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 February
28, 2010 or





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





For the transition period from _____ to
_____





Commission
File Number: 0-9061





ELECTRO RENT
CORPORATION


Exact
Name of Registrant as Specified in its Charter





CALIFORNIA
                
                95-2412961(State
      or Other Jurisdiction
                
                (I.R.S.
      Employerof
      Incorporation or Organization)
                
                Identification
      No.)





6060
SEPULVEDA BOULEVARD


VAN NUYS, CALIFORNIA
91411-2501


(Address
of Principal Executive Offices and Zip Code)





818
787-2100


(Registrant's
Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes  x    No
 ̈





Indicate
by check mark whether the registrant 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  ̈    No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. 
See definitions of “large accelerated filer”, “accelerated filer”  and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer  ̈
              Accelerated
      filer  xNon-accelerated
      filer  ̈
              Smaller
      reporting company  ̈(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   ̈   No
x





The
number of shares outstanding of the registrant's common stock as of March 31,
2010 was 23,946,252.





ELECTRO
RENT CORPORATION


FORM
10-Q


February
28, 2010





TABLE
      OF CONTENTS
                  
                  PagePart
      I: FINANCIAL INFORMATION
                  
                  3Item
      1.
                  Financial
      Statements
                  
                  3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      February 28, 2010 and 2009 (Unaudited)
                  
                  3Condensed
      Consolidated Balance Sheets at February 28, 2010 and May 31, 2009
      (Unaudited)
                  
                  4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended February
      28, 2010 and 2009 (Unaudited)
                  
                  5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                  
                  6Item
      2.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  19Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  26Item
      4.
                  Controls
      and Procedures
                  
                  26Part
      II: OTHER INFORMATION
                  
                  26Item
      1.
                  Legal
      Proceedings
                  
                  26Item
      1A.
                  Risk
      Factors
                  
                  26Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  26Item
      3.
                  Defaults
      Upon Senior Securities
                  
                  26Item
      4.
                  Reserved
                  
                  26Item
      5.
                  Other
      Information
                  
                  26Item
      6.
                  Exhibits
                  
                  27SIGNATURES
                  
                  28


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 Ended
                  
                  
                  Nine Months EndedFebruary 28,
                  
                  
                  February 28,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenues:Rentals
      and leases
                  
                  $
                  22,596
                  
                  
                  $
                  22,491
                  
                  
                  $
                  67,672
                  
                  
                  $
                  75,880Sales
      of equipment and other revenues
                  
                  
                  10,438
                  
                  
                  
                  7,568
                  
                  
                  
                  34,140
                  
                  
                  
                  24,598Total
      revenues
                  
                  
                  33,034
                  
                  
                  
                  30,059
                  
                  
                  
                  101,812
                  
                  
                  
                  100,478Operating
      expenses:Depreciation
      of rental and lease equipment
                  
                  
                  10,218
                  
                  
                  
                  11,555
                  
                  
                  
                  31,486
                  
                  
                  
                  34,694Costs
      of revenues other than depreciation of rental and lease
      equipment
                  
                  
                  7,360
                  
                  
                  
                  5,157
                  
                  
                  
                  24,980
                  
                  
                  
                  17,508Selling,
      general and administrative expenses
                  
                  
                  11,517
                  
                  
                  
                  10,300
                  
                  
                  
                  32,182
                  
                  
                  
                  34,404Total
      operating expenses
                  
                  
                  29,095
                  
                  
                  
                  27,012
                  
                  
                  
                  88,648
                  
                  
                  
                  86,606Operating
      profit
                  
                  
                  3,939
                  
                  
                  
                  3,047
                  
                  
                  
                  13,164
                  
                  
                  
                  13,872Interest
      income, net
                  
                  
                  125
                  
                  
                  
                  145
                  
                  
                  
                  1,481
                  
                  
                  
                  1,368Income
      before income taxes
                  
                  
                  4,064
                  
                  
                  
                  3,192
                  
                  
                  
                  14,645
                  
                  
                  
                  15,240Income
      tax provision
                  
                  
                  1,913
                  
                  
                  
                  1,309
                  
                  
                  
                  6,408
                  
                  
                  
                  5,492Net
      income
                  
                  $
                  2,151
                  
                  
                  $
                  1,883
                  
                  
                  $
                  8,237
                  
                  
                  $
                  9,748Earnings
      per share:Basic
                  
                  $
                  0.09
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.34
                  
                  
                  $
                  0.39Diluted
                  
                  $
                  0.09
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.34
                  
                  
                  $
                  0.39Shares
      used in per share calculation:Basic
                  
                  
                  23,930
                  
                  
                  
                  24,323
                  
                  
                  
                  23,926
                  
                  
                  
                  25,189Diluted
                  
                  
                  23,988
                  
                  
                  
                  24,389
                  
                  
                  
                  23,981
                  
                  
                  
                  25,292
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited).
  Page
3
 
 ELECTRO
RENT CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(in thousands, except share numbers)
 
 February 28,
                  
                  
                  May 31,2010
                  
                  
                  2009ASSETSCash
      and cash equivalents
                  
                  $
                  59,263
                  
                  
                  $
                  22,215Investments
      available-for-sale, at fair value (cost of $27,896)
                  
                  
                  -
                  
                  
                  
                  28,188Investments,
      trading, at fair value (cost of $19,775 and $21,600)
                  
                  
                  18,322
                  
                  
                  
                  19,977Put
      option
                  
                  
                  1,453
                  
                  
                  
                  1,623Accounts
      receivable, net of allowance for doubtful accounts of $450 and
      $317
                  
                  
                  19,395
                  
                  
                  
                  16,271Rental
      and lease equipment, net of accumulated depreciation of $175,038 and
      $179,318
                  
                  
                  143,521
                  
                  
                  
                  158,252Other
      property, net of accumulated depreciation and amortization of $15,816 and
      $15,207
                  
                  
                  13,742
                  
                  
                  
                  13,781Goodwill
                  
                  
                  3,109
                  
                  
                  
                  3,109Intangibles,
      net of amortization of $1,972 and $1,741
                  
                  
                  503
                  
                  
                  
                  734Other
                  
                  
                  10,723
                  
                  
                  
                  7,184$
                  270,031
                  
                  
                  $
                  271,334LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Accounts
      payable
                  
                  $
                  4,490
                  
                  
                  $
                  3,291Accrued
      expenses
                  
                  
                  14,688
                  
                  
                  
                  15,023Deferred
      revenue
                  
                  
                  4,584
                  
                  
                  
                  4,281Deferred
      tax liability
                  
                  
                  16,377
                  
                  
                  
                  19,986Total
      liabilities
                  
                  
                  40,139
                  
                  
                  
                  42,581Commitments
      and contingencies (Note 11)Shareholders'
      equity:Preferred
      stock, $1 par - shares authorized 1,000,000, none issued or
      outstandingCommon
      stock, no par - shares authorized 40,000,000 and 23,941,506 and 23,953,540
      shares issued and outstanding, respectively
                  
                  
                  33,183
                  
                  
                  
                  32,596Accumulated
      other comprehensive income, net of tax
                  
                  
                  -
                  
                  
                  
                  176Retained
      earnings
                  
                  
                  196,709
                  
                  
                  
                  195,981Total
      shareholders' equity
                  
                  
                  229,892
                  
                  
                  
                  228,753$
                  270,031
                  
                  
                  $
                  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)
 
 Nine Months EndedFebruary 28,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income
                    
                    $
                    8,237
                    
                    
                    $
                    9,748Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    32,357
                    
                    
                    
                    35,573Put
      option loss (gain)
                    
                    
                    170
                    
                    
                    
                    (1,075
                    )Unrealized
      holding (gain) loss for trading securities
                    
                    
                    (170
                    )
                    
                    
                    1,075Remeasurement
      loss
                    
                    
                    100
                    
                    
                    
                    471Provision
      for losses on accounts receivable
                    
                    
                    291
                    
                    
                    
                    280Realized
      gain on sale of investments available-for-sale
                    
                    
                    (841
                    )
                    
                    
                    -Gain
      on sale of rental and lease equipment
                    
                    
                    (8,815
                    )
                    
                    
                    (6,554
                    )Stock
      compensation expense
                    
                    
                    436
                    
                    
                    
                    124Excess
      tax benefit for share based compensation
                    
                    
                    (26
                    )
                    
                    
                    (37
                    )Deferred
      income taxes
                    
                    
                    (3,493
                    )
                    
                    
                    3,417Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    (3,508
                    )
                    
                    
                    5,251Other
      assets
                    
                    
                    (3,535
                    )
                    
                    
                    (961
                    )Accounts
      payable
                    
                    
                    (367
                    )
                    
                    
                    457Accrued
      expenses
                    
                    
                    3,112
                    
                    
                    
                    (316
                    )Deferred
      revenue
                    
                    
                    302
                    
                    
                    
                    (637
                    )Net
      cash provided by operating activities
                    
                    
                    24,251
                    
                    
                    
                    46,816Cash
      flows from investing activities:Proceeds
      from sale of rental and lease equipment
                    
                    
                    29,546
                    
                    
                    
                    20,947Payments
      for purchase of rental and lease equipment
                    
                    
                    (35,918
                    )
                    
                    
                    (42,123
                    )Redemptions
      of investments, available-for-sale
                    
                    
                    28,737
                    
                    
                    
                    -Redemptions
      of investments, trading
                    
                    
                    1,825
                    
                    
                    
                    2,000Payments
      for purchase of other property
                    
                    
                    (600
                    )
                    
                    
                    (211
                    )Net
      cash provided by (used in) investing activities
                    
                    
                    23,590
                    
                    
                    
                    (19,387
                    )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                    
                    
                    292
                    
                    
                    
                    1,271Excess
      tax benefit for stock options exercised
                    
                    
                    26
                    
                    
                    
                    37Payments
      for repurchase of common stock
                    
                    
                    (395
                    )
                    
                    
                    (20,395
                    )Payment
      of dividends
                    
                    
                    (10,768
                    )
                    
                    
                    (11,417
                    )Net
      cash used in financing activities
                    
                    
                    (10,845
                    )
                    
                    
                    (30,504
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    36,996
                    
                    
                    
                    (3,075
                    )Effect
      of exchange rate changes on cash
                    
                    
                    52
                    
                    
                    
                    (498
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    22,215
                    
                    
                    
                    50,964Cash
      and cash equivalents at end of period
                    
                    $
                    59,263
                    
                    
                    $
                    47,391
 
 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 that 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 with the SEC on 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.





Effective
September 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (the “FASB Codification” or “ASC”) became the single
source of authoritative GAAP in the United States of America.  The FASB
Codification reorganized the previous GAAP pronouncements into accounting
topics, which are displayed using a single numerical structure.  Certain
SEC guidance that is included in SEC guidelines is also included in the FASB
Codification and follows a similar topical structure in separate SEC
sections.  Any technical references contained in the accompanying interim
financial statements have been updated to correspond to the new FASB
Codification references.





Foreign
Currency





Effective
June 1, 2009, we adopted new accounting guidance intended to improve financial
reporting disclosures about derivative instruments and hedging activities. 
The adoption of this guidance did not have a material effect on our financial
condition, results of operations or cash flows.  We applied the
requirements of the new guidance 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 derivative
instruments, not designated as hedging instruments, 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.


Page
6





ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The fair
value of our foreign exchange forward contracts in the consolidated balance
sheet as of February 28, 2010 is shown in the table below:





Derivatives Not Designated as
                          Hedging Instruments
                        
                        Consolidated Balance Sheet Location
                        
                        Fair ValueForeign
      exchange forward contracts
                        
                        Other
                        
                        $
                        83





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





Derivatives Not Designated
                        as Hedging Instruments
                      
                      Location of Gain Recognized
                        in Income on Derivatives
                      
                      Three Months Ended
                        February 28, 2010
                      
                      
                      Nine Months Ended
                        February 28, 2010Foreign
      exchange forward contracts
                      
                      Selling,
      general and administrative expenses
                      
                      $
                      256
                      
                      
                      $
                      91





Recent Accounting
Pronouncements





Effective
June 1, 2009, we adopted accounting guidance on interim disclosures about fair
value of financial instruments.  This guidance relates to fair value
disclosures for any financial instrument not currently reflected on the balance
sheet at fair value, and requires quarterly disclosures of qualitative and
quantitative information about fair value estimates for financial instruments
not measured on the balance sheet at fair value.  The adoption of this
guidance did not have a material impact on our financial condition, results of
operations or cash flows.





Effective
June 1, 2009, we adopted accounting guidance for determining fair value when
there is no active market or where the price inputs being used represent
distressed sales.  This guidance 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 this
guidance did not have a material impact on our financial condition, results of
operations or cash flows.





Effective
June 1, 2009, we adopted accounting guidance on management’s assessment of
subsequent events, including guidance on the scope and timing.  This
guidance 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 this guidance did
not have a material impact on our financial condition, results of operations or
cash flows.





Effective
June 1, 2009, we adopted accounting guidance for other-than-temporary
impairments.  This guidance 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 of debt
and equity securities.  The adoption of this guidance did not have a
material impact on our financial condition, results of operations or cash
flows.




Effective
June 1, 2009, we adopted accounting guidance on business combinations. 
This guidance revises the method of accounting for a number of aspects of
business combinations, including acquisition costs, contingencies (including
contingent assets, contingent liabilities and contingent purchase price), and
post acquisition exit activities of acquired businesses.  In addition, this
new guidance will require us to expense acquisition costs for future
acquisitions.  Future acquisitions will be accounted for under this
guidance (Note 12).





Effective
June 1, 2009, we adopted accounting guidance on determining the useful life ofintangibleassets. 
This guidance amends the factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of recognized
intangible assets and adds certain disclosures for an entity’s accounting policy
regarding treatment of the costs, period of extension, and total costs
incurred.  We applied this new guidance prospectively to all recognized
intangible assets.  The adoption of this guidance 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 accounting guidance addressing accounting for
instruments granted in share-based payment transactions.  This guidance
defines which types of 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.  This guidance 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 the guidance.  The adoption of this guidance did not have a material
impact on our financial condition, results of operations or cash
flows.




Effective
June 1, 2009, we adopted accounting guidance on non-controlling interests in
consolidated financial statements.  The new accounting guidance requires
that a noncontrolling interest in the equity of a subsidiary be accounted for
and reported as equity, provides revised guidance on the treatment of net income
and losses attributable to the noncontrolling interest and changes in ownership
interests in a subsidiary, and requires additional disclosures that identify and
distinguish between the interests of the controlling and noncontrolling
owners.  The adoption of the new guidance did not have a material effect on
our financial condition, results of operations or cash flows.




Effective
September 1, 2009, we adopted guidance on fair value measurements and
disclosures, which provides clarification that, in the absence of a quoted price
for a liability, companies may apply methods that use the quoted price of an
investment traded as an asset or other valuation techniques consistent with the
fair-value measurement principle.  The adoption of this guidance did not
have a material impact on our financial condition, results of operations or cash
flows.




In
October 2009, the FASB amended revenue recognition guidance for
arrangements with multiple deliverables.  The guidance eliminates the
residual method of revenue recognition and allows the use of management’s best
estimate of the selling price for individual elements of an arrangement when
vendor specific objective evidence, vendor objective evidence or third-party
evidence is unavailable.  This guidance will be effective for fiscal years
beginning on or after June 15, 2010.  We will be required to adopt
this guidance beginning with our first quarter of fiscal 2012.  We do not
anticipate that the adoption of this guidance 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 available-for-sale consist of corporate and government bond funds,
while our investments, trading consist of auction rate securities (“ARS”). 
Our investments are carried at fair value.  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
February 28, 2010, we held $19,775, at cost, of ARS.  During the three and
nine months ended February 28, 2010, $1,100 and $1,825, respectively, 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.


Page
8


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





In
November 2008, we entered into a settlement agreement (“Agreement”) with
UBS.  By accepting the Agreement, we received the right (“Put Option”) to
sell our ARS at par value to UBS, 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 Agreement. 
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 Agreement are not
secured by its assets and do not require UBS to obtain any financing to support
its performance obligations under the Agreement.  UBS has disclaimed any
assurance that it will have sufficient financial resources to satisfy its
obligations under the Agreement.  In accordance with accounting guidance,
which permits an entity to elect the fair value option for financial assets and
liabilities, we elected to measure the Put Option at fair value in order to
match the changes in the fair value of the ARS.  Simultaneously, we
transferred our ARS from investments available-for-sale to trading
securities.The
transfer to trading securities reflects our intent to exercise our Put Option. The fair
value of the trading securities and Put Option are determined by pricing models
(see Note 3).





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.  Realized gains and losses on our
available-for-sale debt securities are recorded in interest income, net, in our
condensed consolidated statements of operations.  During the nine months
ended February 28, 2010, we sold our available-for-sale securities for $28,737
and reclassified a realized gain of $841 out of accumulated other comprehensive
income into interest income, net, in our condensed consolidated statements of
operations.  At February 28, 2010, we did not hold any available-for-sale
securities.  At May 31, 2009, the gross unrealized gains included in other
comprehensive income with respect to our available-for-sale securities were
$292.  Such unrealized gains did not affect net income for the applicable
accounting period.





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





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





Note
3:  Fair Value Measurements




We
measure certain financial assets and liabilities at fair value on a recurring
basis, including cash equivalents, available-for-sale securities, trading
securities and foreign currency derivatives.  The fair value of these
financial assets and liabilities was determined based on three levels of inputs,
of which the first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the following:





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.





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.


Page
9


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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 February 28, 2010Quoted Prices
                    in Active
                    Markets for
                    Identical
                    Instruments
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)
                  
                  
                  Total
                    BalanceMoney
      market funds
                  
                  $
                  54,180
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  54,180Auction
      rate securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,322
                  
                  
                  
                  18,322Put
      option
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,453
                  
                  
                  
                  1,453Foreign
      currency forward contract
                  
                  
                  -
                  
                  
                  
                  83
                  
                  
                  
                  -
                  
                  
                  
                  83Total
      assets measured at fair value
                  
                  $
                  54,180
                  
                  
                  $
                  83
                  
                  
                  $
                  19,775
                  
                  
                  $
                  74,038





At May 31, 2009Quoted Pricesin ActiveMarkets
      forIdenticalInstruments
                    (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 and liabilities measured at fair value
                  
                  $
                  43,788
                  
                  
                  $
                  (81
                  )
                  
                  $
                  21,600
                  
                  
                  $
                  65,307





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, which
are financial instruments that do not qualify as hedges, 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.


Page
10


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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):





Three months ended February 28,2010
                  
                  
                  2009Put Option
                  
                  
                  Auction Rate
                    Securities
                  
                  
                  Put Option
                  
                  
                  Auction Rate
                    SecuritiesFair
      value at beginning of period
                  
                  $
                  1,510
                  
                  
                  $
                  19,365
                  
                  
                  $
                  3,031
                  
                  
                  $
                  19,769Settlements
      (at par)
                  
                  
                  -
                  
                  
                  
                  (1,100
                  )
                  
                  
                  -
                  
                  
                  
                  (1,200
                  )Unrealized
      gains (losses) included in interest income, net
                  
                  
                  (57
                  )
                  
                  
                  57
                  
                  
                  
                  (1,956
                  )
                  
                  
                  1,956Fair
      value at end of period
                  
                  $
                  1,453
                  
                  
                  $
                  18,322
                  
                  
                  $
                  1,075
                  
                  
                  $
                  20,525





Nine months ended February 28,2010
                  
                  
                  2009Put Option
                  
                  
                  Auction Rate
                    Securities
                  
                  
                  Put Option
                  
                  
                  Auction Rate
                    SecuritiesFair
      value at beginning of period
                  
                  $
                  1,623
                  
                  
                  $
                  19,977
                  
                  
                  $
                  -
                  
                  
                  $
                  22,601Issuance
      of put option
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,891
                  
                  
                  
                  -Settlements
      (at par)
                  
                  
                  -
                  
                  
                  
                  (1,825
                  )
                  
                  
                  -
                  
                  
                  
                  (2,000
                  )Unrealized
      gains (losses) included in interest income, net
                  
                  
                  (170
                  )
                  
                  
                  170
                  
                  
                  
                  (816
                  )
                  
                  
                  (76
                  )Fair
      value at end of period
                  
                  $
                  1,453
                  
                  
                  $
                  18,322
                  
                  
                  $
                  1,075
                  
                  
                  $
                  20,525





We
included in earnings unrealized losses of  $65 and $28 for the three
and nine months periods ending February 28, 2010, respectively, attributable to
the remaining ARS we held on that date, and unrealized gains of $65 and $28 for
the three and nine months ended February 28, 2010, respectively, attributable to
our put option on those securities.





Note
4: Stock Options and Equity Incentive Plan





Our 2005
Equity Incentive Plan (the “Equity Incentive Plan”) authorizes our 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 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 stock options to
directors, officers and key employees at prices not less than 100% of the fair
market value on the date of grant.  Stock 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 stock
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
11


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 nine months ended
February 28, 2010:





Options
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Weighted
                Average
                Remaining
                Contractual
                Term (in
                years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at June 1, 2009
              
              
              369
              
              
              $
              10.39Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (32
              )
              
              
              9.10Forfeited/canceled
              
              
              (261
              )
              
              
              9.59Outstanding
      at February 28, 2010
              
              
              76
              
              
              $
              13.69
              
              
              
              1.02
              
              
              $
              76Vested
      and expected to vest at February 28, 2010
              
              
              76
              
              
              $
              13.69
              
              
              
              1.02
              
              
              $
              76Vested
      and exercisable at February 28, 2010
              
              
              76
              
              
              $
              13.69
              
              
              
              1.02
              
              
              $
              76





There
were no stock options granted during the three and nine months ended February
28, 2010 and 2009.  The total fair value of shares vested during the three
and nine months ended February 28, 2010 was $0 and $54, respectively, compared
to $0 and $99 during the three and nine months ended February 28, 2009,
respectively.  The aggregate intrinsic value of options exercised,
calculated as the difference between the exercise price of the underlying awards
and the quoted price of our common stock, was $71 and $73 during the three and
nine months ended February 28, 2010, respectively, and $113 and $347 during the
three and nine months ended February 28, 2009, respectively.  As of
February 28, 2010, there was no remaining unrecognized compensation cost related
to unvested stock options granted under our Plans.  Shares of newly issued
common stock will be issued upon any exercise of stock options.





Restricted
Stock





No
restricted stock was granted during the three and nine months ended February 28,
2010, and 0 and 7 restricted shares were granted during the three and nine
months ended February 28, 2009, respectively.





Restricted
Stock Units





Restricted
stock units represent the right to receive one share of our common stock
provided that the vesting conditions are satisfied.  The following table
represents restricted stock unit activity for the nine months ended February 28,
2010:





Restricted
                    Stock Units
                  
                  
                  Weighted –
                    Average
                    Grant
                    Date
                    Fair ValueNonvested
      at June 1, 2009
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  158
                  
                  
                  
                  10.02Vested
                  
                  
                  (12
                  )
                  
                  
                  (10.80
                  )Canceled
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at February 28, 2010
                  
                  
                  146
                  
                  
                  $
                  9.95Expected
      to vest at February 28, 2010
                  
                  
                  146
                  
                  
                  $
                  9.95





We
granted 0 and 158 restricted stock units during the three and nine months ended
February 28, 2010, respectively.  There were no restricted stock units
granted during the three and nine months ended February 28, 2009.  As of
February 28, 2010, we have unrecognized share-based compensation cost of
approximately $1,166 associated with the restricted stock unit awards. 
This cost is expected to be recognized over a weighted-average period of
approximately 2.3 years.


Page
12


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The total
fair value of shares that vested during the three and nine months ended February
28, 2010 was $53 and $129, respectively, and $22 and $70 during the three and
nine months ended February 28, 2009, respectively, which was calculated based on
the closing price of our common stock on the Nasdaq Stock Market on the
applicable date of vesting.





Accounting
guidance 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.





We use
the Black-Scholes option pricing model to calculate the fair value of any 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 $166 and $436 of stock-based compensation as part of selling, general
and administrative expenses for the three and nine months ended February 28,
2010, respectively, compared to $34 and $124 for the three and nine months ended
February 28, 2009, respectively.





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 nine months ended February 28, 2010 and 2009 was $26 and $37,
respectively.  Cash received from stock option exercises was $292 and
$1,271 for the nine months ended February 28, 2010 and 2009,
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 consist of purchased customer relationships, trademarks and trade names,
developed technologies and other intangible assets.





Our
goodwill and intangibles at February 28, 2010 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 nine
months ended February 28, 2010 are as follows:





Balance as of
                    June 1, 2009 (net
                    of amortization)
                  
                  
                  Amortization
                  
                  
                  Balance as of
                    February 28, 2010Goodwill
                  
                  $
                  3,109
                  
                  
                  $
                  -
                  
                  
                  $
                  3,109Trade
      name
                  
                  
                  411
                  
                  
                  
                  -
                  
                  
                  
                  411Non-compete
      agreements
                  
                  
                  166
                  
                  
                  
                  (74
                  )
                  
                  
                  92Customer
      relationships
                  
                  
                  157
                  
                  
                  
                  (157
                  )
                  
                  
                  -$
                  3,843
                  
                  
                  $
                  (231
                  )
                  
                  $
                  3,612





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


Page
13


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




We
evaluate the recoverability of goodwill and indefinite-lived intangible assets
annually as of May 31, and whenever events or changes in circumstances indicate
that carrying amount may not be recoverable.





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





February 28, 2010Estimated
                    Useful Life
                  
                  Gross Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net Carrying
                    AmountTrade
      name
                  indefinite
                  
                  $
                  411
                  
                  
                  $
                  -
                  
                  
                  $
                  411Non-compete
      agreements
                  2-5
      years
                  
                  
                  1,050
                  
                  
                  
                  (958
                  )
                  
                  
                  92Customer
      relationships
                  3-4
      years
                  
                  
                  1,014
                  
                  
                  
                  (1,014
                  )
                  
                  
                  -$
                  2,475
                  
                  
                  $
                  (1,972
                  )
                  
                  $
                  503





May 31, 2009Estimated
                      Useful Life
                    
                    Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net Carrying
                      AmountTrade
      name
                    indefinite
                    
                    $
                    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 $64 and $231 for the three and nine months ended February 28, 2010,
respectively, compared to $84 and $251 for the three and nine months ended
February 28, 2009, respectively.





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





Year ending May 31,
              
              Future
                Amortization2010
              
              $
              252011
              
              
              67$
              92





Note
6: Noncash Investing and Financing Activities





We had
accounts payable and other accruals related to acquired equipment totaling
$3,666 and $2,098 as of February 28, 2010 and May 31, 2009, respectively, and
$3,420 and $3,824 as of February 28, 2009 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
February 28, 2010 and May 31, 2009, respectively, compared to $3,637 and $0 as
of February 28, 2009 and May 31, 2008, respectively, which amounts were
subsequently paid.


Page
14


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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:





February 28,
                  2010
                
                
                May 31,
                  2009Gross
      minimum lease payments receivable
                
                $
                7,100
                
                
                $
                3,247Less
      – unearned interest
                
                
                (401
                )
                
                
                (193
                )Net
      investment in sales-type lease receivables
                
                $
                6,699
                
                
                $
                3,054





Note
8: Segment Reporting and Related Disclosures





Accounting
guidance establishes reporting standards for an enterprise’s operating segments
and related disclosures about its products, services, geographic areas and major
customers.  Operating segments are defined as components of an enterprise
for which separate financial information is available that is regularly
evaluated 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: 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, 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 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 $279,114 of T&M
equipment and $39,445 of DP equipment at February 28, 2010 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 February 28,
2010 and 2009:





T&M
                    
                    
                    DP
                    
                    
                    Total2010Rentals
      and leases
                    
                    $
                    18,808
                    
                    
                    $
                    3,788
                    
                    
                    $
                    22,596Sales
      of equipment and other revenues
                    
                    
                    9,857
                    
                    
                    
                    581
                    
                    
                    
                    10,438$
                    28,665
                    
                    
                    $
                    4,369
                    
                    
                    $
                    33,0342009Rentals
      and leases
                    
                    $
                    18,133
                    
                    
                    $
                    4,358
                    
                    
                    $
                    22,491Sales
      of equipment and other revenues
                    
                    
                    6,998
                    
                    
                    
                    570
                    
                    
                    
                    7,568$
                    25,131
                    
                    
                    $
                    4,928
                    
                    
                    $
                    30,059


Page
15


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Revenues
for these product groups were as follows for the nine months ended February 28,
2010 and 2009:





T&M
                    
                    
                    DP
                    
                    
                    Total2010Rentals
      and leases
                    
                    $
                    55,630
                    
                    
                    $
                    12,042
                    
                    
                    $
                    67,672Sales
      of equipment and other revenues
                    
                    
                    32,333
                    
                    
                    
                    1,807
                    
                    
                    
                    34,140$
                    87,963
                    
                    
                    $
                    13,849
                    
                    
                    $
                    101,8122009Rentals
      and leases
                    
                    $
                    59,243
                    
                    
                    $
                    16,637
                    
                    
                    $
                    75,880Sales
      of equipment and other revenues
                    
                    
                    22,254
                    
                    
                    
                    2,344
                    
                    
                    
                    24,598$
                    81,497
                    
                    
                    $
                    18,981
                    
                    
                    $
                    100,478





No single
customer accounted for more than 10% of total revenues during the three and nine
months ended February 28, 2010 and 2009.





Selected
country information is presented below:





Three Months Ended
                            February 28,
                          
                          
                          Nine Months Ended
                            February 28,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Revenues: (1)U.S.
                          
                          $
                          27,812
                          
                          
                          $
                          25,873
                          
                          
                          $
                          86,318
                          
                          
                          $
                          86,534Other
      (2)
                          
                          
                          5,222
                          
                          
                          
                          4,186
                          
                          
                          
                          15,494
                          
                          
                          
                          13,944Total
                          
                          $
                          33,034
                          
                          
                          $
                          30,059
                          
                          
                          $
                          101,812
                          
                          
                          $
                          100,478February 28,
                            2010
                          
                          
                          May 31,
                            2009Net Long-Lived Assets: (3)U.S.
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          136,863
                          
                          
                          $
                          151,204Other
      (2)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          24,012
                          
                          
                          
                          24,672Total
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          160,875
                          
                          
                          $
                          175,876





(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 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.


Page
16




ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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 and nine months ended
February 28, 2010 and 2009:





Three Months Ended
                
                
                Nine Months EndedFebruary 28,
                
                
                February 28,2010
                
                
                2009
                
                
                2010
                
                
                2009Denominator:Denominator
      for basic earnings per share -  weighted average common shares
      outstanding
                
                
                23,930
                
                
                
                24,323
                
                
                
                23,926
                
                
                
                25,189Effect
      of dilutive securities-options (1)
                
                
                58
                
                
                
                66
                
                
                
                55
                
                
                
                10323,988
                
                
                
                24,389
                
                
                
                23,981
                
                
                
                25,292Net
      income
                
                $
                2,151
                
                
                $
                1,883
                
                
                $
                8,237
                
                
                $
                9,748Earnings
      per share:Basic
                
                $
                0.09
                
                
                $
                0.08
                
                
                $
                0.34
                
                
                $
                0.39Diluted
                
                $
                0.09
                
                
                $
                0.08
                
                
                $
                0.34
                
                
                $
                0.39





(1)  Excludes
54 options outstanding during each of the three and nine months ended February
28, 2010, and 72 and 57 options outstanding during the three and nine months
ended February 28, 2009, 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 included in accrued
expenses in the liabilities section of our balance
sheet.  Unrecognized tax benefits increased by $697 in the nine months
ended February 28, 2010.  The increase in the unrecognized tax
benefits is the result of changes in the accrual for prior year tax positions
and foreign currency rates for the nine months ended February 28,
2010.





The
unrecognized tax benefits at February 28, 2010, if recognized, would have no
impact on our effective tax rate.  However, the derecognition of
$1,391 related to the associated interest and penalties at February 28, 2010
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 $2,285 for the payment of interest and penalties as of February
28, 2010.




We are
subject to U.S. federal taxation and taxation in various U.S. states and foreign
jurisdictions.  While we have substantially settled all income tax
matters for the United States federal jurisdiction for years through fiscal
2006, we are currently under examination for fiscal 2007 and
2008.  The state jurisdictions most significant to our operations have
been examined through fiscal years 2004 or 2005, and foreign jurisdictions have
not been examined for their respective maximum statutory periods.





Other
than as described above, there were no unrecognized tax benefits for the nine
months ended February 28, 2010.





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.


Page
17


ELECTRO
RENT CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (in
thousands, except per share amounts)


We are
subject to legal proceedings and business disputes involving ordinary routine
legal proceedings and claims incidental to our business.  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 ordinary 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
evaluated subsequent events through the date the financial statements were
issued and have determined that, except as set forth below, there are no
subsequent events that require disclosure.





On March
31, 2010, we completed the acquisition of certain assets (including accounts
receivable and rental equipment but excluding certain designated assets) of
Telogy, LLC (“Telogy”), for $24,653 in cash, subject to post-closing
adjustments, and the assumption of selected post-closing
liabilities.  Telogy, headquartered in Union City, California, is a
leading provider of electronic T&M equipment in North America.  We
will account for the acquisition under ASC 805, Business Combinations(“ASC
805”).  Given the recent date of the acquisition, we have not
completed our initial purchase price allocations and, therefore, cannot provide
preliminary purchase price allocation, qualitative description of any goodwill
or supplemental pro-forma financial information.


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 February 28, 2010
and May 31, 2009, the results of our operations for the three and nine months
ended February 28, 2010 and 2009, respectively, and cash flows for the nine
month periods ended February 28, 2010 and 2009.  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 you are 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 nine 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 nine months of fiscal 2009, both our T&M and
DP rental revenues have declined, primarily due to a decline in rental rates,
reflecting competitive pressures and the recession in the United States and the
international markets that we serve.  The decrease in rental rates was
partially offset by an increase in T&M rental activity.





For the
first nine months of fiscal 2010, rental revenues were 86% of our rental and
lease revenue.  Although that percentage increased slightly from the
first nine months of fiscal 2009, both our rental and lease revenues
declined.





A
significant part of our T&M equipment portfolio is rented or leased to large
companies in the aerospace and defense, telecommunications, semiconductor and
electronics industries.  We believe that a large part of our T&M
equipment is used in research and development activities.  We also
rent equipment to companies of various sizes representing a cross-section of
industry.  Our business is relatively non-seasonal except for our
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.  During the third quarter of fiscal 2010, as part of the
execution of our new agreement with Agilent Technologies (“Agilent”) to sell
more complex T&M equipment (see “Agreement with Agilent Technologies”
below), we terminated our distribution agreement with Agilent, which was our
largest distribution agreement.





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 more frequently when factors indicating impairment are
present.


Page
19





Our
financial results for the nine months ended February 28, 2010 were impacted by
competitive pressure on rental rates due in large part to the recession in the
U.S. and our major international markets, although our utilization rates
improved due to an increase in equipment on rent and a decline in our rental
pool due to increased equipment sales.  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.





Acquisition of
Assets





On March
31, 2010, we completed the acquisition of certain assets (including accounts
receivable and rental equipment but excluding certain designated assets) of
Telogy, LLC (“Telogy”), for $24.7 million in cash, subject to post-closing
adjustments.  Telogy, headquartered in Union City, California, is a
leading provider of electronic T&M equipment in North America.  We
will account for the acquisition under Accounting Standards Codification (“ASC”)
805, Business
Combinations.  Given the recent date of the acquisition, we
have not completed our initial purchase price allocations and, therefore, cannot
provide preliminary purchase price allocation, qualitative description of any
goodwill or supplemental pro-forma financial information.





Agreement with Agilent
Technologies





Effective
December 1, 2009 we entered into an agreement with Agilent whereby we became
Agilent’s sole Authorized Technology Partner (“ATP”) for the United States and
Canada.  The agreement provides a channel for customers to purchase
Agilent’s electronic T&M equipment which was previously sold directly by
Agilent.  We have added approximately 40 people to our sales and
support staff to serve these customers and we expect this agreement to be
material to our operations.  We began selling T&M equipment
through the ATP sales channel during the three months ended February 28,
2010.





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).





During
the first nine months of fiscal 2010, as compared to the same period in fiscal
2009, our revenues increased by 1.3% to $101.8 million, our operating profit
decreased by 5.1% to $13.2 million and our net income decreased by 15.5% to $8.2
million.  Our rental and lease revenues decreased in our T&M and
DP segments, both in North America and our foreign operations, due primarily to
lower demand for leases and a decline in rental rates, reflecting the global
recession and competitive pressures.  This decrease was partially
offset by an increase in sales activity and equipment on rent.





Some of
our key profitability measurements are presented in the table below for the nine
months ended February 28, 2010 and 2009:





2010
                  
                  
                  2009Net
      income per diluted common share (EPS)
                  
                  $
                  0.34
                  
                  
                  $
                  0.39Net
      income as a percentage of average assets (annualized)
                  
                  
                  4.1
                  %
                  
                  
                  4.6
                  %Net
      income as a percentage of average tangible equity
    (annualized)
                  
                  
                  4.9
                  %
                  
                  
                  5.4
                  %





In
response to the recession in the U.S. and our major international markets, we
implemented several cost cutting measures to control or reduce our selling,
general and administrative expenses.  As a result, we reduced our
selling, general and administrative expenses by $2.2 million, or 6.5%, for the
nine months ended February 28, 2010 compared to the nine months ended February
28, 2009.  However, because of the increased proportion of revenues
from sales, our operating profit declined.  We expect our selling,
general and administrative expenses to increase as we develop the infrastructure
necessary to support our new ATP sales channel.


Page
20





The
amount of our equipment on rent, based on acquisition cost, increased 6.7% to
$159.6 million at February 28, 2010 from $149.6 million at February 28,
2009.  Acquisition cost of equipment on lease decreased 3.1% to $27.8
million at February 28, 2010 from $28.7 million at February 28,
2009.  Average rental rates for our T&M and DP segments declined
by 9.5% from February 28, 2009 to February 28, 2010.  Average lease
rates for our T&M and DP segments declined by 2.0% for the same
period.  Utilization for our T&M equipment pool, based on
acquisition cost of equipment on rent and lease compared to the total pool, was
67.1% at February 28, 2010, compared to 55.1% at February 28,
2009.  Over the same period, utilization of our DP equipment pool
decreased to 44.3% from 44.9%.





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





Three Months EndedFeb 28,
                    2010
                  
                  
                  Nov 30,
                    2009
                  
                  
                  Aug 31,
                    2009
                  
                  
                  May 31,
                    2009
                  
                  
                  Feb 28,
                    2009Rentals
      and leases
                  
                  $
                  22,596
                  
                  
                  $
                  23,329
                  
                  
                  $
                  21,747
                  
                  
                  $
                  22,515
                  
                  
                  $
                  22,491Sales
      of equipment and other revenues
                  
                  
                  10,438
                  
                  
                  
                  13,248
                  
                  
                  
                  10,454
                  
                  
                  
                  7,488
                  
                  
                  
                  7,568Operating
      profit
                  
                  
                  3,939
                  
                  
                  
                  5,894
                  
                  
                  
                  3,331
                  
                  
                  
                  3,523
                  
                  
                  
                  3,047





Results
of Operations





Comparison
of Three Months Ended February 28, 2010 and February 28, 2009





Revenues





Total
revenues for the three months ended February 28, 2010 and 2009 were $33.0
million and $30.1 million, respectively.  The 9.9% increase in total
revenues was due to a 37.9% increase in sales of equipment and other revenues
and a 0.5% increase in rental and lease revenues.





Rental
and lease revenues for the third quarter of fiscal 2010 were $22.6 million,
compared to $22.5 million for the same period of the prior fiscal
year.  This increase reflects an increase in our T&M rental
activity, partially offset by a decrease in our T&M and DP rental rates, a
decline in our DP rental revenues, and a decrease in T&M and DP lease
revenues.





Sales of
equipment and other revenues increased to $10.4 million for the three months
ended February 28, 2010, compared to $7.6 million in the same period of the
prior fiscal year.  This increase is primarily due to an increase in
used equipment sales in our T&M business, and sales of new T&M equipment
through our new ATP sales channel.





Operating
Expenses





Depreciation
of rental and lease equipment decreased to $10.2 million, or 45.2% of rental and
lease revenues, in the third quarter of fiscal 2010, from $11.6 million, or
51.4% of rental and lease revenues, in the third quarter of fiscal
2009.  The decreased depreciation expense in fiscal 2010 was due to a
lower average rental and lease equipment pool, while the decreased ratio, as a
percentage of rental and lease revenues, was due to an increase in our rental
and lease revenues resulting from increased T&M rental
activity.





Costs of
revenues other than depreciation increased 42.7% to $7.4 million in the third
quarter of fiscal 2010 from $5.2 million in the same period of the prior fiscal
year.  Costs of revenues other than depreciation primarily includes
the cost of equipment sales, which remained unchanged as a percentage of
equipment sales at 68.0% in the third quarter of fiscal 2010, compared to the
third quarter of fiscal 2009.  Our sales margin is expected to
continue to fluctuate quarterly depending on growth in our finance leases,
reduced distribution sales due to the termination of our largest distribution
agreement in the three months ended February 28, 2010, and sales in connection
with our new ATP sales channel.  Our sales margin is also impacted by
competition, the global recession, and customer requirements and
funding.





Selling,
general and administrative expenses increased 11.8% to $11.5 million in the
third quarter of fiscal 2010, compared to $10.3 million in the third quarter of
fiscal 2009.  Our selling, general and administrative expenses
increased primarily due to additional sales and support staff in connection with
our new ATP sales channel.  As a result, our selling, general and
administrative expenses as a percentage of total revenues increased to 34.9% in
the third quarter of fiscal 2010 from 34.3% in the third quarter of fiscal
2009.


Page
21





Interest
Income, Net





Interest
income, net, was unchanged at $0.1 million for the third quarter of fiscal 2010
from the same period of the prior fiscal year.  Interest income, net,
includes $0.1 million of unrealized losses on our put option to UBS AG (“UBS”)
which was offset by a related $0.1 million of unrealized gains on our
investments, trading.





Income
Tax Provision





Our
effective tax rate was 47.1% in the third quarter of fiscal 2010, compared to
41.0% for the same period in fiscal 2009.  The increase is due
primarily to certain tax rate adjustments, imputed interest on intercompany
receivables, a valuation allowance on tax benefits for certain foreign
subsidiary losses and a reduction of the benefit from tax-advantaged
investments.





Comparison
of Nine Months Ended February 28, 2010 and February 28, 2009





Revenues





Total
revenues for the nine months ended February 28, 2010 and 2009 were $101.8
million and $100.5 million, respectively.  The 1.3% increase in total
revenues was due to a 38.8% increase in sales of equipment and other revenues,
partially offset by a 10.8% decrease in rental and lease revenues.





Rental
and lease revenues in the first nine months of fiscal 2010 were $67.7 million,
compared to $75.9 million in the same period of the prior fiscal
year.  The decrease reflects a decline in our T&M and DP lease
revenues, primarily due to lower demand for leases, and a decrease in T&M
and DP rental revenues due to decreased rental rates, reflecting competitive
pressures and the global recession.  The decrease was partially offset
by an increase in our T&M rental activity.





Sales of
equipment and other revenues increased to $34.1 million for the nine months
ended February 28, 2010, compared to $24.6 million in the same period of the
prior fiscal year.  The increase is primarily due to an increase in
used equipment sales in our T&M business, increased finance lease activity,
resulting from a large sale to a customer and continued development of our
vendor leasing program that provides customers with flexible financing
alternatives, and sales of T&M equipment through our new ATP sales
channel.





Operating
Expenses





Depreciation
of rental and lease equipment decreased to $31.5 million, or 46.5% of rental and
lease revenues, in the first nine months of fiscal 2010, from $34.7 million, or
45.7% of rental and lease revenues, in the first nine months 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.





Costs of
revenues other than depreciation increased 42.7% to $25.0 million in the first
nine months of fiscal 2010 from $17.5 million in the same period of the prior
fiscal year.  Costs of revenues other than depreciation primarily
includes the cost of equipment sales, which increased as a percentage of
equipment sales to 70.7% in the first nine months of fiscal 2010 from 68.7% in
the first nine months of fiscal 2009.  This increase reflects a
decline in our used equipment sales margin, resulting from competitive pressures
and the global recession, as well as increased finance leases and sales of
T&M equipment through our new ATP sales channel, both of which generally
carry a lower margin.





Selling,
general and administrative expenses decreased 6.5% to $32.2 million in the first
nine months of fiscal 2010, compared to $34.4 million in the first nine months
of fiscal 2009.  Our selling, general and administrative expenses
decreased primarily due to a decline in personnel and certain employee benefit
and selling costs resulting from several cost-cutting measures we implemented in
response to the global recession.  The decrease in our selling,
general and administrative expenses has been partially offset by recent
additions to our sales and support staff in connection with our new ATP sales
channel.  As a result of our cost cutting measures, we reduced
selling, general and administrative expenses as a percentage of total revenues
to 31.6% in the first nine months of fiscal 2010 from 34.2% in the first nine
months of fiscal 2009.


Page
22





Interest
Income, Net





Interest
income, net, was $1.5 million for the first nine months of fiscal 2010 compared
to $1.4 million in the same period of the prior fiscal year.  This
increase reflects a realized gain of $0.8 million on the sale of our investments
available-for-sale, offsetting decreases in prevailing interest
rates.  Interest income, net, includes $0.2 million of unrealized
losses on our put option to UBS which was offset by a related $0.2 million of
unrealized gains on our investments, trading.





Income
Tax Provision





Our
effective tax rate was 43.8% in the first nine months of fiscal 2010, compared
to 36.0% for the same period in fiscal 2009.  The increase is due
primarily to certain tax rate adjustments, imputed interest on intercompany
receivables, 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 tax effective rate
was reduced by changes in estimated tax exposures.  There was no such
effect in fiscal 2010.





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 $35.9 million of rental and lease equipment during the
first nine months of fiscal 2010 and $42.1 million during the first nine months
of fiscal 2009.  In response to reduced customer demand in the current
economic downturn, purchases in the first nine months of fiscal 2010 were 14.7%
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
nine months ended February 28, 2010 and 2009, we repurchased 44,114 and
1,841,165 shares of our common stock, respectively, for $0.4 million and $20.4
million, respectively, at an average price per share of $8.94 and $11.08,
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 nine months ended February 28, 2010 and 2009, we paid dividends of $0.15 per
common share, or $0.60 per annum, amounting to an aggregate of $10.8 million and
$11.4 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
February 28, 2010, we held $19.8 million, at cost, in auction rate securities
(“ARS”), which we classify as investments, trading.  The fair value of
our ARS at February 28, 2010 was $18.3 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,
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 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 our agreement with UBS.


Page
23





During
the nine months ended February 28, 2010, we sold our investments
available-for-sale for $28.8 million, including a realized gain of $0.8 million,
included in interest income, net, in our condensed consolidated statements of
operations.





Given the
approximately $59.3 million of cash and cash equivalents that we held as of
February 28, 2010 (primarily U.S. government money market funds), our lack of
bank debt as of that date and our strong cash flow from operations, 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 nine months of fiscal 2010 and fiscal 2009, net cash provided by
operating activities was $24.3      million and
$46.8 million, respectively.  The decrease in operating cash flow for
the nine months ended February 28, 2010 compared to the same period of the prior
fiscal year was due primarily to: a decline in net income of $1.5 million as
previously explained; a $3.5 million increase in accounts receivable for the
nine months ended February 28, 2010 compared to a decrease of $5.3 million in
the same period of the prior fiscal year; a $3.5 million increase in other
assets for the nine months ended February 28, 2010 compared to an increase of
$1.0 million in the same period of the prior fiscal year; a $3.1 million
increase in accrued expenses for the nine months ended February 28, 2010
compared to a decrease of $0.3 million in the same period of the prior fiscal
year; a $3.5 million decrease in deferred tax liability for the nine months
ended February 28, 2010 compared to an increase of $3.4 million in the same
period of the prior fiscal year; and a decrease in depreciation and amortization
expense to $32.4 million for the nine months ended February 28, 2010 from $35.6
million for the nine months ended February 28, 2009.





During
the nine months ended February 28, 2010 net cash provided by investing
activities was $23.6 million compared to $19.4 million of net cash used in
investing activities for the same period of fiscal 2009.  The increase
in investing activities is mainly due to: redemptions of $28.7 million of
available for sale securities during the nine months ended February 28, 2010; a
decrease in payments for the purchase of rental and lease equipment to
$35.9  million for the nine months ended February 28, 2010 compared to
$42.1 million for the nine months ended February 28, 2009; and an increase in
proceeds from sale of rental and lease equipment to $29.5 million for the nine
months ended February 28, 2010 compared to $20.9 million for the nine months
ended February 28, 2009.





Net cash
used in financing activities decreased to $10.9 million for the nine months
ended February 28, 2010 from $30.5 million for the nine months ended February
28, 2009, due primarily to a decrease in payments for the repurchase of common
stock to $0.4 million for the nine months ended February 28, 2010 compared to
$20.4 million for the nine months ended February 28, 2009.





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.  The revolving line of
credit has certain financial covenants with which we are in compliance as of
February 28, 2010.  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 either line and
have no current plans to do so.  We had no bank borrowings outstanding
or off balance sheet financing arrangements at February 28, 2010.





We
believe that based on our current cash and cash equivalents of $59.3 million at
February 28, 2010 and expected operating cash flows, the current reduced
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.





On March
31, 2010 (the “Closing Date”), pursuant to an Asset Purchase Agreement (“APA”),
we completed the acquisition of assets (including accounts receivable and rental
equipment, but excluding certain designated assets) of Telogy, LLC (“Telogy”),
for cash consideration of $24.7 million.  We acquired Telogy in order
to facilitate growth in our T&M business.  Telogy, headquartered
in Union City, California, is a leading provider of electronic T&M
equipment.  Telogy had previously filed a voluntary petition for
relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware, and we were the winning bidder in a
Bankruptcy Court auction of Telogy’s assets.  The final purchase price
is subject to certain post-closing adjustments provided for in the
APA.


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24




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 ASC 740,
Income Taxes,
liabilities of $6.9 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.





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.


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25




Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





During
the first nine 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 Securities Exchange Act of 1934,
as amended (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.




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 our company 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 ordinary routine legal proceedings and claims incidental
to our business, that we believe could reasonably be expected to have a material
adverse effect on our financial condition, results of operations or cash
flows.





Item
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 2010, 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





None.





Item
3.  Defaults Upon Senior Securities





None.





Item
4.  Reserved





Item
5.  Other Information





None.


Page
26





Item
6.  Exhibits





Exhibit
            Description





4.2
            Commercial
      Credit Agreement dated as of September 29, 2008 between Electro Rent
      Corporation (the “Company”) and Union Bank of California,
    N.A.





4.2.1
            First
      Amendment to Commercial Credit Agreement dated as of March 4, 2009 between
      the Company and Union Bank of California,
N.A.





4.2
      2
            Second
      Amendment to Commercial Credit Agreement dated as of September 16, 2009
      between the Company and Union Bank of California,
  N.A.





4.3
            Agreement
      between the Company and UBS regarding Auction Rate
    Securities





31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer





31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer





32.1
            Section
      1350 Certification by Principal Executive
  Officer





32.2
            Section
      1350 Certification by Chief Financial
Officer




Page
27


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:  April
7, 2010





/s/ Craig R. Jones


Craig R.
Jones


Vice
President and Chief Financial Officer


(Principal
Financial and Accounting Officer and duly authorized


to sign
this report on behalf of the company)


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28