UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





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





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





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





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


(do not
check if smaller reporting company)





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





Yes   ̈   No
x





The
number of shares outstanding of the registrant's common stock as of December 16,
2009 was 23,919,508.





ELECTRO
RENT CORPORATION


FORM
10-Q


November
30, 2009





TABLE
      OF CONTENTS
                    
                    PagePart
      I: FINANCIAL INFORMATION
                    
                    3Item
      1.
                    Financial
      Statements
                    
                    3Condensed
      Consolidated Statements of Operations for the Three and Six Months Ended
      November 30, 2009 and 2008 (Unaudited)
                    
                    3Condensed
      Consolidated Balance Sheets at November 30, 2009 and May 31, 2009
      (Unaudited)
                    
                    4Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended November
      30, 2009 and 2008 (Unaudited)
                    
                    5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                    
                    6Item
      2.
                    Management's
      Discussion and Analysis of Financial Condition
      and Results of Operations
                    
                    18Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    24Item
      4.
                    Controls
      and Procedures
                    
                    24Part
      II: OTHER INFORMATION
                    
                    25Item
      1.
                    Legal
      Proceedings
                    
                    25Item
      1A.
                    Risk
      Factors
                    
                    25Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    25Item
      3.
                    Defaults
      Upon Senior Securities
                    
                    25Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    
                    25Item
      5.
                    Other
      Information
                    
                    26Item
      6.
                    Exhibits
                    
                    26SIGNATURES
                    
                    27




Page
2





Part I.  FINANCIAL
INFORMATION





Item
1. Financial Statements





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


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





Three
      Months Ended
                  
                  
                  Six
      Months EndedNovember
      30,
                  
                  
                  November
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues:Rentals
      and leases
                  
                  $
                  23,329
                  
                  
                  $
                  26,155
                  
                  
                  $
                  45,076
                  
                  
                  $
                  53,389Sales
      of equipment and other revenues
                  
                  
                  13,248
                  
                  
                  
                  9,278
                  
                  
                  
                  23,702
                  
                  
                  
                  17,030Total
      revenues
                  
                  
                  36,577
                  
                  
                  
                  35,433
                  
                  
                  
                  68,778
                  
                  
                  
                  70,419Operating
      expenses:Depreciation
      of rental and lease equipment
                  
                  
                  10,473
                  
                  
                  
                  11,555
                  
                  
                  
                  21,268
                  
                  
                  
                  23,139Costs
      of revenues other than deprecation of rentaland
      lease equipment
                  
                  
                  9,853
                  
                  
                  
                  6,985
                  
                  
                  
                  17,620
                  
                  
                  
                  12,351Selling,
      general and administrative expenses
                  
                  
                  10,357
                  
                  
                  
                  12,054
                  
                  
                  
                  20,665
                  
                  
                  
                  24,104Total
      operating expenses
                  
                  
                  30,683
                  
                  
                  
                  30,594
                  
                  
                  
                  59,553
                  
                  
                  
                  59,594Operating
      profit
                  
                  
                  5,894
                  
                  
                  
                  4,839
                  
                  
                  
                  9,225
                  
                  
                  
                  10,825Interest
      income, net
                  
                  
                  1,048
                  
                  
                  
                  632
                  
                  
                  
                  1,356
                  
                  
                  
                  1,223Income
      before income taxes
                  
                  
                  6,942
                  
                  
                  
                  5,471
                  
                  
                  
                  10,581
                  
                  
                  
                  12,048Income
      tax provision
                  
                  
                  2,931
                  
                  
                  
                  1,977
                  
                  
                  
                  4,495
                  
                  
                  
                  4,183Net
      income
                  
                  $
                  4,011
                  
                  
                  $
                  3,494
                  
                  
                  $
                  6,086
                  
                  
                  $
                  7,865Earnings
      per share:Basic
                  
                  $
                  0.17
                  
                  
                  $
                  0.14
                  
                  
                  $
                  0.25
                  
                  
                  $
                  0.31Diluted
                  
                  $
                  0.17
                  
                  
                  $
                  0.14
                  
                  
                  $
                  0.25
                  
                  
                  $
                  0.31Shares
      used in per share calculation:Basic
                  
                  
                  23,918
                  
                  
                  
                  25,420
                  
                  
                  
                  23,925
                  
                  
                  
                  25,646Diluted
                  
                  
                  23,959
                  
                  
                  
                  25,511
                  
                  
                  
                  23,968
                  
                  
                  
                  25,756





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




Page
3





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)
(in thousands, except share numbers)





November
      30,
                      
                      
                      May
      31,2009
                      
                      
                      2009ASSETSCash
      and cash equivalents
                      
                      $
                      58,799
                      
                      
                      $
                      22,215Investments
      available-for-sale, at fair value (cost of $27,896)
                      
                      
                      -
                      
                      
                      
                      28,188Investments,
      trading, at fair value (cost of $20,875 and $21,600)
                      
                      
                      19,365
                      
                      
                      
                      19,977Put
      option
                      
                      
                      1,510
                      
                      
                      
                      1,623Accounts
      receivable, net of allowance for doubtful accounts of $464 and
      $317
                      
                      
                      19,863
                      
                      
                      
                      16,271Rental
      and lease equipment, net of accumulated depreciation of $177,032 and
      $179,318
                      
                      
                      144,477
                      
                      
                      
                      158,252Other
      property, net of accumulated depreciation and amortization of $15,585 and
      $15,207
                      
                      
                      13,435
                      
                      
                      
                      13,781Goodwill
                      
                      
                      3,109
                      
                      
                      
                      3,109Intangibles,
      net of amortization of $1,909 and $1,741
                      
                      
                      566
                      
                      
                      
                      734Other
                      
                      
                      11,570
                      
                      
                      
                      7,184$
                      272,694
                      
                      
                      $
                      271,334LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Accounts
      payable
                      
                      $
                      3,228
                      
                      
                      $
                      3,291Accrued
      expenses
                      
                      
                      13,557
                      
                      
                      
                      15,023Deferred
      revenue
                      
                      
                      4,553
                      
                      
                      
                      4,281Deferred
      tax liability
                      
                      
                      20,407
                      
                      
                      
                      19,986Total
      liabilities
                      
                      
                      41,745
                      
                      
                      
                      42,581Commitments
      and contingencies (Note 11)Shareholders'
      equity:Preferred
      stock, $1 par - shares authorized 1,000,000; none issuedCommon
      stock, no par - shares authorized 40,000,000;issued
      and outstanding November 30, 2009 - 23,919,508;May
      31, 2009 - 23,953,540
                      
                      
                      32,804
                      
                      
                      
                      32,596Accumulated
      other comprehensive income, net of tax
                      
                      
                      -
                      
                      
                      
                      176Retained
      earnings
                      
                      
                      198,145
                      
                      
                      
                      195,981Total
      shareholders' equity
                      
                      
                      230,949
                      
                      
                      
                      228,753$
                      272,694
                      
                      
                      $
                      271,334





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




Page
4





ELECTRO
RENT CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)
(in thousands)





Six
      Months EndedNovember
      30,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      income
                          
                          $
                          6,086
                          
                          
                          $
                          7,865Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                          
                          
                          21,844
                          
                          
                          
                          23,725Put
      option loss (gain)
                          
                          
                          113
                          
                          
                          
                          (3,031
                          )Unrealized
      holding (gain) loss for trading securities
                          
                          
                          (113
                          )
                          
                          
                          3,031Remeasurement
      loss
                          
                          
                          65
                          
                          
                          
                          483Provision
      for losses on accounts receivable
                          
                          
                          272
                          
                          
                          
                          184Realized
      gain on sale of investments available-for-sale
                          
                          
                          (841
                          )
                          
                          
                          -Gain
      on sale of rental and lease equipment
                          
                          
                          (6,068
                          )
                          
                          
                          (4,454
                          )Stock
      compensation expense
                          
                          
                          271
                          
                          
                          
                          90Excess
      tax benefit for share based compensation
                          
                          
                          -
                          
                          
                          
                          (44
                          )Deferred
      tax liability
                          
                          
                          537
                          
                          
                          
                          1,975Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          (3,710
                          )
                          
                          
                          1,331Other
      assets
                          
                          
                          (4,378
                          )
                          
                          
                          (727
                          )Accounts
      payable
                          
                          
                          (551
                          )
                          
                          
                          664Accrued
      expenses
                          
                          
                          1,928
                          
                          
                          
                          275Deferred
      revenue
                          
                          
                          255
                          
                          
                          
                          (115
                          )Net
      cash provided by operating activities
                          
                          
                          15,710
                          
                          
                          
                          31,252Cash
      flows from investing activities:Proceeds
      from sale of rental and lease equipment
                          
                          
                          21,530
                          
                          
                          
                          14,389Payments
      for purchase of rental and lease equipment
                          
                          
                          (22,485
                          )
                          
                          
                          (31,213
                          )Redemptions
      of investments
                          
                          
                          29,462
                          
                          
                          
                          800Payments
      for purchase of other property
                          
                          
                          (62
                          )
                          
                          
                          (186
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          28,445
                          
                          
                          
                          (16,210
                          )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                          
                          
                          106
                          
                          
                          
                          652Excess
      tax benefit for stock options exercised
                          
                          
                          -
                          
                          
                          
                          44Payments
      for repurchase of common stock
                          
                          
                          (395
                          )
                          
                          
                          (16,376
                          )Payment
      of dividends
                          
                          
                          (7,180
                          )
                          
                          
                          (7,762
                          )Net
      cash used in financing activities
                          
                          
                          (7,469
                          )
                          
                          
                          (23,442
                          )Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          36,686
                          
                          
                          
                          (8,400
                          )Effect
      of exchange rate changes on cash
                          
                          
                          (102
                          )
                          
                          
                          (90
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          22,215
                          
                          
                          
                          50,964Cash
      and cash equivalents at end of period
                          
                          $
                          58,799
                          
                          
                          $
                          42,474





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




Page
5


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
1: Basis of Presentation





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





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


Form 10-K
filed with the SEC on August 10, 2009.





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





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





Foreign
Currency





Effective
June 1, 2009, we adopted new accounting guidance intended to improve financial
reporting disclosures about derivative instruments and hedging activities. The
adoption of this guidance did not have a material effect on our financial
condition, results of operations or cash flows. We applied the requirements of
the new guidance on a prospective basis. Accordingly, disclosures related to
interim periods prior to the date of adoption have not been
presented.





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





On
occasion, we have entered into forward contracts designated as hedges against
unfavorable fluctuations in our monetary assets and liabilities, primarily in
our European and Canadian operations. These contracts are designed to minimize
the effect of fluctuations in foreign currencies. Such derivative instruments,
not designated as hedging instruments, are recorded at fair value as a current
asset or liability, and any changes in fair value are recorded in our condensed
consolidated statements of operations.


Page
6


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The fair
value of our foreign exchange forward contracts in the consolidated balance
sheet as of November 30, 2009 is shown in the table below:





Derivatives Not Designated as
                            Hedging Instruments
                          
                          Consolidated Balance Sheet Location
                          
                          Fair ValueForeign
      exchange forward contracts
                          
                          Accrued
      Expenses
                          
                          $
                          21





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





Derivatives Not Designated
                      as Hedging Instruments
                    
                    Location of Loss Recognized
                      in Income on Derivatives
                    
                    Three Months Ended
                      November 30, 2009
                    
                    
                    Six Months Ended
                      November 30, 2009Foreign
      exchange forward contracts
                    
                    Selling,
      general and administrative expenses
                    
                    $
                    78
                    
                    
                    $
                    165





Recently Adopted Accounting
Pronouncements





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





Effective
June 1, 2009, we adopted accounting guidance for determining fair value when
there is no active market or where the price inputs being used represent
distressed sales. This guidance reaffirms the need to use judgment to ascertain
if a formerly active market has become inactive and in determining fair values
when markets have become inactive. The adoption of this guidance did not have a
material impact on our financial condition, results of operations or cash
flows.





Effective
June 1, 2009, we adopted accounting guidance on management’s assessment of
subsequent events, including guidance on the scope and timing. This guidance
defines which types of subsequent events should be recognized in the financial
statements and the extent to which an entity should disclose information
regarding subsequent events. The adoption of this guidance did not have a
material impact on our financial condition, results of operations or cash
flows.





Effective
June 1, 2009, we adopted accounting guidance for other-than-temporary
impairments. This guidance changed the method for determining whether an
other-than-temporary impairment exists for debt securities and the amount of the
impairment to be recorded in earnings as well as expanded and increased the
frequency of existing disclosures about other-than-temporary impairments of debt
and equity securities. The adoption of this guidance did not have a material
impact on our financial condition, results of operations or cash
flows.




Effective
June 1, 2009, we adopted accounting guidance on business combinations. This
guidance revises the method of accounting for a number of aspects of business
combinations, including acquisition costs, contingencies (including contingent
assets, contingent liabilities and contingent purchase price), and post
acquisition exit activities of acquired businesses. In addition, this new
guidance will require us to expense acquisition costs for future acquisitions.
We will evaluate the impact of this guidance on our financial condition, results
of operations and cash flows in the event future business combinations are
consummated.





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




Page
7


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Effective
June 1, 2009 we adopted accounting guidance addressing accounting for
instruments granted in share-based payments. This guidance defines which types
of instruments granted by an entity in share-based payment transactions should
be considered as participating securities prior to vesting and, therefore,
should be included in the earnings allocation in computing earnings per share.
This guidance requires us to retrospectively adjust our earnings per share data
(including any amounts related to interim periods, summaries of earnings and
selected financial data) to conform to the provisions of the guidance. The
adoption of this guidance did not have a material impact on our financial
condition, results of operations or cash flows.




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




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





Pending Accounting
Pronouncements




In
September 2009, the FASB issued an update of the existing multiple-element
revenue arrangements guidance, which revises the existing guidance and changes
the determination of when the individual deliverables included in a
multiple-element revenue arrangement may be treated as separate units of
accounting, modifies the manner in which the transaction consideration is
allocated across the separately identified deliverables and expands the
disclosures required for multiple-element revenue arrangements. This guidance
will be effective for fiscal years beginning on or after June 15, 2010. We will
be required to adopt this guidance beginning with our first quarter of fiscal
2012. We do not anticipate that the adoption of this guidance will have a
material impact on our financial condition, results of operations or cash
flows.




Note
2: Cash and Cash Equivalents and Investments




We
consider highly liquid investments with maturities of three months or less at
the date of purchase to be cash equivalents. Cash equivalents consisted
primarily of AAA-rated money market funds in all periods presented. Investments
available-for-sale consist of corporate and government bond funds, while our
investments, trading consist of auction rate securities (“ARS”). Our investments
are carried at fair value. Except for direct obligations of the United States
government, securities issued by agencies of the United States government, and
money market or cash management funds, we diversify our investments by limiting
our holdings with any individual issuer.




We seek
to establish a portfolio that preserves principal, meets liquidity needs, avoids
inappropriate concentrations and delivers an appropriate yield in relationship
to our investment guidelines and market conditions.




At
November 30, 2009, we held $20,875, at cost, of ARS. During the three and six
months ended November 30, 2009, $225 and $725, respectively, of our ARS were
redeemed at par value. Our ARS are long-term debt instruments backed by student
loans, a substantial portion of which are guaranteed by the United States
government. Although our ARS became illiquid beginning in February 2008, we
continue to earn and receive interest on our ARS at a pre-determined formula
with spreads tied to particular interest rate indexes. We value the ARS from
quotes received from our broker, UBS AG (“UBS”), which are derived from UBS’s
internally developed model. In determining a discount factor for each ARS, the
model incorporates various factors, including assessments of credit quality,
duration, insurance wraps, portfolio composition, discount rates, overall
capital market liquidity and comparable securities, if any.




Page
8


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





In
November 2008, we entered into a settlement agreement (“Agreement”) with UBS. By
accepting the Agreement, we received the right (“Put Option”) to sell our ARS at
par value to UBS, which is defined as the price equal to the liquidation
preference of the ARS plus accrued but unpaid dividends or interest, at any time
between June 30, 2010 and July 2, 2012. Conversely, UBS has the right, in its
discretion, to purchase or sell our ARS at any time until July 2, 2012, so long
as we receive a payment at par value upon any sale or disposition. We expect to
sell our ARS under the Agreement. In addition, UBS Bank USA has established a
credit line for us in an amount up to 75% of the market value of the ARS that we
pledge as collateral, with interest equal to the interest income that we receive
on our ARS investments. We have not drawn any amounts under this line and have
no current plans to do so. UBS’s obligations under the Agreement are not secured
by its assets and do not require UBS to obtain any financing to support its
performance obligations under the Agreement. UBS has disclaimed any assurance
that it will have sufficient financial resources to satisfy its obligations
under the Agreement. In accordance with accounting guidance, which permits an
entity to elect the fair value option for financial assets and liabilities, we
elected to measure the Put Option at fair value in order to match the changes in
the fair value of the ARS. Simultaneously, we transferred our ARS from
investments available-for-sale to trading securities. The transfer to trading
securities reflects our intent to exercise our Put Option. The fair
value of the trading securities and Put Option are determined by pricing models
(see Note 3).





We record
unrealized gains and losses on our available-for-sale securities, net of a tax
benefit, in accumulated other comprehensive income in the shareholders’ equity
section of our balance sheets. Realized gains and losses on our
available-for-sale debt securities are recorded in interest income, net, in our
condensed consolidated statements of operations. During the six months ended
November 30, 2009, we sold available-for-sale securities and recorded a realized
gain of $841, included in interest income, net. At May 31, 2009, the gross
unrealized gains included in other comprehensive income with respect to our
available-for-sale securities was $292. Such unrealized gains did not affect net
income for the applicable accounting period.





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





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





Note
3:  Fair Value Measurements




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





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


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


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





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




Page
9


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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





At
      November 30, 2009Quoted
      Prices
                        in
      Active
                        Markets
      for
                        Identical
                        Instruments
                        (Level
      1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level
      2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level
      3)
                      
                      
                      Total
                        BalanceMoney
      market funds
                      
                      $
                      54,722
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      54,722Auction
      rate securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      19,365
                      
                      
                      
                      19,365Put
      option
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,510
                      
                      
                      
                      1,510Foreign
      currency forward contract
                      
                      
                      -
                      
                      
                      
                      (21
                      )
                      
                      
                      -
                      
                      
                      
                      (21
                      )Total
      assets measured at fair value
                      
                      $
                      54,722
                      
                      
                      $
                      (21
                      )
                      
                      $
                      20,875
                      
                      
                      $
                      75,576




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





The fair
value measurements for our money market funds, government bond fund and
corporate bond fund were derived from quoted market prices in active markets and
are included in Level 1 inputs.  Foreign currency forward contracts,
which are financial instruments that do not qualify as hedges, are valued based
on observable market spot and forward rates as of our reporting date and are
included in Level 2 inputs.  We value our ARS from quotes received
from UBS that are derived from UBS’s internally developed model.  In
determining a discount factor for each ARS, the model incorporates various
factors, including assessments of credit quality, duration, insurance wraps,
portfolio composition, discount rates, overall capital market liquidity and
comparable securities, if any.  The Put Option is a free standing
asset separate from the ARS, and represents our contractual right to require UBS
to purchase our ARS at par value from June 30, 2010 through July 2,
2012.  In order to value the Put Option, we considered the intrinsic
value, time value of money and our assessment of the credit worthiness of
UBS.  Our ARS and Put Option are included in Level 3
inputs.


Page
10


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





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





Three
      months ended November 30,2009
                    
                    
                    2008Put
      Option
                    
                    
                    Auction
      Rate
                      Securities
                    
                    
                    Put
      Option
                    
                    
                    Auction
      Rate
                      SecuritiesFair
      value at beginning of period
                    
                    $
                    1,421
                    
                    
                    $
                    19,679
                    
                    
                    $
                    -
                    
                    
                    $
                    22,644Issuance
      of Put
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,891
                    
                    
                    
                    -Settlements
      (at par)
                    
                    
                    -
                    
                    
                    
                    (225
                    )
                    
                    
                    -
                    
                    
                    
                    (800
                    )Unrealized
      gains (losses) included ininterest
      income, net
                    
                    
                    89
                    
                    
                    
                    (89
                    )
                    
                    
                    1,140
                    
                    
                    
                    (2,075
                    )Fair
      value at end of period
                    
                    $
                    1,510
                    
                    
                    $
                    19,365
                    
                    
                    $
                    3,031
                    
                    
                    $
                    19,769





Six
      months ended November 30,2009
                    
                    
                    2008Put
      Option
                    
                    
                    Auction
      Rate
                      Securities
                    
                    
                    Put
      Option
                    
                    
                    Auction
      Rate
                      SecuritiesFair
      value at beginning of period
                    
                    $
                    1,623
                    
                    
                    $
                    19,977
                    
                    
                    $
                    -
                    
                    
                    $
                    22,601Issuance
      of Put
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,891
                    
                    
                    
                    -Settlements
      (at par)
                    
                    
                    -
                    
                    
                    
                    (725
                    )
                    
                    
                    -
                    
                    
                    
                    (800
                    )Unrealized
      gains (losses) included ininterest
      income, net
                    
                    
                    (113
                    )
                    
                    
                    113
                    
                    
                    
                    1,140
                    
                    
                    
                    (2,032
                    )Fair
      value at end of period
                    
                    $
                    1,510
                    
                    
                    $
                    19,365
                    
                    
                    $
                    3,031
                    
                    
                    $
                    19,769





At
November 30, 2009, we included in earnings unrealized gains of $51 attributable
to the remaining ARS we held on that date and unrealized losses of $51
attributable to our Put Option on those securities.





Note
4: Stock Options and Equity Incentive Plan





Our 2005
Equity Incentive Plan (the “Equity Incentive Plan”) authorizes the Board of
Directors to grant incentive and non-statutory stock option grants, stock
appreciation rights, restricted stock awards, restricted stock units,
performance unit awards and performance share awards covering a maximum of 1,000
shares of our common stock.  The Equity Incentive Plan replaced our
prior stock option plans (those stock option plans, together with the Equity
Incentive Plan, the “Plans”) in October 2005, although 44 options to purchase
our common stock for previously granted incentive stock options and
non-statutory stock options granted to directors, officers and consultants under
our prior stock option plans remain in effect according to their
terms.





Pursuant
to the Plans, we have granted incentive and non-statutory stock options to
directors, officers and key employees at prices not less than 100% of the fair
market value on the date of grant.  Stock options are exercisable at
various dates over a five-year or ten-year period from the date of
grant.  The Plans provide for a variety of vesting dates with the
majority of the stock options vesting at a rate of one-third per year over a
period of three years or one-fourth per year over a period of four years from
the date of grant.


Page
11


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





The
following table represents stock option activity for the six months ended
November 30, 2009:





Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Weighted
                Average
                Remaining
                Contractual
                Term (in
                years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at June 1, 2009
              
              
              369
              
              
              $
              10.39Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (10
              )
              
              
              10.54Forfeited/canceled
              
              
              (261
              )
              
              
              9.59Outstanding
      at November 30, 2009
              
              
              98
              
              
              $
              12.50
              
              
              
              1.12
              
              
              $
              75Vested
      and expected to vest atNovember
      30, 2009
              
              
              98
              
              
              $
              12.50
              
              
              
              1.12
              
              
              $
              75Vested
      and exercisable at November 30, 2009
              
              
              98
              
              
              $
              12.50
              
              
              
              1.12
              
              
              $
              75




There
were no stock options granted during the three and six months ended November 30,
2009 and 2008.  The total fair value of shares vested was $54 for the
three and six months ended November 30, 2009, compared to $99 for the three and
six months ended November 30, 2008.  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 $0 and
$3 during the three and six months ended November 30, 2009, respectively, and
$59 and $233 during the three and six months ended November 30, 2008,
respectively.  As of November 30, 2009, there was no remaining
unrecognized compensation cost related to unvested stock options granted under
our Plans.  Shares of newly issued common stock will be issued upon
any exercise of stock options.





Restricted
stock units represent the right to receive one share of our common stock
provided that the vesting conditions are satisfied.  The following
table represents restricted stock unit activity for the six months ended
November 30, 2009:





Shares
                  
                  
                  Weighted
      –
                    Average
                    Grant
                    Date
                    Fair
      ValueNonvested
      at June 1, 2009
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  158
                  
                  
                  
                  10.02Vested
                  
                  
                  (8
                  )
                  
                  
                  (10.42
                  )Canceled
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at November 30, 2009
                  
                  
                  150
                  
                  
                  $
                  10.00





No
restricted stock was granted during the three and six months ended November 30,
2009, and 0 and 7 restricted shares were granted during the three and six months
ended November 30, 2008, respectively.  We granted 13 and 158
restricted stock units during the three and six months ended November 30, 2009,
respectively.  There were no restricted stock units granted during the
three and six months ended November 30, 2008.  As of November 30,
2009, we have unrecognized share-based compensation cost of approximately $1,332
associated with the restricted stock and restricted stock unit
awards.  This cost is expected to be recognized over a
weighted-average period of approximately 2.4 years.





The total
fair value of shares that vested during the three and six months ended November
30, 2009 was $50 and $87, respectively, and $22 and $48 during the three and six
months ended November 30, 2008, respectively, which was calculated based on the
closing price of our common stock on the Nasdaq Stock Market on the applicable
date of vesting.


Page
12


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




Accounting
guidance requires all share-based payments to employees, including grants of
employee stock options, restricted stock and restricted stock units, to be
recognized as compensation expense in the consolidated financial statements
based on their fair values.  Compensation expense is recognized over
the period that an employee provides service in exchange for the
award.





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





We
recorded $161 and $271 of stock-based compensation as part of selling, general
and administrative expenses for the three and six months ended November 30,
2009, respectively, compared to $40 and $90 for the three and six months ended
November 30, 2008, respectively.  Stock-based compensation cost caused
net income to decrease by $93 and $155 for the three and six months ended
November 30, 2009, respectively, compared to $25 and $57 for the three and six
months ended November 30, 2008, respectively, and did not have a material impact
on our basic or diluted earnings per share.





We
receive a tax deduction for certain stock option exercises during the period the
options are exercised, generally for the excess of the fair value of our common
stock at the date of exercise over the exercise price of the
options.  Excess tax benefits are realized tax benefits from tax
deductions for exercised options in excess of the deferred tax asset
attributable to stock compensation costs for such options.  The total
tax benefit realized from stock option exercises for the six months ended
November 30, 2009 and 2008 was $0 and $44, respectively.  Cash
received from stock option exercises was $107 and $652 for the six months ended
November 30, 2009 and 2008, respectively.





Note
5: Goodwill and Intangibles





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





Our
goodwill and intangibles at November 30, 2009 are the result of our acquisition
of Rush Computer Rentals, Inc. on January 31, 2006.





The
changes in carrying amount of goodwill and other intangible assets for the six
months ended November 30, 2009 are as follows:





Balance as of
                    June 1, 2009 (net
                    of amortization)
                  
                  
                  Amortization
                  
                  
                  Balance as of
                    November 30, 2009Goodwill
                  
                  $
                  3,109
                  
                  
                  $
                  -
                  
                  
                  $
                  3,109Trade
      name
                  
                  
                  411
                  
                  
                  
                  -
                  
                  
                  
                  411Non-Compete
      agreements
                  
                  
                  166
                  
                  
                  
                  (50
                  )
                  
                  
                  116Customer
      relationships
                  
                  
                  157
                  
                  
                  
                  (118
                  )
                  
                  
                  39$
                  3,843
                  
                  
                  $
                  (168
                  )
                  
                  $
                  3,675





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




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


Page
13


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)




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




November 30, 2009Estimated
                            Useful Life
                          
                          
                          Gross Carrying
                            Amount
                          
                          
                          Accumulated
                            Amortization
                          
                          
                          Net Carrying
                            AmountTrade
      name
                          
                          
                          -
                          
                          
                          $
                          411
                          
                          
                          $
                          -
                          
                          
                          $
                          411Non-compete
      agreements
                          
                          2-5
      years
                          
                          
                          
                          1,050
                          
                          
                          
                          (934
                          )
                          
                          
                          116Customer
      relationships
                          
                          3-4
      years
                          
                          
                          
                          1,014
                          
                          
                          
                          (975
                          )
                          
                          
                          39$
                          2,475
                          
                          
                          $
                          (1,909
                          )
                          
                          $
                          566




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





Amortization
expense was $84 and $168 for the three and six months ended November 30, 2009,
respectively, compared to $83 and $167 for the three and six months ended
November 30, 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
                Amortization2010
              
              $
              892011
              
              
              66$
              155





Note
6: Noncash Investing and Financing Activities





We had
accounts payable and other accruals related to acquired equipment totaling
$2,568 and $2,098 as of November 30, 2009 and May 31, 2009, respectively, and
$5,477 and $3,824 as of November 30, 2008 and May 31, 2008, respectively, which
we subsequently paid.  We accrued $0 and $3,593 for dividends declared
and not yet paid in accrued expenses and as a reduction of retained earnings as
of November 30, 2009 and May 31, 2009, respectively, which amount we
subsequently paid.  There were no comparable amounts for the prior
year periods.





Note
7: Sales-type Leases





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





November
      30,
                  2009
                
                
                May
      31,
                  2009Gross
      minimum lease payments receivable
                
                $
                7,593
                
                
                $
                3,247Less
      – unearned interest
                
                
                (457
                )
                
                
                (193
                )Net
      investment in sales-type lease receivables
                
                $
                7,136
                
                
                $
                3,054




Page
14




ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
8: Segment Reporting and Related Disclosures





Accounting
guidance establishes reporting standards for an enterprise’s operating segments
and related disclosures about its products, services, geographic areas and major
customers.  Operating segments are defined as components of an
enterprise for which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.  In order to
determine our operating segments, we considered the following: an operating
segment is a component of an enterprise (i) that engages in business activities
from which it may earn revenues and incur expenses, (ii) whose operating results
are regularly reviewed by the enterprise’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its
performance, and (iii) for which discrete financial information is
available.  In accordance with this guidance, we have identified two
operating segments:  the rental, lease and sale of test and
measurement (“T&M”) and DP equipment.





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





Our
equipment pool, based on acquisition cost, consisted of $279,326 of T&M
equipment and $42,183 of DP equipment at November 30, 2009 and $293,866 of
T&M equipment and $43,704 of DP equipment at May 31, 2009.





Revenues
for these product groups were as follows for the three months ended November 30,
2009 and 2008:





T&M
                            
                            
                            DP
                            
                            
                            Total2009Rentals
      and leases
                            
                            $
                            19,055
                            
                            
                            $
                            4,274
                            
                            
                            $
                            23,329Sales
      of equipment and other revenues
                            
                            
                            12,581
                            
                            
                            
                            667
                            
                            
                            
                            13,248$
                            31,636
                            
                            
                            $
                            4,941
                            
                            
                            $
                            36,5772008Rentals
      and leases
                            
                            $
                            20,441
                            
                            
                            $
                            5,714
                            
                            
                            $
                            26,155Sales
      of equipment and other revenues
                            
                            
                            8,430
                            
                            
                            
                            848
                            
                            
                            
                            9,278$
                            28,871
                            
                            
                            $
                            6,562
                            
                            
                            $
                            35,433





Revenues
for these product groups were as follows for the six months ended November 30,
2009 and 2008:





T&M
                        
                        
                        DP
                        
                        
                        Total2009Rentals
      and leases
                        
                        $
                        36,822
                        
                        
                        $
                        8,254
                        
                        
                        $
                        45,076Sales
      of equipment and other revenues
                        
                        
                        22,476
                        
                        
                        
                        1,226
                        
                        
                        
                        23,702$
                        59,298
                        
                        
                        $
                        9,480
                        
                        
                        $
                        68,7782008Rentals
      and leases
                        
                        $
                        41,110
                        
                        
                        $
                        12,279
                        
                        
                        $
                        53,389Sales
      of equipment and other revenues
                        
                        
                        15,256
                        
                        
                        
                        1,774
                        
                        
                        
                        17,030$
                        56,366
                        
                        
                        $
                        14,053
                        
                        
                        $
                        70,419





No single
customer accounted for more than 10% of total revenues during the three and six
months ended November 30, 2009 and 2008.


Page
15


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Selected
country information is presented below:





Three Months Ended
                          November 30,
                        
                        
                        Six Months Ended
                          November 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Revenues: (1)U.S.
                        
                        $
                        31,058
                        
                        
                        $
                        30,466
                        
                        
                        $
                        58,506
                        
                        
                        $
                        60,299Other
      (2)
                        
                        
                        5,519
                        
                        
                        
                        4,967
                        
                        
                        
                        10,272
                        
                        
                        
                        10,120Total
                        
                        $
                        36,577
                        
                        
                        $
                        35,433
                        
                        
                        $
                        68,778
                        
                        
                        $
                        70,419November 30,
                          2009
                        
                        
                        May 31,
                          2009Net Long-Lived Assets: (3)U.S.
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        138,451
                        
                        
                        $
                        151,204Other
      (2)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        23,136
                        
                        
                        
                        24,672Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        161,587
                        
                        
                        $
                        175,876





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





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





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





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 six months ended November
30, 2009 and 2008:





Three Months Ended
                
                
                Six Months EndedNovember 30,
                
                
                November 30,
                
                
                November 30,
                
                
                November 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Denominator:Denominator
      for basic earnings per share - weighted average common shares
      outstanding
                
                
                23,918
                
                
                
                25,420
                
                
                
                23,925
                
                
                
                25,646Effect
      of dilutive securities-options (1)
                
                
                41
                
                
                
                91
                
                
                
                43
                
                
                
                11023,959
                
                
                
                25,511
                
                
                
                23,968
                
                
                
                25,756Net
      income
                
                $
                4,011
                
                
                $
                3,494
                
                
                $
                6,086
                
                
                $
                7,865Earnings
      per share:Basic
                
                $
                0.17
                
                
                $
                0.14
                
                
                $
                0.25
                
                
                $
                0.31Diluted
                
                $
                0.17
                
                
                $
                0.14
                
                
                $
                0.25
                
                
                $
                0.31





(1)  Excludes
54 options outstanding during the three and six months ended November 30, 2009,
and 38 and 37 during the three and six months ended November 30, 2008,
respectively, for which the exercise price exceeded the average market price of
our common stock during that period.


Page
16


ELECTRO
RENT CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(in
thousands, except per share amounts)





Note
10: Income Taxes





At May
31, 2009, we had unrecognized tax benefits of $3,943.  Unrecognized
tax benefits increased by $693 in the six months ended November 30,
2009.  The increase in the unrecognized tax benefits is the result of
changes in the accrual for prior year tax positions and foreign currency rates
for the six months ended November 30, 2009.





The
unrecognized tax benefit at November 30, 2009, if recognized, would have no
impact on our effective tax rate.  However, the derecognition of
$1,340 related to the associated interest and penalties at November 30, 2009
would decrease the effective tax rate.





We
recognize interest and penalties accrued with respect to uncertain tax positions
as components of our income tax provision.  We had accrued
approximately $2,201 for the payment of interest and penalties as of November
30, 2009.




We are
subject to U.S. federal taxation and taxation in various U.S. states and foreign
jurisdictions.  While we have substantially settled all income tax
matters for the United States federal jurisdiction for years through fiscal
2006, we are currently under examination for fiscal 2007.  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.





Other
than as described above, there were no unrecognized tax benefits for the six
months ended November 30, 2009.  Absent a significant change in
foreign currency rates 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.




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





Note
12: Subsequent Events





During
the second quarter of fiscal 2010 we entered into an agreement with Agilent
Technologies (“Agilent”) whereby we will become Agilent’s sole Authorized
Technology Partner for the United States and Canada.  The agreement,
effective December 1, 2009, will provide customers an additional way to purchase
Agilent’s electronic test and measurement products.  We plan to add
more than 50 people to our sales and support staff to serve these customers and
we expect the agreement will be material to our operations.





We
evaluated subsequent events through December 18, 2009, the date the financial
statements were issued.


Page
17


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





The
following discussion addresses our financial condition as of November 30, 2009
and May 31, 2009 and the results of our operations for the three and six months
ended November 30, 2009 and 2008, respectively, and cash flows for the six month
periods ended November 30, 2009 and 2008.  This discussion should be
read in conjunction with Management's Discussion and Analysis in Item 7, and the
Risk Factors in Item 1A, of our Annual Report on Form 10-K for the fiscal year
ended May 31, 2009, to which the reader is directed for additional
information.





Overview





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





For the
first six months of fiscal 2010, 82% of our rental and lease revenues were
derived from T&M equipment.  Although this percentage has
increased compared to the first six months of fiscal 2009, both our T&M and
DP rental revenues have declined, primarily due to a decline in rental rates,
reflecting competitive pressures and the recession in the United States and the
international markets that we serve.  The decrease in rental rates was
partially offset by an increase in rental activity.





For the
first six months of fiscal 2010, rental revenues were 86% of our rental and
lease revenue.  That percentage is the same as in the first six months
of fiscal 2009, and reflected comparable declines in both our rental and lease
revenues.





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





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





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





·
            Our
      acquisition cost;


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


·
            Our
      estimates of current and future supply of
  product;


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


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


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


Page
18





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.





Our
financial results for the six months ended November 30, 2009 were impacted by
competitive pressure on rental rates due in large part to the recession in the
U.S. and our major international markets, although our utilization rates
improved due to an increase in equipment on rent and a decline in our rental
pool due to increased equipment sales.  The recession in the U.S. and
global economy, resulting in more stringent credit requirements and reduced
access to capital, is adversely affecting our customers and
competitors.  Consequently, while we continue to work at initiatives
to expand revenue, we must also focus on remaining profitable in the current
conditions, as well as being prepared for the possibility that the recession may
deepen and continue in future periods.





Agreement with Agilent
Technologies





During
the second quarter of fiscal 2010 we entered into an agreement with Agilent
Technologies (“Agilent”) whereby we will become Agilent’s sole Authorized
Technology Partner for the United States and Canada.  The agreement,
effective December 1, 2009, will provide customers an additional way to purchase
Agilent’s electronic test and measurement products.  We plan to add
more than 50 people to our sales and support staff to serve these customers and
we expect the agreement will be material to our operations.





Profitability and Key
Business Trends





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


·
            Net
      income per diluted common share
(EPS);


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


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





Comparing
the first six months of fiscal 2010 to the same period in fiscal 2009, our
revenues decreased by 2.3% to $68.8 million, our operating profit decreased by
14.8% to $9.2 million and our net income decreased by 22.6% to $6.1
million.  Our rental and lease revenues decreased in our T&M and
DP segments, both in North America and our foreign operations, due primarily to
lower demand for leases and a decline in rental rates, reflecting the global
recession and competitive pressures.  This decrease was partially
offset by an increase in sales and rental activity.





Some of
our key profitability measurements are presented in the table below for the six
months ended November 30, 2009 and 2008:





2009
                    
                    
                    2008Net
      income per diluted common share (EPS)
                    
                    $
                    0.25
                    
                    
                    $
                    0.31Net
      income as a percentage of average assets (annualized)
                    
                    
                    4.5
                    %
                    
                    
                    5.5
                    %Net
      income as a percentage of average tangible equity
    (annualized)
                    
                    
                    5.4
                    %
                    
                    
                    6.5
                    %





In
response to the recession in the U.S. and our major international markets, we
implemented several cost cutting measures in order to control or reduce our
selling, general and administrative expenses.  As a result, we reduced
our selling, general and administrative expenses by $3.4 million, or 14.3%, for
the six months ended November 30, 2009 compared to the six months ended November
30, 2008.  However, because of the increased proportion of revenues
from sales, our operating profit declined.





The
amount of our equipment on rent, based on acquisition cost, increased 1.1% to
$157.1 million at November 30, 2009 from $155.4 million at November 30,
2008.  Acquisition cost of equipment on lease decreased 10.3% to $28.4
million at November 30, 2009 from $31.6 million at November 30,
2008.  Average rental rates for our T&M and DP segments declined
by 10.1% from November 30, 2008 to November 30, 2009.  Average lease
rates for our T&M and DP segments remained unchanged for the same
period.  Utilization for our T&M equipment pool, based on
acquisition cost of equipment on rent and lease compared to the total pool, was
64.8% at November 30, 2009, compared to 57.9% at November 30,
2008.  Over the same period, utilization of our DP equipment pool
decreased to 46.2% from 46.3%.


Page
19





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




Three Months EndedNov 30,
              2009
            
            
            Aug 31,
              2009
            
            
            May 31,
              2009
            
            
            Feb 28,
              2009
            
            
            Nov 30,
              2008Rentals
      and leases
            
            $
            23,329
            
            
            $
            21,747
            
            
            $
            22,515
            
            
            $
            22,491
            
            
            $
            26,155Sales
      of equipment and other revenues
            
            
            13,248
            
            
            
            10,454
            
            
            
            7,488
            
            
            
            7,568
            
            
            
            9,278Operating
      profit
            
            
            5,894
            
            
            
            3,331
            
            
            
            3,523
            
            
            
            3,047
            
            
            
            4,839




Results
of Operations





Comparison
of Three Months Ended November 30, 2009 and November 30, 2008





Revenues





Total
revenues for the three months ended November 30, 2009 and 2008 were $36.6
million and $35.4 million, respectively.  The 3.2% increase in total
revenues was due to a 42.8% increase in sales of equipment and other revenues,
partially offset by a 10.8% decrease in rental and lease revenues.





Rental
and lease revenues in the second quarter of fiscal 2010 were $23.3 million,
compared to $26.2 million in the same period of the prior fiscal
year.  This 10.8% decrease reflects a decline in our T&M and DP
lease revenues, primarily due to lower demand for leases and a decrease in
T&M and DP rental revenues due to decreased rental rates, based on
competitive pressures and the global recession.  This decrease was
partially offset by an increase in rental activity.





Sales of
equipment and other revenues increased to $13.2 million for the three months
ended November 30, 2009, compared to $9.3 million in the same period of the
prior fiscal year.  This 42.8% increase is primarily due to an
increase in used equipment sales in our T&M business, and increased finance
lease activity, reflecting a large sale to a customer, and continued development
of our vendor leasing program that provides customers with flexible financing
alternatives.





Operating
Expenses





Depreciation
of rental and lease equipment decreased to $10.5 million, or 44.9% of rental and
lease revenues, in the second quarter of fiscal 2010, from $11.6 million, or
44.2% of rental and lease revenues, in the second quarter of fiscal
2009.  The decreased depreciation expense in fiscal 2010 was due to a
lower average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to a
decline in our rental and lease revenues, reflecting lower rental rates and
lower demand for leases.





Costs of
revenues other than depreciation increased 41.1% to $9.9 million in the second
quarter of fiscal 2010 from $7.0 million in the same period of the prior fiscal
year.  Costs of revenues other than depreciation primarily includes
the cost of equipment sales, which decreased to 72.0% in the second quarter of
fiscal 2010, compared to 72.2% in the second quarter of fiscal
2009.  Although our used equipment sales margin decreased, reflecting
competitive pressures and the global recession, our finance lease margin
increased, primarily due to the large sale noted above.  Our sales
margin is expected to continue to fluctuate quarterly depending on growth in our
finance leases, distribution sales, and sales in connection with our new
agreement with Agilent.  Our sales margin is also impacted by
competition, the global recession, and customer requirements and
funding.





Selling,
general and administrative expenses decreased 14.1% to $10.4 million in the
second quarter of fiscal 2010, compared to $12.1 million in the second quarter
of fiscal 2009.  Our selling, general and administrative expenses
decreased primarily due to a decline in personnel and certain employee benefit
and selling costs because we implemented several cost-cutting measures in
response to the global recession.  As a result of these measures, even
though our revenue declined, we reduced selling, general and administrative
expenses as a percentage of total revenues to 28.3% in the second quarter of
fiscal 2010 from 34.0% in the second quarter of fiscal 2009.


Page
20





Interest
Income, Net





Interest
income, net, was $1.0 million for the second quarter of fiscal 2010 compared to
$0.6 million in the same period of the prior fiscal year.  The
increase reflects a realized gain of $0.8 million on the sale of our investments
available-for-sale, offsetting decreases in prevailing interest
rates.  Interest income, net, includes $0.1 million of unrealized
gains on our put option to UBS AG (“UBS”).  In addition, interest
income, net, includes $0.1 million of unrealized losses on our investments,
trading.





Income
Tax Provision





Our
effective tax rate was 42.2% in the second quarter of fiscal 2010, compared to
36.1% for the same period in fiscal 2009.  The increase is due
primarily to a decline in the proportion of foreign subsidiary income, which is
subject to lower tax rates, a valuation allowance on tax benefits for certain
foreign subsidiary losses and a reduction of the benefit from tax-advantaged
investments.  In addition, the fiscal 2009 tax effective rate was
reduced by changes in estimated tax exposures.  There was no such
effect in fiscal 2010.





Comparison
of Six Months Ended November 30, 2009 and November 30, 2008





Revenues





Total
revenues for the six months ended November 30, 2009 and 2008 were $68.8 million
and $70.4 million, respectively. The 2.3% decrease in total revenues was due to
a 15.6% decrease in rental and lease revenues, partially offset by a 39.2%
increase in sales of equipment and other revenues.





Rental
and lease revenues in the first six months of fiscal 2010 were $45.1 million,
compared to $53.4 million in the same period of the prior fiscal year.
 This 15.6% decrease reflects a decline in our T&M and DP lease
revenues, primarily due to lower demand for leases, and a decrease in T&M
and DP rental revenues due to decreased rental rates, based on competitive
pressures and the global recession.  This decrease was partially
offset by an increase in rental activity.





Sales of
equipment and other revenues increased to $23.7 million for the six months ended
November 30, 2009, compared to $17.0 million in the same period of the prior
fiscal year.  This 39.2% increase is primarily due to an increase in
used equipment sales in our T&M business, and increased finance lease
activity, reflecting a large sale to a customer, and continued development of
our vendor leasing program that provides customers with flexible financing
alternatives.





Operating
Expenses





Depreciation
of rental and lease equipment decreased to $21.3 million, or 47.2% of rental and
lease revenues, in the first six months of fiscal 2010, from $23.1 million, or
43.3% of rental and lease revenues, in the first six months of fiscal
2009.  The decreased depreciation expense in fiscal 2010 was due to a
lower average rental and lease equipment pool, while the increased depreciation
ratio, as a percentage of rental and lease revenues, was due primarily to a
decline in our rental and lease revenues, reflecting lower rental rates and
lower demand for leases.





Costs of
revenues other than depreciation increased 42.7% to $17.6 million in the first
six months of fiscal 2010 from $12.4 million in the same period of the prior
fiscal year.  Costs of revenues other than depreciation primarily
includes the cost of equipment sales, which increased as a percentage of
equipment sales to 71.8% in the first six months of fiscal 2010 from 69.0% in
the first six months of fiscal 2009.  This increase reflects a decline
in our used equipment sales margin, reflecting competitive pressures and the
global recession, and increased finance leases, which carry a lower
margin.





Selling,
general and administrative expenses decreased 14.3% to $20.7 million in the
first six months of fiscal 2010, compared to $24.1 million in the first six
months of fiscal 2009.  Our selling, general and administrative
expenses decreased primarily due to a decline in personnel and certain employee
benefit and selling costs because we implemented several cost-cutting measures
in response to the global recession.  As a result of these measures,
even though our revenue declined, we reduced selling, general and administrative
expenses as a percentage of total revenues to 30.0% in the first six months of
fiscal 2010 from 34.2% in the first six months of fiscal 2009.


Page
21





Interest
Income, Net





Interest
income, net, was $1.4 million for the first six months of fiscal 2010 compared
to $1.2 million in the same period of the prior fiscal year.  The
increase reflects a realized gain of $0.8 million on the sale of our investments
available-for-sale, offsetting decreases in prevailing interest
rates.  Interest income, net, includes $0.1 million of unrealized
losses on our put option to UBS.  In addition, interest income, net,
includes $0.1 million of unrealized gains on our investments,
trading.





Income
Tax Provision





Our
effective tax rate was 42.5% in the first six months of fiscal 2010, compared to
34.7% for the same period in fiscal 2009.  The increase is due
primarily to a decline in the proportion of foreign subsidiary income, which is
subject to lower tax rates, a valuation allowance on tax benefits for certain
foreign subsidiary losses and a reduction of the benefit from tax-advantaged
investments.  In addition, the fiscal 2009 tax effective rate was
reduced by changes in estimated tax exposures.  There was no such
effect in fiscal 2010.





Liquidity
and Capital Resources





Capital
Expenditures





Our
primary capital requirements are purchases of rental and lease
equipment.  We generally purchase equipment throughout the year to
replace equipment that has been sold and to maintain adequate levels of rental
equipment to meet existing and expected customer demands.  To meet
T&M rental demand, support areas of potential growth for both T&M and DP
equipment and to keep our equipment pool technologically up-to-date, we made
payments for purchases of $22.5 million of rental and lease equipment during the
first six months of fiscal 2010 and $31.2 million during the first six months of
fiscal 2009.  In response to reduced customer demand in the current
economic downturn, purchases in the first six months of fiscal 2010 were 28.0%
lower than the same period for fiscal 2009.





Share
Repurchases and Dividends





We
periodically repurchase shares of our common stock, which are then retired and
returned to the status of authorized but unissued stock.  During the
six months ended November 30, 2009 and 2008, we repurchased 44,114 and 1,445,660
shares of our common stock, respectively, for $0.4 million and $16.4 million,
respectively, at an average price per share of $8.94 and $11.33,
respectively.  We may make repurchases of common stock in the future
through open market transactions or otherwise, but we have no commitments to do
so.





During
the six months ended November 30, 2009 and 2008, we paid dividends of $0.15 per
common share, or $0.60 per annum, amounting to an aggregate of $7.2 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.





Cash
and Cash Equivalents and Investments





At
November 30, 2009, we held $20.9 million, at cost, in auction rate securities
(“ARS”), which we classify as investments, trading.  The fair value of
our ARS at November 30, 2009 was $19.4 million.  Our ARS are long-term
debt instruments backed by student loans, a substantial portion of which are
guaranteed by the United States government.  Although our ARS became
illiquid beginning in February 2008, we continue to earn and receive interest on
our ARS at a predetermined formula with spreads tied to particular interest rate
indexes.  We value the ARS from quotes received from our broker, UBS,
which are derived from UBS’s internally developed model.  In
determining a discount factor for each ARS, the model weights various factors,
including assessments of credit quality, duration, insurance wraps, portfolio
composition, discount rates, overall capital market liquidity and comparable
securities, if any.





On
November 6, 2008, we accepted an offer from UBS providing us with rights
related to our ARS (the “Rights”).  The Rights permit us to require UBS to
purchase our ARS at par value, which is defined as the price equal to the
liquidation preference of the ARS plus accrued but unpaid dividends or interest,
at any time from June 30, 2010 through July 2,
2012.  Conversely, UBS has the right, in its discretion, to purchase
or sell our ARS at any time until July 2, 2012, so long as we receive a
payment at par value upon any sale or disposition.  We expect to sell
our ARS under our agreement with UBS.


Page
22





During
the six months ended November 30, 2009, we sold our investments
available-for-sale for $28.8 million, including a realized gain of $0.8 million,
included in interest income, net, in our condensed consolidated statements of
operations.





Given the
approximately $58.8 million of cash and cash equivalents that we held as of
November 30, 2009 (primarily U.S. government money market funds), our lack of
bank debt as of that date and our strong cash flow from operations, we expect to
be able to continue to finance our operations even if our ARS were to be
illiquid for an extended period of time.





Cash
Flows and Credit Facilities





During
the first six months of fiscal 2010 and fiscal 2009, net cash provided by
operating activities was $15.7      million and
$31.3 million, respectively.  The decrease in operating cash flow was
due primarily to: a decline in net income of $1.8 million for the six months
ended November 30, 2009 compared to the six months ended November 30, 2008; a
$3.7 million increase in accounts receivable for the six months ended November
30, 2009 compared to a decrease of $1.3 million in the same period of the prior
fiscal year; a $4.4 million increase in other assets for the six months ended
November 30, 2009 compared to an increase of $0.7 million in the same period of
the prior fiscal year; and a decrease in depreciation and amortization expense
to $21.8 million for the six months ended November 30, 2009 from $23.7 million
for the six months ended November 30, 2008.





During
the six months ended November 30, 2009 net cash provided by investing activities
was $28.4 million compared to $16.2 million of net cash used in investing
activities for the same period of fiscal 2009.  The increase in
investing activities is mainly due to: an increase in redemptions of investments
to $29.5 million for the six months ended November 30, 2009 compared to $0.8
million for the six months ended November 30, 2008; a decrease in payments for
the purchase of rental and lease equipment to $22.5 million for the six months
ended November 30, 2009 compared to $31.2 million for the six months ended
November 30, 2008; and an increase in proceeds from sale of rental and lease
equipment to $21.5 million for the six months ended November 30, 2009 compared
to $14.4 million for the six months ended November 30, 2008.





Net cash
used in financing activities decreased to $7.5 million for the six months ended
November 30, 2009 from $23.4 million for the six months ended November 30, 2008,
due to a decrease in payments for the repurchase of common stock to $0.4 million
for the six months ended November 30, 2009 compared to $16.4 million for the six
months ended November 30, 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.  The revolving line of
credit has certain financial covenants for which we are in compliance as of
November 30, 2009.  In addition, UBS Bank USA has established a credit
line for us in an amount up to 75% of the market value of the ARS that we pledge
as collateral, with interest equal to the interest income that we receive on our
ARS investments.  We have not drawn any amounts under this line and
have no current plans to do so.  We had no bank borrowings outstanding
or off balance sheet financing arrangements at November 30, 2009.





We
believe that based on our current cash and cash equivalents of $58.8 million at
November 30, 2009 and expected operating cash flows, the current lack of
liquidity in the global credit and capital markets will not have a material
impact on our liquidity, cash flows, or financial flexibility or our ability to
fund our operations, including our dividends.





Contractual
Obligations





We do not
believe that our contractual obligations have changed materially from those
included in our Annual Report on Form 10-K for the fiscal year ended May 31,
2009.  The exact timing of reversal or settlement of our FIN 48
liabilities of $6.8 million could not be reasonably estimated at the end of the
current fiscal quarter.





Critical
Accounting Policies and Estimates





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


Page
23





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





We
identified certain critical accounting policies that affect certain of our more
significant estimates and assumptions used in preparing our consolidated
financial statements in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2009.  We have not made any material changes to these
policies as previously disclosed.





SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS




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




Factors
that could cause or contribute to these differences include, among others, those
risks and uncertainties discussed under the sections contained in this Form 10-Q
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and in “Part II.  Item 1A.  Risk
Factors” and Item 3. "Quantitative and Qualitative Disclosures About Market Risk
," as well as in our Annual Report on Form 10-K for the fiscal year ended May
31, 2009 (including the "Risk Factors" discussed in Item 1A to that document),
and our other filings with the Securities and Exchange
Commission.  The risks included in those documents are not exhaustive,
and additional factors could adversely affect our business and financial
performance.  We operate in a very competitive and rapidly changing
environment.  New risk factors emerge from time to time, and it is not
possible for us to predict all such risk factors, nor can we assess the impact
of all such risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





During
the first six months of fiscal 2010, there were no material changes in the
information regarding market risk contained in our Annual Report on Form 10-K
for the fiscal year ended May 31, 2009.





Item
4.  Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”)) as of the end of the period covered by this
report.  Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report were effective 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.


Page
24





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





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





Part
II.  OTHER INFORMATION





Item
1.  Legal Proceedings




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





Item
1A.  Risk Factors.





In
addition to the other information set forth in this report, you should carefully
consider the discussion of various risks and uncertainties contained in Part I,
“Item 1A.  Risk Factors” in our Annual Report on Form 10-K for the
fiscal year ended May 31, 2009.  We believe those risk factors are the
most relevant to our business and could cause our results to differ materially
from the forward-looking statements made by us.  However, those are
not the only risk factors facing us.  Additional risks that we do not
consider material, or of which we are not currently aware, may also have an
adverse impact on us.  Our business, financial condition, and results
of operations could be seriously harmed if any of these risks or uncertainties
actually occurs or materializes.  In that event, the market price for
our common stock could decline, and our shareholders may lose all or part of
their investment.  During the first six months of fiscal 2010, we do
not believe there were any material changes in the information regarding risk
factors contained in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2009.





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





Period
                      
                      Total Number of
                        Shares
                        Purchased
                      
                      
                      Average Price
                        Paid per ShareSeptember
      1, 2009 – September 30, 2009
                      
                      
                      –
                      
                      
                      $
                      –October
      1, 2009 – October 31, 2009
                      
                      
                      –
                      
                      
                      
                      –November
      1, 2009 – November 30, 2009
                      
                      
                      1,100
                      
                      
                      
                      9.90Total
                      
                      
                      1,100
                      
                      
                      $
                      9.90





Item
3.  Defaults Upon Senior Securities.





None.





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





a) On
October 15, 2009, we held our 2009 Annual Meeting of Shareholders.  We
solicited proxies in connection with the meeting pursuant to Regulation
14A.


Page
25





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





Name
                  
                  Number of Shares For
                  
                  
                  Number of Shares
                    WithheldGerald
      D. Barrone
                  
                  
                  22,638,582
                  
                  
                  
                  125,509Nancy
      Y. Bekavac
                  
                  
                  22,546,053
                  
                  
                  
                  218,038Karen
      J. Curtin
                  
                  
                  22,715,876
                  
                  
                  
                  48,215Suzan
      K. DelBene
                  
                  
                  22,716,634
                  
                  
                  
                  47,457Daniel
      Greenberg
                  
                  
                  22,519,677
                  
                  
                  
                  244,414Joseph
      J. Kearns
                  
                  
                  22,546,053
                  
                  
                  
                  218,038James
      S. Pignatelli
                  
                  
                  22,637,015
                  
                  
                  
                  127,076





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





The
shareholders ratified the appointment of Deloitte & Touche LLP as the
registrant's independent public accountants for the current
year.  22,734,810 shares were voted for, 11,760 shares were voted
against, and 17,521 shares abstained from voting.





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:  December
18, 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