UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x Quarterly Report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
quarterly period ended November 30, 2008 or
 
  ̈ Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
transition period from _____ to _____
 
 Commission
File Number: 0-9061
 
 ELECTRO RENT
CORPORATION
 Exact
name of registrant as specified in its charter
 
 CALIFORNIA
              95-2412961(State
      or Other Jurisdiction
              (I.R.S.
      Employerof
      Incorporation or Organization)
              Identification
      No.)
 
 6060
SEPULVEDA BOULEVARD
 VAN NUYS, CALIFORNIA
91411-2501
 (Address
of Principal Executive Offices and Zip Code)
 
 818
787-2100
 (Registrant's
Telephone Number, Including Area Code)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yes  x    No
 ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
“accelerated filer”, a “non-accelerated filer” or a “smaller reporting
company”.  See definition of “large accelerated
filer”  “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  Check one:
 
 Large
      accelerated filer  ̈
              Accelerated
      Filer  x
              Non-accelerated filer ̈
 
 Smaller
reporting company  ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Yes   ̈   No
x
 
 The
number of shares outstanding of the registrant's common stock as of December 18,
2008 was 24,575,804.
  
  ELECTRO
RENT CORPORATION
 FORM
10-Q
 November
30, 2008
 
 
 TABLE
      OF CONTENTS
                          
                          PagePart
      I: FINANCIAL INFORMATION
                          
                          3Item
      1. Financial Statements
                          
                          3Condensed
      Consolidated Statements of Operations for the Three and Six Months Ended
      November 30, 2008 and 2007 (Unaudited)
                          
                          3Condensed
      Consolidated Balance Sheets at November 30, 2008 and May 31, 2008
      (Unaudited)
                          
                          4Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended November
      30, 2008 and 2007 (Unaudited)
                          
                          5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                          
                          6Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                          
                          17Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                          
                          24Item
      4. Controls and Procedures
                          
                          24Part
      II: OTHER INFORMATION
                          
                          24Item
      1. Legal Proceedings
                          
                          24Item
      1A.  Risk Factors
                          
                          25Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                          
                          25Item
      3. Defaults Upon Senior Securities
                          
                          25Item
      4. Submission of Matters to a Vote of Security Holders
                          
                          25Item
      5. Other Information
                          
                          25Item
      6. Exhibits
                          
                          26SIGNATURES
                          
                          27
 
 Page
2
 
 Part I.  FINANCIAL
INFORMATION
 
 Item
1. Financial Statements
 
 ELECTRO
RENT CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(000's omitted, except per share data)
 
 Three Months Ended
                            
                            
                            Six Months EndedNovember 30,
                            
                            
                            November 30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Revenues:Rentals
      and leases
                            
                            $
                            26,155
                            
                            
                            $
                            27,425
                            
                            
                            $
                            53,389
                            
                            
                            $
                            54,869Sales
      of equipment and other revenues
                            
                            
                            9,278
                            
                            
                            
                            7,938
                            
                            
                            
                            17,030
                            
                            
                            
                            15,103Total
      revenues
                            
                            
                            35,433
                            
                            
                            
                            35,363
                            
                            
                            
                            70,419
                            
                            
                            
                            69,972Operating
      expenses:Depreciation
      of rental and lease equipment
                            
                            
                            11,555
                            
                            
                            
                            11,211
                            
                            
                            
                            23,139
                            
                            
                            
                            22,204Costs
      of revenues other than deprecation ofrental
      and lease equipment
                            
                            
                            6,985
                            
                            
                            
                            5,189
                            
                            
                            
                            12,351
                            
                            
                            
                            10,052Selling,
      general and administrative expenses
                            
                            
                            12,054
                            
                            
                            
                            10,726
                            
                            
                            
                            24,104
                            
                            
                            
                            21,623Total
      operating expenses
                            
                            
                            30,594
                            
                            
                            
                            27,126
                            
                            
                            
                            59,594
                            
                            
                            
                            53,879Operating
      profit
                            
                            
                            4,839
                            
                            
                            
                            8,237
                            
                            
                            
                            10,825
                            
                            
                            
                            16,093Interest
      income, net
                            
                            
                            632
                            
                            
                            
                            901
                            
                            
                            
                            1,223
                            
                            
                            
                            1,773Income
      before income taxes
                            
                            
                            5,471
                            
                            
                            
                            9,138
                            
                            
                            
                            12,048
                            
                            
                            
                            17,866Income
      tax provision
                            
                            
                            1,977
                            
                            
                            
                            3,402
                            
                            
                            
                            4,183
                            
                            
                            
                            6,816Net
      income
                            
                            $
                            3,494
                            
                            
                            $
                            5,736
                            
                            
                            $
                            7,865
                            
                            
                            $
                            11,050Earnings
      per share:Basic
                            
                            $
                            0.14
                            
                            
                            $
                            0.22
                            
                            
                            $
                            0.31
                            
                            
                            $
                            0.43Diluted
                            
                            $
                            0.14
                            
                            
                            $
                            0.22
                            
                            
                            $
                            0.31
                            
                            
                            $
                            0.42Shares
      used in per share calculation:Basic
                            
                            
                            25,420
                            
                            
                            
                            25,919
                            
                            
                            
                            25,646
                            
                            
                            
                            25,879Diluted
                            
                            
                            25,511
                            
                            
                            
                            26,089
                            
                            
                            
                            25,756
                            
                            
                            
                            26,061
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited).
  Page
3
 
 ELECTRO
RENT CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(000's omitted, except share data)
 
 November 30,
                    
                    
                    May 31,2008
                    
                    
                    2008ASSETSCash
      and cash equivalents
                    
                    $
                    42,474
                    
                    
                    $
                    50,964Investments,
      trading, at fair value (cost of $22,800)
                    
                    
                    19,769
                    
                    
                    
                    -Investments
      available-for-sale, at fair value (cost of $23,600)
                    
                    
                    -
                    
                    
                    
                    22,601Put
      option
                    
                    
                    3,031
                    
                    
                    
                    -Accounts
      receivable, net of allowance for doubtful accounts of $327 and
      $359
                    
                    
                    21,026
                    
                    
                    
                    23,128Rental
      and lease equipment, net of accumulated depreciation of $174,579 and
      $161,187
                    
                    
                    172,061
                    
                    
                    
                    172,468Other
      property, net of accumulated depreciation and amortization of $14,810 and
      $14,427
                    
                    
                    14,109
                    
                    
                    
                    14,341Goodwill
                    
                    
                    3,109
                    
                    
                    
                    3,109Intangibles,
      net of amortization of $1,573 and $1,406
                    
                    
                    902
                    
                    
                    
                    1,069Other
                    
                    
                    6,132
                    
                    
                    
                    5,402$
                    282,613
                    
                    
                    $
                    293,082LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Accounts
      payable
                    
                    $
                    6,612
                    
                    
                    $
                    4,562Accrued
      expenses
                    
                    
                    12,714
                    
                    
                    
                    12,565Deferred
      revenue
                    
                    
                    4,790
                    
                    
                    
                    4,943Deferred
      tax liability
                    
                    
                    17,257
                    
                    
                    
                    14,904Total
      liabilities
                    
                    
                    41,373
                    
                    
                    
                    36,974Commitments
      and contingencies (Note 11)Shareholders'
      equity:Preferred
      stock, $1 par - shares authorized 1,000,000; none issuedCommon
      stock, no par - shares authorized 40,000,000;issued
      and outstanding November 30, 2008 - 24,572,641;May
      31, 2008 - 25,945,283
                    
                    
                    32,790
                    
                    
                    
                    33,938Accumulated
      other comprehensive loss, net of tax
                    
                    
                    -
                    
                    
                    
                    (619
                    )Retained
      earnings
                    
                    
                    208,450
                    
                    
                    
                    222,789Total
      shareholders' equity
                    
                    
                    241,240
                    
                    
                    
                    256,108$
                    282,613
                    
                    
                    $
                    293,082
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited).
  Page
4
  ELECTRO
RENT CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(000's omitted)
 
 Six Months EndedNovember 302008
                        
                        
                        2007Cash
      flows from operating activities:Net
      income
                        
                        $
                        7,865
                        
                        
                        $
                        11,050Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        23,725
                        
                        
                        
                        23,032Put
      option gain
                        
                        
                        (3,031
                        )
                        
                        
                        -Mark
      to market, trading
                        
                        
                        3,031
                        
                        
                        
                        -Remeasurement
      loss (gain)
                        
                        
                        483
                        
                        
                        
                        (203
                        )Gain
      on sale of rental and lease equipment
                        
                        
                        (4,454
                        )
                        
                        
                        (4,872
                        )Deferred
      tax liability
                        
                        
                        1,976
                        
                        
                        
                        701Stock
      compensation expense
                        
                        
                        90
                        
                        
                        
                        152Provision
      for losses on accounts receivable
                        
                        
                        184
                        
                        
                        
                        176Excess
      tax benefit for stock based compensation
                        
                        
                        (44
                        )
                        
                        
                        (128
                        )Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        1,332
                        
                        
                        
                        (2,946
                        )Other
      assets
                        
                        
                        (727
                        )
                        
                        
                        (93
                        )Accounts
      payable
                        
                        
                        664
                        
                        
                        
                        206Accrued
      expenses
                        
                        
                        275
                        
                        
                        
                        1,798Deferred
      revenue
                        
                        
                        (115
                        )
                        
                        
                        68Net
      cash provided by operating activities
                        
                        
                        31,254
                        
                        
                        
                        28,941Cash
      flows from investing activities:Proceeds
      from sale of rental and lease equipment
                        
                        
                        14,389
                        
                        
                        
                        12,681Payments
      for purchase of rental and lease equipment
                        
                        
                        (31,213
                        )
                        
                        
                        (37,228
                        )Purchases
      of investments
                        
                        
                        -
                        
                        
                        
                        (1,800
                        )Redemptions
      of investments
                        
                        
                        800
                        
                        
                        
                        1,250Payments
      for purchase of other property
                        
                        
                        (186
                        )
                        
                        
                        (255
                        )Net
      cash used in investing activities
                        
                        
                        (16,210
                        )
                        
                        
                        (25,352
                        )Cash
      flows from financing activities:Proceeds
      from the exercise of common stock options
                        
                        
                        652
                        
                        
                        
                        1,064Excess
      tax benefit for stock based compensation
                        
                        
                        44
                        
                        
                        
                        128Payment
      for repurchase of common stock
                        
                        
                        (16,376
                        )
                        
                        
                        (19
                        )Payment
      of dividends
                        
                        
                        (7,762
                        )
                        
                        
                        (5,175
                        )Net
      cash used in financing activities
                        
                        
                        (23,442
                        )
                        
                        
                        (4,002
                        )Net
      decrease in cash and cash equivalents
                        
                        
                        (8,400
                        )
                        
                        
                        (413
                        )Effect
      of exchange rate changes on cash
                        
                        
                        (90
                        )
                        
                        
                        125Cash
      and cash equivalents at beginning of period
                        
                        
                        50,964
                        
                        
                        
                        57,172Cash
      and cash equivalents at end of period
                        
                        $
                        42,474
                        
                        
                        $
                        56,884
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited).
  Page
5
  ELECTRO
RENT CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (in
thousands, except per share amounts)
 
 Note
1: Basis of Presentation
 
 The
condensed consolidated financial statements included herein have been prepared
by Electro Rent Corporation without audit, pursuant to the rules and regulations
of the United States Securities and Exchange Commission (the
"SEC").  The condensed consolidated financial statements include the
accounts of Electro Rent Corporation and its wholly owned subsidiaries, Genstar
Rental Electronics, Inc., ER International, Inc., Electro Rent Europe NV,
Electro Rent Asia, Inc., and Electro Rent (Tianjin) Rental Co., Ltd.
(collectively "we", "us", or "our" hereafter) as consolidated with the
elimination of all intercompany transactions.
 
 Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such SEC
rules and regulations.  These condensed consolidated financial
statements reflect all adjustments and disclosures, which are, in our opinion,
necessary for a fair presentation of our financial position and results of
operations for the interim periods presented.  These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our latest Annual Report
on
 Form
10-K.
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
well as the disclosures of contingent assets and liabilities as of the date of
these financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates, and results of operations for interim periods are not necessarily
indicative of results for the full year.
 
 Revenue
recognition:  In accordance with EITF 00-10, Accounting for Shipping and Handling
Fees and Costs, delivery and handling revenues are recorded as other
revenues and the related expenses are recorded in selling, general and
administrative expenses.  An amount of $507 and $922 for the three and
six months ended November 30, 2007, respectively,  has been corrected
to properly state sales of equipment and other revenues and selling, general and
administrative expenses in accordance with this policy.  Management
believes the correction to be immaterial to the consolidated statements of
operations.
 
 Foreign
Currency
 
 The
assets and liabilities of our foreign subsidiaries are remeasured from their
foreign currency to U.S. dollars at current or historic exchange rates, as
appropriate. The U.S. dollar has been determined to be our functional
currency.  Revenues and expenses are remeasured from any foreign
currencies to U.S. dollars using historic rates or an average monthly rate, as
appropriate, for the month in which the transaction occurred.  Our
foreign subsidiaries individually have assets, liabilities, revenues and
expenses under 10% of our respective consolidated amounts. The euro, Canadian
dollar and Chinese yuan are our primary foreign currencies.
 
 We may
enter into forward contracts designated as hedges against unfavorable
fluctuations in our monetary assets and liabilities, primarily in our European
and Canadian operations.  These contracts are designed to minimize the
effect of fluctuations in foreign currencies.  Such contracts do not
qualify to be accounted for under hedge accounting in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative
Instruments and Hedging Activities, (“SFAS
133”) and are recorded at fair value as a current asset or liability and any
changes in fair value are recorded in selling, general and administrative
expenses in the consolidated statements of operations.
  Page
6
  Adopted Accounting
Pronouncements
 
 Effective
June 1, 2008, we adopted  SFAS No. 157, Fair Value Measurements(“SFAS 157”) as amended by Financial Accounting Standards Board (“FASB”)
Staff Position SFAS 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13(“FSP SFAS 157-1”) and FASB Staff Position
SFAS 157-2, Effective Date of
FASB Statement No. 157(“FSP SFAS 157-2”).  SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and provides for expanded disclosure
about fair value measurements.  SFAS 157 applies prospectively to all
other accounting pronouncements that require or permit fair value
measurements.  FSP SFAS 157-1 amends SFAS 157 to exclude from the
scope of SFAS 157 certain leasing transactions accounted for under SFAS
No. 13, Accounting for
Leases.  FSP SFAS 157-2 amends SFAS 157 to defer the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years.  We will adopt FSP SFAS 157-2 with our first quarter of fiscal
2010.
  The
adoption of SFAS 157 did not have a material impact on our financial condition,
results of operations, or cash flows.  While we continue to evaluate
the impact that SFAS 157 will have on our non-financial assets and non-financial
liabilities, we do not anticipate that the impact will be material to our
financial condition, results of operations, or cash flows.  The assets
and liabilities typically recorded at fair value on a non-recurring basis to
which we have not yet applied SFAS 157 due to the deferral of SFAS 157 for such
items include:
  •
              
              Non-financial
      assets and liabilities initially measured at fair value in an acquisition
      or business combination, and
 •
              
              Long-lived
      assets measured at fair value due to an impairment assessment under SFAS
      No. 144, Accounting
      for the Impairment or Disposal of Long-Lived
  Assets.
  Effective
October 10, 2008 we adopted FASB Staff Position 157-3, Determining Fair Values of a
Financial Asset When the Market for That Asset Is Not Active (“FSP FAS
157-3”).  FSP FAS 157-3 clarifies the application of SFAS 157 to
financial instruments in an inactive market.  The adoption of FSP FAS
157-3 did not have a material impact on our financial condition, results of
operations, or cash flows.
  Effective
June 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”).  SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value.  The objective of the guidance is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  The adoption of SFAS 159 did not have a material impact
on our financial condition, results of operations, or cash flows since we did
not elect to apply the fair value option for any of our eligible financial
instruments or other items on the June 1, 2008 effective
date.  See Note 2 for  discussion of the fair value election
of our put option asset.
 
 New Accounting
Pronouncements
 
 In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1,
Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 addresses
whether instruments granted by an entity in share-based payment transactions
should be considered as participating securities prior to vesting and,
therefore, should be included in the earnings allocation in computing earnings
per share under the two-class method described in paragraphs 60 and 61 of FASB
Statement No. 128, Earnings
per Share.FSP EITF 03-6-1 clarifies that instruments granted
in share-based payment transactions can be participating securities prior to
vesting (that is, awards for which the requisite service had not yet been
rendered).  Unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method.  FSP EITF 03-6-1
requires us to retrospectively adjust our earnings per share data (including any
amounts related to interim periods, summaries of earnings and selected financial
data) to conform to the provisions of FSP EITF 03-6-1.  FSP EITF
03-6-1 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008.  Early adoption is
prohibited.  We will adopt FSP EITF 03-6-1 beginning with our first
quarter of fiscal 2010.  We do not anticipate that the adoption of FSP
EITF 03-6-1 will have a material impact on our financial condition, results of
operations, or cash flows.
  Page
7
 
 In April
2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP SFAS 142-3”).  FSP SFAS 142-3 is
intended to improve the consistency between the useful life of recognized
intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS 142”), and the period of expected cash flows used to measure the
fair value of the assets under SFAS No. 141(R),Business Combinations(“SFAS
141R”).  FSP SFAS 142-3 amends the factors an entity should consider
in developing renewal or extension assumptions in determining the useful life of
recognized intangible assets.  FSP SFAS 142-3 requires an entity to
consider its own historical experience in renewing or extending similar
arrangements, or to consider market participant assumptions consistent with the
highest and best use of the assets if relevant historical experience does not
exist.  In addition to the required disclosures under SFAS 142, FSP
SFAS 142-3 requires disclosure of the entity’s accounting policy regarding costs
incurred to renew or extend the term of recognized intangible assets, the
weighted average period to the next renewal or extension, and the total amount
of capitalized costs incurred to renew or extend the term of recognized
intangible assets.  FSP SFAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008.  While the standard for determining the useful life of
recognized intangible assets is to be applied prospectively only to intangible
assets acquired after the effective date, the disclosure requirements shall be
applied prospectively to all recognized intangible assets as of, and subsequent
to, the effective date.  Early adoption is prohibited.  We
will adopt FSP SFAS 142-3 beginning with our first quarter of fiscal
2010.  We do not anticipate that the adoption of FSP SFAS 142-3 will
have a material impact on our financial condition, results of operations, or
cash flows.
  In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“SFAS 161”). SFAS 161 requires entities to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments and
that the objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133, Accounting for Derivative
Instruments and Hedging Activitiesand its related interpretations,
including a tabular format disclosure of the fair values of derivative
instruments and their gains and losses and (c) how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows.  SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged.  SFAS 161
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  We will be required to adopt the provisions of
SFAS 161 beginning with our first quarter of fiscal 2010.  We do
not anticipate that the adoption of SFAS No. 161 will have a material effect on
our financial condition, results of operations, or cash flows.
  In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS
141R”).  SFAS 141R replaces SFAS No. 141, Business Combinations, to
provide greater consistency in the accounting and financial reporting of
business combinations.  SFAS 141R requires that the acquiring entity
in a business combination recognize all assets acquired and liabilities assumed
in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed,
establishes principles and requirements for how an acquirer recognizes and
measures any non-controlling interest in the acquiree and the goodwill acquired,
and requires the acquirer to disclose the nature and financial effect of the
business combination.  Among other changes, this statement also
requires that “negative goodwill” be recognized in earnings as a gain
attributable to the acquisition, that acquisition-related costs are to be
recognized separately from the acquisition and expensed as incurred and that any
deferred tax benefits resulting from a business combination be recognized in
income from continuing operations in the period of the combination or directly
in contributed capital, depending on the
circumstances.  SFAS 141R is effective for fiscal years beginning
on or after December 15, 2008.  We will be required to adopt the
provisions of SFAS 141R beginning with our first quarter of fiscal
2010.  We do not anticipate that the adoption of SFAS 141R will have a
material effect on our financial condition, results of operations, or cash
flows.
  In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (“SFAS 160”).  SFAS 160
amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  It also clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.  SFAS 160
also changes the way the consolidated income statement is presented by requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest.  It
also requires disclosure, on the face of the consolidated statement of income,
of the amounts of consolidated net income attributable to the parent and to the
non-controlling interest.  SFAS 160 requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent owners and the
interests of the non-controlling owners of a subsidiary.  SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  We will be required to adopt
the provisions of SFAS 160 beginning with our first quarter of fiscal
2010.  We do not anticipate that the adoption of SFAS 160 will have a
material effect on our financial condition, results of operations, or cash
flows.
  Page
8
  Note
2: Cash and cash equivalents and investments
  We
consider highly liquid investments with maturities of three months or less at
the date of purchase to be cash equivalents.  Cash equivalents consist
primarily of AAA-rated money market funds in all periods
presented.  Investments consist of Auction Rate Securities (“ARS”)
that we carry at fair value and classify as trading securities at November 30,
2008.  Previously, our ARS were classified as investments
available-for-sale.  Except for direct obligations of the United
States government, securities issued by agencies of the United States
government, and money market or cash management funds, we diversify our
investments by limiting our holdings with any individual issuer.
  When
made, our investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, avoids inappropriate concentrations
and delivers an appropriate yield in relationship to our investment guidelines
and market conditions.
  At
November 30, 2008, we held $22.8 million, at cost, in ARS.  During the
six months ended November 30, 2008, we sold $800 of our ARS at par
value.  Our ARS are long-term debt instruments backed by student
loans, a substantial portion of which are guaranteed by the United States
government.  All of our ARS have credit ratings of AAA or AA, and none
are mortgage-backed debt obligations.  Historically, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest
rate at predetermined intervals, typically every 35 days, to provide
liquidity at par.  However, as a result of liquidity issues in the
global credit and capital markets, the auctions for all of our ARS failed
beginning in February 2008 when sell orders exceeded buy
orders.  The failures of these auctions do not affect the value of the
collateral underlying the ARS, and we continue to earn and receive interest on
our ARS at a pre-determined formula with spreads tied to particular interest
rate indexes.  We value the ARS from quotes received from our broker
which are derived from their internally developed model.  In
determining a discount factor for each ARS, the model weights various factors,
including assessments of credit quality, duration, insurance wraps, portfolio
composition, discount rates, overall capital market liquidity and comparable
securities, if any.
 
 On
November 6, 2008, we accepted an offer from UBS AG (“UBS”), providing us
with rights related to our ARS   (the “Rights”).  The
Rights permit us to require UBS to purchase our ARS at par value, which is
defined as the price equal to the liquidation preference of the ARS plus accrued
but unpaid dividends or interest, at any time during the period of June 30,
2010 through July 2, 2012.  Conversely, UBS has the right, in its
discretion, to purchase or sell our ARS at any time until July 2, 2012, so long
as we receive payment at par value upon any sale or disposition.  We
expect to sell our ARS under the Rights.  However, if the Rights are
not exercised before July 2, 2012 they will expire and UBS will have no
further rights or obligation to buy our ARS.  So long as we hold our
ARS, they will continue to accrue interest as determined by the auction process
or the terms of the ARS if the auction process fails.
 
 UBS’s
obligations under the Rights are not secured by its assets and do not require
UBS to obtain any financing to support its performance obligations under the
Rights.  UBS has disclaimed any assurance that it will have sufficient
financial resources to satisfy its obligations under the Rights.
 
 The
Rights represent a firm agreement in accordance with SFAS 133, which defines a
firm agreement as an agreement with an unrelated party, binding on both parties
and usually legally enforceable, with the following
characteristics:  a) the agreement specifies all significant terms,
including the quantity to be exchanged, the fixed price, and the timing of the
transaction, and b) the agreement includes a disincentive for nonperformance
that is sufficiently large to make performance probable.  The
enforceability of the Rights results in a put option and should be recognized as
a free standing asset separate from the ARS.  Upon acceptance of the
offer from UBS, we recorded $1.9 million as the fair value of the put option
asset with a corresponding credit to interest income, net.  We
subsequently recorded a $1.1 million increase in the fair value of the put
option, for a total fair value of $3.0 million as of November 30, 2008, with a
corresponding credit to interest income, net, in the condensed consolidated
statements of operations for the six months ended November 30,
2008.  The put option does not meet the definition of a derivative
instrument under SFAS 133.  Therefore, we have elected to measure the
put option at fair value under SFAS 159, which permits an entity to elect the
fair value option for recognized financial assets, in order to match the changes
in the fair value of the ARS.  As a result, unrealized gains and
losses will be included in earnings in future periods.   We
expect that future changes in the fair value of the put option will approximate
fair value movements in the related ARS.
  Page
9
 
 Prior to
accepting the UBS offer, we recorded our ARS as investments
available-for-sale.  We recorded unrealized gains and losses on our
available-for-sale debt securities, net of a tax benefit, in accumulated other
comprehensive income in the shareholders’ equity section of our balance
sheets.  Such an unrealized loss did not reduce net income for the
applicable accounting period.
 
 In
connection with our acceptance of the UBS offer in November 2008, resulting in
our right to require UBS to purchase our ARS at par value beginning on June 30,
2010, we transferred our ARS from investments available-for-sale to trading
securities in accordance with SFAS 115.  The transfer to trading
securities reflects management’s intent to exercise its put option during the
period June 30, 2010 to July 3, 2012.  Prior to our agreement with
UBS, our intent was to hold the ARS until the market recovered.  At
the time of transfer, the unrealized loss on our ARS was $1.9 million, an
increase of $900 from May 31, 2008.  This unrealized loss was included
in other comprehensive income.  Upon transfer to trading securities,
we immediately recognized a loss of $1.9 million, included in interest income,
net, for the amount of the unrealized loss not previously recognized in
earnings.  Subsequently, we recognized an additional decline in fair
value of  $1.1 million for a total unrealized loss of $3.0 million,
included in interest income, net, in the condensed consolidated statements of
operations for the six months ended November 30, 2008.
 
 The
following is a summary of available-for-sale securities as of May 31,
2008:
 
 May 31, 2008Available-for-sale SecuritiesGross
                          
                          
                          GrossUnrealized
                          
                          
                          Unrealized
                          
                          
                          EstimatedCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          Fair
      ValueAuction
      rate securities
                          
                          $
                          23,600
                          
                          
                          $
                          -
                          
                          
                          $
                          (999
                          )
                          
                          $
                          22,601$
                          23,600
                          
                          
                          $
                          -
                          
                          
                          $
                          (999
                          )
                          
                          $
                          22,601
 
 We
continue to monitor the market for ARS and consider its impact (if any) on the
fair market value of our investments.  If the market conditions deteriorate
further, we may be required to record additional unrealized losses in earnings,
offset by corresponding increases in the put option.  We believe that,
based on our current cash and cash equivalents balance, the current lack of
liquidity in the credit and capital markets will not have a material impact on
our liquidity, cash flows or ability to fund our operations.
 
 Note
3:  Fair Value Measurements
 
 As
described in Note 1, we adopted SFAS 157 on June 1, 2008.  SFAS 157,
among other things, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset and liability
category measured at fair value on either a recurring or nonrecurring
basis.  SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability.  As a basis for considering such
assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
 
 Level 1 –
Observable inputs, such as quoted prices in active markets for identical assets
or liabilities;
 
 Level 2 –
Inputs, other than the quoted prices in active markets, that are observable
either directly or through corroboration with observable market data;
and
 
 Level 3 –
Unobservable inputs, for which there is little or no market data for the assets
or liabilities, such as internally-developed valuation models.
  Page
10
 
 Assets
and liabilities measured at fair value on a recurring basis at November 30, 2008
are as follows:
 
 Quoted Prices
                          in Active
                          Markets for
                          Identical
                          Instruments
                          (Level 1)
                        
                        
                        Significant
                          Other
                          Observable
                          Inputs
                          (Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)
                        
                        
                        Total
                          BalanceMoney
      market funds
                        
                        $
                        36,974
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        36,974Auction
      rate securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        19,769
                        
                        
                        
                        19,769Put
      option
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,031
                        
                        
                        
                        3,031Foreign
      currency forward contract
                        
                        
                        
                        
                        
                        
                        23
                        
                        
                        
                        
                        
                        
                        
                        23Total
      assets measured at fair value
                        
                        $
                        36,974
                        
                        
                        $
                        23
                        
                        
                        $
                        22,800
                        
                        
                        $
                        59,797
 
 We value
the ARS from quotes received from our broker which are derived from their
internally developed model.  In determining a discount factor for each
ARS, the model weights various factors, including assessments of credit quality,
duration, insurance wraps, portfolio composition, discount rates, overall
capital market liquidity and comparable securities, if any.  The put
option is a free standing asset separate from the ARS, and represents our
contractual right to require our broker, UBS, to purchase our ARS at par value
during the period of June 30, 2010 through July 2, 2012.  In order to
value the put option, we considered the intrinsic value, time value of money,
and our assessment of the credit worthiness of UBS.
 
 The
following table presents a reconciliation of all assets and liabilities measured
at fair value on a recurring basis, excluding accrued interest components, using
significant unobservable inputs (Level 3) for the three and six months ended
November 30, 2008:
 
 Three Months Ended
                        November 30, 2008Put Option
                      
                      
                      Auction
                        Rate
                        SecuritiesFair
      value at August 31, 2008
                      
                      $
                      -
                      
                      
                      $
                      22,644Settlements
      (at par)
                      
                      
                      -
                      
                      
                      
                      (800
                      )Issuance
      of put
                      
                      
                      1,891
                      
                      
                      
                      -Unrealized
      gains included in earnings
                      
                      
                      1,140
                      
                      
                      
                      -Unrealized
      losses included in earnings (1)
                      
                      
                      -
                      
                      
                      
                      (2,075
                      )Fair
      value at November 30, 2008
                      
                      $
                      3,031
                      
                      
                      $
                      19,769
 
 Six Months Ended
                        November 30, 2008Put Option
                      
                      
                      Auction
                        Rate
                        SecuritiesFair
      value at June 1, 2008
                      
                      $
                      -
                      
                      
                      $
                      22,601Settlements
      (at par)
                      
                      
                      -
                      
                      
                      
                      (800
                      )Issuance
      of put
                      
                      
                      1,891
                      
                      
                      
                      -Unrealized
      gains included in earnings
                      
                      
                      1,140
                      
                      
                      
                      -Unrealized
      losses included in earnings (1)
                      
                      
                      -
                      
                      
                      
                      (2,032
                      )Fair
      value at November 30, 2008
                      
                      $
                      3,031
                      
                      
                      $
                      19,769
 
 (1) Total
unrealized losses for the three and six months ended November 30, 2008 were $3.0
million, including $946 and $1.0 million transferred from other comprehensive
income for unrealized losses as of August 31, 2008 and May 31, 2008,
respectively.  (See Note 2 for further discussion).
  Page
11
 
 Note
4: Stock Options and Equity Incentive Plan
 
 We have
an Equity Incentive Plan that authorizes the Board of Directors to grant
incentive and non-statutory stock option grants, stock appreciation rights,
restricted stock awards and performance unit per share awards covering a maximum
of 1,000 shares of our common stock.  The Equity Incentive Plan
replaced our Stock Option Plans (those Stock Option Plans, together with the
Equity Incentive Plan, the “Plans”) in October 2005, although 383 options to
purchase our common stock for previously granted incentive stock options and
non-statutory stock options granted to directors, officers and consultants under
our Stock Option Plans remain in effect according to their
terms.  Pursuant to the Plans, we have granted incentive and
non-statutory options to directors, officers and key employees at prices not
less than 100% of the fair market value on the day of grant.  Options
are exercisable at various dates over a five-year or ten-year period from the
date of grant.  The Plans provide for a variety of vesting dates with
the majority of the options vesting at a rate of one-third per year over a
period of three years or one-fourth per year over a period of four years from
the date of grant.
 
 The
following table represents stock option activity for the six months ended
November 30, 2008:
 
 Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term (in
                    years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding at June 1, 2008
                  
                  
                  512
                  
                  
                  $
                  10.02Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (70
                  )
                  
                  
                  9.14Forfeited/canceled
                  
                  
                  (3
                  )
                  
                  
                  12.21Outstanding
      at November 30, 2008
                  
                  
                  439
                  
                  
                  $
                  10.14
                  
                  
                  
                  0.97
                  
                  
                  $
                  668Vested
      and expected to vest at  November 30, 2008
                  
                  
                  437
                  
                  
                  $
                  10.09
                  
                  
                  
                  0.96
                  
                  
                  $
                  668Exercisable
      at November 30, 2008
                  
                  
                  431
                  
                  
                  $
                  9.99
                  
                  
                  
                  0.93
                  
                  
                  $
                  668
 
 We did
not grant any stock options during the three and six months ended November 30,
2008 and 2007.  The total fair value of options vested was $99 during
the three and six months ended November 30, 2008, compared to $139 and $765
during the three and six months ended November 30, 2007,
respectively.  The aggregate intrinsic value of options exercised is
calculated as the difference between the exercise price of the underlying awards
and the quoted price of our common stock, and was $59 and $233 during the three
and six months ended November 30, 2008, respectively, and $138 and $539 during
the three and six months ended November 30, 2007, respectively.  As of
November 30, 2008 there was approximately $41 of total unrecognized compensation
cost related to unvested share-based arrangements granted under our
Plans.  The cost is expected to be recognized over a weighted-average
period of 0.9 years.  Shares of newly issued common stock will be
issued upon exercise of stock options.
 
 Stock-Based
Compensation
 
 We
account for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment, (“SFAS
123R”) which requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense in the
consolidated financial statements based on their fair
values.  Compensation expense is recognized over the period that an
employee provides service in exchange for the award.
 
 We use
the Black-Scholes option pricing model to calculate the fair-value of each
option grant.  Our computation of expected volatility is based on
historical volatility.  Our computation of expected term is determined
based on historical experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules and expectations
of future employee behavior.  The expected term represents the period
that our stock-based awards are expected to be outstanding and was determined
based on historical experience of similar awards.  The risk-free
interest rate is based on U.S. Treasury zero-coupon issues with a term equal to
the expected term of the option at the date of grant.  Forfeitures are
estimated at the date of grant based on historical experience.
  Page
12


We
recorded $40 and $90 of stock-based compensation for employee stock options and
restricted stock, as part of selling, general and administrative expenses for
the three and six months ended November 30, 2008, respectively, compared to $28
and $152 for the three and six months ended November 30, 2007,
respectively.  This compensation cost caused net income to decrease by
$25 and $57 for the three and six months ended November 30, 2008, respectively,
compared to $18 and $112 for the three and six months ended November 30, 2007,
respectively, and did not have a material impact on basic or diluted earnings
per share.





We
receive a tax deduction for certain stock option exercises during the period the
options are exercised, generally for the excess of the fair value of stock at
the date of exercise over the exercise price of the options.  Excess
tax benefits are realized tax benefits from tax deductions for exercised options
in excess of the deferred tax asset attributable to stock compensation costs for
such options.  The total tax benefit realized from stock option
exercises for the six months ended November 30, 2008 and 2007 was $44 and $128,
respectively.  Cash received from stock option exercises was $652 and
$1.1 million for the six months ended November 30, 2008 and 2007,
respectively.





Restricted
Stock





Compensation
expense resulting from restricted stock awards is measured at fair value on the
date of grant and is recognized in selling, general and administrative expenses
over a one-year vesting period.  We recognized approximately $22 and
$48 of related compensation expense in the three and six months ended November
30, 2008, respectively, related to restricted stock awards.  There
were no restricted stock award grants for the three and six months ended
November 30, 2007.  As of November 30, 2008, we have unrecognized
share-based compensation cost of approximately $45 associated with these
awards.  This cost is expected to be recognized over the next six
months.





Restricted
stock activity for the six months ended November 30, is set forth
below:





Shares
                      
                      
                      Weighted
      –
                        Average
                        Grant
                        Date
                        Fair ValueNonvested
      at June 1, 2008
                      
                      
                      -
                      
                      
                      $
                      -Granted
                      
                      
                      7
                      
                      
                      
                      14.12Vested
                      
                      
                      (3
                      )
                      
                      
                      (14.12
                      )Canceled
                      
                      
                      (1
                      )
                      
                      
                      (14.12
                      )Nonvested
      at November 30, 2008
                      
                      
                      3
                      
                      
                      $
                      14.12





Note
5: Goodwill and Intangibles





Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in a business
combination.  Intangible assets resulting from the acquisitions of
entities accounted for using the purchase method of accounting are recorded at
the estimated fair value of the assets acquired.  Identifiable
intangible assets comprise purchased customer relationships, trademarks and
trade names, developed technologies and other intangible assets.





Our
goodwill and intangibles at November 30, 2008 are the result of the acquisition
of Rush Computer Rentals, Inc. on January 31, 2006.





The
changes in carrying amount of goodwill and other intangible assets for the six
months ended November 30, 2008 are as follows:





Balance as of
                    June 1, 2008 (net
                    of amortization)
                  
                  
                  Adjustments
                  
                  
                  Amortization
                  
                  
                  Balance as of
                    November 30,
                    2008Goodwill
                  
                  $
                  3,109
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,109Trade
      Name
                  
                  
                  411
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  411Non-compete
      agreements
                  
                  
                  266
                  
                  
                  
                  -
                  
                  
                  
                  (50
                  )
                  
                  
                  216Customer
      relationships
                  
                  
                  392
                  
                  
                  
                  -
                  
                  
                  
                  (117
                  )
                  
                  
                  275$
                  4,178
                  
                  
                  $
                  -
                  
                  
                  $
                  (167
                  )
                  
                  $
                  4,011


Page
13





The
goodwill and intangibles have been assigned to our computer-related data
products (“DP”) operating segment.  Goodwill is not deductible for tax
purposes.





We were
aware of no conditions that indicated any impairment of goodwill or identifiable
intangible assets as of November 30, 2008 or May 31, 2008.  The annual
impairment review date for goodwill and intangible assets is May
31.





Intangible
assets with finite useful lives are amortized over their respective estimated
useful lives.  The following table provides a summary of our
intangible assets:





November 30, 2008Estimated
                    Useful Life
                  
                  
                  Gross Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net Carrying
                    AmountTrade
      name
                  
                  
                  -
                  
                  
                  $
                  411
                  
                  
                  $
                  -
                  
                  
                  $
                  411Non-compete
      agreements
                  
                  2-5
      years
                  
                  
                  
                  1,050
                  
                  
                  
                  (834
                  )
                  
                  
                  216Customer
      relationships
                  
                  3-4
      years
                  
                  
                  
                  1,014
                  
                  
                  
                  (739
                  )
                  
                  
                  275$
                  2,475
                  
                  
                  $
                  (1,573
                  )
                  
                  $
                  902





May 31, 2008Estimated
                    Useful Life
                  
                  
                  Gross Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net Carrying
                    AmountTrade
      name
                  
                  
                  -
                  
                  
                  $
                  411
                  
                  
                  $
                  -
                  
                  
                  $
                  411Non-compete
      agreements
                  
                  2-5
      years
                  
                  
                  
                  1,050
                  
                  
                  
                  (784
                  )
                  
                  
                  266Customer
      relationships
                  
                  3-4
      years
                  
                  
                  
                  1,014
                  
                  
                  
                  (622
                  )
                  
                  
                  392$
                  2,475
                  
                  
                  $
                  (1,406
                  )
                  
                  $
                  1,069





Amortization
expense was $83 and $167 for the three and six months ended November 30, 2008,
respectively, compared to $147 and $293 for the three and six months ended
November 30, 2007, respectively.





Amortization
expense for customer relationships and non-compete agreements is included in
selling, general and administrative expenses.  The following table
provides estimated future amortization expense related to intangible
assets:





Year
      ending May 31,
              
              Future
                Amortization2009
              
              $
              1682010
              
              
              2572011
              
              
              662012
              
              
              02013
              
              
              0$
              491





Note
6: Noncash Investing and Financing Activities





We had
accounts payable and other accruals related to acquired equipment totaling
$5,477 and $3,824 as of November 30, 2008 and May 31, 2008, respectively, and
$4,551 and $8,844 as of November 30, 2007 and May 31, 2007, respectively, which
amounts were paid in following periods.  During the six months ended
November 30, 2008 we transferred $20.9 million at fair value from investments
available-for-sale to investments, trading.





Note
7: Sales-type Leases





We have
certain customer leases providing bargain purchase options, which are accounted
for as sales-type leases.  Interest income is recognized over the life
of the lease using the effective interest method.  The minimum lease
payments receivable and the net investment included in other assets for such
leases are as follows:


Page
14





November 30,
                    2008
                  
                  
                  May 31,
                    2008Gross
      minimum lease payments receivable
                  
                  $
                  2,609
                  
                  
                  $
                  1,392Less
      – unearned interest
                  
                  
                  (174
                  )
                  
                  
                  (112
                  )Net
      investment in sales-type lease receivables
                  
                  $
                  2,434
                  
                  
                  $
                  1,280





Note
8: Segment Reporting and Related Disclosures





SFAS No.
131, Disclosure about Segments
of an Enterprise and Related Information (“SFAS 131”), establishes annual
and interim reporting standards for an enterprise’s operating segments and
related disclosures about its products, services, geographic areas and major
customers.  According to SFAS 131, operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.  In
order to determine our operating segments, we considered the following guidance
in accordance with SFAS 131:  An operating segment is a component of
an enterprise (i) that engages in business activities from which it may earn
revenues and incur expenses, (ii) whose operating results are regularly reviewed
by the enterprise’s chief operating decision maker to make decisions about
resources to be allocated to the segment and assess its performance, and (iii)
for which discrete financial information is available.  In accordance
with this guidance, we have identified two operating segments:  the
rental, lease and sale of T&M and DP equipment.





Although
we have separate operating segments for T&M and DP equipment under SFAS 131,
these two segments are aggregated into a single reportable segment because they
have similar economic characteristics and qualitative factors.  The
T&M and DP segments have similar long-term average gross margins, and they
both rent, lease and sell electronic equipment to large corporations, purchase
directly from major manufacturers, configure and calibrate the equipment, and
ship directly to customers.





Our
equipment pool, based on acquisition cost, comprised $301,169 of T&M
equipment and $45,472 of DP equipment at November 30, 2008 and $289,061 of
T&M equipment and $44,594 of DP equipment at May 31, 2008.





Revenues
for these product groups were as follows for the three months ended November 30,
2008 and 2007:





T&M
                      
                      
                      DP
                      
                      
                      Total2008Rentals
      and leases
                      
                      $
                      20,441
                      
                      
                      $
                      5,714
                      
                      
                      $
                      26,155Sales
      of equipment and other revenues
                      
                      
                      8,430
                      
                      
                      
                      848
                      
                      
                      
                      9,278$
                      28,871
                      
                      
                      $
                      6,562
                      
                      
                      $
                      35,4332007Rentals
      and leases
                      
                      $
                      21,435
                      
                      
                      $
                      5,990
                      
                      
                      $
                      27,425Sales
      of equipment and other revenues
                      
                      
                      7,145
                      
                      
                      
                      793
                      
                      
                      
                      7,938$
                      28,580
                      
                      
                      $
                      6,783
                      
                      
                      $
                      35,363





Revenues
for these product groups were as follows for the six months ended November 30,
2008 and 2007:





T&M
                      
                      
                      DP
                      
                      
                      Total2008Rentals
      and leases
                      
                      $
                      41,110
                      
                      
                      $
                      12,279
                      
                      
                      $
                      53,389Sales
      of equipment and other revenues
                      
                      
                      15,256
                      
                      
                      
                      1,774
                      
                      
                      
                      17,030$
                      56,366
                      
                      
                      $
                      14,053
                      
                      
                      $
                      70,4192007Rentals
      and leases
                      
                      $
                      42,766
                      
                      
                      $
                      12,103
                      
                      
                      $
                      54,869Sales
      of equipment and other revenues
                      
                      
                      13,568
                      
                      
                      
                      1,535
                      
                      
                      
                      15,103$
                      56,334
                      
                      
                      $
                      13,638
                      
                      
                      $
                      69,972





No single
customer accounted for more than 10% of total revenues during the three and six
months ended November 30, 2008 and 2007.




Page
15




Selected
country information is presented below:





Three
      Months Ended
                        November
      30,
                      
                      
                      Six
      Months Ended
                        November
      30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Revenues: (1)U.S.
                      
                      $
                      30,466
                      
                      
                      $
                      28,750
                      
                      
                      $
                      60,299
                      
                      
                      $
                      57,961Other
      (2)
                      
                      
                      4,967
                      
                      
                      
                      6,613
                      
                      
                      
                      10,120
                      
                      
                      
                      12,011Total
                      
                      $
                      35,433
                      
                      
                      $
                      35,363
                      
                      
                      $
                      70,419
                      
                      
                      $
                      69,972








November 30,
                      2008
                    
                    
                    May
      31, 2008Net Long-Lived Assets: (3)U.S.
                    
                    $
                    159,198
                    
                    
                    $
                    165,984Other
      (2)
                    
                    
                    30,983
                    
                    
                    
                    25,003Total
                    
                    $
                    190,181
                    
                    
                    $
                    190,987





(1)
            Revenues
      by country are based on the location of shipping destination, and not
      whether the order originates in the U.S. parent or a foreign
      subsidiary.





(2)
            Other
      consists of other foreign countries that each individually account for
      less than 10% of the total revenues or
assets.





(3)
            Net
      long-lived assets include rental and lease equipment, other property,
      goodwill and intangibles, net of accumulated depreciation and
      amortization.





Note
9: Computation of Earnings Per Share





The
following is a reconciliation of the denominator used in the computation of
basic and diluted EPS for the three and six months ended November 30, 2008 and
2007:





Three
      Months Ended
                        November
      30,
                      
                      
                      Six
      Months Ended
                        November
      30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Denominator:Denominator
      for basic earnings per share -  weighted average common shares
      outstanding
                      
                      
                      25,420
                      
                      
                      
                      25,919
                      
                      
                      
                      25,646
                      
                      
                      
                      25,879Effect
      of dilutive securities-options (1)
                      
                      
                      91
                      
                      
                      
                      170
                      
                      
                      
                      110
                      
                      
                      
                      18225,511
                      
                      
                      
                      26,089
                      
                      
                      
                      25,756
                      
                      
                      
                      26,061Net
      income
                      
                      $
                      3,494
                      
                      
                      $
                      5,736
                      
                      
                      $
                      7,865
                      
                      
                      $
                      11,050Earnings
      per share:Basic
                      
                      $
                      0.14
                      
                      
                      $
                      0.22
                      
                      
                      $
                      0.31
                      
                      
                      $
                      0.43Diluted
                      
                      $
                      0.14
                      
                      
                      $
                      0.22
                      
                      
                      $
                      0.31
                      
                      
                      $
                      0.42





(1)  Excludes
38 and 37 options outstanding during the three and six months ended November 30,
2008, respectively, and 41 during the three and six months ended November 30
2007, respectively, for which the exercise price exceeded the average market
price of our stock during that period.





Note
10: Income Taxes





At May
31, 2008, we had unrecognized tax benefits of $3,693.  Unrecognized
tax benefits decreased by $342 in the six months ended November 30,
2008.  The decrease in the unrecognized tax benefits is the result of
a decline in the Canadian dollar for the six months ended November 30,
2008.


Page
16





The
unrecognized tax benefit at November 30, 2008, if recognized, would have no
impact on the effective tax rate.  However, the derecognition of
$1,018 related to the associated interest and penalties at November 30, 2008
would decrease the effective tax rate.





We
recognize interest and penalties accrued with respect to uncertain tax positions
as components of our income tax provision.  We had approximately
$1,506 for the payment of interest and penalties as of November 30,
2008.




We are
subject to taxation in the U.S., various states and foreign
jurisdictions.  We have substantially settled all income tax matters
for the United States federal jurisdiction for years through fiscal
2006.  Major state jurisdictions have been examined through fiscal
years 2004 and 2005, and foreign jurisdictions have not been examined for their
respective maximum statutory periods.





There
were no additional unrecognized tax benefits for the six months ended November
30, 2008.  We anticipate no significant increase or decrease in the
total amounts of unrecognized tax benefits within 12 months of the date of this
report.





Note
11: Commitments and Contingencies





We
purchase substantial amounts of rental equipment from numerous
vendors.  As a result, we have occasionally been included as a member
of the plaintiff class in class action lawsuits related to product warranties or
price adjustments.  Settlements of such claims can result in
distributions of cash or product coupons that can be redeemed, sold or used to
purchase new equipment.  We recognize any benefits from such
settlements when all contingencies have expired to the extent either cash has
been received and/or realization of value from any coupon is
assured.




We are
subject to legal proceedings and business disputes involving ordinary and
routine claims.  The ultimate legal and financial liability with
respect to such matters generally cannot be estimated with certainty and
requires the use of estimates in recording liabilities for potential litigation
settlements.  Estimates for losses from litigation are made after
consultation with outside counsel.  If estimates of potential losses
increase or the related facts and circumstances change in the future, we may be
required to record either more or less litigation expense.  We are not
involved in any pending or threatened legal proceedings, other than routine
legal proceedings and claims incidental to our business, that we believe could
reasonably be expected to have a material adverse effect on our financial
condition, results of operations, or cash flows.





Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations





The
following discussion addresses our financial condition as of November 30, 2008
and May 31, 2008 and the results of our operations for the three and six months
ended November 30, 2008 and  2007, respectively, and cash flows for
the six month periods ended November 30, 2008
and  2007.  This discussion should be read in conjunction
with the Management's Discussion and Analysis section included on pages 10-18
and the Risk Factors discussed in Item 1A, of our 2008 Annual Report on From
10-K to which the reader is directed for additional information.





Overview





We
generate revenues through the rental, lease and sale of electronic equipment,
primarily test and measurement ("T&M") and personal computer-related data
products ("DP") equipment.





For the
first six months of fiscal 2009, 77% of our rental and lease revenues were
derived from T&M equipment.  This percentage has decreased
slightly from the prior year period due to an increase in our DP revenues, while
T&M revenues have declined, primarily due to a decline in lease
revenues.  While we have experienced increased rental activity for our
T&M equipment, it has been offset by a decline in rental rates, reflecting
competitive pressures.





For the
first six months of fiscal 2009, rental revenues comprised 86% of our rental and
lease revenue.  That percentage has increased over the last two years
due to an increase in T&M and DP rental activity in our U.S. and European
operation, while lease revenues have declined.





A
significant part of our T&M equipment portfolio is rented or leased to large
companies in the aerospace and defense, telecommunications, semiconductor and
electronics industries.  We believe that a large part of our T&M
equipment is used in research and development activities.  We also
rent equipment to companies of various sizes representing a cross-section of
industry.  Our business is relatively non-seasonal except for the
third quarter months of December, January and February, when rental activity
declines due to extended holiday closings by a number of
customers.  In addition, rental billing is reduced during February
because it is a short month.


Page
17


We sell
used equipment in the normal course of business based on customer
requirements.  Our sale of used equipment allows us to maintain our
inventory with equipment that meets current technological
standards.  In fiscal 2007, we entered into distribution agreements
with three leading manufacturers to sell basic T&M equipment to current and
prospective customers through our new distribution channel.





The
profitability of our business depends in part on controlling the timing, pricing
and mix of purchases and sales of equipment.  We seek to acquire new
and used equipment at attractive prices for the purpose of deriving a profit
from a combination of renting and/or selling such equipment.  The sale
of equipment, either after acquisition or after it has been rented, can comprise
a significant portion of our revenues and operating profit.  To
maximize our overall profit from the rental, leasing, and sales of equipment, we
manage our equipment pool on an on-going basis by analyzing our product strategy
for each specific equipment class in light of that equipment's historical and
projected life cycle.  In doing so, we must compare our estimate of
potential profit from rental with the potential profit from the product’s
immediate sale and replacement with new or other equipment.  In our
analysis, we assume depreciation and impairment of equipment based on projected
performance and historical levels although historical trends are not necessarily
indicative of future trends.  Our overall equipment management is
complex, and our product strategy can change during a product’s lifetime based
upon numerous factors, including the U.S. and global economy, interest rates and
new product launches.  Our strategic equipment decisions are generally
based on the following fundamentals:





·
            Our
      acquisition cost;


·
            Our
      estimates of current and future market demand for
  rentals;


·
            Our
      estimates of current and future supply of
  product;


·
            The
      book value of the product after depreciation and other
      impairment;


·
            Our
      estimates of the effect of interest rates on rental and leasing fees as
      well as capital financing; and


·
            Our
      estimates of the potential current and future sale
  prices.





If we do
not accurately predict market trends, or if demand for the equipment we supply
declines, we can be left with inventory that we are unable to rent or sell for a
profit.  We assess the carrying value of the equipment pool on a
quarterly basis or when factors indicating impairment are present.





During
the early part of this decade, our business significantly contracted due to a
slow-down in the U.S. economy.  When the U.S. and global economy began
to rebound in fiscal 2004, we saw increased demand for our equipment, and were
able to sell equipment that was older and more fully depreciated.  Due
in part to these events, we experienced greater than normal gross margin on
equipment sales of 47% for our 2007 fiscal year.  As we anticipated,
our gross margin on sales in fiscal 2008 declined to 35%, reflecting increases
in lower margin sales under our arrangements to act as a distributor of new
T&M equipment for certain manufacturers and a large buyout of used equipment
at lower than normal margins.  Based on our current equipment
management strategy, we anticipate that future gross margin on sales will trend
downward as lower margin finance leases and distribution sales continue to grow,
although the gross margin percentage will fluctuate on a quarterly
basis.  Our gross margin on sales for the three and six months ended
November 30, 2008 was 28% and 31%, respectively, compared to 37% and 38% for the
three and six months ended November 30, 2007, respectively.





The
economy in the United States and, to a certain degree the other markets in which
we operate, has been slowing, which has impacted our current profitability, and
may impact our prospects for growth and profitability in future
periods.





We
generally measure our overall level of profitability with the following
metrics:


·
            Net
      income per diluted common share
(EPS);


·
            Net
      income as a percentage of average assets (annualized);
  and


·
            Net
      income as a percentage of average tangible equity
      (annualized).


Page
18





STRATEGIC
GROWTH PLANS





We
believe that our resources and financial infrastructure remain capable of
handling a significantly greater volume of business activity without a
proportionate increase in expenses.  Based on this belief, we have
been seeking ways to increase revenues to leverage that
infrastructure.  These strategies include:





INTERNAL
GROWTH STRATEGIES: We intend to foster internal growth by building upon our
vendor and customer relationships and expanding the types of services and
equipment we provide.  Thus, for example,





·
            We
      created a new distribution channel by entering into distribution
      agreements with three leading manufacturers for a range of basic T&M
      equipment.


·
            We
      have re-focused our DP marketing approach to emphasize short-term,
      event-oriented rentals in addition to our traditional
    markets.


·
            We
      are developing vendor leasing programs that provide customers with
      flexible financing alternatives.





ACQUISITION
GROWTH STRATEGIES: We are also seeking to grow through
acquisitions.  Acquisitions can permit us to rapidly add revenues, as
well as to expand into new geographical areas and/or markets.





GEOGRAPHIC
EXPANSION STRATEGIES: Prior to fiscal 2006, our activity was largely limited to
North America, except for some limited rentals to North American companies
operating in other geographical areas.  We have been expanding our
rental and leasing services globally.  As part of that strategy, in
fiscal 2006 we entered two of the largest world markets: Europe and
China.





·
            Our
      wholly owned subsidiary in Tianjin, China, commenced operations in June
      2005 after we received what we believe to be one of the first licenses for
      a wholly foreign-owned equipment rental business in
  China.


·
            In
      September 2005, we acquired a small T&M equipment rental company based
      in Belgium, from which we service the European
  market.





The
financial results of our European operation improved during the first six months
of fiscal 2009, compared to the same period in fiscal 2008, while our other
foreign operations declined.





Although
our strategic initiatives have contributed to our revenue growth, our operating
results declined for the six months ended November 30, 2008, compared to the six
months ended November 30, 2007.  Each of our strategic initiatives
entails risks that could impact our continuing business results over the long
term.  In addition to the risks associated with our core operations,
there are special risks associated with international operations and with
acquisitions, as well as with growth in general.  Recent uncertainty
in the U.S. and global economy as a result of more stringent credit requirements
and access to capital may adversely affect our customers.  While our
results improved from 2004 through 2007, and were flat in fiscal 2008, our
financial results for the first six months of fiscal 2009 were impacted by
competitive pressure on rental rates and lower utilization rates due in part to
the economic slow-down in the U.S. and our major international
markets.  Furthermore, as our foreign operations continue to grow,
fluctuations in currency exchange rates will result in additional gains and
losses which are difficult to predict.  As noted above, our rental and
lease utilization rates, operating results and net income could continue to be
adversely affected by recent economic trends.  For a more detailed
summary of some of the risks associated with these and other factors, please see
the Risk Factors discussed in Item 1A of our 2008 Annual Report on Form
10-K.





PROFITABILITY
AND KEY BUSINESS TRENDS





For the
first six months of fiscal 2009, compared to the same period in fiscal 2008, our
revenues rose by 0.6 % to $70.4 million, our operating profit decreased by 32.9%
to $10.8 million and our net income decreased by 28.1% to $7.9
million.  Our revenue growth included growth in our DP business,
European operation and distribution channel.  Our T&M rental
activity increased for the six months ended November 30, 2008 compared to the
six months ended November 30, 2007.  However, T&M revenues
slightly declined, due primarily to competitive pressure on rental rates and a
decline in lease revenues.  Our profitability measurements are
presented in the table below for the six months ended November 30, 2008 and
2007:





2008
                    
                    
                    2007Net
      income per diluted common share (EPS)
                    
                    $
                    0.31
                    
                    
                    $
                    0.42Net
      income as a percentage of average assets (annualized)
                    
                    
                    5.5
                    %
                    
                    
                    7.7
                    %Net
      income as a percentage of average tangible equity
    (annualized)
                    
                    
                    6.5
                    %
                    
                    
                    9.1
                    %


Page
19


The
decrease in our operating profit primarily reflects competitive pressures on
rental rates and lower equipment utilization rates.  In addition, our
selling, general and administrative expenses have increased due to higher
personnel and benefit costs to support our current operations and develop our
strategic initiatives, and foreign currency losses of $837 for the six months
ended November 30, 2008, compared to a foreign currency gain of $203 for the
prior year period, as a result of a strengthening of the U.S. dollar against key
currencies.





The
amount of our equipment on rent, based on acquisition cost, increased 4.4% to
$155.4 million at November 30, 2008 from $148.8 million at November 30,
2007.  Acquisition cost of equipment on lease decreased 18.4% to $31.6
million at November 30, 2008 from $38.7 million at November 30,
2007.  Utilization for our T&M equipment pool, based on
acquisition cost of equipment on rent and lease compared to the total pool, was
57.9% at November 30, 2008 compared to 63.7% at November 30,
2007.  Over the same period, utilization of our DP equipment pool
decreased to     46.3% from 57.2%.





The
following table shows the revenue and operating profit trends over the last five
quarters (in thousands):





Three
      Months EndedNov
      30,
                      2008
                    
                    
                    Aug
      31,
                      2008
                    
                    
                    May
      31,
                      2008
                    
                    
                    Feb
      29,
                      2008
                    
                    
                    Nov
      30,
                      2007Rentals
      and leases
                    
                    $
                    26,155
                    
                    
                    $
                    27,234
                    
                    
                    $
                    27,648
                    
                    
                    $
                    26,244
                    
                    
                    $
                    27,425Sales
      of equipment and other revenues
                    
                    
                    9,278
                    
                    
                    
                    7,752
                    
                    
                    
                    11,253
                    
                    
                    
                    9,419
                    
                    
                    
                    7,938Operating
      profit
                    
                    
                    4,839
                    
                    
                    
                    5,986
                    
                    
                    
                    7,673
                    
                    
                    
                    6,929
                    
                    
                    
                    8,237





Critical
Accounting Policies and Estimates





The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  On a regular basis, we review these estimates,
including those related to asset lives and depreciation methods, impairment of
long-lived assets including rental and lease equipment, allowance for doubtful
accounts and income taxes, and adjust them as appropriate.  These
estimates are based on our historical experience and on various other
assumptions believed to be reasonable under the circumstances.





These
determinations, even though inherently subjective and subject to change, affect
the reported amounts of our assets, liabilities and expenses.  While
we believe that our estimates are based on reasonable assumptions and judgments
at the time they are made, some of our assumptions, estimates and judgments will
inevitably prove to be incorrect.  As a result, actual outcomes will
likely differ from our accruals, and those differences—positive or
negative—could be material.





We
identified certain critical accounting policies which affect certain of our more
significant estimates and assumptions used in preparing our consolidated
financial statements in our Annual Report on Form 10-K for the year ended
May 31, 2008.  We have not made any material changes to these
policies as previously disclosed.





Results
of Operations





Comparison
of Three Months Ended November 30, 2008 and November 30, 2007





Revenues





Total
revenues for the three months ended November 30, 2008 and 2007 were flat at
$35.4 million.  Sales of equipment and other revenue increased 16.9%,
offset by a decline in rental and lease revenues of 4.6%.





Rental
and lease revenues in the second quarter of fiscal 2009 were $26.2 million,
compared to $27.4 million in the prior year period.  This reflects a
decline in our T&M lease revenues, while our T&M rental revenues
remained flat, with an increase in T&M rental activity offset by a decline
in rental rates due to competitive pressure.  In addition, demand for
our DP equipment declined for the three months ended November 30, 2008 compared
to the prior year period.


Page
20





Sales of
equipment and other revenues increased to $9.3 million for the three months
ended November 30, 2008 compared to $7.9 million in the prior year
period.  In part, this increase reflects the results of our strategic
initiatives outlined above relating to distribution sales and increased finance
lease activity.  Gross margin on sales decreased to $2.2 million in
the second quarter of fiscal 2009 as compared to $2.5 million a year ago, while
the gross margin percentage decreased to 27.8% for the second quarter of fiscal
2009 compared to 36.7% for the second quarter of fiscal 2008.  As
noted above, our gross margin percentage decreased primarily due to an increase
in our lower margin finance leases and distribution sales.





Operating
Expenses





Depreciation
of rental and lease equipment increased to $11.6 million, or 44.2% of rental and
lease revenues, in the second quarter of fiscal 2009, from $11.2 million, or
40.9% of rental and lease revenues, in the second quarter of fiscal
2008.  The increased depreciation expense in fiscal 2009 was due to a
higher average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to lower
rental and utilization rates.





Costs of
revenues other than depreciation increased 34.6% to $7.0 million in the second
quarter of fiscal 2009 from $5.2 million in the prior year
period.  Costs of revenues other than depreciation primarily includes
the cost of equipment sales, which increased as a percentage of equipment sales
to 72.2% in the second quarter of fiscal 2009 from 63.3% in the second quarter
of fiscal 2008, reflecting increased finance leases and distribution sales which
carry a lower margin.  Our cost of revenues other than depreciation
increased primarily due to an increase in our finance leases and distribution
sales.  As noted above in the “overview section”, we expect that this
number will fluctuate quarter-to-quarter, depending primarily on customer
requirements and funding and growth in our distribution channel.





Selling,
general and administrative expenses were $12.1 million in the second quarter of
fiscal 2009, as compared to $10.7 million in the second quarter of fiscal
2008.  Selling, general and administrative expenses as a percentage of
total revenues increased to 34.0% in the second quarter of fiscal 2009 from
30.3% in the second quarter of fiscal 2008.  Our selling, general and
administrative expenses increased due to higher personnel and benefit costs to
support our current operations and develop our strategic initiatives, and a
foreign currency loss of $361 for the three months ended November 30, 2008,
compared to a foreign currency gain of $187 for the three months ended November
30, 2007, as a result of a strengthening of the U.S. dollar against key
currencies.





Interest
Income, Net





Net
interest income was $0.6 million for the second quarter of fiscal 2009 compared
to $0.9 million in the prior year period.  The decrease reflects
decreases in prevailing money-market interest rates and a lower cash
balance.  Interest income, net, includes $3.0 million of unrealized
gain on our put option.  In addition, interest income, net, includes
$3.0 million of unrealized losses on our investments, trading.





Income
Tax Provision





Our
effective tax rate was 36.1% in the second quarter of fiscal 2009, compared to
37.2% for the same period in fiscal 2008.  The decrease is due
primarily to changes in estimated tax exposures.





Comparison
of Six Months Ended November 30, 2008 and November 30, 2007





Revenues





Total
revenues for the six months ended November 30, 2008 rose $0.4 million, or 0.6%,
to $70.4 million, compared to $70.0 million in the same period in the prior
year.  The increase in total revenues was due to a 12.8% increase in
sales of equipment and other revenues, offset by a decline in rental and lease
revenues of 2.7%.





Rental
and lease revenues in the first six months of fiscal 2009 were $53.4 million,
compared to $54.9 million in the prior year period.  This reflects a
decline in our T&M lease revenues, while our T&M rental revenues
remained flat, with an increase in T&M rental activity offset by a decline
in rental rates due to competitive pressure.  The decline was offset
in part by higher demand for our DP equipment.





Sales of
equipment and other revenues increased to $17.0 million for the six months ended
November 30, 2008 compared to $15.1 million in the prior year
period.  In part, this increase reflects the results of our strategic
initiatives outlined above relating to distribution sales and increased finance
lease activity.  Gross margin on sales decreased to $4.5 million in
the first six months of fiscal 2009 as compared to $4.9 million a year ago,
while the gross margin percentage decreased to 31.0% for the first six months of
fiscal 2009 compared to 38.4% for the first six months of fiscal
2008.  As noted above, our gross margin percentage decreased primarily
due to an increase in our lower margin finance leases and distribution
sales.


Page
21





Operating
Expenses





Depreciation
of rental and lease equipment increased to $23.1 million, or 43.3% of rental and
lease revenues, in the first six months of fiscal 2009, from $22.2 million, or
40.5% of rental and lease revenues, in the first six months of fiscal
2008.  The increased depreciation expense in fiscal 2009 was due to a
higher average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to lower
rental and utilization rates.





Costs of
revenues other than depreciation increased 22.9% to $12.4 million in the first
six months of fiscal 2009 from $10.1 million in the prior year
period.  Costs of revenues other than depreciation primarily includes
the cost of equipment sales, which increased to 69.0% of equipment sales in the
first six months of fiscal 2009 from 61.6% in the first six months of fiscal
2008, reflecting increased finance leases and distribution sales which carry a
lower margin.  Our cost of revenues other than depreciation increased
primarily due to an increase in our finance leases and distribution
sales.  As noted above in the “overview section”, we expect that this
number will fluctuate quarter-to-quarter, depending primarily on customer
requirements and funding and growth in our distribution channel.





Selling,
general and administrative expenses were $24.1 million in the first six months
of fiscal 2009, as compared to $21.6 million in the first six months of fiscal
2008.  Selling, general and administrative expenses as a percentage of
total revenues increased to 34.2% in the first six months of fiscal 2009 from
30.9% in the first six months of fiscal 2008.  Our selling, general
and administrative expenses increased due to higher personnel and benefit costs
to support our current operations and develop our strategic initiatives, and a
foreign currency loss of $837 for the six months ended November 30, 2008,
compared to a foreign currency gain of $203 for the six months ended November
30, 2007, as a result of a strengthening of the U.S. dollar against key
currencies.





Interest
Income, Net





Net
interest income was $1.2 million for the first six months of fiscal 2009
compared to $1.8 million in the prior year period.  The decrease
reflects decreases in prevailing money-market interest rates and a lower cash
balance.  Interest income, net, includes $3.0 million of unrealized
gain on our put option.  In addition, interest income, net, includes
$3.0 million of unrealized losses on our investments, trading.





Income
Tax Provision





Our
effective tax rate was 34.7% in the first six months of fiscal 2009, compared to
38.2% for the same period in fiscal 2008.  The decrease is due
primarily to changes in estimated tax exposures.





Liquidity
and Capital Resources





Our
primary capital requirements are purchases of rental and lease
equipment.  We generally purchase equipment throughout each year to
replace equipment that has been sold and to maintain adequate levels of rental
equipment to meet existing and new customer demands.  To meet T&M
rental demand, support areas of potential growth for both T&M and DP
equipment and to keep our equipment pool technologically up-to-date, we made
payments for the purchase of $31.2 million of rental and lease equipment during
the first six months of fiscal 2009.  This amount was 16% lower than
the $37.2 million in the same period for fiscal 2008.





In
addition to increasing our rental equipment pool, we periodically repurchase
shares of our common stock under an authorization from our board of
directors.  Shares we repurchase are retired and returned to the
status of authorized but unissued stock.  During the six months ended
November 30, 2008, we purchased 1,445,660 shares of our common stock for $16.4
million, at an average price of $11.33 per share.  We may make
purchases of common stock in the future through open market transactions or
otherwise, but we have no commitments to do so.





In
April 2007, our board of directors authorized a regular quarterly cash
dividend of $0.10 per common share, or $0.40 per annum.  We commenced
payment of our quarterly cash dividend in July 2007.  In
January 2008, our board of directors approved an increase to $0.15 per
common share, or $0.60 per annum.  For the six months ended November
30, 2008 and 2007, we paid dividends of $7.8 million and $5.2 million,
respectively.


Page
22




We expect
to continue paying a quarterly dividend in future quarters, although the amount
and timing of dividends, if any, will be made at the discretion of our board of
directors in each quarter, subject to compliance with applicable
law.




At
November 30, 2008, we held $22.8 million, at cost, in auction rate securities
(“ARS”), which we classify as investments, trading.  The fair value of
our ARS at November 30, 2008 was $19.8 million.  Our ARS are long-term
debt instruments backed by student loans, a substantial portion of which are
guaranteed by the United States government.  All of our ARS have
credit ratings of AAA or AA, and none are mortgage-backed debt
obligations.  Historically, our ARS have been highly liquid, using a
Dutch auction process that resets the applicable interest rate at predetermined
intervals, typically every 35 days, to provide liquidity at
par.  However, as a result of liquidity issues in the global credit
and capital markets, the auctions for all of our ARS failed beginning in
February 2008 when sell orders exceeded buy orders.  The failures
of these auctions do not affect the value of the collateral underlying the ARS,
and we continue to earn and receive interest on our ARS at a predetermined
formula with spreads tied to particular interest rate indexes.  We
value the ARS from quotes received from our broker which are derived from their
internally developed model.  In determining a discount factor for each
ARS, the model weights various factors, including assessments of credit quality,
duration, insurance wraps, portfolio composition, discount rates, overall
capital market liquidity and comparable securities, if any.





On
November 6, 2008, we accepted an offer from UBS AG (“UBS”), providing us
with rights related to our ARS (the “Rights”).  The Rights permit us to
require UBS to purchase our ARS at par value, which is defined as the price
equal to the liquidation preference of the ARS plus accrued but unpaid dividends
or interest, at any time during the period of June 30, 2010 through
July 2, 2012.  Conversely, UBS has the right, in its discretion,
to purchase or sell our ARS at any time until July 2, 2012, so long as we
receive a payment at par value upon any sale or disposition.  We
expect to sell our ARS under the Rights.  However, if the Rights are
not exercised before July 2, 2012 they will expire and UBS will have no further
rights or obligation to buy our ARS.  So long as we hold our ARS, they
will continue to accrue interest as determined by the auction process or the
term of the ARS if the auction process fails.  In addition, if we
request, prior to June 30, 2010, UBS Bank USA or an affiliate will
establish a credit line for us in an amount up to 75% of the market value of the
ARS that we pledge as collateral.





In any
case, given the approximately $42.5 million we hold in cash and cash
equivalents, primarily U.S. Treasury money market funds, and our lack of bank
debt, we expect to continue to finance our operations even if our ARS were to be
illiquid for an extended period of time.





During
the first six months of fiscal 2009 and fiscal 2008, net cash provided by
operating activities was $31.3      million and
$28.9 million, respectively.  The increase in operating cash flow was
due primarily to a $1.3 million decrease in accounts receivable for the six
months ended November 30, 2008 compared to an increase of $2.9 in the prior year
period, and a remeasurement loss of $483 for the six months ended November 30,
2008, compared to a gain of $203 in the prior year period.  This
increase was offset by a decline in net income of $3.1 million for the six
months ended November 30, 2008 compared to the six months ended November 30,
2007.





During
the six months ended November 30, 2008 net cash used in investing activities was
$16.2 million, compared to $25.4 million in the same period of fiscal
2008.  The decline in net cash used in investing activities is due to
a decrease in payments for the purchase of rental and lease equipment to $31.2
million for the six months ended November 30, 2008 compared to $37.2 million for
the six months ended November 30, 2007.  In addition, proceeds from
sale of rental and lease equipment increased to $14.4 million for the six months
ended November 30, 2008 from $12.7 million in the prior year
period.





Net cash
used in financing activities increased to $23.4 million from $4.0 million for
the six months ended November 30, 2008 and 2007, respectively, due to an
increase in payments for the repurchase of common stock to
$16.4     million for the current fiscal period
compared to $19 for the prior year period, and an increase in dividends paid to
$7.8 million for the six months ended November 30, 2008 compared to $5.2 million
for the six months ended November 30, 2007.





We have a
$10.0 million revolving line of credit with an institutional lender, subject to
certain restrictions, to meet equipment acquisition needs as well as working
capital and general corporate requirements.  We had no bank borrowings
outstanding or off balance sheet financing arrangements at November 30,
2008.


We
believe that based on our current cash and cash equivalents balance of $42.5
million at November 30, 2008 and expected operating cash flows, the current lack
of liquidity in the global credit and capital markets will not have a material
impact on our liquidity, cash flows, or financial flexibility or our ability to
fund our operations, including the dividend.




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23




Contractual
Obligations





Our
contractual obligations have not changed materially from those included in our
Annual Report on Form 10-K for the fiscal year ended May 31,
2008.  The exact timing of reversal or settlement of our FIN 48
liabilities of $4.9 million could not be reasonably estimated at the end of the
current fiscal quarter.





SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS







This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.  You can find many (but not all) of
these statements by looking for words such as “approximates,” “believes,”
“expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or
other similar expressions in this report.  We claim the protection of
the safe harbor contained in the Private Securities Litigation Reform Act of
1995.  We caution investors that any forward-looking statements
presented in this report, or which we may make orally or in writing from time to
time, are based on the beliefs of, assumptions made by, and information
currently available to us.  Such statements are based on assumptions
and the actual outcome will be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control.  Although we
believe that our assumptions are reasonable, they are not guarantees of future
performance and some will inevitably prove to be incorrect.  As a
result, our actual future results may differ from our expectations, and those
differences may be material.  We are not undertaking any obligation to
update any forward-looking statements.  Accordingly, investors should
use caution in relying on past forward-looking statements, which are based on
known results and trends at the time they are made, to anticipate future results
or trends.




Factors
that could cause or contribute to these differences include, among others, those
risks and uncertainties discussed under the sections contained in this Form 10-Q
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and in “Part II.  Item 1A.  Risk
Factors” and in "Quantitative and Qualitative Disclosure About Market Risk
Related to Interest Rates and Currency Rates," as well as in our Annual Report
on Form 10-K for the year ended May 31, 2008 (including the "Risk Factors"
discussed in Item 1A to that document), and our other filings with the
Securities and Exchange Commission.  The risks included in those
documents are not exhaustive, and additional factors could adversely affect our
business and financial performance.  We operate in a very competitive
and rapidly changing environment.  New risk factors emerge from time
to time and it is not possible for us to predict all such risk factors, nor can
we assess the impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





During
the first six months of fiscal 2009, there were no material changes in the
information regarding market risk contained in our Annual Report on Form 10-K
for the fiscal year ended May 31, 2008.





Item
4.  Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act of 1934) as of the
end of the period covered by this report.  Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this
report were effective in ensuring that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.





There was
no change in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Part
II.  OTHER INFORMATION





Item
1.  Legal Proceedings




In the
normal course of our business, we are involved in various claims and legal
proceedings.  We are not involved in any pending or threatened legal
proceedings, other than routine legal proceedings and claims incidental to our
business, that we believe could reasonably be expected to have a material
adverse effect on our financial condition, results of operations, or cash
flows.


Page
24





Item
1A.  Risk Factors.





In
addition to the other information set forth in this report, you should carefully
consider the discussion of various risks and uncertainties contained in Part I,
“Item 1A.  Risk Factors” in our fiscal 2008 Annual Report on Form
10-K.  We believe those risk factors are the most relevant to our
business and could cause our results to differ materially from the
forward-looking statements made by us.  However, those are not the
only risk factors facing us.  Additional risks that we do not consider
material, or of which we are not currently aware, may also have an adverse
impact on us.  Our business, financial condition, and results of
operations could be seriously harmed if any of these risks or uncertainties
actually occurs or materializes.  In that event, the market price for
our common stock could decline, and our shareholders may lose all or part of
their investment.  During the first six months of fiscal 2009, we do
not believe there were any material changes in the information regarding risk
factors contained in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2008.  However, economic and credit conditions in recent
months have significantly deteriorated.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.





None.





Item
3.  Defaults Upon Senior Securities.





None.





Item
4.  Submission of Matters to a Vote of Security Holders





a) On
October 16, 2008, we held our 2008 Annual Meeting of Shareholders. We solicited
proxies in connection with the meeting pursuant to Regulation
14A.  24,431,495 shares were present in person or by proxy out of a
total of 26,008,563 shares issued and outstanding and eligible to vote on the
record date.





(b) At
the meeting the following directors were elected by the number of affirmative
votes set opposite their respective names:





Name
                      
                      Number
      of
                        Shares
      For
                      
                      
                      Number of Shares
                        WithheldGerald
      D. Barrone
                      
                      
                      24,184,190
                      
                      
                      
                      247,305Nancy
      Y. Bekavac
                      
                      
                      24,184,190
                      
                      
                      
                      247,305Karen
      J. Curtin
                      
                      
                      24,364,417
                      
                      
                      
                      67,078Daniel
      Greenberg
                      
                      
                      24,184,207
                      
                      
                      
                      247,288Joseph
      J. Kearns
                      
                      
                      24,184,190
                      
                      
                      
                      247,305James
      S. Pignatelli
                      
                      
                      24,235,426
                      
                      
                      
                      196,069





(c) Other
matters submitted to a vote of security holders:





The
shareholders ratified the appointment of Deloitte & Touche LLP as the
registrant's independent public accountants for the current
year.  24,418,081 shares were voted for, 5,579 shares were voted
against, and 7,895 shares abstained from voting.





Item
5.  Other Information





There
have been no material changes to the procedures by which security holders may
recommend nominees to our board of directors since we last provided disclosure
in response to the requirements of Item 407(c)(2)(iv) or Item 401(c)(3) of
Regulation S-K.


Page
25





Item
6.  Exhibits





Exhibit#
              
              Description31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
              
              Section
      1350 Certification by Principal Executive Officer32.2
              
              Section
      1350 Certification by Chief Financial
Officer


Page
26





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.





ELECTRO
RENT CORPORATION





DATED:  December
23, 2008





/s/
      Craig R. JonesCraig
      R. Jones
                  Vice
      President and Chief Financial Officer
                  (Principal
      Financial and Accounting Officer and duly authorized
                  to
      sign this report on behalf of the
company)


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27