UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the quarterly period ended February
28, 2009 or





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





For the transition period from _____ to
_____





Commission
File Number: 0-9061





ELECTRO RENT
CORPORATION


Exact
Name of Registrant as Specified in its Charter





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





6060
SEPULVEDA BOULEVARD


VAN NUYS, CALIFORNIA
91411-2501


(Address
of Principal Executive Offices and Zip Code)





818
787-2100


(Registrant's
Telephone Number, Including Area Code)





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





Yes x   No
 ̈





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





Large
      accelerated filer  ̈
                Accelerated
      Filer  xNon-accelerated
      filer   ̈
                Smaller
      reporting company   ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes
 ̈    No
x





The
number of shares outstanding of the registrant's common stock as of March 20,
2009 was 24,273,768.





ELECTRO
RENT CORPORATION


FORM
10-Q


February
28, 2009





TABLE
      OF CONTENTS
                        PagePart
      I: FINANCIAL INFORMATION
                        3Item
      1.
                        Financial
      Statements
                        3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      February 28, 2009 and February 29, 2008 (Unaudited)
                        3Condensed
      Consolidated Balance Sheets at February 28, 2009 and May 31, 2008
      (Unaudited)
                        4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended February
      28, 2009 and February 29, 2008 (Unaudited)
                        5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                        6Item
      2.
                        Management's
      Discussion and Analysis of Financial Condition
      and Results of Operations
                        19Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        25Item
      4.
                        Controls
      and Procedures
                        25Part
      II: OTHER INFORMATION
                        25Item
      1.
                        Legal
      Proceedings
                        25Item
      1A.
                        Risk
      Factors
                        26Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        26Item
      3.
                        Defaults
      Upon Senior Securities
                        26Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        26Item
      5.
                        Other
      Information
                        26Item
      6.
                        Exhibits
                        26SIGNATURES
                        27


Page
2





Part I.  FINANCIAL
INFORMATION





Item
1. Financial Statements





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)
(000's omitted, except per share data)





Three
      Months Ended
                  
                  
                  Nine
      Months EndedFebruary
      28,
                  
                  
                  February
      29,
                  
                  
                  February
      28,
                  
                  
                  February
      29,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues:Rentals
      and leases
                  
                  $
                  22,491
                  
                  
                  $
                  26,244
                  
                  
                  $
                  75,880
                  
                  
                  $
                  81,113Sales
      of equipment and other revenues
                  
                  
                  7,568
                  
                  
                  
                  9,419
                  
                  
                  
                  24,598
                  
                  
                  
                  24,522Total
      revenues
                  
                  
                  30,059
                  
                  
                  
                  35,663
                  
                  
                  
                  100,478
                  
                  
                  
                  105,635Operating
      expenses:Depreciation
      of rental and lease equipment
                  
                  
                  11,555
                  
                  
                  
                  11,265
                  
                  
                  
                  34,694
                  
                  
                  
                  33,469Costs
      of revenues other than deprecation of rental and lease
      equipment
                  
                  
                  5,157
                  
                  
                  
                  6,694
                  
                  
                  
                  17,508
                  
                  
                  
                  16,746Selling,
      general and administrative expenses
                  
                  
                  10,300
                  
                  
                  
                  10,775
                  
                  
                  
                  34,404
                  
                  
                  
                  32,398Total
      operating expenses
                  
                  
                  27,012
                  
                  
                  
                  28,734
                  
                  
                  
                  86,606
                  
                  
                  
                  82,613Operating
      profit
                  
                  
                  3,047
                  
                  
                  
                  6,929
                  
                  
                  
                  13,872
                  
                  
                  
                  23,022Interest
      income, net
                  
                  
                  145
                  
                  
                  
                  854
                  
                  
                  
                  1,368
                  
                  
                  
                  2,627Income
      before income taxes
                  
                  
                  3,192
                  
                  
                  
                  7,783
                  
                  
                  
                  15,240
                  
                  
                  
                  25,649Income
      tax provision
                  
                  
                  1,309
                  
                  
                  
                  2,939
                  
                  
                  
                  5,492
                  
                  
                  
                  9,755Net
      income
                  
                  $
                  1,883
                  
                  
                  $
                  4,844
                  
                  
                  $
                  9,748
                  
                  
                  $
                  15,894Earnings
      per share:Basic
                  
                  $
                  0.08
                  
                  
                  $
                  0.19
                  
                  
                  $
                  0.39
                  
                  
                  $
                  0.61Diluted
                  
                  $
                  0.08
                  
                  
                  $
                  0.19
                  
                  
                  $
                  0.39
                  
                  
                  $
                  0.61Shares
      used in per share calculation:Basic
                  
                  
                  24,323
                  
                  
                  
                  25,934
                  
                  
                  
                  25,189
                  
                  
                  
                  25,897Diluted
                  
                  
                  24,389
                  
                  
                  
                  26,092
                  
                  
                  
                  25,292
                  
                  
                  
                  26,070





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


Page
3


ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)
(000's omitted, except share data)





February
      28,
                
                
                May
      31,2009
                
                
                2008ASSETSCash
      and cash equivalents
                
                $
                47,391
                
                
                $
                50,964Investments,
      trading, at fair value (cost of $21,600)
                
                
                20,525
                
                
                
                -Investments
      available-for-sale, at fair value (cost of $23,600)
                
                
                -
                
                
                
                22,601Put
      option
                
                
                1,075
                
                
                
                -Accounts
      receivable, net of allowance for doubtful accounts of $327 and
      $359
                
                
                17,031
                
                
                
                23,128Rental
      and lease equipment, net of accumulated depreciation of $180,232 and
      $161,187
                
                
                165,100
                
                
                
                172,468Other
      property, net of accumulated depreciation and amortization of $14,999 and
      $14,427
                
                
                13,925
                
                
                
                14,341Goodwill
                
                
                3,109
                
                
                
                3,109Intangibles,
      net of amortization of $1,657 and $1,406
                
                
                818
                
                
                
                1,069Other
                
                
                6,365
                
                
                
                5,402$
                275,339
                
                
                $
                293,082LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Accounts
      payable
                
                $
                4,538
                
                
                $
                4,562Accrued
      expenses
                
                
                15,807
                
                
                
                12,565Deferred
      revenue
                
                
                4,229
                
                
                
                4,943Deferred
      tax liability
                
                
                18,307
                
                
                
                14,904Total
      liabilities
                
                
                42,881
                
                
                
                36,974Commitments
      and contingencies (Note 11)Shareholders'
      equity:Preferred
      stock, $1 par - shares authorized 1,000,000; none issuedCommon
      stock, no par - shares authorized 40,000,000; issued and outstanding
      February 28, 2009 - 24,243,587; May 31, 2008 - 25,945,283
                
                
                32,898
                
                
                
                33,938Accumulated
      other comprehensive loss, net of tax
                
                
                -
                
                
                
                (619
                )Retained
      earnings
                
                
                199,560
                
                
                
                222,789Total
      shareholders' equity
                
                
                232,458
                
                
                
                256,108$
                275,339
                
                
                $
                293,082





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


Page
4


ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)
(000's omitted)





Nine
      Months EndedFebruary
      28,
                
                
                February
      29,2009
                
                
                2008Cash
      flows from operating activities:Net
      income
                
                $
                9,748
                
                
                $
                15,894Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                35,573
                
                
                
                34,680Put
      option gain
                
                
                (1,075
                )
                
                
                -Unrealized
      holding losses for trading securities
                
                
                1,075
                
                
                
                -Remeasurement
      loss (gain)
                
                
                471
                
                
                
                (407
                )Gain
      on sale of rental and lease equipment
                
                
                (6,554
                )
                
                
                (7,682
                )Deferred
      tax liability
                
                
                3,417
                
                
                
                701Stock
      compensation expense
                
                
                124
                
                
                
                176Provision
      for losses on accounts receivable
                
                
                280
                
                
                
                283Excess
      tax benefit for stock based compensation
                
                
                (37
                )
                
                
                (149
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                5,251
                
                
                
                (3,298
                )Other
      assets
                
                
                (961
                )
                
                
                700Accounts
      payable
                
                
                457
                
                
                
                64Accrued
      expenses
                
                
                (316
                )
                
                
                1,297Deferred
      revenue
                
                
                (637
                )
                
                
                (85
                )Net
      cash provided by operating activities
                
                
                46,816
                
                
                
                42,174Cash
      flows from investing activities:Proceeds
      from sale of rental and lease equipment
                
                
                20,947
                
                
                
                21,027Payments
      for purchase of rental and lease equipment
                
                
                (42,123
                )
                
                
                (55,527
                )Purchases
      of investments
                
                
                -
                
                
                
                (3,500
                )Redemptions
      of investments
                
                
                2,000
                
                
                
                3,450Payments
      for purchase of other property
                
                
                (211
                )
                
                
                (297
                )Net
      cash used in investing activities
                
                
                (19,387
                )
                
                
                (34,847
                )Cash
      flows from financing activities:Proceeds
      from the exercise of common stock options
                
                
                1,271
                
                
                
                1,240Excess
      tax benefit for stock based compensation
                
                
                37
                
                
                
                149Payment
      for repurchase of common stock
                
                
                (20,395
                )
                
                
                (19
                )Payment
      of dividends
                
                
                (11,417
                )
                
                
                (7,770
                )Net
      cash used in financing activities
                
                
                (30,504
                )
                
                
                (6,400
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                (3,075
                )
                
                
                927Effect
      of exchange rate changes on cash
                
                
                (498
                )
                
                
                208Cash
      and cash equivalents at beginning of period
                
                
                50,964
                
                
                
                57,172Cash
      and cash equivalents at end of period
                
                $
                47,391
                
                
                $
                58,307





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


Page
5




ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
1: Basis of Presentation





The
unaudited condensed consolidated financial statements included herein have been
prepared by Electro Rent Corporation, pursuant to the rules and regulations of
the United States Securities and Exchange Commission (the "SEC").  The
condensed consolidated financial statements include the accounts of Electro Rent
Corporation and its wholly owned subsidiaries, Genstar Rental Electronics, Inc.,
ER International, Inc., Electro Rent Europe NV, Electro Rent Asia, Inc., and
Electro Rent (Tianjin) Rental Co., Ltd. (collectively "we", "us", or "our") as
consolidated with the elimination of all intercompany transactions.





Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such SEC
rules and regulations.  These condensed consolidated financial
statements reflect all adjustments and disclosures, which are, in our opinion,
necessary for a fair presentation of our financial position and results of
operations for the interim periods presented.  These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our latest Annual Report
on


Form
10-K.





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
well as the disclosures of contingent assets and liabilities as of the date of
these financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates, and results of operations for interim periods are not necessarily
indicative of results for the full year.





Revenue
recognition





In
accordance with EITF 00-10, Accounting for Shipping and Handling
Fees and Costs, delivery and handling revenues are recorded as other
revenues and the related expenses are recorded in selling, general and
administrative expenses.  An amount of $446 and $1,368 for the three
and nine months ended February 29, 2008, respectively, has been corrected to
properly state sales of equipment and other revenues and selling, general and
administrative expenses in accordance with this policy.  Management
believes the correction to be immaterial to the consolidated statements of
operations.





Foreign
Currency





The
assets and liabilities of our foreign subsidiaries are remeasured from their
foreign currency to U.S. dollars at current or historic exchange rates, as
appropriate. The U.S. dollar has been determined to be our functional
currency.  Revenues and expenses are remeasured from any foreign
currencies to U.S. dollars using historic rates or an average monthly rate, as
appropriate, for the month in which the transaction occurred.  Our
foreign subsidiaries individually have assets, liabilities, revenues and
expenses under 10% of our respective consolidated amounts. The euro, Canadian
dollar and Chinese yuan are our primary foreign currencies.





We may
enter into forward contracts designated as hedges against unfavorable
fluctuations in our monetary assets and liabilities, primarily in our European
and Canadian operations.  These contracts are designed to minimize the
effect of fluctuations in foreign currencies.  Such contracts do not
qualify to be accounted for under hedge accounting in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”) and are recorded at fair
value as a current asset or liability, and any changes in fair value are
recorded in selling, general and administrative expenses in the consolidated
statements of operations.





Adopted Accounting
Pronouncements





Effective
June 1, 2008, we adopted  SFAS No. 157, Fair Value Measurements(“SFAS 157”) as amended by Financial Accounting Standards Board (“FASB”)
Staff Position SFAS 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13(“FSP SFAS 157-1”) and FASB Staff Position
SFAS 157-2, Effective Date of
FASB Statement No. 157(“FSP SFAS 157-2”).  SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and provides for expanded disclosure
about fair value measurements.  SFAS 157 applies prospectively to all
other accounting pronouncements that require or permit fair value
measurements.  FSP SFAS 157-1 amends SFAS 157 to exclude from the
scope of SFAS 157 certain leasing transactions accounted for under SFAS
No. 13, Accounting for
Leases.  FSP SFAS 157-2 amends SFAS 157 to defer the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years.  We will adopt FSP SFAS 157-2 with our first quarter of fiscal
2010.


Page
6


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




The adoption of SFAS 157 did not have a
material impact on our financial condition, results of operations, or cash
flows.  While we continue to evaluate the impact that SFAS 157 will
have on our non-financial assets and non-financial liabilities, we do not
anticipate that the impact will be material to our financial condition, results
of operations, or cash flows.  The assets and liabilities typically
recorded at fair value on a non-recurring basis to which we have not yet applied
SFAS 157 due to the deferral of SFAS 157 for such items include:




•
            
            Non-financial
      assets and liabilities initially measured at fair value in an acquisition
      or business combination, and




•
            
            Long-lived
      assets measured at fair value due to an impairment assessment under SFAS
      No. 144, Accounting
      for the Impairment or Disposal of Long-Lived
  Assets.




Effective
October 10, 2008 we adopted FASB Staff Position 157-3, Determining Fair Values of a
Financial Asset When the Market for That Asset Is Not Active (“FSP FAS
157-3”).  FSP FAS 157-3 clarifies the application of SFAS 157 to
financial instruments in an inactive market.  The adoption of FSP FAS
157-3 did not have a material impact on our financial condition, results of
operations, or cash flows.




Effective
June 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”).  SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value.  The objective of the guidance is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  The adoption of SFAS 159 did not have a material impact
on our financial condition, results of operations, or cash flows since we did
not elect to apply the fair value option for any of our eligible financial
instruments or other items on the June 1, 2008 effective
date.  See Note 2 for  discussion of the fair value election
of our put option asset.





New Accounting
Pronouncements





In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1,
Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 addresses
whether instruments granted by an entity in share-based payment transactions
should be considered as participating securities prior to vesting and,
therefore, should be included in the earnings allocation in computing earnings
per share under the two-class method described in paragraphs 60 and 61 of FASB
Statement No. 128, Earnings
per Share.FSP EITF 03-6-1 clarifies that instruments granted
in share-based payment transactions can be participating securities prior to
vesting (that is, awards for which the requisite service had not yet been
rendered).  Unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method.  FSP EITF 03-6-1
requires us to retrospectively adjust our earnings per share data (including any
amounts related to interim periods, summaries of earnings and selected financial
data) to conform to the provisions of FSP EITF 03-6-1.  FSP EITF
03-6-1 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008.  Early adoption is
prohibited.  We will adopt FSP EITF 03-6-1 beginning with our first
quarter of fiscal 2010.  We do not anticipate that the adoption of FSP
EITF 03-6-1 will have a material impact on our financial condition, results of
operations, or cash flows.


Page
7


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





In April
2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP SFAS 142-3”).  FSP SFAS 142-3 is
intended to improve the consistency between the useful life of recognized
intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS 142”), and the period of expected cash flows used to measure the
fair value of the assets under SFAS No. 141(R),Business Combinations(“SFAS
141R”).  FSP SFAS 142-3 amends the factors an entity should consider
in developing renewal or extension assumptions in determining the useful life of
recognized intangible assets.  FSP SFAS 142-3 requires an entity to
consider its own historical experience in renewing or extending similar
arrangements, or to consider market participant assumptions consistent with the
highest and best use of the assets if relevant historical experience does not
exist.  In addition to the required disclosures under SFAS 142, FSP
SFAS 142-3 requires disclosure of the entity’s accounting policy regarding costs
incurred to renew or extend the term of recognized intangible assets, the
weighted average period to the next renewal or extension, and the total amount
of capitalized costs incurred to renew or extend the term of recognized
intangible assets.  FSP SFAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008.  While the standard for determining the useful life of
recognized intangible assets is to be applied prospectively only to intangible
assets acquired after the effective date, the disclosure requirements shall be
applied prospectively to all recognized intangible assets as of, and subsequent
to, the effective date.  Early adoption is prohibited.  We
will adopt FSP SFAS 142-3 beginning with our first quarter of fiscal
2010.  We do not anticipate that the adoption of FSP SFAS 142-3 will
have a material impact on our financial condition, results of operations, or
cash flows.




In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“SFAS 161”).  SFAS 161 requires entities to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments and that the objectives for using derivative instruments
be disclosed in terms of underlying risk and accounting designation,
(b) how derivative instruments and related hedged items are accounted for
under SFAS 133, Accounting for
Derivative Instruments and Hedging Activitiesand its related
interpretations, including a tabular format disclosure of the fair values of
derivative instruments and their gains and losses and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged.  SFAS 161
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  We will be required to adopt the provisions of
SFAS 161 beginning with our first quarter of fiscal 2010.  We do
not anticipate that the adoption of SFAS 161 will have a material effect on our
financial condition, results of operations, or cash flows.




In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS
141R”).  SFAS 141R replaces SFAS No. 141, Business Combinations, to
provide greater consistency in the accounting and financial reporting of
business combinations.  SFAS 141R requires that the acquiring entity
in a business combination recognize all assets acquired and liabilities assumed
in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed,
establishes principles and requirements for how an acquirer recognizes and
measures any non-controlling interest in the acquiree and the goodwill acquired,
and requires the acquirer to disclose the nature and financial effect of the
business combination.  Among other changes, this statement also
requires that “negative goodwill” be recognized in earnings as a gain
attributable to the acquisition, that acquisition-related costs are to be
recognized separately from the acquisition and expensed as incurred and that any
deferred tax benefits resulting from a business combination be recognized in
income from continuing operations in the period of the combination or directly
in contributed capital, depending on the
circumstances.  SFAS 141R is effective for fiscal years beginning
on or after December 15, 2008.  We will be required to adopt the
provisions of SFAS 141R beginning with our first quarter of fiscal
2010.  We do not anticipate that the adoption of SFAS 141R will have a
material effect on our financial condition, results of operations, or cash
flows.




In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (“SFAS 160”).  SFAS 160
amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  It also clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.  SFAS 160
also changes the way the consolidated income statement is presented by requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest.  It
also requires disclosure, on the face of the consolidated statement of income,
of the amounts of consolidated net income attributable to the parent and to the
non-controlling interest.  SFAS 160 requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent owners and the
interests of the non-controlling owners of a subsidiary.  SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  We will be required to adopt
the provisions of SFAS 160 beginning with our first quarter of fiscal
2010.  We do not anticipate that the adoption of SFAS 160 will have a
material effect on our financial condition, results of operations, or cash
flows.


Page
8


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




Note
2: Cash and cash equivalents and investments




We
consider highly liquid investments with maturities of three months or less at
the date of purchase to be cash equivalents.  Cash equivalents consist
primarily of AAA-rated money market funds in all periods
presented.  Investments consist of Auction Rate Securities (“ARS”)
that we carry at fair value and classify as trading securities at February 28,
2009.  Previously, our ARS were classified as investments
available-for-sale.  Except for direct obligations of the United
States government, securities issued by agencies of the United States
government, and money market or cash management funds, we diversify our
investments by limiting our holdings with any individual issuer.




When
made, our investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, avoids inappropriate concentrations
and delivers an appropriate yield in relationship to our investment guidelines
and market conditions.




At
February 28, 2009, we held $21,600, at cost, of ARS.  During the nine
months ended February 28, 2009, we sold $2,000 of our ARS at par
value.  Our ARS are long-term debt instruments backed by student
loans, a substantial portion of which are guaranteed by the United States
government.  All of our ARS have credit ratings of AAA or AA, and none
are mortgage-backed debt obligations.  Historically, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest
rate at predetermined intervals, typically every 35 days, to provide
liquidity at par.  However, as a result of liquidity issues in the
global credit and capital markets, the auctions for all of our ARS failed
beginning in February 2008 when sell orders exceeded buy
orders.  The failures of these auctions do not affect the value of the
collateral underlying the ARS, and we continue to earn and receive interest on
our ARS at a pre-determined formula with spreads tied to particular interest
rate indexes.  We value the ARS from quotes received from our broker,
UBS AG (“UBS”), which are derived from UBS’s internally developed
model.  In determining a discount factor for each ARS, the model
weights various factors, including assessments of credit quality, duration,
insurance wraps, portfolio composition, discount rates, overall capital market
liquidity and comparable securities, if any.





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





UBS’s
obligations under the Rights are not secured by its assets and do not require
UBS to obtain any financing to support its performance obligations under the
Rights.  UBS has disclaimed any assurance that it will have sufficient
financial resources to satisfy its obligations under the Rights.





The
Rights represent a firm agreement in accordance with SFAS 133, which defines a
firm agreement as an agreement with an unrelated party, binding on both parties
and usually legally enforceable, with the following
characteristics:  a) the agreement specifies all significant terms,
including the quantity to be exchanged, the fixed price, and the timing of the
transaction, and b) the agreement includes a disincentive for nonperformance
that is sufficiently large to make performance probable.  The
enforceability of the Rights results in a put option and should be recognized as
a free standing asset separate from the ARS.  Upon acceptance of the
offer from UBS, we recorded $1,891 as the fair value of the put option, included
in interest income, net.  We subsequently recorded an $816 decrease in
the fair value of the put option, for a total fair value of $1,075, included in
interest income, net, in the condensed consolidated statements of operations for
the nine months ended February 28, 2009.  The put option does not meet
the definition of a derivative instrument under SFAS 133.  Therefore,
we have elected to measure the put option at fair value under SFAS 159, which
permits an entity to elect the fair value option for recognized financial
assets, in order to match the changes in the fair value of the
ARS.  As a result, unrealized gains and losses will be included in
earnings in future periods.   We expect that future changes in
the fair value of the put option will approximate fair value movements in the
related ARS.


Page
9


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Prior to
accepting the UBS offer, we recorded our ARS as investments
available-for-sale.  We recorded unrealized gains and losses on our
available-for-sale debt securities, net of a tax benefit, in accumulated other
comprehensive income in the shareholders’ equity section of our balance
sheets.  Such an unrealized loss did not reduce net income for the
applicable accounting period.





In
connection with our acceptance of the UBS offer in November 2008, we transferred
our ARS from investments available-for-sale to trading securities in accordance
with SFAS No. 115, Accounting
for Certain InvestmentsinDebt and Equity
Securities. The transfer to trading securities reflects management’s
intent to exercise its put option during the period from June 30, 2010 to July
3, 2012.  Prior to our agreement with UBS, our intent was to hold the
ARS until the market recovered.  At the time of transfer, the
unrealized loss on our ARS was $1,891, an increase in loss of $892 from May 31,
2008.  This unrealized loss was included in other comprehensive
income.  Upon transfer to trading securities, we immediately
recognized a loss of $1,891, included in interest income, net, for the amount of
the unrealized loss not previously recognized in
earnings.  Subsequently, we recognized an increase in fair value
of $816 for a total unrealized loss of $1,075, included in interest income,
net, in the condensed consolidated statements of operations for the nine months
ended February 28, 2009.





The
following is a summary of available-for-sale securities as of May 31,
2008:





May 31, 2008Available-for-sale SecuritiesGross
                      
                      
                      GrossUnrealized
                      
                      
                      Unrealized
                      
                      
                      EstimatedCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      Fair ValueAuction
      rate securities
                      
                      $
                      23,600
                      
                      
                      $
                      -
                      
                      
                      $
                      (999
                      )
                      
                      $
                      22,601$
                      23,600
                      
                      
                      $
                      -
                      
                      
                      $
                      (999
                      )
                      
                      $
                      22,601





We
continue to monitor the market for ARS and consider its impact (if any) on the
fair market value of our investments.  If the market conditions deteriorate
further, we may be required to record additional unrealized losses in earnings,
offset by corresponding increases in the put option.  We believe that,
based on our current cash and cash equivalents balance, the current lack of
liquidity in the credit and capital markets will not have a material impact on
our liquidity, cash flows or ability to fund our operations.





Note
3:  Fair Value Measurements





As
described in Note 1, we adopted SFAS 157 on June 1, 2008.  SFAS 157,
among other things, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset and liability
category measured at fair value on either a recurring or nonrecurring
basis.  SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability.  As a basis for considering such
assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:





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





Level 2 –
Inputs, other than the quoted prices in active markets, that are observable
either directly or through corroboration with observable market data;
and





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


Page
10


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Assets
and liabilities measured at fair value on a recurring basis at February 28, 2009
are as follows:





Quoted Prices
                      in Active
                      Markets for
                      Identical
                      Instruments
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)
                    
                    
                    Total
                      BalanceMoney
      market funds
                    
                    $
                    41,476
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    41,476Auction
      rate securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,525
                    
                    
                    
                    20,525Put
      option
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,075
                    
                    
                    
                    1,075Foreign
      currency forward contract
                    
                    
                    
                    
                    
                    
                    (4
                    )
                    
                    
                    
                    
                    
                    
                    (4
                    )Total
      assets measured at fair value
                    
                    $
                    41,476
                    
                    
                    $
                    (4
                    )
                    
                    $
                    21,600
                    
                    
                    $
                    63,072





We value
the ARS from quotes received from UBS which are derived from UBS’s internally
developed model.  In determining a discount factor for each ARS, the
model weights various factors, including assessments of credit quality,
duration, insurance wraps, portfolio composition, discount rates, overall
capital market liquidity and comparable securities, if any.  The put
option is a free standing asset separate from the ARS, and represents our
contractual right to require UBS to purchase our ARS at par value during the
period 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.





The
following table presents a reconciliation of all assets and liabilities measured
at fair value on a recurring basis, excluding accrued interest components, using
significant unobservable inputs (Level 3) for the three and nine months ended
February 28, 2009:





Three Months Ended
                    February 28, 2009Put Option
                  
                  
                  Auction Rate
                    SecuritiesFair value at
      November 30, 2008
                  
                  $
                  3,031
                  
                  
                  $
                  19,769Settlements
      (at par)
                  
                  
                  -
                  
                  
                  
                  (1,200
                  )Unrealized
      gains (losses) included in earnings
                  
                  
                  (1,956
                  )
                  
                  
                  1,956Fair
      value at February 28, 2009
                  
                  $
                  1,075
                  
                  
                  $
                  20,525





Nine Months Ended
                    February 28, 2009Put Option
                  
                  
                  Auction Rate
                    SecuritiesFair value
      at June 1, 2008
                  
                  $
                  -
                  
                  
                  $
                  22,601Settlements
      (at par)
                  
                  
                  -
                  
                  
                  
                  (2,000
                  )Issuance
      of put
                  
                  
                  1,891
                  
                  
                  
                  -Unrealized
      losses included in earnings (1)
                  
                  
                  (816
                  )
                  
                  
                  (76
                  )Fair
      value at February 28, 2009
                  
                  $
                  1,075
                  
                  
                  $
                  20,525





(1) Total
unrealized losses for Auction Rate Securities for the nine months ended February
28, 2009 were $1,075, including $999 transferred from other comprehensive income
for unrealized losses as of May 31, 2008.  (See Note 2 for further
discussion).





Note
4: Stock Options and Equity Incentive Plan





We have
an Equity Incentive Plan that authorizes the Board of Directors to grant
incentive and non-statutory stock option grants, stock appreciation rights,
restricted stock awards and performance unit per share awards covering a maximum
of 1,000 shares of our common stock.  The Equity Incentive Plan
replaced our previous stock option plans (those stock option plans, together
with the Equity Incentive Plan, the “Plans”) in October 2005, although 318
options to purchase our common stock for previously granted incentive stock
options and non-statutory stock options granted to directors, officers and
consultants under our stock option plans remain in effect according to their
terms.  Pursuant to the Plans, we have granted incentive and
non-statutory options to directors, officers and key employees at prices not
less than 100% of the fair market value on the date of grant.  Options
are exercisable at various dates over a five-year or ten-year period from the
date of grant.  The Plans provide for a variety of vesting dates with
the majority of the options vesting at a rate of one-third per year over a
period of three years or one-fourth per year over a period of four years from
the date of grant.


Page
11


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The
following table represents stock option activity for the nine months ended
February 28, 2009:





Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Weighted
                Average
                Remaining
                Contractual
                Term
                (in
      years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at June 1, 2008
              
              
              512
              
              
              $
              10.02Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (134
              )
              
              
              9.23Forfeited/canceled
              
              
              (3
              )
              
              
              12.21Outstanding
      at February 28, 2009
              
              
              375
              
              
              $
              10.28
              
              
              
              0.80
              
              
              $
              35Vested
      and expected to vest atFebruary
      28, 2009
              
              
              372
              
              
              $
              10.23
              
              
              
              0.79
              
              
              $
              35Vested
      and exercisable at February 28, 2009
              
              
              366
              
              
              $
              10.11
              
              
              
              0.76
              
              
              $
              35





We did
not grant any stock options during the three and nine months ended February 28,
2009 and February 29, 2008.  The total fair value of options vested
was $0 and $99 during the three and nine months ended February 28, 2009,
respectively, compared to $0 and $765 during the three and nine months ended
February 29, 2008, respectively.  The aggregate intrinsic value of
options exercised is calculated as the difference between the exercise price of
the underlying awards and the quoted price of our common stock, and was $113 and
$347 during the three and nine months ended February 28, 2009, respectively, and
$86 and $624 during the three and nine months ended February 29, 2008,
respectively.  As of February 28, 2009 there was approximately $30 of
total unrecognized compensation cost related to unvested share-based
arrangements granted under our Plans.  The cost is expected to be
recognized over a weighted-average period of 0.6 years.  Shares of
newly issued common stock will be issued upon exercise of stock
options.





Stock-Based
Compensation





We
account for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment (“SFAS
123R”), which requires all share-based payments to employees, including grants
of employee stock options, to be recognized as compensation expense in the
consolidated financial statements based on their fair
values.  Compensation expense is recognized over the period that an
employee provides service in exchange for the award.





We use
the Black-Scholes option pricing model to calculate the fair-value of each
option grant.  Our computation of expected volatility is based on
historical volatility.  Our computation of expected term is determined
based on historical experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules and expectations
of future employee behavior.  The expected term represents the period
that our stock-based awards are expected to be outstanding and was determined
based on historical experience of similar awards.  The risk-free
interest rate is based on U.S. Treasury zero-coupon issues with a term equal to
the expected term of the option at the date of grant.  Forfeitures are
estimated at the date of grant based on historical experience.





We
recorded $34 and $124 of stock-based compensation for employee stock options and
restricted stock, as part of selling, general and administrative expenses for
the three and nine months ended February 28, 2009, respectively, compared to $24
and $176 for the three and nine months ended February 29, 2008,
respectively.  This compensation cost caused net income to decrease by
$21 and $78 for the three and nine months ended February 28, 2009, respectively,
compared to $16 and $128 for the three and nine months ended February 29, 2008,
respectively, and did not have a material impact on basic or diluted earnings
per share.


Page
12


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





We
receive a tax deduction for certain stock option exercises during the period the
options are exercised, generally for the excess of the fair value of our common
stock at the date of exercise over the exercise price of the
options.  Excess tax benefits are realized tax benefits from tax
deductions for exercised options in excess of the deferred tax asset
attributable to stock compensation costs for such options.  The total
tax benefit realized from stock option exercises for the nine months ended
February 28, 2009 and February 29, 2008 was $37 and $149,
respectively.  Cash received from stock option exercises was $1,271
and $1,240 for the nine months ended February 28, 2009 and February 29, 2008,
respectively.





Restricted
Stock





Compensation
expense resulting from restricted stock awards is measured at fair value on the
date of grant and is recognized in selling, general and administrative expenses
over a one-year vesting period.  We recognized approximately $22 and
$70 of related compensation expense in the three and nine months ended February
28, 2009, respectively, related to restricted stock awards.  There
were no restricted stock award grants for the three and nine months ended
February 29, 2008.  As of February 28, 2009, we have unrecognized
share-based compensation cost of approximately $22 associated with these
awards.  This cost is expected to be recognized over the next three
months.





Restricted
stock activity for the nine months ended February 28, 2009, is set forth
below:





Shares
                      
                      
                      Weighted –
                        Average
                        Grant
                        Date
                        Fair ValueNonvested at
      June 1, 2008
                      
                      
                      -
                      
                      
                      $
                      -Granted
                      
                      
                      7
                      
                      
                      
                      14.12Vested
                      
                      
                      (5
                      )
                      
                      
                      (14.12
                      )Canceled
                      
                      
                      (1
                      )
                      
                      
                      (14.12
                      )Nonvested
      at February 28, 2009
                      
                      
                      1
                      
                      
                      $
                      14.12





Note
5: Goodwill and Intangibles





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





Our
goodwill and intangibles at February 28, 2009 are the result of the acquisition
of Rush Computer Rentals, Inc. on January 31, 2006.





The
changes in carrying amount of goodwill and other intangible assets for the nine
months ended February 28, 2009 are as follows:





Balance as of
                    June 1, 2008 (net
                    of amortization)
                  
                  
                  Adjustments
                  
                  
                  Amortization
                  
                  
                  Balance as of
                    February 28, 2009Goodwill
                  
                  $
                  3,109
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,109Trade
      Name
                  
                  
                  411
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  411Non-compete
      agreements
                  
                  
                  266
                  
                  
                  
                  -
                  
                  
                  
                  (75
                  )
                  
                  
                  191Customer
      relationships
                  
                  
                  392
                  
                  
                  
                  -
                  
                  
                  
                  (176
                  )
                  
                  
                  216$
                  4,178
                  
                  
                  $
                  -
                  
                  
                  $
                  (251
                  )
                  
                  $
                  3,927





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


Page
13


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




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





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







February
      28, 2009Estimated
                                          Useful Life
                                        
                                        
                                        Gross Carrying
                                          Amount
                                        
                                        
                                        Accumulated
                                          Amortization
                                        
                                        
                                        Net Carrying
                                          AmountTrade name
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        411
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        411Non-compete
      agreements
                                        
                                        2-5
      years
                                        
                                        
                                        
                                        1,050
                                        
                                        
                                        
                                        (859
                                        )
                                        
                                        
                                        191Customer
      relationships
                                        
                                        3-4
      years
                                        
                                        
                                        
                                        1,014
                                        
                                        
                                        
                                        (798
                                        )
                                        
                                        
                                        216$
                                        2,475
                                        
                                        
                                        $
                                        (1,657
                                        )
                                        
                                        $
                                        818








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





Amortization
expense was $84 and $251 for the three and nine months ended February 28, 2009,
respectively, compared to $125 and $418 for the three and nine months ended
February 29, 2008, respectively.





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





Year
      ending May 31,
              
              Future
                Amortization2009
              
              $
              842010
              
              
              2572011
              
              
              662012
              
              
              02013
              
              
              0$
              407





Note
6: Noncash Investing and Financing Activities





We had
accounts payable and other accruals related to acquired equipment totaling
$3,420 and $3,824 as of February 28, 2009 and May 31, 2008, respectively, and
$6,100 and $8,844 as of February 29, 2008 and May 31, 2007, respectively, which
amounts were subsequently paid.  During the nine months ended February
28, 2009 we transferred $20,909 at fair value from investments
available-for-sale to investments, trading.  We accrued $3,637 and $0
for dividends declared and not yet paid in accrued expenses and as a reduction
of retained earnings as of February 28, 2009 and May 31, 2008, respectively,
compared to $3,891 and $2,580 as of February 29, 2008 and May 31, 2007,
respectively, which amounts were subsequently paid.


Page
14


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




Note
7: Sales-type Leases





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





February 28,
                    2009
                  
                  
                  May 31,
                    2008Gross
      minimum lease payments receivable
                  
                  $
                  2,927
                  
                  
                  $
                  1,392Less
      – unearned interest
                  
                  
                  (189
                  )
                  
                  
                  (112
                  )Net
      investment in sales-type lease receivables
                  
                  $
                  2,738
                  
                  
                  $
                  1,280





Note
8: Segment Reporting and Related Disclosures





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





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





Our
equipment pool, based on acquisition cost, comprised $301,198 of T&M
equipment and $44,134 of DP equipment at February 28, 2009 and $289,061 of
T&M equipment and $44,594 of DP equipment at May 31, 2008.





Revenues
for these product groups were as follows for the three months ended February 28,
2009 and February 29, 2008:





T&M
                      
                      
                      DP
                      
                      
                      Total2009Rentals
      and leases
                      
                      $
                      18,133
                      
                      
                      $
                      4,358
                      
                      
                      $
                      22,491Sales
      of equipment and other revenues
                      
                      
                      6,998
                      
                      
                      
                      570
                      
                      
                      
                      7,568$
                      25,131
                      
                      
                      $
                      4,928
                      
                      
                      $
                      30,0592008Rentals
      and leases
                      
                      $
                      20,726
                      
                      
                      $
                      5,518
                      
                      
                      $
                      26,244Sales
      of equipment and other revenues
                      
                      
                      8,530
                      
                      
                      
                      889
                      
                      
                      
                      9,419$
                      29,256
                      
                      
                      $
                      6,407
                      
                      
                      $
                      35,663


Page
15


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Revenues
for these product groups were as follows for the nine months ended February 28,
2009 and February 29, 2008:





T&M
                      
                      
                      DP
                      
                      
                      Total2009Rentals
      and leases
                      
                      $
                      59,243
                      
                      
                      $
                      16,637
                      
                      
                      $
                      75,880Sales
      of equipment and other revenues
                      
                      
                      22,254
                      
                      
                      
                      2,344
                      
                      
                      
                      24,598$
                      81,497
                      
                      
                      $
                      18,981
                      
                      
                      $
                      100,4782008Rentals
      and leases
                      
                      $
                      63,492
                      
                      
                      $
                      17,621
                      
                      
                      $
                      81,113Sales
      of equipment and other revenues
                      
                      
                      22,098
                      
                      
                      
                      2,424
                      
                      
                      
                      24,522$
                      85,590
                      
                      
                      $
                      20,045
                      
                      
                      $
                      105,635





No single
customer accounted for more than 10% of total revenues during the three and nine
months ended February 28, 2009 and February 29, 2008.





Selected
country information is presented below:





Three Months Ended
                              
                              
                              Nine Months EndedFebruary 28,
                              
                              
                              February 29,
                              
                              
                              February 28,
                              
                              
                              February 29,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Revenues: (1)U.S.
                              
                              $
                              25,873
                              
                              
                              $
                              31,230
                              
                              
                              $
                              86,534
                              
                              
                              $
                              90,113Other
      (2)
                              
                              
                              4,186
                              
                              
                              
                              4,433
                              
                              
                              
                              13,944
                              
                              
                              
                              15,522Total
                              
                              $
                              30,059
                              
                              
                              $
                              35,663
                              
                              
                              $
                              100,478
                              
                              
                              $
                              105,635February 28,
                                2009
                              
                              
                              May 31,
                                2008Net Long-Lived Assets: (3)U.S.
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              156,834
                              
                              
                              $
                              165,984Other
      (2)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              26,118
                              
                              
                              
                              25,003Total
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              182,952
                              
                              
                              $
                              190,987





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





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





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


Page
16


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
9: Computation of Earnings Per Share





The
following is a reconciliation of the denominator used in the computation of
basic and diluted earnings per share for the three and nine months ended
February 28, 2009 and February 29, 2008:





Three
      Months Ended
                      
                      
                      Nine
      Months EndedFebruary
      28,
                      
                      
                      February
      29,
                      
                      
                      February
      28,
                      
                      
                      February
      29,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Denominator:Denominator
      for basic earnings per share - weighted average common shares
      outstanding
                      
                      
                      24,323
                      
                      
                      
                      25,934
                      
                      
                      
                      25,189
                      
                      
                      
                      25,897Effect
      of dilutive securities-options (1)
                      
                      
                      66
                      
                      
                      
                      158
                      
                      
                      
                      103
                      
                      
                      
                      17324,389
                      
                      
                      
                      26,092
                      
                      
                      
                      25,292
                      
                      
                      
                      26,070Net
      income
                      
                      $
                      1,883
                      
                      
                      $
                      4,844
                      
                      
                      $
                      9,748
                      
                      
                      $
                      15,894Earnings
      per share:Basic
                      
                      $
                      0.08
                      
                      
                      $
                      0.19
                      
                      
                      $
                      0.39
                      
                      
                      $
                      0.61Diluted
                      
                      $
                      0.08
                      
                      
                      $
                      0.19
                      
                      
                      $
                      0.39
                      
                      
                      $
                      0.61





(1)  Excludes
72 and 57 options outstanding during the three and nine months ended February
28, 2009, respectively, and 41 during each of the three and nine months ended
February 29, 2008, for which the exercise price exceeded the average market
price of our common stock during that period.





Note
10: Income Taxes





At May
31, 2008, we had unrecognized tax benefits of $3,693.  Unrecognized
tax benefits decreased by $368 in the nine months ended February 28,
2009.  The decrease in the unrecognized tax benefits is the result of
a decline in the value of the Canadian dollar, as compared to the U.S. dollar,
for the nine months ended February 28, 2009.





The
unrecognized tax benefit at February 28, 2009, if recognized, would have no
impact on the effective tax rate.  However, the derecognition of $932
related to the associated interest and penalties at February 28, 2009 would
decrease the effective tax rate.





We
recognize interest and penalties accrued with respect to uncertain tax positions
as components of our income tax provision.  We had accrued
approximately $1,526 for the payment of interest and penalties as of February
28, 2009.




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





There
were no additional unrecognized tax benefits for the nine months ended February
28, 2009.  Absent a significant change in the value of
the  Canadian dollar, as compared to the U.S. dollar, we anticipate no
significant increase or decrease in the total amounts of unrecognized tax
benefits within 12 months of the date of this report.





Note
11: Commitments and Contingencies





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


Page
17




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




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


Page
18


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





The
following discussion addresses our financial condition as of February 28, 2009
and May 31, 2008 and the results of our operations for the three and nine months
ended February 28, 2009 and February 29, 2008, respectively, and cash flows for
the nine month periods ended February 28, 2009 and February 29,
2008.  This discussion should be read in conjunction with the
Management's Discussion and Analysis section included on pages 10-18 and the
Risk Factors discussed in Item 1A, of our Annual Report on Form 10-K for the
fiscal year ended May 31, 2008, to which the reader is directed for additional
information.





Overview





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





For the
first nine months of fiscal 2009, 78% of our rental and lease revenues were
derived from T&M equipment.  This percentage has remained
unchanged from the prior year period as both our T&M and DP rental and lease
revenues have declined.  While our T&M rental activity has
remained relatively flat, we have experienced a decline in rental rates,
reflecting competitive pressures and the recession in the United States and the
international markets that we serve, resulting in a decline in rental
revenues.





For the
first nine months of fiscal 2009, rental revenues were 85% of our rental and
lease revenue.  That percentage has increased over the last two years
due to an increase in T&M rental activity in our U.S. and European
operations, while lease revenues have declined.





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





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





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





·
            Our
      acquisition cost;


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


·
            Our
      estimates of current and future supply of
  product;


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


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


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


Page
19





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





Several
years, ago, we put in place internal and external growth strategies, including
creating a new distribution channel by entering into distribution agreements
with three leading manufacturers, developing vendor leasing programs that
provide customers with flexible financing alternatives and expanding our rental
and leasing services globally through our operations in Europe and
China.  While our results improved from 2004 through 2007, and were
flat in fiscal 2008, our financial results for the first nine months of fiscal
2009 were impacted by competitive pressure on rental rates and lower utilization
rates due in large part to the recession in the U.S. and our major international
markets.  The recession in the U.S. and global economy, resulting in
more stringent credit requirements and reduced access to capital, is adversely
affecting our customers and competitors.  Consequently, while we
continue to work at initiatives to expand revenue, we must also focus on
remaining profitable in the current conditions, as well as being prepared for
the possibility that the recession may deepen and continue in future
periods.





Profitability and Key
Business Trends





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


·
            Net
      income per diluted common share
(EPS);


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


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





For the
first nine months of fiscal 2009, compared to the same period in fiscal 2008,
our revenues decreased by 4.9% to $100.5 million, our operating profit decreased
by 39.7% to $13.9 million and our net income decreased by 38.7% to $9.7
million.  The revenue decrease reflects lower demand in our DP
business and foreign operations, with the exception of our European operation
which grew during the period.  Furthermore, while our T&M rental
activity was relatively flat for the nine months ended February 28, 2009,
compared to the nine months ended February 29, 2008, T&M rental and lease
revenues declined, reflecting the global recession and competitive pressure on
rental rates.  Our profitability measurements are presented in the
table below for the nine months ended February 28, 2009 and February 29,
2008:





2009
                  
                  
                  2008Net
      income per diluted common share (EPS)
                  
                  $
                  0.39
                  
                  
                  $
                  0.61Net
      income as a percentage of average assets (annualized)
                  
                  
                  4.6
                  %
                  
                  
                  7.3
                  %Net
      income as a percentage of average tangible equity
    (annualized)
                  
                  
                  5.4
                  %
                  
                  
                  8.7
                  %





The
decrease in our operating profit primarily reflects competitive pressures on
rental rates and lower equipment utilization rates.  In addition, our
selling, general and administrative expenses have increased due to higher
personnel and benefit costs to support our current operations and develop our
growth strategies, and foreign currency losses of $862 for the nine months ended
February 28, 2009, compared to a foreign currency gain of $407 for the prior
year period, as a result of a strengthening of the U.S. dollar against key
currencies.





The
amount of our equipment on rent, based on acquisition cost, decreased 0.9% to
$149.6 million at February 28, 2009 from $151.0 million at February 29,
2008.  Acquisition cost of equipment on lease decreased 25.8% to $28.7
million at February 28, 2009 from $38.7 million at February 29,
2008.  Average rental and lease rates for our T&M and DP segments
declined by 12.4% and 1.5%, respectively, from February 29, 2008 to February 28,
2009.  Utilization for our T&M equipment pool, based on
acquisition cost of equipment on rent and lease compared to the total pool was
55.1% at February 28, 2009, compared to 62.7% at February 29,
2008.  Over the same period, utilization of our DP equipment pool
decreased to 44.9% from 55.1%.


Page
20





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





Three
      Months EndedFeb
      28,
                      2009
                    
                    
                    Nov
      30,
                      2008
                    
                    
                    Aug
      31,
                      2008
                    
                    
                    May
      31,
                      2008
                    
                    
                    Feb
      29,
                      2008Rentals
      and leases
                    
                    $
                    22,491
                    
                    
                    $
                    26,155
                    
                    
                    $
                    27,234
                    
                    
                    $
                    27,648
                    
                    
                    $
                    26,244Sales
      of equipment and other revenues
                    
                    
                    7,568
                    
                    
                    
                    9,278
                    
                    
                    
                    7,752
                    
                    
                    
                    11,253
                    
                    
                    
                    9,419Operating
      profit
                    
                    
                    3,047
                    
                    
                    
                    4,839
                    
                    
                    
                    5,986
                    
                    
                    
                    7,673
                    
                    
                    
                    6,929





Results
of Operations





Comparison
of Three Months Ended February 28, 2009 and February 29, 2008





Revenues





Total
revenues for the three months ended February 28, 2009 and February 29, 2008 were
$30.1 million and $35.7 million, respectively.  The decrease in total
revenues was due to a 14.3% decrease in rental and lease revenues and a 19.7%
decrease in sales of equipment and other revenues.





Rental
and lease revenues in the third quarter of fiscal 2009 were $22.5 million,
compared to $26.2 million in the prior year period.  This reflects a
decline in our T&M and DP lease revenues, primarily due to lower demand, and
a decrease in T&M and DP rental revenues, reflecting lower rental rates due
to competitive pressures and the global recession.





Sales of
equipment and other revenues decreased to $7.6 million for the three months
ended February 28, 2009, compared to $9.4 million in the prior year
period.  This decrease is primarily due to declines in our used
equipment and distribution sales, reflecting lower customer
demand.  These declines were partially offset by growth in finance
leases, reflecting one of our growth strategies outlined above.





Operating
Expenses





Depreciation
of rental and lease equipment increased to $11.6 million, or 51.4% of rental and
lease revenues, in the third quarter of fiscal 2009, from $11.3 million, or
42.9% of rental and lease revenues, in the third quarter of fiscal
2008.  The increased depreciation expense in fiscal 2009 was due to a
higher average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to a
decline in our rental and lease revenues, reflecting lower rental rates and
lower demand for leases, as well as lower utilization rates.





Costs of
revenues other than depreciation decreased 23.0% to $5.2 million in the third
quarter of fiscal 2009 from $6.7 million in the prior year
period.  Costs of revenues other than depreciation primarily includes
the cost of equipment sales, which increased as a percentage of equipment sales
to 68.0% in the third quarter of fiscal 2009 from 66.3% in the third quarter of
fiscal 2008; this increase reflects a decline in our higher-margin used
equipment sales due to lower customer demand, reflecting competitive pressures
and the global recession, and increased finance leases, which carry a lower
margin.  Our cost of revenues other than depreciation decreased
primarily due to a decline in our used equipment sales.  Based on our
current equipment management strategy, we anticipate that future gross margin on
sales will trend downward as lower margin finance leases and distribution sales
continue to represent an increased portion of our equipment sales, although the
gross margin percentage will fluctuate on a quarterly basis, depending primarily
on customer requirements and funding and growth in our distribution channel and
finance leases.





Selling,
general and administrative expenses were $10.3 million in the third quarter of
fiscal 2009, compared to $10.8 million in the third quarter of fiscal
2008.  Selling, general and administrative expenses as a percentage of
total revenues increased to 34.3% in the third quarter of fiscal 2009 from 30.2%
in the third quarter of fiscal 2008, due to a decline in revenue.  Our
selling, general and administrative expenses decreased due to a decline in
certain employee benefit and selling costs, partially offset by a foreign
currency loss of $25 for the three months ended February 28, 2009, compared to a
foreign currency gain of $204 for the three months ended February 29, 2008, as a
result of a strengthening of the U.S. dollar against key
currencies.


Page
21





Interest
Income, Net





Interest
income, net, was $0.1 million for the third quarter of fiscal 2009 compared to
$0.9 million in the prior year period.  The decrease reflects
decreases in prevailing interest rates and a lower cash
balance.  Interest income, net, includes $2.0 million of unrealized
losses on our put option.  In addition, interest income, net, includes
$2.0 million of unrealized gains on our investments, trading.





Income
Tax Provision





Our
effective tax rate was 41.0% in the third quarter of fiscal 2009, compared to
37.8% for the same period in fiscal 2008.  The increase is due
primarily to a decline in the proportion of foreign subsidiary income, which is
subject to lower tax rates, to total income, and disallowance of tax benefits on
certain foreign currency losses.





Comparison
of Nine Months Ended February 28, 2009 and February 29, 2008





Revenues





Total
revenues for the nine months ended February 28, 2009 declined $5.1 million, or
4.9%, to $100.5 million, compared to $105.6 million in the same period in the
prior year.  The decrease in total revenues was due to a 6.5% decrease
in rental and lease revenues, offset by an increase in sales of equipment and
other revenues of 0.3%.





Rental
and lease revenues in the first nine months of fiscal 2009 were $75.9 million,
compared to $81.1 million in the prior year period.  This decrease
reflects a decline in our T&M and DP lease revenues, primarily due to lower
demand, and a decrease in T&M and DP rental revenues, reflecting lower
rental rates due to competitive pressures and the global recession.





Sales of
equipment and other revenues increased to $24.6 million for the nine months
ended February 28, 2009, compared to $24.5 million in the prior year
period.  Our used equipment sales have declined, reflecting lower
customer demand; however this decline has been offset by an increase in
distribution sales and increased finance lease activity, as a result of our
growth strategies outlined above.





Operating
Expenses





Depreciation
of rental and lease equipment increased to $34.7 million, or 45.7% of rental and
lease revenues, in the first nine months of fiscal 2009, from $33.5 million, or
41.3% of rental and lease revenues, in the first nine months of fiscal
2008.  The increased depreciation expense in fiscal 2009 was due to a
higher average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to a
decline in our rental and lease revenues, reflecting lower rental rates and
lower demand for leases, as well as lower utilization rates.





Costs of
revenues other than depreciation increased 4.6% to $17.5 million in the first
nine months of fiscal 2009 from $16.7 million in the prior year
period.  Costs of revenues other than depreciation primarily includes
the cost of equipment sales, which increased to 68.7% of equipment sales in the
first nine months of fiscal 2009 from 63.5% in the first nine months of fiscal
2008; this increase reflects a decline in our higher margin used equipment sales
and  increased finance leases and distribution sales which carry a
lower margin.  Our cost of revenues other than depreciation increased
primarily due to growth in our finance leases and distribution
sales.





Selling,
general and administrative expenses were $34.4 million in the first nine months
of fiscal 2009, compared to $32.4 million in the first nine months of fiscal
2008.  Selling, general and administrative expenses as a percentage of
total revenues increased to 34.2% in the first nine months of fiscal 2009 from
30.7% in the first nine months of fiscal 2008, due in part to a decline in
revenue.  Our selling, general and administrative expenses increased
due to higher personnel and benefit costs to support our current operations and
develop our growth strategies, and a foreign currency loss of $862 for the nine
months ended February 28, 2009, compared to a foreign currency gain of $407 for
the nine months ended February 29, 2008, as a result of a strengthening of the
U.S. dollar against key currencies.


Page
22





Interest
Income, Net





Interest
income, net, was $1.4 million for the first nine months of fiscal 2009 compared
to $2.6 million in the prior year period.  The decrease reflects
decreases in prevailing interest rates and a lower cash
balance.  Interest income, net, includes $1.1 million of unrealized
gain on our put option.  In addition, interest income, net, includes
$1.1 million of unrealized losses on our investments, trading.





Income
Tax Provision





Our
effective tax rate was 36.0% in the first nine months of fiscal 2009, compared
to 38.0% for the same period in fiscal 2008.  The decrease is due
primarily to changes in estimated tax exposures, partially offset by reduced
foreign subsidiary earnings subject to lower tax rates, and disallowance of tax
benefits on certain foreign currency losses.





Liquidity
and Capital Resources





Our
primary capital requirements are purchases of rental and lease
equipment.  We generally purchase equipment throughout the year to
replace equipment that has been sold and to maintain adequate levels of rental
equipment to meet existing and expected customer demands.  To meet
T&M rental demand, support areas of potential growth for both T&M and DP
equipment and to keep our equipment pool technologically up-to-date, we made
payments for the purchase of $42.1 million of rental and lease equipment during
the first nine months of fiscal 2009.  This amount was 24.1% lower
than the $55.5 million in the same period for fiscal 2008.





In
addition to increasing our rental equipment pool, we periodically repurchase
shares of our common stock under an authorization from our board of
directors.  Shares we repurchase are retired and returned to the
status of authorized but unissued stock.  During the nine months ended
February 28, 2009, we purchased 1,841,165 shares of our common stock for $20.4
million, at an average price of $11.08 per share.  We may make
purchases of common stock in the future through open market transactions or
otherwise, but we have no commitments to do so.





In
April 2007, our board of directors authorized a regular quarterly cash
dividend of $0.10 per common share, or $0.40 per annum.  We commenced
payment of our quarterly cash dividend in July 2007.  In
January 2008, our board of directors approved an increase to $0.15 per
common share, or $0.60 per annum.  For the nine months ended February
28, 2009 and February 29, 2008, we paid dividends of $11.4 million and $7.8
million, respectively.





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





At
February 28, 2009, we held $21.6 million, at cost, in auction rate securities
(“ARS”), which we classify as investments, trading.  The fair value of
our ARS at February 28, 2009 was $20.5 million.  Our ARS are long-term
debt instruments backed by student loans, a substantial portion of which are
guaranteed by the United States government.  All of our ARS have
credit ratings of AAA or AA, and none are mortgage-backed debt
obligations.  Historically, our ARS have been highly liquid, using a
Dutch auction process that resets the applicable interest rate at predetermined
intervals, typically every 35 days, to provide liquidity at
par.  However, as a result of liquidity issues in the global credit
and capital markets, the auctions for all of our ARS failed beginning in
February 2008 when sell orders exceeded buy orders.  The failures
of these auctions do not affect the value of the collateral underlying the ARS,
and we continue to earn and receive interest on our ARS at a predetermined
formula with spreads tied to particular interest rate indexes.  We
value the ARS from quotes received from our broker, UBS AG (“UBS”), which are
derived from UBS’s internally developed model.  In determining a
discount factor for each ARS, the model weights various factors, including
assessments of credit quality, duration, insurance wraps, portfolio composition,
discount rates, overall capital market liquidity and comparable securities, if
any.





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


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23





Given the
approximately $47.4 million we hold in cash and cash equivalents, primarily
U.S. Treasury money market funds, and our lack of bank debt, we expect to be
able to continue to finance our operations even if our ARS were to be illiquid
for an extended period of time.





During
the first nine months of fiscal 2009 and fiscal 2008, net cash provided by
operating activities was $46.8 million and $42.2 million,
respectively.  The increase in operating cash flow was due primarily
to: a $5.3 million decrease in accounts receivable for the nine months ended
February 28, 2009, compared to an increase of $3.3 million in the prior year
period; an increase in deferred tax liability of $3.4 million for the nine
months ended February 29, 2009, compared to an increase of $701 for the prior
year period; and a remeasurement loss of $471 for the nine months ended February
28, 2009, compared to a gain of $407 in the prior year period.  This
increase was offset by a decline in net income of $6.1 million for the nine
months ended February 28, 2009, compared to the nine months ended February 29,
2008.





During
the nine months ended February 28, 2009 net cash used in investing activities
was $19.4 million, compared to $34.8 million in the same period of fiscal
2008.  The decline in net cash used in investing activities is mainly
due to a decrease in payments for the purchase of rental and lease equipment to
$42.1 million for the nine months ended February 28, 2009, compared to $55.5
million for the nine months ended February 29, 2008.





Net cash
used in financing activities increased to $30.5 million from $6.4 million for
the nine months ended February 28, 2009 and February 29, 2008, respectively, due
to an increase in payments for the repurchase of common stock to $20.4 million
for the current fiscal period, compared to $19 for the prior year period, and an
increase in dividends paid to $11.4 million for the nine months ended February
28, 2009, compared to $7.8 million for the nine months ended February 29,
2008.





We have a
$10.0 million revolving line of credit with an institutional lender, subject to
certain restrictions, to meet equipment acquisition needs as well as working
capital and general corporate requirements.  We had no bank borrowings
outstanding or off balance sheet financing arrangements at February 28,
2009.





We
believe that based on our current cash and cash equivalents balance of $47.4
million at February 28, 2009 and expected operating cash flows, the current lack
of liquidity in the global credit and capital markets will not have a material
impact on our liquidity, cash flows, or financial flexibility or our ability to
fund our operations, including our dividends.





Contractual
Obligations





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





Critical
Accounting Policies and Estimates





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





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





We
identified certain critical accounting policies 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, 2008.  We have not made any material changes to these
policies as previously disclosed.


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24





SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS




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




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





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





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





Item
4.  Controls and Procedures





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





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





Part
II.  OTHER INFORMATION





Item
1.  Legal Proceedings




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


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25





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





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





Period
                        
                        Total
      Number of
                          Shares
                          Purchased
                        
                        
                        Average
      Price
                          Paid
      per ShareDecember
      1, 2008 – December 31, 2008
                        
                        
                        243,044
                        
                        
                        $
                        10.29January
      1, 2009 – January 31, 2009
                        
                        
                        122,961
                        
                        
                        $
                        10.46February
      1, 2009- February 28, 2009
                        
                        
                        29,500
                        
                        
                        $
                        7.86Total
                        
                        
                        395,505





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





Item
3.  Defaults Upon Senior Securities.





None.





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





None.





Item
5.  Other Information





None.





Item
6.  Exhibits





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




Page
26


SIGNATURES





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





ELECTRO
RENT CORPORATION





DATED:  April
3, 2009





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


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27