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 August
31, 2009 or





o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the transition period from _____ to
_____





Commission
File Number: 0-9061





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
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o    No
o





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 definitions of “large accelerated filer”, “accelerated
filer”  and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  Check one:





Large
accelerated filer o                                                               Accelerated
filer  x





Non-accelerated
filer o                                                        
        Smaller reporting company o


(do not
check if 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  o   No
x





The
number of shares outstanding of the registrant's common stock as of September
25, 2009 was 23,915,608.





ELECTRO
RENT CORPORATION


FORM
10-Q


August
31, 2009





TABLE
      OF CONTENTS
                              PagePart
      I: FINANCIAL INFORMATION
                              3Item
      1.
                              Financial
      Statements
                              3Condensed
      Consolidated Statements of Operations for the Three Months Ended August
      31, 2009 and August 31, 2008 (Unaudited)
                              3Condensed
      Consolidated Balance Sheets at August 31, 2009 and May 31, 2009
      (Unaudited)
                              4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended August
      31, 2009 and August 31, 2008 (Unaudited)
                              5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                              6Item
      2.
                              Management's
      Discussion and Analysis of FinancialCondition and Results of
      Operations
                              19Item
      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
                              25SIGNATURES
                              26


Page
2





Part I.  FINANCIAL
INFORMATION





Item
1. Financial Statements





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)
(in thousands, except per share data)





Three
      Months EndedAugust
      31,2009
                
                
                2008Revenues:Rentals
      and leases
                
                $
                21,747
                
                
                $
                27,234Sales
      of equipment and other revenues
                
                
                10,454
                
                
                
                7,752Total
      revenues
                
                
                32,201
                
                
                
                34,986Operating
      expenses:Depreciation
      of rental and lease equipment
                
                
                10,795
                
                
                
                11,584Costs
      of revenues other than deprecation of rental and lease
      equipment
                
                
                7,767
                
                
                
                5,366Selling,
      general and administrative expenses
                
                
                10,308
                
                
                
                12,050Total
      operating expenses
                
                
                28,870
                
                
                
                29,000Operating
      profit
                
                
                3,331
                
                
                
                5,986Interest
      income, net
                
                
                308
                
                
                
                591Income
      before income taxes
                
                
                3,639
                
                
                
                6,577Income
      tax provision
                
                
                1,564
                
                
                
                2,206Net
      income
                
                $
                2,075
                
                
                $
                4,371Earnings
      per share:Basic
                
                $
                0.09
                
                
                $
                0.17Diluted
                
                $
                0.09
                
                
                $
                0.17Shares
      used in per share calculation:Basic
                
                
                23,931
                
                
                
                25,873Diluted
                
                
                23,943
                
                
                
                26,003





See
accompanying notes to condensed consolidated financial statements
(unaudited).


Page
3





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)
(in thousands, except share numbers)





August
      31,
                                  
                                  
                                  May
      31,2009
                                  
                                  
                                  2009ASSETSCash
      and cash equivalents
                                  
                                  $
                                  29,315
                                  
                                  
                                  $
                                  22,215Investments
      available-for-sale, at fair value (cost of $27,896 and
      $27,896)
                                  
                                  
                                  28,638
                                  
                                  
                                  
                                  28,188Investments,
      trading, at fair value (cost of $21,100 and $21,600)
                                  
                                  
                                  19,679
                                  
                                  
                                  
                                  19,977Put
      option
                                  
                                  
                                  1,421
                                  
                                  
                                  
                                  1,623Accounts
      receivable, net of allowance for doubtful accounts of $410 and
      $317
                                  
                                  
                                  16,925
                                  
                                  
                                  
                                  16,271Rental
      and lease equipment, net of accumulated depreciation of $178,412 and
      $179,318
                                  
                                  
                                  150,054
                                  
                                  
                                  
                                  158,252Other
      property, net of accumulated depreciation and amortization of $15,415 and
      $15,207
                                  
                                  
                                  13,575
                                  
                                  
                                  
                                  13,781Goodwill
                                  
                                  
                                  3,109
                                  
                                  
                                  
                                  3,109Intangibles,
      net of amortization of $1,825 and $1,741
                                  
                                  
                                  650
                                  
                                  
                                  
                                  734Other
                                  
                                  
                                  8,284
                                  
                                  
                                  
                                  7,184$
                                  271,650
                                  
                                  
                                  $
                                  271,334LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Accounts
      payable
                                  
                                  $
                                  2,985
                                  
                                  
                                  $
                                  3,291Accrued
      expenses
                                  
                                  
                                  13,356
                                  
                                  
                                  
                                  15,023Deferred
      revenue
                                  
                                  
                                  4,342
                                  
                                  
                                  
                                  4,281Deferred
      tax liability
                                  
                                  
                                  20,186
                                  
                                  
                                  
                                  19,986Total
      liabilities
                                  
                                  
                                  40,869
                                  
                                  
                                  
                                  42,581Commitments
      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 August 31, 2009 - 23,915,609;May
      31, 2009 - 23,953,540
                                  
                                  
                                  32,594
                                  
                                  
                                  
                                  32,596Accumulated
      other comprehensive income, net of tax
                                  
                                  
                                  456
                                  
                                  
                                  
                                  176Retained
      earnings
                                  
                                  
                                  197,731
                                  
                                  
                                  
                                  195,981Total
      shareholders' equity
                                  
                                  
                                  230,781
                                  
                                  
                                  
                                  228,753$
                                  271,650
                                  
                                  
                                  $
                                  271,334





See
accompanying notes to condensed consolidated financial statements
(unaudited).


Page
4





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)
(in thousands)





Three
      Months EndedAugust
      31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      income
                          
                          $
                          2,075
                          
                          
                          $
                          4,371Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                          
                          
                          11,088
                          
                          
                          
                          11,876Put
      option loss
                          
                          
                          202
                          
                          
                          
                          -Unrealized
      holding gain for trading securities
                          
                          
                          (202
                          )
                          
                          
                          -Remeasurement
      loss
                          
                          
                          60
                          
                          
                          
                          476Provision
      for losses on accounts receivable
                          
                          
                          178
                          
                          
                          
                          106Gain
      on sale of rental and lease equipment
                          
                          
                          (2,672
                          )
                          
                          
                          (2,242
                          )Stock
      compensation expense
                          
                          
                          110
                          
                          
                          
                          50Excess
      tax benefit for share based compensation
                          
                          
                          -
                          
                          
                          
                          (28
                          )Deferred
      tax liability
                          
                          
                          30
                          
                          
                          
                          700Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          (816
                          )
                          
                          
                          2,744Other
      assets
                          
                          
                          (1,097
                          )
                          
                          
                          (461
                          )Accounts
      payable
                          
                          
                          (313
                          )
                          
                          
                          186Accrued
      expenses
                          
                          
                          1,825
                          
                          
                          
                          806Deferred
      revenue
                          
                          
                          59
                          
                          
                          
                          112Net
      cash provided by operating activities
                          
                          
                          10,527
                          
                          
                          
                          18,696Cash
      flows from investing activities:Proceeds
      from sale of rental and lease equipment
                          
                          
                          9,397
                          
                          
                          
                          6,435Payments
      for purchase of rental and lease equipment
                          
                          
                          (9,320
                          )
                          
                          
                          (15,695
                          )Redemptions
      of investments
                          
                          
                          500
                          
                          
                          
                          -Payments
      for purchase of other property
                          
                          
                          (3
                          )
                          
                          
                          (62
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          574
                          
                          
                          
                          (9,322
                          )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                          
                          
                          48
                          
                          
                          
                          520Excess
      tax benefit for stock options exercised
                          
                          
                          -
                          
                          
                          
                          28Payments
      for repurchase of common stock
                          
                          
                          (384
                          )
                          
                          
                          (2,609
                          )Payment
      of dividends
                          
                          
                          (3,593
                          )
                          
                          
                          (3,893
                          )Net
      cash used in financing activities
                          
                          
                          (3,929
                          )
                          
                          
                          (5,954
                          )Net
      increase in cash and cash equivalents
                          
                          
                          7,172
                          
                          
                          
                          3,420Effect
      of exchange rate changes on cash
                          
                          
                          (72
                          )
                          
                          
                          (321
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          22,215
                          
                          
                          
                          50,964Cash
      and cash equivalents at end of period
                          
                          $
                          29,315
                          
                          
                          $
                          54,063





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
unaudited condensed consolidated financial statements included herein have been
prepared by Electro Rent Corporation, 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") 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 (“GAAP”) 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
filed August 10, 2009.





The
preparation of financial statements in conformity with GAAP 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.





Foreign
Currency





Effective
June 1, 2009, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of Financial Accounting
Standards Board (“FASB”) Statement No. 133 (“SFAS 161”).  The
adoption of SFAS 161 did not have a material effect on our financial condition,
results of operations or cash flows. We applied the requirements of SFAS 161 on
a prospective basis.  Accordingly, disclosures related to interim
periods prior to the date of adoption have not been presented.





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.  The
assets, liabilities, revenues and expenses of our foreign subsidiaries are
individually less than 10% of our respective consolidated amounts. The euro,
Canadian dollar and Chinese Yuan are our primary foreign
currencies.





On
occasion, we have entered 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 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 our condensed consolidated statements of operations.





The fair
value of our foreign exchange forward contracts in the consolidated balance
sheet as of August 31, 2009 is shown in the table below:





Derivatives
      not designated as hedging
                              instruments
      under SFAS 133
                            
                            Consolidated
      Balance Sheet
                              Location
                            
                            Fair
      ValueForeign
      exchange forward contracts
                            
                            Accrued
      Expenses
                            
                            $
                            14


Page
6


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The table
below provides data about the amount of gains and losses recognized in income
for derivative instruments not designated as hedging instruments:





Derivatives
      not designated as hedging
                      instruments
      under SFAS 133
                    
                    Location
      of loss recognized in
                      income
      on derivatives
                    
                    Three
      months ended
                      August
      31, 2009Foreign
      exchange forward contracts
                    
                    Selling,
      general and administrative expenses
                    
                    $
                    87





Recently Adopted Accounting
Pronouncements





Effective
June 1, 2009, we adopted the provision of FASB Staff Position (“FSP”) SFAS No.
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP SFAS 107-1
and APB 28-1”).   FSP SFAS 107-1 and APB 28-1 relate to fair
value disclosures for any financial instruments that are not currently reflected
on the balance sheet at fair value.  Prior to the issuance of this
FSP, fair values for these assets and liabilities were only disclosed once a
year.   FSP SFAS 107-1 and APB 28-1 now require these disclosures
on a quarterly basis, providing qualitative and quantitative information about
fair value estimates for financial instruments not measured on the balance sheet
at fair value.  The adoption of FSP SFAS 107-1 and APB 28-1 did not
have a material impact on our financial condition, results of operations or cash
flows.





Effective
June 1, 2009, we adopted the provisions of SFAS No. 165, Subsequent Events (“SFAS
165”).  SFAS 165 provides guidance on management’s assessment of subsequent
events, including guidance on the scope and timing.  SFAS 165 also defines
which types of subsequent events should be recognized in the financial
statements and the extent to which an entity should disclose information
regarding subsequent events.  The adoption of SFAS 165 did not have a
material impact on our financial condition, results of operations or cash
flows.





Effective
June 1, 2009, we adopted the provision of FSP SFAS No. 115-2 and FSP SFAS No.
124-2, Recognition and
Presentation of Other-Than-Temporary Impairments(“FSP SFAS 115-2 and
SFAS 124-2”).  FSP SFAS 115-2 and SFAS 124-2 changed the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings as well
as expanded and increased the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities.  The
adoption of FSP SFAS 115-2 and SFAS 124-2 did not have a material impact on our
financial condition, results of operations or cash flows.




Effective
June 1, 2009, we adopted the provisions of SFAS No. 141R, Business Combinations (“SFAS
141R”).  SFAS 141R replaces SFAS No. 141, Business Combinations, which
is intended 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 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.  The adoption of
SFAS 141R could have an impact on the cost allocation of future acquisitions and
will require us to expense acquisition costs for future
acquisitions.  We will evaluate the impact of SFAS 141R on our
financial condition, results of operations and cash flows in the event future
business combinations are consummated.





Effective
June 1, 2009, we adopted the provisions of FSP SFAS No. 141R-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies (“FSP SFAS 141R-1”).  FSP SFAS 141R-1 amended and
clarified SFAS 141R.  FSP SFAS 141R-1 requires an acquirer to
recognize at fair value, at the acquisition date, an asset acquired or a
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period.  If the fair value cannot be determined
during the measurement period, an asset or a liability should be recognized at
the acquisition date if the asset or liability can be reasonably estimated and
if information available before the end of the measurement period indicates that
it is probable that an asset existed or that a liability had been incurred at
the acquisition date.  FSP SFAS 141R-1 amended the disclosure
requirements of SFAS 141R to include business combinations that occur either
during the current reporting period or after the reporting period but before the
financial statements are issued.  The adoption of FSP SFAS 141R-1 did
not have a material impact on our financial condition, results of operations or
cash flows.


Page
7





ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Effective
June 1, 2009 we adopted the provisions of 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.  The adoption
of FSP EITF 03-6-1 did not have a material impact on our financial condition,
results of operations or cash flows.





Effective
June 1, 2009, we adopted the provisions of 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 141R.  FSP SFAS 142-3 amended 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.  The adoption of FSP
SFAS 142-3 did not have a material impact on our financial condition, results of
operations or cash flows.





Effective
June 1, 2009, we adopted the provisions of FSP SFAS No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP SFAS
157-4”).  FSP SFAS 157-4 relates to determining fair values when there
is no active market or where the price inputs being used represent distressed
sales.  It reaffirms what SFAS No. 157, Fair Value Measurements
(“SFAS 157”) states, which is that the objective of fair value measurement is to
reflect how much an asset would be sold for in an orderly transaction (as
opposed to a distressed or forced transaction) at the date of the financial
statements under current market conditions.  Specifically, it
reaffirms the need to use judgment to ascertain if a formerly active market has
become inactive and in determining fair values when markets have become
inactive.  The adoption of FSP SFAS 157-4 did not have a material
effect on our financial condition, results of operations or cash
flows.




Effective
June 1, 2009, we adopted the provisions of SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (“SFAS 160”).  SFAS 160
amended 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 changed 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.  The adoption
of SFAS 160 did not have a material effect on our financial condition, results
of operations or cash flows.


Page
8


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




Pending Accounting
Pronouncements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FAS Statement No. 162 (“SFAS 168”), which is effective
July 1, 2009 and will apply to all interim periods ending after September 15,
2009.  SFAS 168 establishes the FASB Accounting Standards Codification (the
“Codification”) as the single source of authoritative United States accounting
and reporting standards applicable for all non-governmental entities, with the
exception of guidance issued by the SEC and its staff.  SFAS 168 will
amend our disclosure for references to accounting guidance to include reference
to the applicable section of the Codification.  All existing
accounting standard documents are superseded and all other accounting literature
not included in the Codification is considered nonauthoritative.  SFAS
168 is effective for financial statements issued for interim and annual periods
ending after September 15, 2009.  We do not anticipate that the
adoption of SFAS 168 will have a material impact on our financial condition,
results of operations or cash flows.




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
consisted primarily of AAA-rated money market funds in all periods
presented.  Investments consist of corporate and government bond funds
and auction rate securities (“ARS”), and are carried at fair
value.  As of August 31, 2009,  our investments other than
ARS (which were transferred from investments available-for-sale to trading
securities in November 2008) are designated as
available-for-sale.  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.




We seek
to establish a 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 August
31, 2009, we held $21,100, at cost, of ARS.  During the three months
ended August 31, 2009, $500 of our ARS were redeemed 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.  Although our ARS became illiquid beginning in
February 2008, 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, UBS
AG (“UBS”), which are derived from UBS’s internally developed model. In
determining a discount factor for each ARS, the model incorporates various
factors, including assessments of credit quality, duration, insurance wraps,
portfolio composition, discount rates, overall capital market liquidity and
comparable securities, if any.





We have
entered into an arrangement (the “Rights”) with UBS under which we can 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 between June 30, 2010 and 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.  In addition, UBS Bank USA has established a
credit line for us in an amount up to 75% of the market value of the ARS that we
pledge as collateral, with interest equal to the interest income that we receive
on our ARS investments.  We have not drawn any amounts under this line
and have no current plans to do so.  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.


Page
9


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The
Rights represent a firm commitment 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.  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 No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, 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.  Unrealized gains and losses are included in
earnings.  At August 31, 2009, the fair value of the put option was
$1,421, compared to a fair value of $1,623 at May 31,
2009.  Accordingly, we recorded a $202 decrease in the fair value of
the put option, included in interest income, net, in the consolidated statements
of operations for the three months ended August 31, 2009.  We expect
that future changes in the fair value of the put option will approximate fair
value movements in the related ARS.





In
connection with our acceptance of the Rights in November 2008, we transferred
our ARS from investments available-for-sale to trading securities in accordance
with SFAS No. 115, Accounting
for Investments in Debt and Equity Securities.  The transfer to
trading securities reflects our intent to exercise our put
option.  During the three months ended August 31, 2009, the fair value
of the trading securities increased, thereby reducing our unrealized loss to
$1,421 from $1,623 at May 31, 2009.  We recorded an unrealized
gain of $202 on our trading securities, included in interest income, net, in the
consolidated statements of operations for the three months ended August 31, 2009
for the increase in fair value.





We record
unrealized gains and losses on our available-for-sale securities, net of a tax
benefit, in accumulated other comprehensive income in the shareholders’ equity
section of our balance sheets.  At August 31, 2009, our gross
unrealized gains were $742 compared to gross unrealized gains of $292 at
May 31, 2009.  Such unrealized gains did not affect net income
for the applicable accounting period.





The
following is a summary of available-for-sale securities:





At
      August 31, 2009Available-for-sale
      SecuritiesGross
                            
                            
                            GrossUnrealized
                            
                            
                            Unrealized
                            
                            
                            EstimatedCost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            Fair
      ValueGovernment
      bond fund
                            
                            $
                            13,896
                            
                            
                            $
                            26
                            
                            
                            $
                            -
                            
                            
                            $
                            13,922Corporate
      bond fund
                            
                            
                            14,000
                            
                            
                            
                            716
                            
                            
                            
                            -
                            
                            
                            
                            14,716$
                            27,896
                            
                            
                            $
                            742
                            
                            
                            $
                            -
                            
                            
                            $
                            28,638





At
      May 31, 2009Available-for-sale
      SecuritiesGross
                            
                            
                            GrossUnrealized
                            
                            
                            Unrealized
                            
                            
                            EstimatedCost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            Fair
      ValueGovernment
      bond fund
                            
                            $
                            13,896
                            
                            
                            $
                            25
                            
                            
                            $
                            -
                            
                            
                            $
                            13,921Corporate
      bond fund
                            
                            
                            14,000
                            
                            
                            
                            267
                            
                            
                            
                            -
                            
                            
                            
                            14,267$
                            27,896
                            
                            
                            $
                            292
                            
                            
                            $
                            -
                            
                            
                            $
                            28,188





We have
no available-for-sale securities in an unrealized loss position.  Our
available-for-sale securities held at August 31, 2009 are due in one year or
less.





Note
3:  Fair Value Measurements





Effective
June 1, 2008, we adopted SFAS 157. 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.  FSP SFAS 157-4
provides guidance on determining when market activity has
decreased.  FSP SFAS 115-2 and SFAS 124-2 address other-than-temporary
impairments for debt securities.  We adopted the provisions of SFAS
157, as amended by FSP SFAS 157-4 as well as FSP SFAS 115-2 and SFAS 124-2,
beginning June 1, 2009.  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.  SFAS 157 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:


Page
10




ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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.





SFAS No.
107, Disclosure about Fair
Value of Financial Instruments, as amended by FSP SFAS 107-1 and APB
28-1, requires disclosure of fair value of all financial instruments in interim
financial statements as well as annual financial statements.





Cash and cash equivalents, accounts
receivable and accounts payable – we consider the carrying values of
these financial instruments to approximate fair value because of the short
period of time between origination of the instruments and their expected
realization.





Considerable
judgment is necessary to develop estimated fair values of financial
instruments.  Accordingly, the estimates presented herein are not
necessarily indicative of the amounts we may realize on disposition of the
financial instruments.  In accordance with the fair value hierarchy
described above, the following tables show the fair value of our financial
assets and liabilities that are required to be measured at fair value on a
recurring basis:





At August 31, 2009Quoted Prices
                        in Active
                        Markets for
                        Identical
                        Instruments
                        (Level 1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Total
                        BalanceMoney
      market funds
                      
                      $
                      22,767
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      22,767Government
      bond fund
                      
                      
                      13,922
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,922Corporate
      bond fund
                      
                      
                      14,716
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,716Auction
      rate securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      19,679
                      
                      
                      
                      19,679Put
      option
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,421
                      
                      
                      
                      1,421Foreign
      currency forward contract
                      
                      
                      -
                      
                      
                      
                      (14
                      )
                      
                      
                      -
                      
                      
                      
                      (14
                      )Total
      assets measured at fair value
                      
                      $
                      51,405
                      
                      
                      $
                      (14
                      )
                      
                      $
                      21,100
                      
                      
                      $
                      72,491





At May 31, 2009Quoted Prices
                        in Active
                        Markets for
                        Identical
                        Instruments
                        (Level 1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Total
                        BalanceMoney
      market funds
                      
                      $
                      15,600
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      15,600Government
      bond fund
                      
                      
                      13,921
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,921Corporate
      bond fund
                      
                      
                      14,267
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,267Auction
      rate securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      19,977
                      
                      
                      
                      19,977Put
      option
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,623
                      
                      
                      
                      1,623Foreign
      currency forward contract
                      
                      
                      -
                      
                      
                      
                      (81
                      )
                      
                      
                      -
                      
                      
                      
                      (81
                      )Total
      assets measured at fair value
                      
                      $
                      43,788
                      
                      
                      $
                      (81
                      )
                      
                      $
                      21,600
                      
                      
                      $
                      65,307




Page
11


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The fair
value measurements for our money market funds, government bond fund and
corporate bond fund were derived from quoted market prices in active markets and
are included in Level 1 inputs.  Foreign currency forward contracts
are valued based on observable market spot and forward rates as of our reporting
date and are included in Level 2 inputs.  We value our ARS from quotes
received from UBS that are derived from UBS’s internally developed
model.  In determining a discount factor for each ARS, the model
incorporates 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 UBS to purchase our ARS at par value from 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.  Our ARS and put option are included in Level 3
inputs.





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 months ended August 31,
2009:





Three Months Ended
                          August 31, 2009Put Option
                        
                        
                        Auction Rate
                          SecuritiesFair
      value at June 1, 2009
                        
                        $
                        1,623
                        
                        
                        $
                        19,977Settlements
      (at par)
                        
                        
                        -
                        
                        
                        
                        (500
                        )Unrealized
      gains (losses) included in earnings
                        
                        
                        (202
                        )
                        
                        
                        202Fair
      value at August 31, 2009
                        
                        $
                        1,421
                        
                        
                        $
                        19,679





The
unrealized gains on our trading securities included in earnings attributable to
the assets still held at August 31, 2009 was $164.  The unrealized
losses on our put option included in earnings attributable to the assets still
held August 31, 2009was $164.





Note
4: Stock Options and Equity Incentive Plan





Our 2005
Equity Incentive Plan (the “Equity Incentive Plan”) authorizes the Board of
Directors to grant incentive and non-statutory stock option grants, stock
appreciation rights, restricted stock awards, restricted stock units,
performance unit awards and performance share awards covering a maximum of 1,000
shares of our common stock.  The Equity Incentive Plan replaced our
prior stock option plans (those stock option plans, together with the Equity
Incentive Plan, the “Plans”) in October 2005, although 57 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 prior 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 date 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.


Page
12


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The
following table represents stock option activity for the three months ended
August 31, 2009:





Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Weighted
                Average
                Remaining
                Contractual
                Term (in
                years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at June 1, 2009
              
              
              369
              
              
              $
              10.39Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (5
              )
              
              
              9.51Forfeited/canceled
              
              
              (253
              )
              
              
              9.53Outstanding
      at August 31, 2009
              
              
              111
              
              
              $
              12.40
              
              
              
              1.22
              
              
              $
              77Vested
      and expected to vest atAugust
      31, 2009
              
              
              110
              
              
              $
              12.35
              
              
              
              1.21
              
              
              $
              77Vested
      and exercisable at August 31, 2009
              
              
              103
              
              
              $
              11.95
              
              
              
              1.15
              
              
              $
              77





There
were no stock options granted during the three months ended August 31, 2009 and
August 31, 2008.  The total fair value of shares vested during each of
the three months ended August 31, 2009 and 2008 was $0.  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 $3 and $174 during the three months ended August 31, 2009 and
2008, respectively.  As of August 31, 2009 there was approximately $6
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 0.11 years.  Shares of
newly issued common stock will be issued upon any exercise of stock
options.





The
following table represents restricted stock unit activity for the three months
ended August 31, 2009:





Shares
                  
                  
                  Weighted –
                    Average
                    Grant
                    Date
                    Fair ValueNonvested
      at June 1, 2009
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  145
                  
                  
                  
                  9.88Vested
                  
                  
                  (4
                  )
                  
                  
                  (9.65
                  )Canceled
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at August 31, 2009
                  
                  
                  141
                  
                  
                  $
                  9.88





No
restricted stock was granted during the three months ended August 31, 2009, and
7 restricted shares were granted during the three months ended August 31,
2008.  145 restricted stock units were granted during the three months
ended August 31, 2009, and no restricted stock units were granted during the
three months ended August 31, 2008.  Restricted stock units represent
the right to receive one share of our common stock provided that the vesting
conditions are satisfied.   As of August 31, 2009, we have
unrecognized share-based compensation cost of approximately $1,337 associated
with these awards.  This cost is expected to be recognized over a
weighted-average period of approximately 2.87 years.





The total
fair value of shares that vested during the three months ended August 31, 2009
and 2008 was $37 and $25, respectively, which was calculated based on the
closing price of our common stock on the Nasdaq Stock Market on the applicable
date of vesting.





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, restricted stock and restricted stock units, 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.


Page
13


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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 option 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.  We use
the market price of our Common Stock on the date of grant to calculate the fair
value of each grant of restricted stock and restricted stock units.





We
recorded $110 and $50 of stock-based compensation for employee stock options,
restricted stock and restricted stock units, as part of selling, general and
administrative expenses for the three months ended August 31, 2009 and 2008,
respectively.  This compensation cost caused net income to decrease by
$63 and $32 for the three months ended August 31, 2009 and 2008, 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 our common
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 three months ended
August 31, 2009 and 2008 was $0 and $28, respectively.  Cash received
from stock option exercises was $48 and $520 for the three months ended August
31, 2009 and 2008, respectively.





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 August 31, 2009 are the result of our acquisition of
Rush Computer Rentals, Inc. on January 31, 2006.





The
changes in carrying amount of goodwill and other intangible assets for the three
months ended August 31, 2009 are as follows:





Balance as of
                    June 1, 2009 (net
                    of amortization)
                  
                  
                  Amortization
                  
                  
                  Balance as of
                    August 31, 2009Goodwill
                  
                  $
                  3,109
                  
                  
                  $
                  -
                  
                  
                  $
                  3,109Trade
      Name
                  
                  
                  411
                  
                  
                  
                  -
                  
                  
                  
                  411Non-compete
      agreements
                  
                  
                  166
                  
                  
                  
                  (25
                  )
                  
                  
                  141Customer
      relationships
                  
                  
                  157
                  
                  
                  
                  (59
                  )
                  
                  
                  98$
                  3,843
                  
                  
                  $
                  (84
                  )
                  
                  $
                  3,759





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




We
evaluate the recoverability of goodwill and indefinite-lived intangible assets
annually as of May 31.


Page
14


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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





August 31, 2009Estimated
                      UsefulLife
                    
                    
                    Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net Carrying
                      AmountTrade
      name
                    
                    
                    -
                    
                    
                    $
                    411
                    
                    
                    $
                    -
                    
                    
                    $
                    411Non-compete
      agreements
                    
                    2-5
      years
                    
                    
                    
                    1,050
                    
                    
                    
                    (909
                    )
                    
                    
                    141Customer
      relationships
                    
                    3-4 years
                    
                    
                    
                    1,014
                    
                    
                    
                    (916
                    )
                    
                    
                    98$
                    2,475
                    
                    
                    $
                    (1,825
                    )
                    
                    $
                    650




May 31, 2009Estimated
                        Useful Life
                      
                      
                      Gross Carrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Net Carrying
                        AmountTrade
      name
                      
                      
                      -
                      
                      
                      $
                      411
                      
                      
                      $
                      -
                      
                      
                      $
                      411Non-compete
      agreements
                      
                      2-5
      years
                      
                      
                      
                      1,050
                      
                      
                      
                      (884
                      )
                      
                      
                      166Customer
      relationships
                      
                      3-4 years
                      
                      
                      
                      1,014
                      
                      
                      
                      (857
                      )
                      
                      
                      157$
                      2,475
                      
                      
                      $
                      (1,741
                      )
                      
                      $
                      734





Amortization
expense was $84 for the three months ended August 31, 2009 and
2008.





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
                Amortization2010
              
              $
              1732011
              
              
              66$
              239





Note
6: Noncash Investing and Financing Activities





We had
accounts payable and other accruals related to acquired equipment totaling
$2,100 and $2,098 as of August 31, 2009 and May 31, 2009, respectively, and
$5,393 and $3,824 as of August 31, 2008 and May 31, 2008, respectively, which we
subsequently paid.  We accrued $0 and $3,593 for dividends declared
and not yet paid in accrued expenses and as a reduction of retained earnings as
of August 31, 2009 and May 31, 2009, respectively, which amount we subsequently
paid.  There were no comparable amounts for the prior year
periods.





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:





August 31,
                      2009
                    
                    
                    May 31,
                      2009Gross
      minimum lease payments receivable
                    
                    $
                    4,255
                    
                    
                    $
                    3,247Less
      – unearned interest
                    
                    
                    (229
                    )
                    
                    
                    (193
                    )Net
      investment in sales-type lease receivables
                    
                    $
                    4,026
                    
                    
                    $
                    3,054




Page
15


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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 test and measurement (“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, consisted of $285,375 of T&M
equipment and $43,091 of DP equipment at August 31, 2009 and $293,866 of T&M
equipment and $43,704 of DP equipment at May 31, 2009.





Revenues
for these product groups were as follows for the three months ended August 31,
2009 and 2008:





T&M
                          
                          
                          DP
                          
                          
                          Total2009Rentals
      and leases
                          
                          $
                          17,767
                          
                          
                          $
                          3,980
                          
                          
                          $
                          21,747Sales
      of equipment and other revenues
                          
                          
                          9,895
                          
                          
                          
                          559
                          
                          
                          
                          10,454$
                          27,662
                          
                          
                          $
                          4,539
                          
                          
                          $
                          32,2012008Rentals
      and leases
                          
                          $
                          20,669
                          
                          
                          $
                          6,565
                          
                          
                          $
                          27,234Sales
      of equipment and other revenues
                          
                          
                          6,826
                          
                          
                          
                          926
                          
                          
                          
                          7,752$
                          27,495
                          
                          
                          $
                          7,491
                          
                          
                          $
                          34,986





No single
customer accounted for more than 10% of total revenues during the three months
ended August 31, 2009 and 2008.





Selected
country information is presented below:





Three Months EndedAugust 31,
                      
                      
                      August 31,2009
                      
                      
                      2008Revenues: (1)U.S.
                      
                      $
                      27,447
                      
                      
                      $
                      29,833Other
      (2)
                      
                      
                      4,754
                      
                      
                      
                      5,153Total
                      
                      $
                      32,201
                      
                      
                      $
                      34,986As
      ofAugust
      31,
                        2009
                      
                      
                      May
      31,
                        2009Net Long-Lived Assets: (3)U.S.
                      
                      $
                      143,700
                      
                      
                      $
                      151,204Other
      (2)
                      
                      
                      23,688
                      
                      
                      
                      24,672Total
                      
                      $
                      167,388
                      
                      
                      $
                      175,876




Page
16


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





(1)
              Revenues
      by country are based on the location of shipping destination, and not
      whether the order originates in the United States 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 earnings per share for the three months ended August 31, 2009
and 2008:





Three Months EndedAugust 31,
                  
                  
                  August 31,2009
                  
                  
                  2008Denominator:Denominator
      for basic earnings per share - weighted average common shares
      outstanding
                  
                  
                  23,931
                  
                  
                  
                  25,873Effect
      of dilutive securities-options (1)
                  
                  
                  12
                  
                  
                  
                  13023,943
                  
                  
                  
                  26,003Net
      income
                  
                  $
                  2,075
                  
                  
                  $
                  4,371Earnings
      per share:Basic
                  
                  $
                  0.09
                  
                  
                  $
                  0.17Diluted
                  
                  $
                  0.09
                  
                  
                  $
                  0.17





(1)  Excludes
69 and 38 options outstanding during the three months ended August 31, 2009 and
2008, respectively, for which the exercise price exceeded the average market
price of our common stock during that period.





Note
10: Income Taxes





At May
31, 2009, we had unrecognized tax benefits of $3,943.  Unrecognized
tax benefits increased by $457 in the three months ended August 31,
2009.  The increase in the unrecognized tax benefits is the result of
a change in the accrual for prior year tax positions.





The
unrecognized tax benefit at August 31, 2009, if recognized, would have no impact
on the effective tax rate.  However, the derecognition of $1,243
related to the associated interest and penalties at August 31, 2009 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 accrued
approximately $2,041 for the payment of interest and penalties as of August 31,
2009.




We are
subject to U.S. federal taxation and taxation in various U.S. 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 three months ended August
31, 2009.  Absent a significant change in the value of the Canadian
dollar, as compared to the U.S. dollar, we anticipate no significant increase or
decrease in the total amounts of unrecognized tax benefits within 12 months of
the date of this report.




Page
17


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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.





Note
12: Subsequent Events




We have
evaluated all events subsequent to the balance sheet date of August 31, 2009
through October 7, 2009, the date of issuance of these unaudited condensed
consolidated financial statements, and believe that there are no subsequent
events that require disclosure under SFAS 165.


Page
18


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





The
following discussion addresses our financial condition as of August 31, 2009 and
May 31, 2009 and the results of our operations for the three months ended August
31, 2009 and 2008, respectively, and cash flows for the three month periods
ended August 31, 2009 and 2008.  This discussion should be read in
conjunction with Management's Discussion and Analysis in Item 7, and the Risk
Factors in Item 1A, of our Annual Report on Form 10-K for the fiscal year ended
May 31, 2009, 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 three months of fiscal 2010, 82% of our rental and lease revenues were
derived from T&M equipment.  Although this percentage has
increased compared to the first quarter of fiscal 2009, both our T&M and DP
rental activity and rental rates have decreased, reflecting competitive
pressures and the recession in the United States and the international markets
that we serve.





For the
first three months of fiscal 2010, rental revenues were 85% of our rental and
lease revenue.  That percentage is the same as in the first three
months of fiscal 2009, and reflected comparable declines in both our rental and
lease revenues.





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.





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 and customer
demand.  In addition, we are a party to distribution agreements with
three leading manufacturers to sell basic T&M equipment to current and
prospective customers through our 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 provide
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.


Page
19





Our
financial results for the three months ended August 31, 2009, were impacted by
competitive pressure on rental rates and lower utilization rates due in large
part to the recession in the U.S. and our major international
markets.  The recession in the U.S. and global economy, resulting in
more stringent credit requirements and reduced access to capital, is adversely
affecting our customers and competitors.  Consequently, while we
continue to work at initiatives to expand revenue, we must also focus on
remaining profitable in the current conditions, as well as being prepared for
the possibility that the recession may deepen and continue in future
periods.





Profitability and Key
Business Trends





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).





Comparing
the first three months of fiscal 2010 to the same period in fiscal 2009, our
revenues decreased by 8.0% to $32.2 million, our operating profit decreased by
44.4% to $3.3 million and our net income decreased by 52.5% to $2.1
million.  Our rental and lease revenues decreased in our T&M and
DP segments, due primarily to lower demand for leases and a decline in rental
activity and rental rates due to the global recession and competitive pressures.
Revenue also decreased in our foreign operations, with the exception of our
European operation, which grew in the three months ended August 31,
2009.





Some of
our key profitability measurements are presented in the table below for the
three months ended August 31, 2009 and 2008:





2009
                  
                  
                  2008Net
      income per diluted common share (EPS)
                  
                  $
                  0.09
                  
                  
                  $
                  0.17Net
      income as a percentage of average assets (annualized)
                  
                  
                  3.1
                  %
                  
                  
                  5.9
                  %Net
      income as a percentage of average tangible equity
    (annualized)
                  
                  
                  3.7
                  %
                  
                  
                  7.0
                  %





The
decrease in our operating profit primarily reflects competitive pressures on
rental rates and lower equipment utilization rates.  Although our
operating profit declined, we reduced our selling, general and administrative
expenses by $1.7 million for the three months ended August 31, 2009 compared to
the three months ended August 31, 2008.  In response to the recession
in the U.S. and our major international markets, we implemented several cost
cutting measures in order to control or reduce our selling, general and
administrative expenses.





The
amount of our equipment on rent, based on acquisition cost, decreased 5.7% to
$154.9 million at August 31, 2009 from $164.2 million at August 31,
2008.  Acquisition cost of equipment on lease decreased 14.8% to $28.2
million at August 31, 2009 from $33.1 million at August 31,
2008.  Average rental and lease rates for our T&M and DP segments
declined by 14.5% and 1.8%, respectively, from August 31, 2008 to August 31,
2009.  Utilization for our T&M equipment pool, based on
acquisition cost of equipment on rent and lease compared to the total pool, was
59.9% at August 31, 2009, compared to 61.4% at August 31, 2008.  Over
the same period, utilization of our DP equipment pool decreased to 42.0% from
55.9%.





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





Three Months EndedAug 31,
                      2009
                    
                    
                    May 31,
                      2009
                    
                    
                    Feb 28,
                      2009
                    
                    
                    Nov 30,
                      2008
                    
                    
                    Aug 31,
                      2008Rentals
      and leases
                    
                    $
                    21,747
                    
                    
                    $
                    22,515
                    
                    
                    $
                    22,491
                    
                    
                    $
                    26,155
                    
                    
                    $
                    27,234Sales
      of equipment and other revenues
                    
                    
                    10,454
                    
                    
                    
                    7,488
                    
                    
                    
                    7,568
                    
                    
                    
                    9,278
                    
                    
                    
                    7,752Operating
      profit
                    
                    
                    3,331
                    
                    
                    
                    3,523
                    
                    
                    
                    3,047
                    
                    
                    
                    4,839
                    
                    
                    
                    5,986




Page
20


Results
of Operations





Comparison
of Three Months Ended August 31, 2009 and August 31, 2008





Revenues





Total
revenues for the three months ended August 31, 2009 and 2008 were $32.2 million
and $35.0 million, respectively.  The 8% decrease in total revenues
was due to a 20.1% decrease in rental and lease revenues, partially offset by a
34.9% increase in sales of equipment and other revenues.





Rental
and lease revenues in the first quarter of fiscal 2010 were $21.7 million,
compared to $27.2 million in the same period of the prior fiscal
year.  This 20% decrease reflects a decline in our T&M and DP
lease revenues, primarily due to lower demand, and a decrease in T&M and DP
rental revenues due to decreased rental activity and rental rates based on
competitive pressures and the global recession.





Sales of
equipment and other revenues increased to $10.5 million for the three months
ended August 31, 2009, compared to $7.8 million in the same period of the prior
fiscal year.  This 35% increase is primarily due to an increase in
used equipment sales in our T&M business, in both North America and our
foreign operations, and an increase in finance lease activity, reflecting
continued development, both in terms of personnel and marketing, of our vendor
leasing program that provides customers with flexible financing
alternatives.





Operating
Expenses





Depreciation
of rental and lease equipment decreased to $10.8 million, or 49.6% of rental and
lease revenues, in the first quarter of fiscal 2010, from $11.6 million, or
42.5% of rental and lease revenues, in the first quarter of fiscal
2009.  The decreased depreciation expense in fiscal 2010 was due to a
lower average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to a
decline in our rental and lease revenues, reflecting lower rental rates and
lower demand for leases as well as lower utilization rates.





Costs of
revenues other than depreciation increased 44.7% to $7.8 million in the first
quarter of fiscal 2010 from $5.4 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 71.6% in the first quarter of fiscal 2010 from 65.2% in the first quarter of
fiscal 2009.  This increase reflects a decline in our used equipment
sales margin, reflecting competitive pressures and the global recession, and
increased finance leases, which carry a lower margin.  Our sales
margin is expected to continue to fluctuate quarterly depending on growth in our
finance leases and distribution sales, the impact of competition and the global
recession on our used equipment sales, and customer requirements and
funding.





Selling,
general and administrative expenses decreased 15% to $10.3 million in the first
quarter of fiscal 2010, compared to $12.1 million in the first quarter of fiscal
2009.  Our selling, general and administrative expenses decreased
primarily due to a decline in personnel and certain employee benefit and selling
costs because we implemented several cost cutting measures in response to the
global recession.  As a result of these measures, even though our
revenue declined, we reduced selling, general and administrative expenses as a
percentage of total revenues to 32.0% in the first quarter of fiscal 2010 from
34.4% in the first quarter of fiscal 2009.





Interest
Income, Net





Interest
income, net, was $0.3 million for the first quarter of fiscal 2010 compared to
$0.6 million in the same period of the prior fiscal year.  The
decrease reflects decreases in prevailing interest rates.  Interest
income, net, includes $0.2 million of unrealized losses on our put
option.  In addition, interest income, net, includes $0.2 million of
unrealized gains on our investments, trading.





Income
Tax Provision





Our
effective tax rate was 43.0% in the first quarter of fiscal 2010, compared to
33.5% for the same period in fiscal 2009.  The increase is due
primarily to a decline in the proportion of foreign subsidiary income, which is
subject to lower tax rates, a valuation allowance on tax benefits for certain
foreign subsidiary losses and a reduction of the benefit from tax-advantaged
investments.  In addition, the fiscal 2009 effective rate was reduced
by changes in estimated tax exposures.  There was no such effect in
fiscal 2010.


Page
21





Liquidity
and Capital Resources





Capital
Expenditures





Our
primary capital requirements are purchases of rental and lease
equipment.  We generally purchase equipment throughout the year to
replace equipment that has been sold and to maintain adequate levels of rental
equipment to meet existing and expected 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 purchases of $9.3 million of rental and lease equipment during the
first three months of fiscal 2010 and $15.7 million during the first three
months of fiscal 2009.  In response to reduced customer demand in the
current economic downturn, purchases in the first three months of fiscal 2010
were 40.6% lower than the same period for fiscal 2009.





Share
Repurchases and Dividends





We
periodically repurchase shares of our common stock which are then retired and
returned to the status of authorized but unissued stock.  During the
three months ended August 31, 2009 and 2008, we repurchased 43,014 and 208,756
shares of our common stock, respectively, for $0.4 million and $2.6 million,
respectively, at an average price per share of $8.94 and $12.50,
respectively.  We may make repurchases of common stock in the future
through open market transactions or otherwise, but we have no commitments to do
so.





During
the three months ended August 31, 2009 and 2008, we paid dividends of $0.15 per
common share, or $0.60 per annum, amounting to an aggregate of $3.6 million and
$3.9 million, respectively.  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.





Cash
and Cash Equivalents and Investments





At August
31, 2009, we held $21.1 million, at cost, in auction rate securities (“ARS”),
which we classify as investments, trading.  The fair value of our ARS
at August 31, 2009 was $19.7 million.  Our ARS are long-term debt
instruments backed by student loans, a substantial portion of which are
guaranteed by the United States government.  Although our ARS became
illiquid beginning in February 2008, 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, UBS
AG (“UBS”), which are derived from UBS’s 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 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 from 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 our agreement with UBS.





Given the
approximately $58.0 million of cash and cash equivalents and investments
available-for-sale that we held as of August 31, 2009 (primarily U.S. Treasury
money market funds and corporate and government bond funds), and our lack of
bank debt as of that date, we expect to be able to continue to finance our
operations even if our ARS were to be illiquid for an extended period of
time.





Cash
Flows and Credit Facilities





During
the first three months of fiscal 2010 and fiscal 2009, net cash provided by
operating activities was $10.5      million and
$18.7 million, respectively.  The decrease in operating cash flow was
due primarily to:  a decline in net income of $2.3 million for the
three months ended August 31, 2009 compared to the three months ended August 31,
2008; a $0.8 million increase in accounts receivable for the three months ended
August 31, 2009 compared to a decrease of $2.7 million in the same period of the
prior fiscal year; and a decrease in depreciation and amortization expense to
$11.1 million for the three months ended August 31, 2009 from $11.9 million for
the three months ended August 31, 2008.


Page
22





During
the three months ended August 31, 2009 net cash provided by investing activities
was $0.6 million compared to $9.3 million of net cash used in investing
activities for the same period of fiscal 2009.  The decrease in net
cash used in investing activities is mainly due to a decrease in payments for
the purchase of rental and lease equipment to $9.3 million for the three months
ended August 31, 2009 compared to $15.7 million for the three months ended
August 31, 2008, and an increase in proceeds from sale of rental and lease
equipment to $9.4 million for the three months ended August 31, 2009 compared to
$6.4 million for the three months ended August 31, 2008.





Net cash
used in financing activities decreased to $4.0 million for the three months
ended August 31, 2009 from $6.0 million for the three months ended August 31,
2008, due to a decrease in payments for the repurchase of common stock to $0.4
million for the three months ended August 31, 2009 compared to $2.6 million for
the three months ended August 31, 2008.





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.  In addition, UBS Bank USA
has established a credit line for us in an amount up to 75% of the market value
of the ARS that we pledge as collateral, with interest equal to the interest
income that we receive on our ARS investments.  We have not drawn any
amounts under this line and have no current plans to do so.  We had no
bank borrowings outstanding or off balance sheet financing arrangements at
August 31, 2009.





We
believe that based on our current cash and cash equivalents and investments
available-for-sale balance of $58.0 million at August 31, 2009 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 our
dividends.





Contractual
Obligations





We do not
believe that our contractual obligations have changed materially from those
included in our Annual Report on Form 10-K for the fiscal year ended May 31,
2009.  The exact timing of reversal or settlement of our FIN 48
liabilities of $6.4 million could not be reasonably estimated at the end of the
current fiscal quarter.





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 we 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 that 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 fiscal year ended
May 31, 2009.  We have not made any material changes to these
policies as previously disclosed.


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23


SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS




This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  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 that
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 Item 3. "Quantitative and Qualitative Disclosures About Market Risk
," as well as in our Annual Report on Form 10-K for the fiscal year ended May
31, 2009 (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 three months of fiscal 2010, 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, 2009.





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) 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.





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within Electro Rent Corporation have been detected.





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.


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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 Annual Report on Form 10-K for the
fiscal year ended May 31, 2009.  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 nine 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, 2009.





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





Period
                  
                  Total Number of
                    Shares
                    Purchased
                  
                  
                  Average Price
                    Paid per ShareJune
      1, 2009 – June 30, 2009
                  
                  
                  -
                  
                  
                  
                  -July
      1, 2009 – July 31, 2009
                  
                  
                  43,014
                  
                  
                  $
                  8.94August
      1, 2009 – August 31, 2009
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  43,014
                  
                  
                  $
                  8.94





All of
these common stock repurchases were made in open-market transactions and not
pursuant to any publicly announced plans.  We may choose to make
additional open-market or other purchases of our common stock in the future, but
have no commitment to do so.





Item
3.  Defaults Upon Senior Securities.





None.





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





None.





Item
5.  Other Information





None.





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
25


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:  October
7, 2009





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




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26