UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





x Quarterly Report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the quarterly period ended August
31, 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 September
30, 2010 was 23,975,155.





ELECTRO
RENT CORPORATION


FORM
10-Q


August
31, 2010





TABLE
      OF CONTENTS
                              
                              PagePart
      I: FINANCIAL INFORMATION
                              
                              3Item
      1.
                              Financial
      Statements
                              
                              3Condensed
      Consolidated Statements of Operations for the Three Months Ended August
      31, 2010 and 2009 (Unaudited)
                              
                              3Condensed
      Consolidated Balance Sheets at August 31, 2010 and May 31, 2010
      (Unaudited)
                              
                              4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended August
      31, 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
                              
                              17Item
      3.
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              
                              22Item
      4.
                              Controls
      and Procedures
                              
                              22Part
      II: OTHER INFORMATION
                              
                              22Item
      1.
                              Legal
      Proceedings
                              
                              22Item
      1A.
                              Risk
      Factors
                              
                              22Item
      2.
                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                              
                              23Item
      3.
                              Defaults
      Upon Senior Securities
                              
                              23Item
      4.
                              Reserved
                              
                              23Item
      5.
                              Other
      Information
                              
                              23Item
      6.
                              Exhibits
                              
                              23SIGNATURES
                              
                              24




Page
2





Part I.  FINANCIAL
INFORMATION





Item
1. Financial Statements





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


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





Three Months EndedAugust 31,2010
                
                
                2009Revenues:Rentals
      and leases
                
                $
                28,787
                
                
                $
                21,747Sales
      of equipment and other revenues
                
                
                22,038
                
                
                
                10,454Total
      revenues
                
                
                50,825
                
                
                
                32,201Operating
      expenses:Depreciation
      of rental and lease equipment
                
                
                11,656
                
                
                
                10,795Costs
      of revenues other than depreciation of rental and lease
      equipment
                
                
                17,222
                
                
                
                7,767Selling,
      general and administrative expenses
                
                
                13,568
                
                
                
                10,308Gain
      on bargain purchase, net of taxes
                
                
                (153
                )
                
                
                -Total
      operating expenses
                
                
                42,293
                
                
                
                28,870Operating
      profit
                
                
                8,532
                
                
                
                3,331Interest
      income, net
                
                
                118
                
                
                
                308Income
      before income taxes
                
                
                8,650
                
                
                
                3,639Income
      tax provision
                
                
                3,429
                
                
                
                1,564Net
      income
                
                $
                5,221
                
                
                $
                2,075Earnings
      per share:Basic
                
                $
                0.22
                
                
                $
                0.09Diluted
                
                $
                0.22
                
                
                $
                0.09Shares
      used in per share calculation:Basic
                
                
                23,964
                
                
                
                23,931Diluted
                
                
                24,047
                
                
                
                23,943





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


Page
3





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)
(in thousands, except share numbers)





August 31,
                    
                    
                    May 31,2010
                    
                    
                    2010ASSETSCash
      and cash equivalents
                    
                    $
                    40,431
                    
                    
                    $
                    32,906Investments,
      trading, at fair value (cost of $14,275)
                    
                    
                    -
                    
                    
                    
                    13,323Put
      option
                    
                    
                    -
                    
                    
                    
                    952Accounts
      receivable, net of allowance for doubtful accounts of $471 and
      $536
                    
                    
                    26,573
                    
                    
                    
                    25,670Rental
      and lease equipment, net of accumulated depreciation of $181,680 and
      $177,380
                    
                    
                    182,794
                    
                    
                    
                    173,647Other
      property, net of accumulated depreciation and amortization of $16,289 and
      $16,055
                    
                    
                    13,526
                    
                    
                    
                    13,585Goodwill
                    
                    
                    3,109
                    
                    
                    
                    3,109Intangibles,
      net of amortization of $2,071 and $2,017
                    
                    
                    1,344
                    
                    
                    
                    1,398Other
                    
                    
                    13,249
                    
                    
                    
                    11,478$
                    281,026
                    
                    
                    $
                    276,068LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Accounts
      payable
                    
                    $
                    8,849
                    
                    
                    $
                    8,294Accrued
      expenses
                    
                    
                    20,833
                    
                    
                    
                    14,240Deferred
      revenue
                    
                    
                    6,178
                    
                    
                    
                    6,022Deferred
      tax liability
                    
                    
                    16,879
                    
                    
                    
                    17,550Total
      liabilities
                    
                    
                    52,739
                    
                    
                    
                    46,106Commitments
      and contingencies (Note 12)Shareholders'
      equity:Preferred
      stock, $1 par - shares authorized 1,000,000, none issued or
      outstandingCommon
      stock, no par - shares authorized 40,000,000;issued
      and outstanding August 31, 2010 - 23,973,155;May
      31, 2010 - 23,960,694
                    
                    
                    33,913
                    
                    
                    
                    33,555Retained
      earnings
                    
                    
                    194,374
                    
                    
                    
                    196,407Total
      shareholders' equity
                    
                    
                    228,287
                    
                    
                    
                    229,962$
                    281,026
                    
                    
                    $
                    276,068





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


Page
4





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)
(in thousands)





Three Months EndedAugust 31,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                5,221
                
                
                $
                2,075Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                11,952
                
                
                
                11,088Put
      option loss
                
                
                952
                
                
                
                202Unrealized
      holding gain for trading securities
                
                
                -
                
                
                
                (202
                )Realized
      gain on redemption of trading securities
                
                
                (952
                )
                
                
                -Remeasurement
      loss on foreign currency
                
                
                48
                
                
                
                60Provision
      for losses on accounts receivable
                
                
                11
                
                
                
                178Gain
      on sale of rental and lease equipment
                
                
                (2,420
                )
                
                
                (2,672
                )Gain
      on bargain purchase, net of taxes
                
                
                (153
                )
                
                
                -Stock
      compensation expense
                
                
                195
                
                
                
                110Excess
      tax benefit for share based compensation
                
                
                (14
                )
                
                
                -Deferred
      income taxes
                
                
                (671
                )
                
                
                30Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (878
                )
                
                
                (816
                )Other
      assets
                
                
                (1,770
                )
                
                
                (1,097
                )Accounts
      payable
                
                
                (70
                )
                
                
                (313
                )Accrued
      expenses
                
                
                2,988
                
                
                
                1,825Deferred
      revenue
                
                
                156
                
                
                
                59Net
      cash provided by operating activities
                
                
                14,595
                
                
                
                10,527Cash
      flows from investing activities:Proceeds
      from sale of rental and lease equipment
                
                
                6,507
                
                
                
                9,397Proceeds
      from acquisition purchase price adjustment
                
                
                153
                
                
                
                -Payments
      for purchase of rental and lease equipment
                
                
                (24,272
                )
                
                
                (9,320
                )Redemptions
      of investments, available-for-sale
                
                
                -
                
                
                
                500Redemptions
      of investments, trading
                
                
                14,275
                
                
                
                -Payments
      for purchase of other property
                
                
                (183
                )
                
                
                (3
                )Net
      cash (used in) provided by investing activities
                
                
                (3,520
                )
                
                
                574Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                149
                
                
                
                48Excess
      tax benefit for stock options exercised
                
                
                14
                
                
                
                -Payments
      for repurchase of common stock
                
                
                -
                
                
                
                (384
                )Payment
      of dividends
                
                
                (3,594
                )
                
                
                (3,593
                )Net
      cash used in financing activities
                
                
                (3,431
                )
                
                
                (3,929
                )Net
      increase in cash and cash equivalents
                
                
                7,644
                
                
                
                7,172Effect
      of exchange rate changes on cash
                
                
                (119
                )
                
                
                (72
                )Cash
      and cash equivalents at beginning of period
                
                
                32,906
                
                
                
                22,215Cash
      and cash equivalents at end of period
                
                $
                40,431
                
                
                $
                29,315





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.,
Electro Rent, LLC, 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 12, 2010.





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





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.  Remeasurement gains and losses are included in selling,
general and administrative expenses or income taxes, as
appropriate.  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 to hedge 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 are not designated as hedging instruments and, therefore, are
recorded at fair value as a current asset or liability, and any changes in fair
value are recorded in our condensed consolidated statements of
operations.





The fair
value of our foreign exchange forward contracts in the consolidated balance
sheets is shown in the table below:





Derivatives Not Designated as
                      Hedging Instruments
                    
                    Consolidated Balance Sheet Location
                    
                    August 31,
                      2010
                    
                    
                    May 31,
                      2010Foreign
      exchange forward contracts
                    
                    Other
                    
                    $
                    77
                    
                    
                    $
                    176




Page
6


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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





Derivatives Not Designated as
                      Hedging Instruments
                    
                    Location of Loss Recognized in
                      Income on Derivatives
                    
                    Three Months
                      Ended
                      August 31,
                      2010
                    
                    
                    Three Months
                      Ended
                      August 31,
                      2009Foreign
      exchange forward contracts
                    
                    Selling,
      general and administrative expenses
                    
                    $
                    138
                    
                    
                    $
                    87





Recent Accounting
Pronouncements




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.




In July
2010, the FASB issued an update regarding disclosures about the credit quality
of financing receivables and the allowance for credit losses.  This
update amends previous guidance and the main objective is to provide greater
transparency about an entity’s allowance for credit losses and the credit
quality of its financing receivables.  Disclosures required under this
update will discuss the nature of the credit risk inherent in the entity’s
portfolio of financing receivables, how that risk is analyzed and assessed in
arriving at the allowance for credit losses and the changes and reasons for
those changes in the allowance for credit losses.  This amendment is
effective for public entities for interim and annual reporting periods ending on
or after December 15, 2010.  The disclosures about activity that
occurs during a reporting period are effective for interim and annual reporting
periods beginning on or after December 15, 2010.  We will be required
to adopt this guidance beginning with our fourth quarter of fiscal 2011. 
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.  Our trading investments at May 31, 2010 consisted of
auction rate securities (“ARS”) and were 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 May
31, 2010 we held $14.3 million, at cost, of ARS.  During the three
months ended August 31, 2010, we sold all of our remaining ARS to UBS AG (“UBS”)
at par plus accrued interest, for $14.3 million in cash when we exercised our
put right on the ARS (the “Put Option”) under a November 2008 settlement
agreement (“Agreement”) with UBS.  Our ARS were long-term debt
instruments backed by student loans, a substantial portion of which were
guaranteed by the United States government.  Our ARS were carried as
trading securities based on our intent to exercise our Put Option.  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.  As discussed in Note 3, the fair values of the
trading securities and the Put Option were determined by option pricing models,
with the result that the changes in values of the trading securities and the Put
Option substantially offset each other.


Page
7


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
3:  Fair Value Measurements





We
measure certain financial assets and liabilities at fair value on a recurring
basis, including cash equivalents, trading securities, Put Option, supplemental
executive retirement plan asset and liability, 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, as follows:





Level 1 –
Observable inputs, such as quoted prices in active markets for identical assets
or liabilities;





Level 2 –
Inputs, other than the quoted prices in active markets, that are observable
either directly or through


corroboration
with observable market data; and





Level 3 –
Unobservable inputs, for which there is little or no market data for the assets
or liabilities, such as internally-developed valuation models.





Assets
and liabilities measured at fair value on a recurring basis are as
follows:





At August 31, 2010Quoted Prices
                        in Active
                        Markets for
                        Identical
                        Instruments
                        (Level 1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Total
                        BalanceAssetsMoney
      market funds
                      
                      $
                      34,208
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      34,208Supplemental
      executive retirement plan
                      
                      
                      2,177
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,177Foreign
      exchange forward contracts
                      
                      
                      -
                      
                      
                      
                      77
                      
                      
                      
                      -
                      
                      
                      
                      77Total
      assets measured at fair value
                      
                      $
                      36,385
                      
                      
                      $
                      77
                      
                      
                      $
                      -
                      
                      
                      $
                      36,462LiabilitiesSupplemental
      executive retirement plan
                      
                      $
                      2,177
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,177Total
      liabilities measured at fair value
                      
                      $
                      2,177
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,177





At May 31, 2010Quoted Prices
                        in Active
                        Markets for
                        Identical
                        Instruments
                        (Level 1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Total
                        BalanceAssetsMoney
      market funds
                      
                      $
                      27,802
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      27,802Auction
      rate securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,323
                      
                      
                      
                      13,323Put
      option
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      952
                      
                      
                      
                      952Supplemental
      executive retirement plan
                      
                      
                      2,081
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,081Foreign
      exchange forward contracts
                      
                      
                      -
                      
                      
                      
                      176
                      
                      
                      
                      -
                      
                      
                      
                      176Total
      assets measured at fair value
                      
                      $
                      29,883
                      
                      
                      $
                      176
                      
                      
                      $
                      14,275
                      
                      
                      $
                      44,334LiabilitiesSupplemental
      executive retirement plan
                      
                      $
                      2,081
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,081Total
      liabilities measured at fair value
                      
                      $
                      2,081
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,081




Page
8


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The fair
value measurements for our money market funds and supplemental executive
retirement plan asset and liability were derived from quoted market prices in
active markets and are included in Level 1 inputs.  Foreign currency
forward contracts were valued based on observable market spot and forward rates
as of our reporting date and are included in Level 2 inputs.  We
valued our ARS from quotes received from UBS that were derived from UBS’s
internally developed model.  In determining a discount factor for each
ARS, the model weighted 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 was a free standing asset separate from the ARS,
and represented our contractual right to require UBS to purchase our ARS at par
value from June 30, 2010 through July 2, 2012.  In order to value the
Put Option, we considered the intrinsic value, time value of money and our
assessment of the credit worthiness of UBS.  Our ARS and Put Option
are included in Level 3 inputs.




The
following table presents a reconciliation of all assets and liabilities measured
at fair value on a recurring basis, excluding accrued interest components, using
significant unobservable inputs (Level 3):





Three Months Ended August 31,2010
                    
                    
                    2009Put Option
                    
                    
                    Auction Rate
                      Securities
                    
                    
                    Put Option
                    
                    
                    Auction Rate
                      SecuritiesFair
      value at beginning of period
                    
                    $
                    952
                    
                    
                    $
                    13,323
                    
                    
                    $
                    1,623
                    
                    
                    $
                    19,977Settlements
      (at par)
                    
                    
                    -
                    
                    
                    
                    (14,275
                    )
                    
                    
                    -
                    
                    
                    
                    (500
                    )Unrealized
      (losses) gains included in
                      interest
      income, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (202
                    )
                    
                    
                    202Realized
      (losses) gains included in
                      interest
      income, net
                    
                    
                    (952
                    )
                    
                    
                    952
                    
                    
                    
                    -
                    
                    
                    
                    -Fair
      value at end of period
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,421
                    
                    
                    $
                    19,679





For the
three months ending August 31, 2009, we included in earnings unrealized losses
of $164 attributable to the remaining ARS we held on that date and unrealized
gains of $164 attributable to the Put Option.  During the three months
ended August 31, 2010, we sold all of our remaining ARS to UBS pursuant to the
Put Option at par plus accrued interest and included in earnings a realized gain
of $952 attributable to the sale, and a realized loss of $952 attributable to
the Put Option.





Note
4: Acquisition





On March
31, 2010, pursuant to an Asset Purchase Agreement (“APA”), we completed the
purchase of certain assets and the assumption of specified post-closing
liabilities of Telogy, LLC (“Telogy”), for cash consideration of
$24,653.  We acquired Telogy in order to facilitate growth in our test
and measurement (“T&M”) business.  Telogy, headquartered in Union
City, California, was 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 purchase price,
which was subject to post closing adjustments, was allocated to the assets
acquired and liabilities assumed based upon our estimate of their respective
fair values.  Because the estimated fair value of the net assets
acquired exceeded the acquisition cost, we recorded a bargain purchase gain with
respect to this transaction.  The bargain purchase reflects the
recurring losses incurred by Telogy and liquidity constraints resulting from the
difficult global economy and the recent bankruptcy filing.


Page
9


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The
following table provides estimated fair values of the assets acquired and
liabilities assumed as of the date of acquisition.





Total
      cash consideration
                  
                  $
                  24,653Preliminary
      purchase price allocation:Accounts
      receivable
                  
                  
                  2,723Rental
      and lease equipment
                  
                  
                  22,922Customer
      relationships acquired
                  
                  
                  940Other
                  
                  
                  34Accrued
      expenses
                  
                  
                  (189
                  )Deferred
      tax liability
                  
                  
                  (481
                  )Deferred
      revenue
                  
                  
                  (617
                  )Net
      assets acquired
                  
                  
                  25,332Bargain
      purchase gain, net of estimated taxes of $481
                  
                  $
                  (679
                  )





During
the first quarter of fiscal 2011, the purchase price was reduced by $260,
representing the final determination of assets acquired and other components of
the purchase price in accordance with specific provisions of the
APA.  As a result, the bargain purchase gain was increased by $153,
net of estimated taxes of $107.





The
bargain purchase gain is classified separately within operating
expenses.





The fair
value of assets acquired included gross accounts receivable of $3,153, of which
an estimated $430 is not expected to be collected, resulting in a fair value of
$2,723.  Intangible assets consisted of customer relationships and
have a useful life of 8 years.





Acquisition-related
transaction costs of $180 were accounted for as expenses in the periods in which
the costs were incurred and are included in our selling, general and
administrative expenses for fiscal 2010.  There were no
acquisition-related transaction costs for the three months ended August 31,
2010.





The
acquisition of Telogy was an asset purchase, and Telogy’s operations were
integrated with ours immediately after the closing date.





The
following pro forma results of operations for the three months ended August 31,
2009 assume the acquisition of Telogy occurred as of the beginning of fiscal
2010.  The pro forma results have been prepared for comparative
purposes only and do not purport to indicate the results of operations that
would actually have occurred had the acquisition occurred on the dates
indicated, nor are these results necessarily indicative of future consolidated
results of operations.  We have included the operating results of
Telogyin our
consolidated financial statements since the March 31, 2010 acquisition date.





Three Months Ended
                    August 31, 2009Revenues
                  
                  $
                  37,244Net
      income
                  
                  $
                  949Earnings
      per share:Basic
                  
                  $
                  0.04Diluted
                  
                  $
                  0.04




Page
10


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
5: 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, under which there are no outstanding
options.  Pursuant to the Equity Incentive Plan, we have granted
incentive and non-statutory options to directors, officers and key employees at
prices not less than 100% of the fair market value on the day of
grant.  In addition, we have granted restricted stock and restricted
stock units to directors, officers and key employees.  The Equity
Incentive Plan provides for a variety of vesting dates with the majority of the
outstanding grants vesting at a rate of one-third per year over a period of
three years from the date of grant.  All outstanding options expire at
dates ranging from October 2010 to October 2011.





Stock
Options





The
following table summarizes certain information relative to options for common
stock:





Options
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Term(in
                            years)Outstanding
      at May 31, 2010
                          
                          
                          57
                          
                          
                          $
                          15.46Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          (13
                          )
                          
                          
                          11.85Forfeited/canceled
                          
                          
                          (2
                          )
                          
                          
                          8.45Outstanding
      at August 31, 2010
                          
                          
                          42
                          
                          
                          $
                          16.90
                          
                          
                          
                          1.0Vested
      and expected to vest at August 31, 2010
                          
                          
                          42
                          
                          
                          $
                          16.90
                          
                          
                          
                          1.0Vested
      and exercisable at August 31, 2010
                          
                          
                          42
                          
                          
                          $
                          16.90
                          
                          
                          
                          1.0





There
were no stock options granted or shares vested during the three months ended
August 31, 2010 and 2009.  The aggregate intrinsic value of options
exercised is calculated as the difference between the exercise price of the
underlying awards and the closing price of our common stock on the Nasdaq Stock
Market on the date of measurement.  The aggregate intrinsic value of
options exercised during the three months ended August 31, 2010 and 2009, was $7
and $3, respectively.  Shares of newly issued common stock are issued
upon any exercise of stock options.





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 three months ended
August 31, 2010:





Restricted
                        Stock
                        Units
                      
                      
                      Weighted –
                        Average
                        Grant
                        Date
                        Fair ValueNonvested
      at May 31, 2010
                      
                      
                      150
                      
                      
                      $
                      10.14Granted
                      
                      
                      96
                      
                      
                      
                      12.30Vested
                      
                      
                      (49
                      )
                      
                      
                      9.94Canceled
                      
                      
                      -
                      
                      
                      
                      -Nonvested
      at August 31, 2010
                      
                      
                      197
                      
                      
                      $
                      11.24





We
granted 96 and 145 restricted stock units during the three months ended August
31, 2010 and 2009, respectively.  As of August 31, 2010, we have
unrecognized share-based compensation cost of approximately $2,093 associated
with restricted stock unit awards.  This cost is expected to be
recognized over a weighted-average period of approximately 2.5
years.


Page
11


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Accounting
for Share Based Payments





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 $195 and $110 of stock-based compensation as part of selling, general
and administrative expenses for the three months ended August 31, 2010 and 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, and
dividends paid on vested restricted stock units.  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
and for dividend payments for vested restricted stock units for the three months
ended August 31, 2010 and 2009 was $14 and $0, respectively.  Cash
received from stock option exercises was $149 and $48 for the three months ended
August 31, 2010 and 2009, respectively.





Note
6: 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, trade names, and
other intangible assets.





Our
goodwill and intangibles at August 31, 2010 are the result of our acquisition of
Telogy on March 31, 2010 and of Rush Computer Rentals, Inc. on January 31,
2006.





The
changes in carrying amount of goodwill and other intangible assets for the three
months ended August 31, 2010 are as follows:





Balance as of
                      June 1,2010 (net
                      ofamortization)
                    
                    
                    Amortization
                    
                    
                    Balance as of
                      August 31,2010Goodwill
                    
                    $
                    3,109
                    
                    
                    $
                    -
                    
                    
                    $
                    3,109Trade
      name
                    
                    
                    411
                    
                    
                    
                    -
                    
                    
                    
                    411Non-compete
      agreements
                    
                    
                    66
                    
                    
                    
                    (25
                    )
                    
                    
                    41Customer
      relationships
                    
                    
                    921
                    
                    
                    
                    (29
                    )
                    
                    
                    892$
                    4,507
                    
                    
                    $
                    (54
                    )
                    
                    $
                    4,453





Goodwill
is not deductible for tax purposes.




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


Page
12





ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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





August
      31, 2010Estimated
                                            Useful Life
                                          
                                          Gross Carrying
                                            Amount
                                          
                                          
                                          Accumulated
                                            Amortization
                                          
                                          
                                          Net Carrying
                                            AmountTrade
      name
                                          
                                          indefinite
                                          
                                          $
                                          411
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          411Non-compete
      agreements
                                          
                                          2-5
      years
                                          
                                          
                                          1,050
                                          
                                          
                                          
                                          (1,009
                                          )
                                          
                                          
                                          41Customer
      relationships
                                          
                                          3-4
      years
                                          
                                          
                                          1,954
                                          
                                          
                                          
                                          (1,062
                                          )
                                          
                                          
                                          892$
                                          3,415
                                          
                                          
                                          $
                                          (2,071
                                          )
                                          
                                          $
                                          1,344





May
      31, 2010Estimated
                                    Useful Life
                                  
                                  Gross Carrying
                                    Amount
                                  
                                  
                                  Accumulated
                                    Amortization
                                  
                                  
                                  Net Carrying
                                    AmountTrade
      name
                                  
                                  indefinite
                                  
                                  $
                                  411
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  411Non-compete
      agreements
                                  
                                  2-5
      years
                                  
                                  
                                  1,050
                                  
                                  
                                  
                                  (984
                                  )
                                  
                                  
                                  66Customer
      relationships
                                  
                                  3-4
      years
                                  
                                  
                                  1,954
                                  
                                  
                                  
                                  (1,033
                                  )
                                  
                                  
                                  921$
                                  3,415
                                  
                                  
                                  $
                                  (2,017
                                  )
                                  
                                  $
                                  1,398





Amortization
expense related to intangible assets was $54 and $84 for the three months ended
August 31, 2010 and 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 as
of August 31, 2010:





Year ending May 31,
                  
                  Future
                    Amortization2011
      (remaining)
                  
                  $
                  1302012
                  
                  
                  1182013
                  
                  
                  1182014
                  
                  
                  1182015
                  
                  
                  118Thereafter
                  
                  
                  331$
                  933





Note
7: Noncash Investing and Financing Activities





We had
accounts payable and other accruals related to acquired rental and lease
equipment totaling $6,760 and $6,167 as of August 31, 2010 and May 31, 2010,
respectively, and $2,100 and $2,098 as of August 31, 2009 and May 31, 2009,
respectively, all of which amounts were subsequently paid.  We accrued
$3,596 and $0 for dividends declared and not yet paid in accrued expenses and as
a reduction of retained earnings as of August 31, 2010 and May 31, 2010,
respectively, compared to $0 and $3,593 as of August 31, 2009 and May 31, 2009,
respectively, all of which amounts were subsequently paid.





Note
8: Sales-Type Leases





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


Page
13


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





August 31,
                  2010
                
                
                May 31,
                  2010Gross
      minimum lease payments receivable
                
                $
                6,196
                
                
                $
                6,874Less
      – unearned interest
                
                
                (309
                )
                
                
                (355
                )Net
      investment in sales-type lease receivables
                
                $
                5,887
                
                
                $
                6,519





Note
9: 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 T&M and data
products (“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 $322,295 of T&M
equipment and $42,179 of DP equipment at August 31, 2010 and $310,292 of T&M
equipment and $40,735 of DP equipment at May 31, 2010.





Revenues
for these product groups were as follows for the three months ended August 31,
2010 and 2009:





T&M
                      
                      
                      DP
                      
                      
                      Total2010Rentals
      and leases
                      
                      $
                      24,037
                      
                      
                      $
                      4,750
                      
                      
                      $
                      28,787Sales
      of equipment and other revenues
                      
                      
                      21,370
                      
                      
                      
                      668
                      
                      
                      
                      22,038$
                      45,407
                      
                      
                      $
                      5,418
                      
                      
                      $
                      50,8252009Rentals
      and leases
                      
                      $
                      17,767
                      
                      
                      $
                      3,980
                      
                      
                      $
                      21,747Sales
      of equipment and other revenues
                      
                      
                      9,895
                      
                      
                      
                      559
                      
                      
                      
                      10,454$
                      27,662
                      
                      
                      $
                      4,539
                      
                      
                      $
                      32,201





No single
customer accounted for more than 10% of total revenues during the three months
ended August 31, 2010 and 2009.


Page
14


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Selected
country information is presented below:





Three Months Ended
                      August 31,2010
                    
                    
                    2009Revenues: (1)U.S.
                    
                    $
                    45,124
                    
                    
                    $
                    27,447Other
      (2)
                    
                    
                    5,701
                    
                    
                    
                    4,754Total
                    
                    $
                    50,825
                    
                    
                    $
                    32,201





As
      ofAugust
      31,
                                2010
                              
                              
                              May
      31,
                                2010Net Long-Lived Assets: (3)U.S.
                              
                              $
                              177,557
                              
                              
                              $
                              166,533Other
      (2)
                              
                              
                              23,216
                              
                              
                              
                              25,206Total
                              
                              $
                              200,773
                              
                              
                              $
                              191,739





(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.





Note
10: Computation of Earnings Per Share





The
following is a reconciliation of the denominator used in the computation of
basic and diluted earnings per share for the three months ended August 31, 2010
and 2009:





Three
      Months EndedAugust
      31,2010
                
                
                2009Denominator:Denominator
      for basic earnings per share -  weighted
      averagecommon
      shares outstanding
                
                
                23,964
                
                
                
                23,931Effect
      of dilutive options and restricted stock (1)
                
                
                83
                
                
                
                12Diluted
      shares used in per share calculation
                
                
                24,047
                
                
                
                23,943Net
      income
                
                $
                5,221
                
                
                $
                2,075Earnings
      per share:Basic
                
                $
                0.22
                
                
                $
                0.09Diluted
                
                $
                0.22
                
                
                $
                0.09





(1)  Excludes
36 options outstanding during the three months ended August 31, 2010, and 69
options outstanding during the three months ended August 31, 2009, for which the
exercise price exceeded the average market price of our common stock during that
period.





Note
11: Income Taxes





At May
31, 2010, we had unrecognized tax benefits of $4,691 included in accrued
expenses in the liabilities section of our balance
sheet.  Unrecognized tax benefits decreased by $268 in the three
months ended August 31, 2010.  The decrease in the unrecognized tax
benefits is the result of partial payment of the accrual for prior year tax
positions and a decrease in the foreign currency rates for the three months
ended August 31, 2010.


Page
15


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The
unrecognized tax benefits at August 31, 2010, if recognized, would have no
impact on our effective tax rate. However, the derecognition of $1,307 related
to the associated interest and penalties at August 31, 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 $2,180
for the payment of interest and penalties as of August 31, 2010.




We are
subject to U.S. federal taxation and taxation in various U.S. states and foreign
jurisdictions. We have substantially settled all income tax matters for the
United States federal jurisdiction for years through fiscal 2009. Major state
jurisdictions 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 three
months ended August 31, 2010.





Note
12: Commitments and Contingencies





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




We are
subject to legal proceedings and business disputes involving ordinary 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
13: Subsequent Events





On
September 22, 2010, we renewed our $10,000 standby revolving line of credit for
one year at substantially the same terms. We have no borrowings outstanding on
the line of credit.


Page
16


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





The
following discussion addresses our financial condition as of August 31, 2010 and
May 31, 2010, the results of our operations for the three months ended August
31, 2010 and 2009, respectively, and cash flows for the three month periods
ended August 31, 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,
2010, to which you are directed for additional information.





Overview





We are
one of the largest global organizations devoted to the rental, lease and sale of
new and used electronic test and measurement (“T&M”) equipment. We purchase
that equipment from leading manufacturers such as Agilent Technologies, Inc.
(“Agilent”) and Tektronix primarily for use by our customers in the aerospace,
defense, telecommunications, electronics, industrial and semiconductor
industries. Although it represented only approximately 13% of our revenues in
fiscal 2010 and 11% of our revenues for the three months ended August 31, 2010,
we believe our data products (“DP”) division is one of the largest rental
companies in the United States for personal computers and servers from
manufacturers including Dell, HP/Compaq, IBM and Toshiba. We have also recently
expanded our efforts in the rental, lease and sale of industrial equipment such
as electrical test equipment and inspection equipment. Our Authorized Technology
Partnership (“ATP”) agreement with Agilent gives us the exclusive right to sell
Agilent’s more complex T&M equipment to small and medium size customers (who
previously purchased directly from Agilent) in the United States and Canada. In
connection with this agreement, we terminated our prior distribution agreement
with Agilent. We have added approximately 40 people to our sales and support
staff to serve these customers, and this agreement is material to our
operations. We began selling T&M equipment under the ATP sales agreement
during our third quarter of fiscal 2010.





On March
31, 2010, we completed the acquisition of certain assets (including accounts
receivable and rental equipment but excluding certain designated assets) and
select liabilities of Telogy, LLC (“Telogy”), for $24.7 million in cash, subject
to post-closing adjustments. The purchase price was reduced by $0.3 million in
the first quarter of fiscal 2011 reflecting the final determination of assets
acquired and other components of the purchase price in accordance with specific
provisions of the Asset Purchase Agreement with Telogy. Telogy, headquartered in
Union City, California, was a leading provider of electronic T&M equipment
in North America. We accounted for the acquisition under Accounting Standards
Codification (“ASC”) 805, Business Combinations. See
Note 4 to our condensed consolidated financial statements.





Our
financial results for fiscal 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 demand and equipment on rent. During the first three months of
fiscal 2011, we have seen modest improvement in rental rates and continued
improvement in utilization rates, in particular in our North American and
European operations. As a result of these improvements, our recent acquisition
of Telogy, and sales of T&M equipment in connection with our ATP sales
agreement, we have experienced substantial growth in revenues and operating
profit for the three months ended August 31, 2010. Despite this growth, our
customers and competitors continue to be affected by the ongoing recession in
the U.S. and global economy, resulting in more stringent credit requirements and
reduced access to capital. We must continue to be focused 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.





For the
first three months of fiscal 2011, 83% of our rental and lease revenues were
derived from T&M equipment, compared to 82% for the first three months of
fiscal 2010. We have experienced growth in both our T&M and DP rental
revenues, due to increased rental activity and rental rates. Our T&M rental
revenues for the first quarter of fiscal 2011 include the rental revenues
acquired from Telogy.





For the
first three months of fiscal 2011, rental revenues were 89% of our rental and
lease revenue, compared to 85% for the first three months of fiscal 2010. The
increase is the result of an increase in our T&M and DP rental activity,
including the rental revenues acquired from Telogy, while our lease revenues
were unchanged.





The
profitability of our business depends in part on controlling the timing, pricing
and mix of purchases and sales of equipment. To maximize our overall profit from
the rental, leasing, and sales of equipment, we manage our equipment pool on an
on-going basis by controlling the timing, pricing and mix of our purchases and
sales. We acquire new and used equipment to meet current technological standards
and current and anticipated customer demand, and we sell our used equipment
where we believe that is the most lucrative option. We employ a complex
equipment management strategy and our proprietary PERFECTTM software to adjust
our inventory and pricing on a dynamic basis in order to maximize equipment
availability, utilization and profitability. We manage each specific equipment
class based on a separate assessment of that equipment's historical and
projected life cycle and numerous other factors, including the U.S. and global
economy, interest rates and new product launches. 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
17





Profitability and Key
Business Trends





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




·
            Net
      income per diluted common share
(EPS);


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


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





Comparing
the first three months of fiscal 2011 to the first three months of fiscal 2010,
our revenues increased by 57.8% to $50.8 million, our operating profit increased
by 156.1% to $8.5 million, and our net income increased by 151.6% to $5.2
million.  Our rental and lease revenues increased in our T&M and
DP segments in our North American and European operations, reflecting increased
rental activity and rental rates, due to improved market conditions and the
T&M rental revenues acquired from Telogy.  In addition, our
T&M sales activity increased due to new equipment sales in connection with
our ATP sales agreement, offsetting declines in our sales of used equipment,
finance leases, and distribution.





Some of
our key profitability measurements are presented in the table below for the
three months ended August 31, 2010 and 2009:





2010
                  
                  
                  2009Net
      income per diluted common share (EPS)
                  
                  $
                  0.22
                  
                  
                  $
                  0.09Net
      income as a percentage of average assets (annualized)
                  
                  
                  7.5
                  %
                  
                  
                  3.1
                  %Net
      income as a percentage of average tangible equity
    (annualized)
                  
                  
                  9.3
                  %
                  
                  
                  3.7
                  %





The
increase in our operating profit is due primarily to increased rental revenues
and sales of new equipment for the first three months of fiscal 2011. The
increase was partially offset by an increase in depreciation expense of $0.9
million, or 8.0%, as we have invested in additional rental equipment to support
our growth, and an increase in selling, general and administrative expenses of
$3.3 million, or 31.6%. Our investment in the infrastructure necessary to
support our ATP sales agreement offset several cost cutting measures that we
introduced at the beginning of fiscal 2010 to control or reduce our selling,
general and administrative expenses in response to the recession in the U.S. and
our major international markets.





The
amount of our equipment on rent, based on acquisition cost, increased 32.6% to
$205.4 million at August 31, 2010 from $154.9 million at August 31, 2009.
Acquisition cost of equipment on lease increased 4.3% to $29.4 million at August
31, 2010 from $28.2 million at August 31, 2009. Average rental rates for our
T&M and DP segments increased by 3.2% from August 31, 2009 to August 31,
2010. Average lease rates for our T&M and DP segments declined by 8.3% 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 equipment
pool, was 70.3% at August 31, 2010, compared to 59.9% at August 31, 2009 due to
an increase in rental utilization and demand for leases. Over the same period,
utilization of our DP equipment pool increased to 46.7% from 42.0%, due to an
increase in rental utilization, partially offset by a decline in equipment on
lease.





As of
August 31, 2010, we had an order backlog of $12.3 million, the result of sales
in connection with our ATP sales agreement. There was no such backlog in the
first quarter of fiscal 2010. We expect that a majority of the backlog will be
delivered to customers within six months of August 31, 2010.


Page
18





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





Three
      Months EndedAug
      31,
                            2010
                          
                          
                          May
      31,
                            2010
                          
                          
                          Feb
      28,
                            2010
                          
                          
                          Nov
      30,
                            2009
                          
                          
                          Aug
      31,
                            2009Rentals
      and leases
                          
                          $
                          28,787
                          
                          
                          $
                          26,529
                          
                          
                          $
                          22,596
                          
                          
                          $
                          23,329
                          
                          
                          $
                          21,747Sales
      of equipment and other revenues
                          
                          
                          22,038
                          
                          
                          
                          17,526
                          
                          
                          
                          10,438
                          
                          
                          
                          13,248
                          
                          
                          
                          10,454Operating
      profit
                          
                          
                          8,532
                          
                          
                          
                          5,269
                          
                          
                          
                          3,939
                          
                          
                          
                          5,894
                          
                          
                          
                          3,331





Results
of Operations





Comparison
of Three Months Ended August 31, 2010 and August 31, 2009





Revenues





Total
revenues for the first quarter of fiscal 2011 and 2010 were $50.8 million and
$32.2 million, respectively. The 57.8% increase in total revenues was due to a
32.4% increase in rental and lease revenues and a 110.8% increase in sales of
equipment and other revenues.





Rental
and lease revenues for the first quarter of fiscal 2011 were $28.8 million,
compared to $21.7 million for the same period of the prior fiscal year. This
increase reflects an increase in our T&M and DP rental activity and rental
rates in our North American and European operations, due to improved market
conditions and the acquisition of Telogy in the fourth quarter of fiscal 2010,
while our lease revenues were essentially unchanged.





Sales of
equipment and other revenues increased to $22.0 million for the first quarter of
fiscal 2011, compared to $10.5 million in the same period of the prior fiscal
year. This increase is due to sales of new T&M equipment through our ATP
sales agreement, which was not in place during the fiscal 2010 period, partially
offset by declines in sales of used equipment and finance lease activity. We
terminated our distribution agreement with Agilent (which was replaced with the
ATP sales agreement) on January 31, 2010. Therefore, there were no distribution
sales for the first quarter of fiscal 2011.





Operating
Expenses





Depreciation
of rental and lease equipment increased to $11.7 million, or 40.5% of rental and
lease revenues, in the first quarter of fiscal 2011, from $10.8 million, or
49.6% of rental and lease revenues, in the first quarter of fiscal 2010. The
increased depreciation expense in fiscal 2011 was due to a higher average rental
and lease equipment pool, while the decreased ratio, as a percentage of rental
and lease revenues, was due to higher utilization and higher rental
rates.





Costs of
revenues other than depreciation increased 121.7% to $17.2 million in the first
quarter of fiscal 2011 from $7.8 million in the same period of fiscal 2010.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which increased as a percentage of equipment sales to 76.7% in
the first quarter of fiscal 2011 from 71.6% in the first quarter of fiscal 2010.
This increase reflects a decline in our used equipment sales, and an increase in
sales of new T&M equipment through our ATP sales agreement, which generally
carry a lower margin. Our sales margin is expected to continue to decline as a
result of anticipated growth in connection with our ATP sales agreement. Our
sales margins are also impacted by competition, the global recession, and
customer requirements and funding.





Selling,
general and administrative expenses increased 31.6% to $13.6 million in the
first quarter of fiscal 2011, compared to $10.3 million in the first quarter of
fiscal 2010. Our selling, general and administrative expenses increased
primarily due to additional sales and support staff in connection with our ATP
sales agreement, offsetting several cost cutting measures that we introduced in
the first quarter of fiscal 2010 to control or reduce our selling, general and
administrative expenses in response to the recession in the U.S. and our major
international markets. As a percentage of total revenues, selling, general and
administrative expenses decreased to 26.7% in the first quarter of fiscal 2011
from 32.0% in the first quarter of fiscal 2010, due to the increase in total
revenues.


Page
19





Interest
Income, Net





Interest
income, net, was $0.1 million for the first quarter of fiscal 2011 compared to
$0.3 million in the first quarter of fiscal 2010 due to a lower cash balance and
the redemption of our auction rate securities (“ARS”) (which carried a higher
interest rate) in the first quarter of fiscal 2011. During the first quarter of
fiscal 2011 and 2010, interest income, net, included offsetting gains and losses
on our ARS and the related put option, with no net impact on our net
income.





Income
Tax Provision





Our
effective tax rate was 39.6% in the first quarter of fiscal 2011, compared to
43.0% for the same period in fiscal 2010. The decrease is due primarily to an
increase in certain permanent differences, primarily in our foreign operations,
and a decrease in the effect of tax exposures due to an increase in our income
before income taxes.





Liquidity
and Capital Resources





Capital
Expenditures





Our
primary capital requirements have been 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
$24.3 million of rental and lease equipment during the first quarter of fiscal
2011 and $9.3 million during the first quarter of fiscal 2010. In response to
increasing customer demand, which began in the second half of fiscal 2010,
purchases of equipment for the first three months of fiscal 2011 were 160.4%
higher than the first three months of fiscal 2010.





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 first
quarter of fiscal 2010, we repurchased 43,014 shares of our common stock, for
$0.4 million, at an average price per share of $8.94. There were no repurchases
during the first quarter of fiscal 2011. 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 first quarters of fiscal 2011 and 2010, we paid dividends of $0.15 per
common share, or $0.60 per annum, amounting to an aggregate of $3.6 million for
each period. 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





Despite
the $64.4 million in cash we have returned to our shareholders over the past
three fiscal years, and the $24.4 million we paid in connection with the Telogy
acquisition in fiscal 2010, we continue to maintain substantial cash and cash
equivalents and investments. We expect that the level of our cash and cash
equivalents and investments may decrease as we pay dividends in future quarters,
or if we decide to buy back additional shares of our common stock, increase
equipment purchases in response to demand, finance another acquisition, or
pursue other opportunities. We invest our cash balance in government money
market funds.





At May
31, 2010, we held $14.3 million, at cost, in ARS, which we classified as
investments, trading. During June and July 2010, we sold our remaining ARS of
$14.3 million at par value plus accrued interest under a contractual put
right.





Cash
Flows and Credit Facilities





During
the first quarter of fiscal 2011 and fiscal 2010, net cash provided by operating
activities was $14.6 million and $10.5 million, respectively. The increase in
operating cash flow for the first quarter of fiscal 2011 compared to the same
period of the prior fiscal year was due primarily to an increase in net income
to $5.2 million for the first quarter of fiscal 2011 from $2.1 million for the
first quarter of fiscal 2010, and an increase of $3.0 million in accrued
expenses for the first quarter of fiscal 2011 compared to an increase of $1.8
million in the first quarter of fiscal 2010 primarily due to an increase in
income taxes payable. This increase was partially offset by a $1.8 million
increase in other assets for the first quarter of fiscal 2011 compared to an
increase of $1.1 million in the first quarter of fiscal 2010 due to an increase
in our demonstration equipment inventory in fiscal 2011.


Page
20





During
the first quarter of fiscal 2011 net cash used in investing activities was $3.5
million compared to $0.6 million of net cash provided by investing activities
for the same period of fiscal 2010. Payments for the purchase of rental and
lease equipment were $24.3 million for the first quarter of fiscal 2011 compared
to $9.3 million for the first quarter of fiscal 2010. Redemptions of
investments, trading were $14.3 million during the first quarter of fiscal 2011.
There were no redemptions in the first quarter of fiscal 2010. Proceeds from the
sale of rental and lease equipment decreased to $6.5 million for the first
quarter of fiscal 2011 compared to $9.4 million for the first quarter of fiscal
2010.





Net cash
used in financing activities decreased to $3.4 million for the first quarter of
2011 from $4.0 million for the first quarter of fiscal 2010, due primarily to a
decrease in payments for the repurchase of common stock to $0 for the first
quarter of fiscal 2011, compared to $0.4 million for the first quarter of fiscal
2010.





We have a
$10.0 million revolving line of credit with an institutional lender, subject to
certain restrictions, to meet equipment acquisition needs as well as working
capital and general corporate requirements. We had no bank borrowings
outstanding or off balance sheet financing arrangements at August 31,
2010.





We
believe that cash and cash equivalents, cash flows from operating activities,
proceeds from the sale of equipment and our borrowing capacity will be
sufficient to fund our operations for at least the next twelve
months.





Contractual
Obligations





Our
contractual obligations have not changed materially from those included in our
Annual Report on Form 10-K for the fiscal year ended May 31, 2010. The exact
timing of reversal or settlement of ourunrecognized tax benefit
liabilities of $6.6 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, goodwill and definite lived intangible
assets, 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 believe 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, 2010. 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.


Page
21




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, 2010 (including the
"Risk Factors" discussed in Item 1A to that document), and our other filings
with the Securities and Exchange Commission. The risks included in those
documents are not exhaustive, and additional factors could adversely affect our
business and financial performance. We operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time, and it is not
possible for us to predict all such risk factors, nor can we assess the impact
of all such risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





During
the first quarter of fiscal 2011, 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, 2010.





Item
4. Controls and Procedures





As of
August 31, 2010, the end of the period covered by this report, 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”)). 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




Other
than ordinary routine litigation incidental to our business, we are not involved
in any legal proceedings that we believe could reasonably be expected to have a
material adverse effect on our business, financial condition, or results of
operations.





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, 2010.  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 quarter of fiscal 2011, 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, 2010.


Page
22





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.





Item
6.  Exhibits





Exhibit
              
              Description10.1
              
              Third
      Amendment to Commercial Credit Agreement dated as of September 22, 2010
      between the Company and Union Bank of California, N.A.31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
              
              Section
      1350 Certification by Principal Executive Officer32.2
              
              Section
      1350 Certification by Chief Financial
Officer


Page
23


SIGNATURES





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





ELECTRO
RENT CORPORATION





DATED:  October
6, 2010





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


Page
24