenue in FY2003 and 14% of the Company’s revenue in FY 2002.  The business entity is principally owned byan individual who is a shareholder of the Company.

 

**ITEM 2****                                                       **NotApplicable

 

**ITEM 3**                                                        **RECENT SALESOF UNREGISTERED SECURITIES**

 

On July 30, 2003 theCompany issued a total of 333,334 shares of its common stock to the WasatchMicro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002.  Funds managed by Wasatch Advisors, Inc. heldshares of the Company’s common stock, constituting less than 5% of the issuedand outstanding shares of its common stock, prior to that transaction.  These securities were sold in transactionsexempt from registration under Section 4(2) of the Securities Act of 1933 andRegulation D thereunder.

 

 

**ITEM 4**-                                           NotApplicable

 

**ITEM 5**-                                           NotApplicable

 

**ITEM****6******-                                         EXHIBITSAND REPORTS ON FORM 8-K

 

(a)                                  Exhibits

 

31.1        Certification of ChiefExecutive Officer under Rule 13a-14(a)

31.2        Certification of PrincipalFinancial Officer under Rule 13a-14(a)

32.1        Certification of PeriodicReports pursuant to Sarbanes-Oxley Act of 2002

 

(b)                                 Reportson Form 8-K

 

Item 4 Changes inRegistrant's Certifying Accountant July 15, 2003

Item 4 Changes isRegistrant's Certifying Accountant July 29, 2003

Item 9 Regulation FDDisclosure, Private Equity Placement July 31, 2003

 

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**SIGNATURE**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,Encision has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| **Name**             |   | **Title** |                            | **Date** |
|----------------------|--------|-----------|---------------------------------|----------|
|                 |   |      |                            |     |
|                 |   |      |                            |     |
| /s/ Marcia  McHaffie |   |      | Controller                      |     | October 17, 2003 |
| Marcia McHaffie      |   |      | (Principal Accounting  Officer) |     |   |

 

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