**UNITED
      STATES**


**SECURITIES
      EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-K**





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934**For
                the fiscal year ended June 30, 2008**OR ̈
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934


For
      the
      transition period from ____________ to ____________





**Commission
      file number: 000-30486**





**ENCOMPASS
      GROUP AFFILIATES, INC.**


(Exact
      name of registrant as specified in its charter)





**FLORIDA**
            ****
            **65-0738251**State or other jurisdiction of incorporation or organization
            
            (I.R.S. Employer Identification No.)**420 Lexington
                Avenue, Suite 2739,**
            
            **10170****New
                York, NY**
            
            (Zip
                Code)(Address
                of principal executive offices)





Registrant’s
      telephone number, including area code **(646)
      227-1600**





Securities
      registered pursuant to Section 12(b) of the Act:


Title
                of each class
            
            Name
                of each exchange on which registeredNone
            
            None





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value
      per
      Share





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes  ̈  No þ





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes  ̈  No þ





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 þ  No  ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈





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
      the 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 ̈Non-accelerated
                filer ̈
            Smaller
                reporting companyþ(Do
                not check if a 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 þ





As
      of
      December 31, 2007, the aggregate market value of the registrant’s common stock
      held by non-affiliates of the registrant was $3,539,777 based on the average
      of
      the bid and asked prices as quoted on the OTC Bulletin Board.





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at September 22, 2008[Common
                Stock, No par value per share]
            
            16,286,151,226
                shares





**DOCUMENTS
      INCORPORATED BY REFERENCE**


None





**Encompass
      Group Affiliates, Inc. and Subsidiaries**


**Form
      10-K**


**Table
      of Contents**





**Page****Part
                I**Item
                1.
            Business
            1-8Item
                1.A.
            Risk
                Factors
            8-11Item
                1.B.
            Unresolved
                Staff Comments
            11Item
                2.
            Properties
            11Item
                3.
            Legal
                Proceedings
            11Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            12-13**Part
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            14-15Item
                6.
            Selected
                Financial Data
            15Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of Operations
            15-28Item
                7.A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            28Item
                8.
            Financial
                Statements and Supplementary Data
            28Item
                9.
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            28Item
                9A(T)
            Controls
                and Procedures
            29Item
                9B.
            Other
                Information
            29**Part
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            30-34Item
                11.
            Executive
                Compensation
            34-41Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            42-46Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            46-49Item
                14.
            Principal
                Accountant Fees and Service
            49**Part
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            50-56Signatures
            
            
            57










As
      used
      herein, the terms the “Company,” “Encompass Group Affiliates,” “we,” “us,” or
“our” refer to Encompass Group Affiliates, Inc., a Florida corporation.




**Forward-Looking
      Statements**




*Certain
      statements in the Item 1 - Business, Item 1A – Risk Factors, Item 7 -
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation and elsewhere in this Annual Report on Form 10-K constitute
      "forward-looking statements" (within the meaning of the Private Securities
      Litigation Reform Act of 1995 (the "Act")) relating to us and our business,
      which represent our current expectations or beliefs including, but not limited
      to, statements concerning our operations, performance, financial condition
      and
      growth. All statements, other than statements of historical facts, included
      in
      this Annual Report on Form 10-K that address activities, events or developments
      that we expect or anticipate will or may occur in the future, including such
      matters as our projections, future capital expenditures, business strategy,
      competitive strengths, goals, expansion, market and industry developments and
      the growth of our businesses and operations are forward-looking statements.
      Without limiting the generality of the foregoing, words such as "may,”
"anticipation,” "intend,” "could,” "estimate,” or "continue" or the negative or
      other comparable terminologies are intended to identify forward-looking
      statements. These statements by their nature involve substantial risks and
      uncertainties, such as credit losses, dependence on management and key
      personnel, variability of quarterly results, our ability to continue our growth
      strategy and competition, certain of which are beyond our control. Any or all
      of
      our forward-looking statements may turn out to be wrong. They may be affected
      by
      inaccurate assumptions that we might make or by known or unknown risks or
      uncertainties. Should one or more of these risks or uncertainties materialize
      or
      should the underlying assumptions prove incorrect, actual outcomes and results
      could differ materially from those indicated in the forward-looking
      statements.*




*Additional
      factors that could affect future results are set forth throughout Item 1 -
      Business and Item 1A – Risk Factors and elsewhere in this Annual Report on Form
      10-K. Because of the risks and uncertainties associated with forward-looking
      statements, you should not place undue reliance on them. Further, any
      forward-looking statement speaks only as of the date on which it is made, and
      we
      undertake no obligation to update any forward-looking statement to reflect
      events or circumstances after the date on which the statement is made or to
      reflect the occurrence of unanticipated events.*













**Part
      I**




**Item
      1. Business**




Encompass
      Group Affiliates, Inc., a Florida corporation ("we," "us," "our," “Encompass” or
      the "Company"), is a public holding company specializing in the technology
      aftermarket service and supply chain known as reverse logistics. Our
      wholly-owned subsidiary and principal operating unit, Encompass Parts
      Distribution, Inc. (formerly known as Encompass Group Affiliates,
      Inc.-Delaware), a Delaware corporation ("Encompass Parts"), acquires and
      operates businesses that provide depot repair of consumer electronics, computers
      and peripheral equipment, de-manufacturing and reclamation services for flat
      panel display products and distributes both new and reclaimed parts for those
      and other products and anticipates providing end-of-life cycle services for
      all
      such products.





Our
      strategy is to become a market leader in reverse logistics for the electronics
      industry by consolidating a core group of highly synergistic companies to
      provide original equipment manufacturers (“OEMs”), retailers, third party
      administrators (“TPAs”) and end-users with single-source, integrated life cycle
      reverse logistic management services for technology products. We have chosen
      to
      address the overall market from both the end-user driven product support and
      repair industry and from the manufacturer-driven e-Waste recovery industry.
      While these two industries have different characteristics, they have significant
      back-end operational synergies. We are focused on becoming a full-service
      provider of repair, refurbishment, parts distribution and end-of-life cycle
      services in the computer peripheral and consumer electronics markets. To that
      end we intend to continue to acquire businesses that either repair and refurbish
      equipment or distribute parts typically used in the repair and refurbishment
      process, as well as those that provide e-Waste recovery services. We intend
      to
      provide single source life cycle professional management services for technology
      products to businesses and consumers in the North American market initially,
      and
      then on a more worldwide basis.





Encompass
      Parts owns Cyber-Test, Inc., a Delaware corporation ("Cyber-Test"), a depot
      repair and refurbishment company based in Florida that has heretofore been
      our
      principal operating business. Cyber-Test, which we acquired in June 2004,
      operates as an independent service organization with the expertise to provide
      board-level repair of technical products to third-party warranty companies,
      OEMs, national retailers and national office equipment dealers. Service options
      include advance exchange, depot repair, call center support, parts supply and
      warranty management. Cyber-Test's technical competency extends from office
      equipment and fax machines to printers, scanners, laptop computers, monitors,
      multi-function units and high-end consumer electronics such as GPS devices,
      PDAs
      and digital cameras and de-manufacturing and reclamation services for flat-panel
      display products. Services are delivered nationwide through proprietary systems
      that feature real-time electronic data interchange (“EDI”), flexible analysis
      tools and repair tracking.





On
      August
      17, 2007, Encompass Parts completed the acquisition of Vance Baldwin, Inc.,
      d/b/a Vance Baldwin Electronics, an OEM parts distributor that has been a leader
      in the industry for over fifty years. Vance Baldwin has operations in southern
      Florida and suburban Atlanta and distributes tens of thousands of different
      parts (i.e., SKU’s) ranging from consumer electronics, computers, printers,
      appliances and office supplies carried in stock or special ordered from the
      five
      million parts that it has access to for distribution. In addition, Vance Baldwin
      provides service aids and industrial products such as cable, tools, test
      equipment, cleaners and other installation equipment.





On
      July
      14, 2008, Vance Baldwin entered into an agreement with Philips Consumer
      Lifestyle North America (“Philips”), a division of Philips Electronics North
      America Corporation. Under the terms of the agreement, Vance Baldwin, as single
      primary authorized distributor, will assume the management and execution
      responsibilities for operational and order fulfillment of the replacement parts
      business for Philips’ digital flat panel display products. In this role the
      Company will sell replacement parts to independent service centers as well
      as
      other parts distributors with whom it competes.





On
      August
      1, 2008, Encompass Parts completed the acquisition of Tritronics, Inc., an
      OEM
      parts distributor that has been in business since 1975 and has operations in
      suburban Baltimore and Miami. Tritronics similarly distributes tens of thousands
      of different parts (i.e., SKU’s) ranging from consumer electronics, computers,
      printers, appliances and office supplies carried in stock or special ordered
      from the five million parts that it has access to for distribution. In addition,
      as with Vance Baldwin, Tritronics also provides service aids and industrial
      products such as cable, tools, test equipment, cleaners and other installation
      equipment. Tritronics is a distributor of replacement parts in the U.S. for
      substantially all of the major OEM manufacturers, with a particularly strong
      market presence selling to the extensive network of independent service centers
      that operate nationwide.


1


***The
      Reverse Logistics Industry***





Reverse
      logistics was first implemented in the electronics industry (computing, office
      automation, telecommunications process, etc.) in the early 1980s as a result
      of
      miniaturization and modularization design, with the repair of a product or
      piece
      of equipment performed in the field (i.e., fix in place). More recently, the
      proliferation of large-scale, sophisticated, integrated digital circuits and
      circuit boards, carrying built in diagnostics and defined test points, have
      led
      to increased reliability of the subsystems and components, reducing repair
      time
      through the pull-and-replacement of modules rather than field repair. As the
      value of these components continuously increases, so does the demand for
      solutions that monetize and extend the life of components through repair and
      reallocation. Larger high-cost products, not well suited for off-site repair,
      such as DLP and LCD televisions, continue to drive demand for a field repair
      solution.





The
      growth in sales of consumer electronics and computer and peripheral equipment,
      partly fueled by the continuing introduction of new products, is driving the
      need for reverse logistics and repair services, representing one of the largest
      opportunities within the industry. There remains significant opportunity for
      above average company growth within the industry by continuing to increase
      capabilities across the product life cycle. We believe the need for reverse
      logistics and repair services will not be not impacted by economic downturn
      cycles to the extent that retailer sales levels may decline since consumers
      are
      more likely to repair currently owned equipment if a new product purchase is
      deferred.





The
      consumer electronics (including high-tech home appliances), computer and
      computer peripherals segment of the reverse logistics industry can be broken
      down into five segments which span the industry lifecycle, including: parts
      suppliers; repair, refurbishment and returns management companies; remote/onsite
      repair management and service dispatch providers; warranty administrators;
      and
      e-Waste recovery organizations. These constituencies provide services to the
      participants at various points along the product life-cycle continuum, from
      the
      OEMs who manufacture the products and original parts to the retailers engaged
      in
      marketing and selling of the end-products to the TPAs which underwrite the
      extended service plans.




*Parts
      Suppliers* **




Historically,
      parts suppliers tended to be regionally focused, lacking the ability to provide
      clients with a national solution and serving the network of repair centers
      and
      onsite service technicians in their surrounding areas. Today, most part
      suppliers are regionally based, and struggle with the cost of supporting
      customers nationally due to the minimum service requirement of two-day delivery,
      forcing them to resort to expensive freight methods such as two-day air
      delivery. Some parts suppliers have vertically integrated repair operations,
      leveraging the sourcing of parts from their own inventory. Parts companies
      tend
      to specialize around certain product categories, and/or specific OEMs. Because
      of the lengthy authorization process initiated by the OEM, many parts companies
      do not cross manufacturer lines. OEMs control parts access and in some cases
      (like Apple and Sony for certain product lines) make it virtually impossible
      for
      independent service or parts providers to gain access to their parts. The rise
      of Asian parts suppliers that allow access to “proprietary” OEM parts sold in
      the U.S. is key to gaining market share in the parts support and repair
      industry. The cost of over-runs in the manufacturing of products is also a
      primary factor driving demand for parts distributors. To extend the life of
      products and to prevent inefficient post-manufacturing parts production (after
      a
      product line is closed), OEMs will apply core charges to circuit boards and
      other high mortality items to extend product life.




*Repair,
      Refurbishment and Returns Management Companies* **




Historic
      repair and refurbishment activities for technology products have been organized
      based on the proximity of the repair center to the end-user. Examples include
      the independent service dealer handling in-warranty authorized repairs for
      OEMs
      or out-of-warranty repairs for end consumers (all walk-in driven). The industry
      has witnessed consolidation in service repair centers, as well as groups
      aligning together to create a national network for OEMs. Over the last 20 years,
      the growth of the service contract business has been driven by large insurance
      agencies that have acquired a sizeable portion of the former out-of-warranty
      repair business and placing it under the service plans they underwrite.


2


The
      larger scale operations have historically been run by OEMs. Integrated
      circuitry, power source improvements and lifestyle changes are driving products
      toward smaller dimensions. As a result, price pressures from imports, fickle
      consumer demand and manufacturer consolidation have forced OEMs to close these
      large scale facilities and outsource work to external service providers or
      cobble together a network to replicate this operation. The influx of Asian
      OEMs,
      many of which are Chinese manufacturers historically focused on private label
      manufacturing for major US brands (e.g., Panasonic, Sony, etc), have been
      aggressively selling into the U.S. with extremely cost-competitive products.
      However, these OEMs do not possess the requisite US-based service
      infrastructures and, therefore, are driving additional demand toward a group
      of
      smaller external service providers. In addition to pure service delivery, the
      repair and refurbishment companies are broadening their offerings to include
      level II and III technical support, diagnosing and potentially repairing
      equipment directly over the phone with the end user. As equipment becomes more
      integrated with other systems and software, it has become necessary for the
      repair centers to offer this value added service. An industry trend is the
      rise
      of so-called “Big Box” retailers entering into this area, such as Best Buy
      through its “Geek Squad” group and Circuit City through its “Firedog”
group.





***The
      Equipment Warranty/Repair Management Industry***





Warranty
      periods, including product warranties issued by manufacturers and extended
      life
      warranties issued by third-party insurers, and longer product life cycles demand
      a maintenance/repair commitment that can typically support a product for up
      to
      ten years. In addition, the industry relationship among OEMs, the integrator,
      and the third- and fourth-party service providers has become more complex.
      The
      end-user, or consumer, must have assurance that products are supported by an
      after-sales service team capable of providing preventive maintenance and/or
      an
      immediate remedy upon equipment failure.





With
      the
      technological advances and associated cost reductions in shipping, the warranty
      manager’s challenge is to meet and exceed customer’s expectations with respect
      to speed of response. The repair/warranty industry has seen a shift towards
      outsourcing warranty service to companies whose primary purpose and core
      strength is to manage complex demands of the repair/warranty chain process.
      Warranty service companies are expected to be able to:





·
            offer
                one-stop / turnkey service;




·
            have
                the technical ability to repair multi-products for
                multi-vendors;




·
            offer
                advance exchange of office equipment computer peripheral
                products;




·
            offer
                distribution logistics from call management through delivery;
                and




·
            demonstrate
                supply-line parts management logistics
                efficiencies.





In
      addition to existing warranty service companies, traditional distribution
      logistics providers (such as UPS, Airborne Express, etc.) are also entering
      this
      industry. Ultimately, the success or failure of meeting warranty commitments
      will depend on the ability of the warrantor or its service provider to have
      the
      right component in the right place at the right time and the right skills to
      affect the necessary repair at the most cost-effective price.





***Our
      Products and Services*** ****




Cyber-Test
      operates in the reverse logistics industry within the office equipment and
      computer peripheral products repair/warranty management industry, with its
      primary focus on facsimile machines, printers, scanners, PDAs, laptop computers,
      monitors, and multi-function units. The following describes the individual
      components that make up the current Cyber-Test family of products and services.





*Repair
      and Exchange.* Cyber-Test
      has offered board-level repair of technical products for more than 20 years,
      and
      offers service programs for equipment dealers, OEMs, extended warranty
      companies, retail outlets and end-users. The service programs include:





·
            return
                to depot repair of office equipment and computer peripheral
                products;




·
            advance
                exchange of office equipment and computer peripheral
                products;




·
            board-level
                repair of circuit boards and sub assemblies;




3


·
            return
                to depot repair for component-level circuit
                boards;




·
            OEM
                warranty exchange and repair programs;




·
            large
                volume repair and refurbishment;
                and




·
            call
                center technical support.





Cyber-Test’s
      repair and exchange service is managed by a proprietary information system
      designed and developed by the management team of Cyber-Test with
      software-tracking that allows customers or the call center function (whether
      it
      is onsite at Cyber-Test’s facilities or at the customer’s facility) to track on
      a real-time basis the repair status of any given unit, including a date of
      return delivery to the end-user, while at the same time allowing Cyber-Test
      to
      manage the output volume and quality of the repair process. This software allows
      its clients to view their inventory, parts, parts used per unit, and the status
      of all equipment on a real-time basis via its secure website. Clients may also
      change priorities and accelerate orders directly from this proprietary,
      customized web portal. Repair work is principally performed for OEM’s, retailers
      and TPAs under warranty programs.





*Parts
      and Sales.* Cyber-Test
      stocks a line of parts, accessories, and consumables for its in-house repair
      needs and offers these parts for sale as well. Cyber-Test stocks over 30,000
      parts for printers, facsimile machines, scanners, laptops, monitors and PDAs.
      Customer’s can view a full listing of parts at Cyber-Test’s website (in the
      ADVANCEXTM section) and, if any part is not in stock, it can usually be made
      available in one business day. Cyber-Test's unique parts ordering system affords
      the capability to search, order, and buy parts without an OEM part number,
      and
      its search feature will cross-reference to other OEMs or parts manufacturers
      that may fit the desired part.





Further,
      Cyber-Test stocks an extensive inventory of new and refurbished equipment
      available for purchase. New equipment is backed with a full OEM warranty, and
      90-day warranties are offered by Cyber-Test for refurbished units.





*Call
      Center Technical Support* .
      Cyber-Test offers partial or full (turnkey) Help Desk support through its Call
      Center. The Call Center has handled as many as 25,000 calls per month from
      its
      customers and currently averages approximately 9,000 calls per month. The Call
      Center has a phone-fix rate of approximately 69%, which significantly reduces
      Cyber-Test's overall costs. Cyber-Test's Call Center is the sole technical
      help
      line for selected Xerox printers and fax machines.





*Logistics
      and Outsourcing.* Cyber-Test
      offers its customers an outsourcing service of inventory, warehousing, and
      shipping of parts and end products for warranty fulfillment, with full
      refurbishing and inspection programs including "A" and "B" goods logistics.
      OEMs
      can direct all store returns to Cyber-Test for inspection. If units have not
      been taken out of the box, those items can be inspected and resold out as "A"
      goods. Products that have been used or are defective are processed through
      the
      refurbishment process and repackaged and resold as "B" goods. Cyber-Test can
      assist the OEM with "B" goods distribution and resale.





Cyber-Test
      also has a salvage division that receives extended warranty products that were
      "bought out" by the warranty provider. Products are received, sorted and
      palletized for resale to wholesalers worldwide.





*Service
      Contracts.* In
      addition to OEMs and major retailers, Cyber-Test has established relationships
      with a number of insurance companies and third-party service providers to
      provide full repair and call center support service. Extended manufacturer’s
      warranties sold at retail stores are typically backed by a third party insurance
      company. In other cases, the extended warranty is managed by the retailer
      itself. If a product covered in a service contract is determined to be in need
      of repair by the Call Center, a replacement unit may be sent directly to the
      end-user via ADVANCEXTM. Cyber-Test manages the process from call receipt and
      receiving the defective product back from the customer, to tracking the product,
      repairing the returned units, and managing against customer fraud.





Cyber-Test
      also offers an "Advance Exchange" program, known as ADVANCEXTM, which provides
      same day service to its customers on all products Cyber-Test repairs. With
      the
      ADVANCEXTM program, Cyber-Test can ship an equivalent-to-new ("ETN") replacement
      product directly to the customer if phone support fails to correct the problem.
      The customer then returns the defective unit to Cyber-Test for repair and
      refurbishment and subsequent use for another customer. A special capability
      of
      Cyber-Test’s proprietary system is that it allows the OEM to gather failure
      analysis and failure trends critical to the release of new products. This
      information is collected online while Cyber-Test is providing Level II and
      III
      technical support directly to the customer. Its telephone support achieves
      a
      current phone fix-rate of more than 69%, saving OEMs millions of dollars per
      year in unnecessary product exchange expenses. The ADVANCEXTM program has
      resulted in decreased product returns and increased customer
      satisfaction.


4


*Vance
      Baldwin and Tritronics*





*Parts
      and Sales.* As
      two of
      the nation’s largest distributors of parts for consumer electronics products,
      computers, printers and fax machines as well as office supplies, Vance Baldwin
      and Tritronics currently sell from stock and have access to over five million
      parts for distribution. Customers can view a full listing of parts at each
      company’s website and, if any part is not in stock, it can usually be made
      available in one business day. Vance Baldwin’s unique parts ordering system
      affords the capability to search, order, and buy parts without an OEM part
      number, and its search feature will cross-reference to other OEMs or parts
      manufacturers that may fit the desired part. Parts and products sold are
      typically backed with a full OEM warranty.





Generally,
      Vance Baldwin and Tritronics serve customers in the Eastern half of the country,
      although Tritronics has more of a nationwide presence because it has typically
      focused more on the independent service centers than Vance Baldwin and the
      Company’s one other major competitor have, both of whom have strong market
      presence with national “big box” retailers and rental organizations. Freight
      costs make it prohibitively costly to supply customers on a nation-wide basis,
      hence, all competitors with the exception of one other major competitor, are
      substantially smaller and serve smaller regions.





In
      an
      effort to generate increased parts sales volume, Vance Baldwin has entered
      into
      innovative contractual agreements with several of the country’s largest
      providers of extended warranty plans to consumers. Such extended warranty plans
      are purchased in approximately 15% of product purchases that consumers make
      at
“big box” retailers and others for flat screen TV’s, cell phones, PDA’s,
      printers and laptop computers. Vance Baldwin has developed a program, including
      developing proprietary technical information systems, whereby Vance Baldwin
      supplies parts to the thousands of repair businesses like Cyber-Test. The
      advantage to the extended warranty provider is (a) standard pricing for parts
      and (b) a system that offers control over the repair cycle so that the extended
      warranty provider has the ability to monitor the repair cycle status and
      associated cost for hundreds of thousands of repair jobs, an ability that did
      not previously exist to any meaningful degree.





*Call
      Center Technical Support* .
      Vance
      Baldwin and Tritronics offer customers support through their Call Centers.
      Vance
      Baldwin’s Call Center currently averages approximately 40,000 calls per month.
      Tritronics’ Call Center currently averages approximately 23,000 calls per month.
      The principal service provided by the Call Centers is assisting customers with
      parts searches and purchases.





***Competition***





*Cyber-Test*





Cyber-Test's
      business is highly competitive in each area from which it derives revenue.
      It
      competes with some larger and numerous smaller companies that provide repair
      services for office equipment and computer peripheral products, that supply
      parts and consumables to end-users and other repair companies of such equipment
      and products, and with other sellers of new equipment and resellers of
      refurbished equipment and products.





Competition
      within the office equipment and computer peripheral products service and repair
      industry is based on quality of service, depth of technical know-how, price,
      availability of parts, speed and accuracy of delivery, and the ability to tailor
      specific solutions to customer needs. In the U.S., there are hundreds of
      manufacturers of technical products of the type Cyber-Test repairs, hundreds
      of
      independent companies that repair products in a manner similar to Cyber-Test,
      as
      well as hundreds of companies that supply parts and components for use in
      repair, and thousands of independent service technicians that do on-site repair.
      In addition, there are thousands of companies that sell technical products
      that
      may need repair, and many of these do their own repair or service work.





Many
      of Cyber-Test's competitors are larger in terms of revenue, customers
      and employees, such as privately-held companies DEX and Nexicore. Cyber-Test
      also competes with OEMs and major retailers that do their own repair work,
      as
      well as large distribution and logistics companies such as United Parcel Service
      and Airborne Logistics.


5


*Vance
      Baldwin and Tritronics*





Vance
      Baldwin’s and Tritronics’ businesses are highly competitive within the
      geographic area in which they operate. They compete with numerous smaller,
      more
      regionally restricted firms. In the Eastern half of the country, Vance Baldwin’s
      size relative to its smaller regional competitors has helped it become the
      predominant distributor for the largest well known Original Equipment
      Manufacturers, such as Panasonic, Samsung, Toshiba, RCA, JVC, Sony, Philips,
      and
      many others, as well as the predominant supplier to the largest retailers,
      such
      as Circuit City, Best Buy and Rent-a-Center.





Competition
      within the parts distribution segment of the reverse logistics industry is
      based
      on service, price, availability of parts (fill rate), speed and accuracy of
      delivery, depth of technical know-how and the ability to tailor specific
      solutions to customer needs. Vance Baldwin and Tritronics are very
      proficient in forging technological links with their respective suppliers and
      customers to streamline the exchange of information for ordering, shipping
      and
      paying, something which has given each of them a clear competitive advantage
      over other parts distributors. Freight cost is a major expense component
      affecting all parts distributors. With the move of its warehouse operation
      to a
      larger facility in April 2006, Vance Baldwin lowered freight costs and gained
      the ability to ship to more customers by two-day land delivery, thereby reducing
      its reliance on more costly air shipping.





Competitors
      of Vance Baldwin and Tritronics include MTI/Andrews Electronics, Herman
      Electronics, Fox International, Union Electronics and, Partsearch.





***Customers***





*Cyber-Test*





Cyber-Test
      currently generates a significant portion of its revenues from two large
      customers. During the fiscal years ended June 30, 2008 and 2007, Cyber-Test’s
      sales to two customers accounted for approximately 75% and 85% of its total
      sales, respectively.  The
      loss
      of one or more of these customers would have a material adverse effect on our
      business, results of operations and financial condition. Management believes
      it
      is essential to expand Cyber-Test's customer base to lessen this dependency.
      Cyber-Test's ability to do so is dependent upon many variables including its
      ability to successfully attract and retain technicians that are capable of
      performing repair on all brands and models of office equipment and computer
      peripherals at prices which remain competitive.





*Vance
      Baldwin*





Vance
      Baldwin, which currently sells to approximately 7,000 active customers, many
      for
      a decade or more. During the fiscal years ended June 30, 2008 and 2007, Vance
      Baldwin’s sales to three customers accounted for approximately 52% and 60% of
      its total sales, respectively.. The loss of one or more of these customers
      would
      have a material adverse effect on our business, results of operations and
      financial condition.





*Tritronics*





Tritronics,
      which currently sells to approximately 5,000 active customers, many for a decade
      or more, derives approximately 75% of its sales volume from the nationwide
      network of independent service contractors and approximately 25% from three
      large customers.




***Company
      History***





We
      were
      incorporated in Florida on April 30, 1998 under the name Media Forum
      International, Inc. ("Media Forum"). We were inactive from April 1998 to June
      1998, except for the issuance of founders’ shares during such time period. On
      April 7, 1999, Advanced Communications Technologies, Inc., a Nevada corporation
      ("Advanced Communications (Nevada)") merged with and into us. Pursuant to this
      merger, the shareholders of Advanced Communications (Nevada) received 90% of
      our
      outstanding common stock and we received all of Advanced Communications
      (Nevada)’s assets. These assets included all of the North and South American
      rights to market and distribute SpectruCell, a wireless software-defined radio
      ("SDR")-based communications platform under development in Australia by entities
      related to a founding shareholder, to offer mobile communications network
      providers the flexibility of processing and transmitting multiple wireless
      communications signals through one base station. We subsequently changed our
      name from Media Forum to Advanced Communications Technologies, Inc. Upon
      completion of the merger, we changed our trading symbol to "ADVC." As a result
      of the merger, Advanced Communications (Nevada) ceased to exist as a separate
      entity.


6


On
      January 31, 2000, we acquired Smart Investments.com, Inc. through a stock
      exchange with Smart Investments’ sole shareholder. Immediately upon completion
      of that acquisition, we elected successor issuer status in accordance with
      Rule
      12g-3 promulgated under the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”), and consequently became a "reporting company" under the
      Exchange Act.




In
      2002,
      we closed operations relating to SpectruCell, significantly reduced our
      expenses, and shifted to a holding company structure, as it became uncertain
      whether SpectruCell’s development would ever be completed and brought to market
      in the U.S. On December 17, 2003, we formed SpectruCell, Inc., a wholly owned
      Delaware subsidiary, and transferred all of our rights in the SpectruCell
      technology to this subsidiary. SpectruCell, Inc. is presently inactive and
      the
      technology, to the best of our knowledge, has never been commercially developed
      and/or tested.




On
      April
      13, 2004, we formed Encompass Group Affiliates, Inc., a Delaware corporation,
      currently known as Encompass Parts, to be our wholly-owned subsidiary for the
      purpose of becoming our principal operating unit. Encompass Parts is the direct
      parent company to Cyber-Test, Vance Baldwin and Tritronics, our core operating
      businesses.




On
      June
      3, 2004, pursuant to the terms of an asset purchase agreement dated May 27,
      2004, Encompass Parts acquired 100% of the assets and business of Cyber-Test.




On
      December 30, 2004, we acquired a controlling interest in Pacific Magtron
      International Corp. (“PMIC”) PMIC engaged in the wholesale distribution of
      electronics products, computer components, and computer peripheral equipment
      throughout the United States. On May 11, 2005, PMIC and its subsidiaries filed
      voluntary petitions to reorganize their businesses under Chapter 11 of the
      United States Bankruptcy Code in the United States Bankruptcy Court for the
      Southern District of Nevada. Due to the bankruptcy filing of PMIC and its
      subsidiaries on May 11, 2005, and as of that date, the Company was no longer
      able to exercise management control over PMIC’s business operations.
      Consequently, as of June 30, 2005, the Company accounted for the investment
      in
      PMIC under the cost method of accounting. PMIC and its operating subsidiaries
      have been liquidated under Chapter 11 of the bankruptcy code pursuant to plans
      confirmed by the Bankruptcy Court in August 2005 and January 2006.




On
      August
      17, 2007 Encompass Parts entered into a series of transactions to effect a
      recapitalization which, among other transactions, included the
      following:




•  the
      acquisition of Vance Baldwin for cash, a convertible note and shares of our
      Series D Convertible Preferred Stock;




•  the
      offer
      and sale of a significant preferred stock investment of $6.3 million to ACT-DE,
      LLC, an affiliate of H.I.G. Capital, LLC, which, together with certain other
      parties, received newly designated Series C Convertible Preferred Stock, par
      value $.01, constituting approximately 79.5% of the ownership interest in the
      Company (before dilution for stock options issued to management as described
      herein); and




•  the
      issuance of approximately $23.4 million in senior and subordinated notes
      pursuant to a Note Purchase Agreement, for which Sankaty Advisors, LLC is the
      collateral agent.




In
      connection with the above-described recapitalization, the Company offered the
      holders of the Company’s Series A Convertible Preferred Stock, par value $.01
      per share, Series A-1 Convertible Preferred Stock, par value $.01 per share,
      and
      Series B Convertible Preferred Stock, par value $.01 per share, the right to
      exchange such stock for the newly designated Series A-2 Preferred (the
“Exchange”). In the Exchange, the existing preferred stockholders provided a
      full release of any claims against the Company, but were not required to provide
      any other consideration other than the surrender of their outstanding shares
      of
      preferred stock. In connection with the recapitalization, the Company also
      paid
      off outstanding debts to certain creditors with an aggregate payment of
      approximately $3,600,000 in cash. One creditor received a convertible promissory
      note in addition to a cash payment. Certain of these creditors then purchased
      shares of the Series A-2 Preferred from one of the stockholders receiving such
      stock pursuant to the exchange. In May 2008, following an increase in the number
      of authorized shares of our common stock, all shares of Series A-2 Preferred
      automatically converted into shares of common stock.


7


On
      August
      1, 2008 Encompass Parts entered into a series of transactions which
      included:





·  the
      acquisition of Tritronics, Inc. as a new operating subsidiary, for cash, a
      promissory note and shares of our common stock;





·  the
      offer
      and sale of shares of Series E Preferred Stock, for an aggregate purchase price
      of $4,166,672 to ACT-DE, LLC and the other holders of its Series C Preferred;
      and





the
      issuance of approximately $13.2 million in additional subordinated notes under
      an Amended and Restated Note Purchase Agreement with our existing
      lender.




Effective
      May, 5, 2008, we changed our name to Encompass Group Affiliates, Inc. and our
      trading symbol to "ECGA”.




**Employees**




As
      of
      June 30, 2008, the Company had 237 full-time employees.




**Item
      1.A. Risk Factors**




Our
      business is subject to the following risk factors:




***We
      Will Need Additional Capital to Achieve Our Business
      Plans.***




We
      will
      need capital to fund transactions with potential acquisition candidates. Any
      inability in obtaining this funding for further acquisitions will delay or
      inhibit our progress in achieving our goals.





Currently,
      under our senior secured credit facility, we have the ability to issue only
      up
      to $500,000 more in senior notes. Our ability to secure additional financing
      for
      future strategic acquisitions will depend upon a number of factors such as
      then
      prevailing general economic and credit market conditions, including interest
      rate levels and the availability of credit generally, many of which are beyond
      our control. The prolonged continuation or worsening of current credit market
      conditions could have a material adverse effect on our ability to secure
      financing on favorable terms, if at all. If financing is not available when
      needed, or is available on unfavorable terms, we may be unable to complete
      acquisitions at the pace or on the scale that we have contemplated, or otherwise
      take advantage of business opportunities or respond to competitive pressures,
      any of which could have a material adverse effect on our business, financial
      condition and results of operations.





***Making
      and Integrating Acquisitions Could Impair the Company’s Operating
      Results.***





Our
      current strategy is to actively pursue acquisitions of businesses that will
      complement or expand upon our current business. Acquisitions involve a number
      of
      risks, including diversion of management’s attention from current operations;
      disruption of the Company’s ongoing business; difficulties in integrating and
      retaining all or part of the acquired business, its customers and its personnel;
      and the effectiveness of the acquired company’s internal controls and
      procedures. The individual or combined effect of these risks could have an
      adverse effect on the Company’s business. In paying for an acquisition, the
      Company may deplete its cash resources or issue additional debt or equity
      securities. Furthermore, there is the risk that the Company’s valuation
      assumptions, customer retention expectations and its models for an acquired
      product or business may be erroneous or inappropriate due to foreseen or
      unforeseen circumstances and thereby cause the Company to overvalue an
      acquisition target. There is also the risk that the contemplated benefits of
      an
      acquisition may not materialize as planned or may not materialize within the
      time period or to the extent anticipated. The occurrence of one or more of
      the
      foregoing risks associated with an acquisition could have a material adverse
      effect on our results of operations.





There
      can
      be no assurance that the Company will be able to successfully integrate its
      most
      recent acquisition of Tritronics’ business with the Company’s existing business.
      The Company could have difficulty retaining and assimilating new personnel,
      retaining vendors of the acquired business, and assimilating the services of
      the
      acquired business into the Company’s overall operations. These difficulties
      could disrupt the Company’s business, distract its management and employees,
      increase expenses and adversely affect the Company’s business, results of
      operations and financial condition.


8


***To
      Service Our Indebtedness, We Will Require A Significant Amount Of Cash; Our
      Ability To Generate Cash Depends On Many Factors Beyond Our
      Control.***




Our
      ability to make payments on the indebtedness that we have incurred to fund
      our
      recent acquisitions and may incur in respect of future acquisitions will depend
      on our ability to generate cash from our operations in the future. This, to
      a
      certain extent, is subject to general economic, financial, competitive,
      legislative, regulatory and other factors that are beyond our control. We cannot
      provide any assurances that we will have sufficient cash flow to fund our debt
      service and other liquidity needs. We may need to refinance or restructure
      all
      or a portion of our indebtedness on or before maturity. We cannot make any
      assurances that we will be able to refinance any of our indebtedness on
      commercially reasonable terms or at all. If we cannot service our indebtedness,
      we may have to take actions such as selling assets, seeking additional equity
      or
      reducing or delaying capital expenditures, a sale of our business, strategic
      acquisitions, investments and alliances. We cannot make any assurances that
      any
      such actions, if necessary, could be effected on commercially reasonable terms,
      or at all.




***New
      Equity Financing Could Dilute Current Stockholders.***




If
      we
      raise additional funds through equity financing to meet the needs discussed
      above, it will have a further dilutive effect on existing holders of our shares
      by reducing their percentage ownership. The shares may be sold at a time when
      the market price is low because we need the funds. This will dilute existing
      holders more than if our stock price was higher. In addition, equity financings
      often involve shares sold at a discount to the current market price.




***The
      Loss Of Any One Of our Key Customers Could Have A Material Adverse Effect On
      Our
      Business.***




Cyber-Test
      and Vance Baldwin rely heavily on the business of a limited number of key
      customers. While some of these key customers are contractually committed, these
      contracts are terminable within 60 to 90 days. If any one (or all) of these
      key
      customers terminates its relationship with Cyber-Test and Vance Baldwin, it
      could have a material adverse effect on our business.




***Our
      Business Could Suffer If There Is A Prolonged Economic
      Downturn.***




We
      believe the need for reverse logistics and repair services will not be not
      impacted by economic downturn cycles to the extent that retailer sales levels
      may decline since consumers are more likely to repair currently owned equipment
      if a new product purchase is deferred. Nevertheless, there is no assurance
      that
      a prolonged national or regional economic downturn will not have a material
      adverse effect on our businesses.




***Fluctuations
      In The Price Or Availability Of Office Equipment Parts And Computer Peripheral
      Products Could Materially Adversely Affect Us.***




The
      price
      of office equipment parts and computer peripheral products that Cyber-Test
      purchases and the parts for consumer electronics, printers, appliances, and
      computers that Vance Baldwin and Tritronics purchase may fluctuate significantly
      in the future. Changes in the supply of or demand for such parts and products
      could affect delivery times and prices. We cannot provide any assurances that
      Cyber-Test, Tritronics and Vance Baldwin will continue to have access to such
      parts and products in the necessary amounts or at reasonable prices or that
      any
      increases in the cost of such parts and products will not have a material
      adverse effect on our business.




***We
      Could Be Materially Affected By Turnover Among Our Service Qualified Technical
      and Other Personnel.***




Cyber-Test,
      Tritronics and Vance Baldwin depend on their ability to identify, hire, train,
      and retain qualified technical and other personnel as well as a management
      team
      to oversee the services that each provide. A loss of a significant number of
      these experienced personnel would likely result in reduced revenues for
      Cyber-Test, Tritronics and Vance Baldwin and could materially affect our
      business. Their ability to attract and retain qualified personnel depends on
      numerous factors, including factors that they cannot control, such as conditions
      in the local employment markets in which it operates. We cannot provide any
      assurances that Cyber-Test, Tritronics and Vance Baldwin will be able to hire
      or
      retain a sufficient number of qualified personnel to achieve its financial
      objectives.


9


***We
      Could Fail To Attract Or Retain Key Personnel.***




Our
      success largely depends on the efforts and abilities of key corporate executives
      as well as key executives at Cyber-Test, Tritronics and Vance Baldwin. The
      loss
      of the services of these key executives could materially adversely affect our
      business because of the cost and time necessary to replace and train a
      replacement. Such a loss would also divert management’s attention away from
      operational issues.




***The
      Company’s Issuances of Preferred Stock Has Significantly Diluted the Equity
      Ownership of our Stockholders and the Future Conversion of our Outstanding
      Preferred Stock will also Cause Significant Dilution to our Existing
      Stockholders.***





The
      Company’s issuances of preferred stock in August 2007 in connection with our
      recapitalization and acquisition of Vance Baldwin significantly diluted the
      equity ownership of our stockholders. The significant dilution of the common
      stock ownership of existing stockholders could have an adverse effect on the
      price of the shares of common stock and on the future volume of the shares
      of
      common stock traded.





***The
      Price of Our Common Stock May Be Affected By A Limited Trading Volume And May
      Fluctuate Significantly and May Not Reflect the Actual Value of Our Business.***





There
      is
      a very limited public market for our common stock, and there can be no assurance
      that an active trading market will continue. An absence of an active trading
      market could adversely affect our stockholders’ ability to sell our common stock
      in short time periods, or at all. Our common stock has experienced, and is
      likely to experience in the future, significant price and volume fluctuations
      that could adversely affect the market price of our common stock without regard
      to our operating performance. In addition, we believe that factors, such as
      quarterly fluctuations in our financial results, changes in the overall economy
      and the volatility of the financial markets, could cause the price of our common
      stock to fluctuate substantially.





As
      a
      result of the significant preferred stock issuances we have undertaken,
      outstanding shares of our common stock represent only a small portion of our
      fully diluted equity. The price at which shares of our common stock may trade
      from time to time may not reflect the actual value of our business or the actual
      value of our common stock.




***Our
      Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
      For
      Investors To Sell Their Shares Due To Suitability
      Requirements.***




Our
      common stock is deemed to be "penny stock" as that term is defined in Rule
      3a51-1 promulgated under the Exchange Act. These requirements may reduce the
      potential market for our common stock by reducing the number of potential
      investors. This may make it more difficult for investors in our common stock
      to
      sell shares to third parties or to otherwise dispose of them. This could also
      cause our stock price to decline. Penny stocks:





·
            have
                a price of less than $5.00 per share;


·
            are
                not traded on a "recognized" national exchange;


·
            are
                not quoted on the NASDAQ automated quotation system (NASDAQ listed
                stock
                must still have a price of not less than $5.00 per share); or


·
            include
                stock in issuers with net tangible assets of less than $2.0 million
                (if
                the issuer has been in continuous operation for at least three years)
                or
                $5.0 million (if in continuous operation for less than three years),
                or
                with average revenues of less than $6.0 million for the last three
                years.




Broker/dealers
      dealing in penny stocks are required to provide potential investors with a
      document disclosing the risks of penny stocks. Moreover, broker/dealers are
      required to determine whether an investment in a penny stock is a suitable
      investment for a prospective investor.


10


***The
      Holders of Preferred Stock are Entitled to Rights and Preferences that are
      Significantly Greater than the Rights and Preferences of the Holders of our
      Common Stock, Including Preferential Payments Upon a Sale or Liquidation of
      the
      Company.***





Holders
      of our preferred stock are entitled to a number of rights and preferences which
      holders of shares of our outstanding common stock do not and will not have.
      Among these rights and preferences is a preference on a sale or liquidation
      of
      the Company, which means that holders of preferred stock will be entitled to
      receive the proceeds out of any sale or liquidation of the Company before any
      such proceeds are paid to holders of our common stock. In general, if the
      proceeds received upon any sale or liquidation do not exceed the total
      liquidation proceeds payable to the holders of the preferred stock, holders
      of
      common stock would receive no value for their shares upon such sale or
      liquidation.





***Certain
      Private Stockholders, such as ACT-DE, LLC and Some of Our Directors and
      Officers, Control a Substantial Interest in the Company and thus may Influence
      Certain Actions, Including Actions Requiring a Shareholder
      Vote.***





ACT-DE,
      LLC and our officers and directors own approximately 71.86% **** of
      our
      outstanding common stock in the aggregate on a fully diluted basis. As a result,
      these shareholders have the ability to influence certain actions requiring
      a
      shareholder vote, including the election of directors. In connection with our
      recapitalization in August 2007, we entered into a Stockholder Agreement with,
      among other parties, ACT-DE, LLC. The Stockholder





Agreement
      includes provisions regarding the election of certain individuals, or
      individuals nominated by certain parties, to our Board of Directors. As a
      result, certain private stockholders and some of our officers and directors
      may
      have the ability to influence certain actions, including actions requiring
      a
      shareholder vote.




**Item
      1.B. Unresolved Staff Comments**




Not
      applicable.




**Item
      2.** **Properties**




The
      Company’s principal executive office is located at 420 Lexington Avenue, Suite
      2739, New York, New York 10170. The Company, through a license agreement
      effective August 15, 2007 with Danson Partners, LLC, a party related to our
      chief executive officer, effectively assumed the Danson Partners’ lease
      obligation for a total of approximately 2,300 square feet of office space
      through May 31, 2010, and licenses for its use all the furniture, fixtures,
      filing cabinets, computers, servers, office equipment, etc. that it needs to
      conduct its business.




Cyber-Test
      leases an aggregate of approximately 42,000 square foot office/shop/warehouse
      facility space in three separate buildings in the same building complex in
      Longwood, Florida, generally under one-year triple net lease that carries a
      one-year option renewal option.




Vance
      Baldwin leases 55,985 square foot office/warehouse facility in Lawrenceville,
      GA
      under a lease that commenced February 15, 2006 and ends on June 30, 2011, and
      carries a one-year option, and leases a second 50,900 square foot
      office/warehouse facility also in Lawrenceville, GA under a lease that commenced
      July 10, 2008 and ends on October 10, 2013. Vance Baldwin also leases 10,010
      square foot office facility in Ft. Lauderdale, FL.




Tritronics
      leases a 43,100 square foot office/warehouse facility located in Abingdon,
      Maryland and a 13,500 square foot office/warehouse facility located in Miami,
      Florida. The Abingdon Lease, which has a five-year term with an option for
      one
      additional five-year period, also contains an opt out provision whereby the
      Company can terminate the lease if it does not meet certain financial targets.
      The Miami Lease has a two-year term with no renewal option.




Item
      3.
      LegalProceedings




The
      Company from time-to-time is involved in litigation incidental to the conduct
      of
      its business. Currently, there are no pending legal proceedings to which the
      Company or any of its subsidiaries is a party, or to which any of their
      respective properties is subject, for which any material adverse judgment is
      considered probable.


11




**Item
      4. Submission Of Matters To A Vote Of Security Holders**




In
      the
      fourth quarter of fiscal 2008, our shareholders approved a proxy solicitation
      by
      written consent on May 5, 2008 with respect to the following
      actions:





1.
            an
                amendment of our Articles of Incorporation, as amended, to increase
                the
                number of authorized shares of common stock from 5,000,000,000 to
                230,000,000,000;





2.
            an
                amendment of our Articles of Incorporation changing our name to Encompass
                Group Affiliates, Inc.;





3.
            an
                amendment and restatement of our 2005 Stock Plan to increase in the
                number
                of shares of our common stock available for issuance under such plan
                from
                700,000,000 shares to 15,000,000,000 shares; and




4.
            the
                election of seven members to our Board of Directors; and.





5.
            the
                ratification of the appointment of J.H. Cohn LLP as independent public
                accountants for the fiscal year ending June 30, 2008.





In
      an
      uncontested election, seven nominees of the Board of Directors were elected
      for
      one-year terms expiring on the date of the next annual meeting. The votes were
      as follows:





FOR
            
            WITHHELD
            
            ABSTENTIONSWayne
                I. Danson
            
            
            102,706,359
            
            
            1,556,844
            
            
            0Wilbank
                J. Roche
            
            
            102,719,157
            
            
            1,544,046
            
            
            0John
                G. Ball
            
            
            102,752,903
            
            
            1,510,300
            
            
            0John
                R. Black
            
            
            102,719,157
            
            
            1,544,046
            
            
            0Thomas
                R. Ketteler
            
            
            102,752,903
            
            
            1,510,300
            
            
            0William
                J. Nolan IV
            
            
            102,752,903
            
            
            1,500,300
            
            
            0Gerald
                E. Wedren
            
            
            102,752,903
            
            
            1,500,300
            
            
            0





The
      results of voting on Proposals 1, 2, 3, and 5 (as described above) were as
      follows:





1.  An
      amendment of our Articles of Incorporation, as amended, to increase the number
      of authorized shares of common stock from 5,000,000,000 to 230,000,000,000;





Number of VotesFor
            
            
            102,634,272Against
            
            
            1,628,931Abstain
            
            
            0Broker
                non-votes
            
            
            48,061,685





2.  An
      amendment of our Articles of Incorporation changing our name to Encompass Group
      Affiliates, Inc.;





Number of VotesFor
            
            
            149,892,592Against
            
            
            2,432,296Abstain
            
            
            0Broker
                non-votes
            
            
            0





3.  An
      amendment and restatement of our 2005 Stock Plan to increase in the number
      of
      shares of our common stock available for issuance under such plan from
      700,000,000 shares to 15,000,000,000 shares;





Number of VotesFor
            
            
            102,718,318Against
            
            
            1,544,885Abstain
            
            
            0Broker
                non-votes
            
            
            48,061,685


12





5.  The
      ratification of the appointment of J.H. Cohn LLP as independent public
      accountants for the fiscal year ending June 30, 2008.





Number of VotesFor
            
            
            104,252,903Against
            
            
            10,300Abstain
            
            
            0Broker
                non-votes
            
            
            48,061,685


13


**Part
      II**




**Item
      5.**  **Market
      For Registrant’s Common Equity, Related Stockholder Matters** **and Issuer Purchases of Equity Securities**




***Price
      Range Of Common Stock***




Our
      common stock is currently traded on the Over-the-Counter Bulletin Board
      ("OTCBB") under the symbol “ECGA.” As of September 22, 2008, there were
      16,286,151,226 common shares issued and outstanding and approximately 550
      holders of record. The number of beneficial owners is substantially greater
      than
      the number of record holders because a large portion of our common stock is
      held
      in "broker" or "street names". There are approximately 6,500 such holders of
      common stock




The
      following table sets forth, for the fiscal periods indicated, the bid price
      range of our common stock:




**High
                Bid**
            
            **Low
                Bid****Fiscal
                Year 2008**Quarter
                Ended September 30, 2007
            
            **$**
            **.0008**
            
            **$**
            **.0006**Quarter
                Ended December 31, 2007
            
            
            **.0014**
            
            
            **.0006**Quarter
                Ended March 31, 2008
            
            
            **.0009**
            
            
            **.0004**Quarter
                Ended June 30, 2008
            
            
            **.0008**
            
            
            **.0005****Fiscal
                Year 2007**Quarter
                Ended September 30, 2006
            
            **$**
            **.0010**
            
            **$**
            **.0008**Quarter
                Ended December 31, 2006
            
            
            **.0008**
            
            
            **.0003**Quarter
                Ended March 31, 2007
            
            
            **.0006**
            
            
            **.0004**Quarter
                Ended June 30, 2007
            
            
            **.0008**
            
            
            **.0005**







Such
      market quotations reflect inter-dealer prices, without retail mark-up, mark-down
      or commissions and may not represent actual transactions.




We
      did
      not pay any dividends during fiscal 2008 and have never paid any dividends
      on
      our capital stock. We currently expect that we will retain future earnings
      for
      use in the operation and expansion of our business and do not anticipate paying
      any cash dividends in the foreseeable future. Any decision on the future payment
      of dividends will depend on our earnings and financial position at that time
      and
      such other factors as our Board of Directors deems relevant. Our agreements
      with
      the holders of our Senior and Subordinated Notes restrict the payment of
      dividends. The provisions of our Series C Convertible Preferred Stock prohibit
      the payment of dividends on common stock, or other capital stock ranking junior
      to the Series C Preferred Stock, without the consent of a the holders of a
      majority of the Series C Preferred Stock. In addition, so long as any shares
      of
      Series E Preferred are outstanding, no dividends may be paid or distributions
      made on the common stock or any class of preferred stock ranking junior to
      the
      Series E Preferred until all accrued but unpaid dividends, if any, on the Series
      E Preferred have been paid, unless:


 ̈
              the
                  Company obtains the written consent of the holders of a majority
                  of the
                  outstanding shares of the Series E Preferred; or ̈
              the
                  Company is a party to an agreement with any officer, employee or
                  director
                  of the Company pursuant to which the Company is entitled or required
                  to
                  repurchase shares of common stock or any preferred stock (or options
                  therefore) from such officer, employee or director.




***R*** ***ecent
      Sales Of Unregistered Securities***




On
      August
      17, 2007, we engaged in the recapitalization and acquisition of Vance Baldwin
      described above under *Item
      1, Description of Business - Company History* ,
      and
      issued certain shares of our Series C, Series D and Series A-2 Preferred Stock,
      as well as certain notes. On August 1, 2008, we engaged in the financing and
      acquisition of Tritronics described above under *Item
      1, Description of Business - Company History* ,
      and
      issued certain shares of our Series E Preferred Stock and common stock, as
      well
      as certain notes. For a further description of these transactions, reference
      is
      made to our Current Reports on Form 8-K filed with the SEC on August 21, 2007,
      August 7, 2008 and August 18, 2008.




14


With
      respect to the sale of unregistered securities referenced above, all
      transactions were exempt from registration pursuant to Section 4(2) of the
      Securities Act of 1933 (the "Securities Act"). These offerings may have
      qualified for other exemptions as well. In each instance, the purchaser had
      access to sufficient information regarding the Company so as to make an informed
      investment decision. More specifically, the Company had a reasonable basis
      to
      believe that each purchaser was an "accredited investor" as defined in
      Regulation D under the Securities Act, which information was based on
      representations received from such investors, and otherwise had the requisite
      sophistication to make an investment in the Company's securities.




***Issuer
      Purchases of Equity Securities***




We
      did
      not make any purchases of equity securities during the fiscal year ended June
      30, 2008.




**Item
      6. Selected Financial Data**




As
      a
      smaller reporting company the Company has elected scaled disclosure reporting
      and therefore is not required to provide information required by this Item
      6.





**Item
      7. Management’s Discussion And Analysis** **of
      Financial Condition and Results of Operations**





The
      following discussion should be read in conjunction with our financial statements
      and the related notes and the other financial information appearing elsewhere
      in
      this report. In addition to historical information, the following discussion
      and
      other parts of this Annual Report contain forward-looking information that
      involves risks and uncertainties including the use of words such as "estimates,"
      "expects," "anticipates," "believes," "intends," "will," "seek" and other
      similar expressions, are intended to identify forward-looking information that
      involves risks and uncertainties. In addition, any statements that refer to
      expectations or other characterizations of future events or circumstances are
      forward-looking statements. Actual results and outcomes could differ materially
      as a result of important factors including, among other things, general economic
      conditions, the Company's ability to renew or replace key supply and credit
      agreements, fluctuations in operating results, committed backlog, public market
      and trading issues, risks associated with dependence on key personnel,
      competitive market conditions in the Company's existing lines of business and
      technological obsolescence, as well as other risks and
      uncertainties.




**General**




We
      are a
      New York-based public holding company specializing in the technology aftermarket
      service and supply chain, known as reverse logistics. Through our wholly-owned
      subsidiary and principal operating unit, Encompass Parts Distribution, Inc.
      (formerly known as Encompass Group Affiliates, Inc.) ("Encompass Parts"), our
      strategy is to acquire and operates businesses that provide computer and
      electronics repair and refurbishment services and end-of-life cycle services,
      as
      well as parts distribution, for such products as laptop computers, monitors,
      multi-function units and high-end consumer electronics such as PDA’s, digital
      cameras and flat-panel display products, as well as office equipment such as
      fax
      machines, printers, copiers and scanners. Encompass Parts owns Cyber-Test,
      Inc.,
      an electronic equipment repair company based in Florida,, Vance Baldwin, Inc.,
      an OEM parts distributor with operations in southern Florida and suburban
      Atlanta, and Tritronics, Inc., an OEM parts distributor with operations in
      suburban Baltimore and Miami. For the fiscal year ended June 30, 2008 and 2007,
      the Company primarily operated in one segment, the reverse logistics industry,
      involving the repair of office and consumer electronic products and the
      supplying of replacement parts for such repairs, which expanded with the
      acquisition of Vance Baldwin and Tritronics.




**Critical
      Accounting Policies, Estimates and Judgments**





The
      Company’s significant accounting policies are described in Note 1 in the *Notes
      to Consolidated Financial Statements* included
      in *Item 8 –
      Financial Statements and Supplementary Data* in this
      Annual Report on Form 10-K for the year ended June 30, 2008. The preparation
      of
      financial statements in conformity with accounting principles generally accepted
      in the United States requires management to make estimates and assumptions
      to
      apply certain of these critical accounting policies. Actual results may differ
      from estimates. Critical accounting policies requiring the use of estimates
      and
      assumptions include the following:


15


***Financial
      Statement Presentation and Principles of Consolidation***





The
      consolidated financial statements include the Company and all of its
      wholly-owned subsidiaries. All significant inter-company transactions have
      been
      eliminated in consolidation. The Company consolidates all majority-owned and
      controlled subsidiaries, uses the equity method of accounting for investments
      in
      which the Company is able to exercise significant influence, and uses the cost
      method for all other investments.





***Use
      of Estimates***




The
      preparation of the consolidated financial statements of the Company in
      conformity with accounting principles generally accepted in the United States
      of
      America requires management to make estimates and assumptions that affect the
      reported amount of assets and liabilities at the date of the financial
      statements and the reported amount of revenues and expenses during the period.
      In particular, significant estimates are required to value replacement parts
      and
      equipment and estimate the future cost associated with the Company’s warranties.
      If the actual value of the Company’s replacement parts and equipment differs
      from these estimates, the Company’s operating results could be adversely
      impacted. The actual results with regard to warranty expenditures could also
      have an adverse impact on the Company if the actual rate of repair failure
      or
      the cost to re-repair a unit is greater than what the Company has used in
      estimating the warranty expense accrual.




***Long-Lived
      Assets***




Long-lived
      assets to be held and used are reviewed for impairment whenever events or
      changes in circumstances indicate that the carrying amount of an asset may
      not
      be recoverable. If such review indicates that the asset is impaired when the
      carrying amount of an asset exceeds the sum of its expected future cash flows,
      on an undiscounted basis, the asset’s carrying amount is written down to fair
      value. Long-lived assets to be disposed of are reported at the lower of carrying
      amount or fair value, net of disposal costs.





***Goodwill
      and Intangible Assets***





In
      accordance with SFAS No. 141, the Company allocates the purchase price of its
      acquisitions to the tangible assets, liabilities and identifiable intangible
      assets acquired based on their estimated fair values. The excess purchase price
      over those fair values is recorded as “Goodwill”. The fair value assigned to
      intangible assets acquired is based on appraisals preformed by a qualified
      independent third party consulting firm. In accordance with SFAS No. 144,
      goodwill and purchased intangibles with indefinite lives are not amortized,
      but
      are reviewed periodically for impairment. In accordance with SFAS No. 142,
      purchased intangibles with finite lives are reviewed periodically for
      impairment.





***Inventory,
      Replacement Parts and Equipment***





Inventory
      of OEM parts purchased for resale within the reverse logistics industry, which
      consists solely of finished goods, is valued at the lower of cost (first-in,
      first-out basis) or market.





Replacement
      parts and equipment consist primarily of repair parts, as well as consumable
      supplies for resale and used machines that are held for resale, that are stated
      at the lower of weighted average cost or market. The weighted average cost
      of
      replacement parts and equipment approximates the first-in, first-out (“FIFO”)
      method.





Management
      performs periodic assessments to determine the existence of obsolete,
      slow-moving and non-usable replacement parts and equipment and records necessary
      provisions to reduce such replacement parts and equipment to net realizable
      value.





***Core
      Charges***




The
      vendors of products distributed by the Company frequently add a "core charge"
      to
      the cost of certain high value inventory items that the Company distributes
      as a
      means of encouraging the return of certain replaced components, most frequently
      circuit boards, which are defective. These defective replaced components are
      ultimately repaired and re-enter the distribution channel.


16


Core
      charges borne by the Company associated with goods in inventory are not included
      in inventory, but are classified separately in current assets. Customers either
      receive a credit for cores when returned, or are obligated to pay the billed
      core charge in the event a core is not returned. This payment effectively
      compensates the Company for the core charge it is obligated to pay vendors.
      The
      Company returns cores to its vendors for credit.





***Property
      and Equipment***




Property
      and equipment are stated at cost, less accumulated depreciation. When equipment
      is sold or otherwise disposed of, the cost and related accumulated depreciation
      are eliminated from the accounts and any resulting gain or loss is reflected
      in
      operations. Assets are depreciated using the straight-line method based on
      the
      following estimated useful lives:




Machinery
                and equipment
            3
                to 7 yearsFurniture
                and fixtures
            5
                to 7 yearsLeasehold
                improvements
            Estimated
                useful life or length of the lease, whichever is
                shorter





The
      Company leases certain equipment and software under agreements that are
      classified as capital leases and are included in the accompanying balance sheet
      under property and equipment. Amortization of equipment held under capital
      leases is included in depreciation expense.




***Fair
      Value of Financial Instruments***




The
      carrying amounts of the Company’s accounts payable, accrued liabilities,
      debentures, and loans payable approximate fair value due to the relatively
      short
      period to maturity for these instruments.




***Revenue
      Recognition***





The
      Company recognizes revenue upon delivery of goods to a common carrier for
      delivery to the customer, at which point title passes, at a sales price that
      is
      fixed and determinable and collectability is reasonably assured. Provisions
      for
      product returns and core returns are accounted for as sales reductions in
      determining sales in the same period that the related sales are recorded. The
      Company also recognizes revenue from the sale of refurbished computer equipment
      and related products upon delivery of goods to a common carrier for delivery
      to
      the customer. Revenue for the repair of customer-owned equipment is recognized
      upon completion of the repair. The Company assumes the risk of loss due to
      damage or loss of refurbished products during shipment and is reimbursed by
      the
      common carriers for shipping damage and lost products.




***Income
      Taxes***





The
      Company accounts for income taxes under SFAS No. 109 " *Accounting
      for Income Taxes* ".
      Under
      SFAS No. 109, deferred tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under SFAS No. 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period that includes the enactment
      date.





***Stock
      Based Compensation***




The
      Company determines the value of grants of restricted common stock to employees
      and others based on the closing price per share at the date of grant and
      amortizes the cost as compensation expense over the period of vesting. The
      exercise price of stock options granted is equal to or greater than fair market
      value at the date of grant as determined by the closing price per share. The
      fair value of stock option grants is calculated using the Black-Scholes Option
      Pricing Model.


17


***Deferred
      Finance Costs***




Costs
      associated with the Company’s debt obligations are capitalized and amortized
      using the interest method over the life of the related debt
      obligation.




***Classification
      of Preferred Stock***




Under
      the
      guidance in paragraph 20 of Emerging Issues Task Force 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” (“EITF 00-19”), a company is required to classify
      convertible preferred stock as a liability rather than as a component of
      stockholders’ equity if it cannot conclude that it has sufficient available
      authorized and unissued shares of common stock to meet the issues’ conversion
      requirements.





**COMPARISON
      OF THE FISCAL YEAR ENDED JUNE 30, 2008 TO THE FISCAL YEAR ENDED JUNE 30, 2007**





**Financial
      Condition**





In
      our
      prior two fiscal years ended June 30, 2007 and 2006 we incurred pre-tax net
      losses of $1,250,000 and $574,000, respectively. However, as a result of the
      transactions in August 2007 described below, we reduced our pre-tax net loss
      to
      $453,000 for the year ended June 30, 2008, with consolidated revenue increasing
      to $64,300,000 for the year ended June 30, 2008 from $9,200,000 for the year
      ended June 30, 2007, and had, as of June 30, 2008, current assets in excess
      of
      current liabilities of $8,400,000 and stockholders’ equity of $12,500,000.





In
      August
      2007, we entered into a series of transactions to effect a recapitalization
      in
      connection with the acquisition of Vance Baldwin which included: (i) the
      completion of a preferred stock investment of $6,300,000, (ii) the issuance
      of
      $23,400,000 in senior and subordinated notes, (iii) the liquidation of
      substantially all of the our current liabilities, including notes payable,
      by
      cash payment or conversion into Series A-2 Convertible Preferred Stock or a
      note, and, (iv) the exchange of substantially all of our convertible preferred
      stock into Series A-2 Convertible Preferred Stock, which automatically converted
      into common stock following stockholder approval to increase the number of
      authorized shares of common stock in May 2008. In the acquisition of Vance
      Baldwin, we paid cash and issued a convertible note and shares of our Series
      D
      Convertible Preferred Stock. Revenue and net income for Vance Baldwin for the
      year ended December 31, 2007 amounted to $48,690,000 and $4,558,000,
      respectively.





In
      July
      2008, Vance Baldwin entered into an agreement with Philips Consumer Lifestyle
      North America, a division of Philips Electronics North America Corporation,
      to
      act as the single primary authorized distributor and assume the management
      and
      execution responsibilities for operational and order fulfillment of the
      replacement parts business for Philips’ digital flat panel display products in
      North America. Under the terms of the agreement, Vance Baldwin has purchased
      approximately $4,200,000 of inventory directly from Philips.





In
      August
      2008, we further expanded our OEM parts distributor business through Encompass
      Parts’ acquisition of Tritronics, as a new operating subsidiary. We paid cash
      and issued a promissory note and shares of our common stock in the amount of
      $8,949,000, $1,000,000 and $1,118,000, respectively, in connection with the
      acquisition of Tritronics. We financed this acquisition as well as the Philips
      transaction described above through the offer and sale of shares of Series
      E
      Preferred Stock, for an aggregate purchase price of $4,167,000 to ACT-DE, LLC
      and the other holders of our Series C Preferred, and the issuance of
      approximately $13,200,000 in additional subordinated notes under an Amended
      and
      Restated Note Purchase Agreement with our existing lender.





With
      growth in revenue and operating income currently being attained by Vance
      Baldwin, and the completion of the aforementioned July and August 2008
      transactions and the resultant accretive contributions to the Company’s
      consolidated pre-tax income, management developed a forecast of its estimated
      taxable income and, notwithstanding its past history of financial and tax net
      operating losses, has concluded that the Company will have sufficient taxable
      income to utilize a portion of its NOL carry forward. Accordingly, in fiscal
      2008, we realized an income tax benefit of $4,500,000 due to the reversal of
      a
      portion of our deferred tax asset valuation allowance.





We
      believe that our present and future sales levels will, for the foreseeable
      future, generate cash flows that will be sufficient to fund our operating
      working capital needs, as well as capital expenditures and quarterly interest
      and principal payments that are required under our debt facility. We intend
      to
      implement internal growth initiatives to expand our sales levels and to seek
      significant business acquisitions in the future which will likely require
      additional borrowings and, in all likelihood, additional equity. Our debt
      agreement requires an annual sweep of excess cash flow (as defined therein),
      which may limit our ability to use operating cash flow to fund
      acquisitions.


18


**Summary
      of Results Of Operations**





The
      following table sets forth certain selected financial data as a percentage
      of
      sales for the years ended June 30, 2008 and 2007:





**2008**
            
            **2007**Net
                sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            78.6
            
            
            66.3Gross
                profit
            
            
            21.4
            
            
            33.7Operating
                expenses
            
            
            17.9
            
            
            45.73.5
            
            
            (12.0
            )Other
                income (expense)
            
            
            (4.1
            )
            
            (1.5
            )Net
                income (loss) before tax benefit
            
            
            (0.6
            )
            
            (13.5
            )Income
                tax benefit
            
            
            6.9
            
            
            —Net
                income (loss)
            
            
            6.3
            %
            
            (13.5
            )%





**Net
      Sales**





Net
      sales
      for the fiscal year ended June 30, 2008 amounted to $64,327,000 as compared
      to
      net sales of $9,244,000 for the fiscal year ended June 30, 2007, an increase
      of
      $55,083,000, or 596%. The increase in net sales was primarily due to the
      inclusion of Vance Baldwin sales generated in the period following the August
      17, 2007 acquisition, and an increase in net sales by Cyber-Test for the fiscal
      year ended June 30, 2008 over the prior year. The increase in Cyber-Test’s net
      sales during fiscal 2008 compared to fiscal 2007 was primarily due to an
      increase in repair orders from its two major customers, as well as an increase
      in repair orders from several customers added in fiscal 2008.




***Cost
      of sales***




Our
      cost
      of sales totaled $50,543,000 for the fiscal year ended June 30, 2008 as compared
      to $6,133,000 for the fiscal year ended June 30, 2007, an increase of
      $44,410,000, or 724%. Our gross profit increased to $13,784,000 for the fiscal
      year ended June 30, 2008 as compared to $3,111,000 for the fiscal year ended
      June 30, 2007, with gross margins declining to 21.4% from 33.7% for the
      comparable periods.




The
      increase in cost of sales and gross profit was primarily due to the inclusion
      of
      Vance Baldwin’s results in the period. The overall decrease in gross margin is
      primarily attributable to the effect of the inclusion of net sales and cost
      of
      sales of Vance Baldwin, which operates at a lower gross margin than Cyber-Test.
      Cyber-Test experienced a decrease in gross margin due to a change in product
      mix
      and price adjustments for certain recurring work.




***Operating
      Expenses***




Operating
      expenses for the fiscal years ended June 30, 2008 and 2007 were $11,544,000
      and
      $4,218,000, respectively, representing a $7,326,000, or 174%, increase compared
      to the fiscal year ended June 30, 2007. The increase was primarily due to the
      inclusion of expenses of Vance Baldwin in the current period.




Depreciation
      and amortization for the fiscal year ended June 30, 2008 amounted to $1,245,000
      compared to $75,000 for the fiscal year ended June 30, 2007. The increase is
      primarily attributable to amortization expense associated with intangible assets
      acquired in connection with the acquisition of Vance Baldwin.




Selling,
      general and administrative expenses increased to $10,299,000 for the fiscal
      year
      ended June 30, 2008 from $3,743,000 for the fiscal year ended June 30, 2007,
      principally due to (i) the inclusion of Vance Baldwin’s expenses for the period
      following its acquisition, (ii) an increase in stock-based compensation expense
      in the current period compared to the earlier period, which increase is
      attributable to the expense associated with stock option grants made by the
      Company contemporaneously with the closing of the recapitalization and the
      acquisition of Vance Baldwin, and (iii) an increase in expenses incurred by
      Cyber-Test to support a higher level of sales volume.


19


***Other
      Income and Expenses***




Other
      expense amounted to $2,693,000 for the fiscal year ended June 30, 2008, compared
      to $143,000 for the fiscal year ended June 30, 2007. Other income amounted
      to
      $59,000 for the fiscal year ended June 30, 2008, compared to $0 for the fiscal
      year ended June 30, 2007, and includes a $75,000 gain on settlement of an amount
      due to a creditor as a part of the recapitalization on August 17, 2007. Interest
      expense, net, for the fiscal year ended June 30, 2008 was $2,752,000 compared
      to
      $143,000 for the fiscal year ended June 30, 2007, with the increase due to
      the
      inclusion of interest on the debt financing entered into in connection with
      the
      recapitalization and the acquisition of Vance Baldwin.




As
      described further above, in fiscal 2008 we realized an income tax benefit of
      $4,500,000 from the reversal of a portion of our deferred tax asset valuation
      allowance.




**COMPARISON
      OF THE FISCAL YEAR ENDED JUNE 30, 2007 TO THE FISCAL YEAR ENDED JUNE 30,
      2006**





**Summary
      of Results Of Operations**





The
      following table sets forth certain selected financial data as a percentage
      of
      sales for the years ended June 30, 2007 and 2006:





2007
            
            2006Net
                sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            66.3
            
            
            64.9Gross
                profit
            
            
            33.7
            
            
            35.1Operating
                expenses
            
            
            45.7
            
            
            42.9(12.0
            )
            
            (7.8
            )Other
                income (expenses)
            
            
            (1.5
            )
            
            1.6Net
                loss
            
            
            (13.5
            )%
            
            (6.2
            )%





***Net
      Sales***





Net
      sales
      for the fiscal year ended June 30, 2007 amounted to $9,244,000 as compared
      to
      net sales of $9,183,000 for the fiscal year ended June 30, 2006, an increase
      of
      $61,000, or 0.7%. This minor increase in net sales was due to an increase of
      $149,000, or 1.6%, in Cyber-Test’s sales offset by a decrease of $88,000 in
      sales as final PMIC inventory clearing sales were completed in the earlier
      period. During fiscal 2007, Cyber-Test continued to experience the shift in
      sales mix from its more traditional core work such as fax machines, printers
      and
      multifunction machines repair work to an increased volume of PDA, Blackberry
      and
      laptop repair work that began in fiscal 2006.




***Cost
      of sales***




Our
      cost
      of sales totaled $6,133,000 for the fiscal year ended June 30, 2007 as compared
      to $5,959,000 for the fiscal year ended June 30, 2006 an increase of $174,000,
      or 2.9%. Cost of sales for Cyber-Test increased by 3% as a result of the
      aforementioned 1.7% increase in gross sales and a decrease in gross margin
      for
      the current fiscal year compared to fiscal 2006. Gross margin for Cyber-Test
      was
      33.7% for the year ended June 30, 2007, compared to gross margin of 34.6% in
      2006, with the decrease attributable to lower margin laptop repair work
      representing a greater percentage of volume. In addition to the effect of
      Cyber-Test’s decrease in gross margin on total Company gross margin, which
      decreased from 35.1% for fiscal 2006 to 33.7% for fiscal 2007, the
      aforementioned sales of PMIC inventory in fiscal 2006, with no associated cost
      since the inventory had been previously written off, had an unfavorable
      impact.


20


***Operating
      Expenses***




Operating
      expenses for the fiscal years ended June 30, 2007 and 2006 were $4,218,000
      and
      $3,935,000, respectively, representing a $283,000, or 7.2%, increase from the
      fiscal year ended June 30, 2006. The increase was primarily attributable to
      a
      charge for an impairment of an intangible asset of $400,000, partially offset
      by
      a decrease of $94,000 in selling, general and administrative expenses as
      compared to the fiscal year ended June 30, 2006.




Professional
      and consulting fees decreased by $489,000 from $862,000 for the fiscal year
      ended June 30, 2006 to $373,000, or 56.7%, for the fiscal year ended June 30,
      2007, primarily due to the decrease in legal fees associated with the PMIC
      bankruptcy and litigation that was settled in the first quarter of fiscal 2007.
      This decrease was partially offset by an increase in corporate compensation
      expense of $445,000 due to the addition of two executives in anticipation of
      the
      recently completed recapitalization and acquisition of Vance Baldwin and due
      to
      recording a one-time credit to income in fiscal 2006 to reverse deferred
      compensation amortization charges for a terminated executive




***Other
      Income and Expenses***




Our
      other
      income (expense) amounted to $143,000 of expense for the fiscal year ended
      June
      30, 2007 compared to $137,000 of income for the prior year. We settled
      litigation with two former PMIC’s executives for a $325,000 cash payment in
      exchange for the cancellation of notes totaling $500,000, plus accrued interest,
      payable to the former PMIC’s executives. We recorded a gain of $220,000 for this
      settlement in the year ended June 30, 2006. Net interest expense increased
      by
      $60,000 to $143,000 for the fiscal year ended June 30, 2007 from $83,000 for
      the
      fiscal year ended June 30, 2006. This increase was due to recording interest
      expense in the amount of $85,000 for the beneficial conversion feature
      attributable to the conversion discount of the Series A-1 Convertible Preferred
      Stock issued in fiscal 2007, partially offset by a reduction in the average
      amount of interest-bearing debt outstanding during fiscal 2007 compared to
      fiscal 2006.




**Liquidity
      and Capital Resources**




***Sources
      of Liquidity***




At
      June
      30, 2008, the Company had cash and liquid cash equivalents of $4,008,000
      available to meet its working capital and operational needs.




*Net
      Cash Provided By Operating Activities*





Net
      cash
      provided by operating activities was $152,000 for the fiscal year ended June
      30,
      2008 compared to $342,000 for the year ended June 30, 2007. Cash provided by
      operating activities in the year ended June 30, 2008 was principally due net
      income of $4,047,000, non-cash charges of $1,926,000 for depreciation,
      amortization, and stock-based compensation expense, a decrease in accounts
      receivable of $315,000 and an increase in accounts payable and accrued expenses
      of $311,000, which were partially offset by increases in inventory of $820,000,
      replacement parts and equipment of $284,000, amounts due from vendors of
      $337,000 and prepaid expenses and other assets of $506,000. Recognition of
      a
      deferred tax asset in the amount of $4.5 million is included in net income
      for
      the fiscal year ended June 30, 2008, which represents a non-cash income
      component.





Cash
      provided by operating activities in the year ended June 30, 2007 was principally
      due to an increase in accounts payable and accrued expenses of $984,000 and
      non-cash charges of $604,000 for depreciation, amortization, stock issued for
      services, beneficial conversion feature and an asset impairment charge, which
      was partially offset by a loss from operations of $1,250,000 and an increase
      in
      accounts receivable of $59,000.





*Net
      Cash Used In Investing Activities*





Net
      cash used
      in
      investing activities was
      $25,361,000 for the fiscal year ended June 30, 2008 compared to $245,000 for
      the
      year ended June 30, 2007. Net
      cash
      used in investing activities for the fiscal year ended June 30, 2008 was
      attributable almost entirely to the acquisition of Vance Baldwin for
      $22,321,000; net of cash acquired, plus related transaction costs of $2,769,000.


21


Net
      cash
      used in investing activities of $245,000 for the fiscal year ended June 30,
      2007
      was attributable to deferred legal, accounting and consulting costs of $176,000
      relating to several contemplated acquisitions of targeted businesses and
      purchases of property and equipment of $108,000.





*Net
      Cash* *Provided
      By* *Financing
      Activities*





Net
      cash
      provided by financing activities was $28,373,000 for the year ended June 30,
      2008 compared
      to cash used in financing activities of $9,000 for the year ended June 30,
      2007. Net
      cash
      provided by financing activities was principally attributable to proceeds of
      $6,300,000 and $24,000,000 from the sale of Series C Preferred Stock and senior
      and subordinated notes, respectively, in connection with the recapitalization
      and the acquisition of Vance Baldwin, offset by principal payments of $1,026,000
      to repay all notes payable outstanding at the August 17, 2007 closing, as well
      as principal payments for the senior debt and monthly capital lease payments.
      In
      addition, transaction costs of $901,000 were incurred in connection with
      the  equity
      and debt issued in connection with the recapitalization and acquisition
      transactions.





Net
      cash
      used in financing activities of $9,000 for the fiscal year ended June 30, 2007
      was attributable to principal payments of $349,000 on notes payable and capital
      leases, offset by proceeds of $340,000 from the issuance of Series A-1
      Convertible Preferred Stock.





*Senior
      Notes and Senior Subordinated Notes and Senior Secured Credit
      Facility*





On
      August
      17, 2007, in connection with the recapitalization and the acquisition of Vance
      Baldwin, we entered into a series of transactions which included the completion
      of a preferred stock investment of $6.3 million, the issuance of $23.4 million
      in senior and subordinated notes, the liquidation of substantially all of the
      Company’s current liabilities, including notes payable, by cash payment or
      conversion into Series A-2 Preferred, and the conversion of substantially all
      of
      the Company’s convertible preferred stock, by cash payment or conversion into
      Series A-2 Preferred.





On
      that
      date, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”)
      with Sankaty Advisors, LLC (“Sankaty”) and other “Note Purchasers”, Encompass
      Parts as issuer, and SpectruCell, Inc., Hudson Street Investments, Inc.,
      Cyber-Test and Vance Baldwin, as guarantors (the “Guarantors”). Pursuant to the
      Note Purchase Agreement, we issued $12,690,355 in aggregate principal amount
      of
      our senior secured notes for an aggregate purchase price of $12,500,000 (the
      “Senior Notes”) and $10,714,286 in aggregate principal amount of Series A senior
      subordinated notes for an aggregate purchase price of $10,500,000 (the “Series A
      Subordinated Notes”). Under the Note Purchase Agreement, we could issue up to an
      additional $2,500,000 in Senior Notes and/or Series A Subordinated Notes if
      the
      Company met a certain financial covenant. On September 27, 2007, we issued
      an
      additional $1,020,048 in principal amount of Series A Senior Subordinated Notes
      for a purchase price of $1,000,000 under the terms described below for Series
      A
      Senior Subordinated Notes.





The
      Senior Notes bear interest at LIBOR plus 3.75%, per annum payable quarterly,
      in
      arrears, and have a five-year term through August 17, 2012 (the “Maturity
      Date”). They are repayable in consecutive quarterly installments in an amount
      equal to 1%, or approximately $127,000, through August 17, 2012. At the Maturity
      Date the remaining principal amount and any unpaid and accrued interest on
      the
      Senior Notes shall be due. We are required to prepay the Senior Notes from
      any
      new equity or debt financing, certain excess cash flow or the cash proceeds
      of
      asset sales and casualty events, subject to stipulated exceptions. We may redeem
      the Senior Notes at any time, subject to a redemption premium, as defined.
      The
      Senior Notes are secured by a first priority security interest in substantially
      all of our assets and are guaranteed by our direct or indirect wholly-owned
      subsidiaries.





The
      Series A Subordinated Notes bear interest, payable quarterly, in arrears, at
      13%
      per annum, plus an increment of up to 4% based on the debt to equity leverage
      ratio. The Series A Subordinated Notes have a six-year term through August
      17,
      2013. Redemption of the Series A Subordinated Notes was permitted but only
      following repayment of the Senior Notes in full, subject to a redemption
      premium. The Series A Subordinated Notes are secured by a second priority
      security interest in substantially all of our assets and are guaranteed by
      our
      direct or indirect wholly-owned subsidiaries.





On
      August
      1, 2008, we amended and restated the Note Purchase Agreement (the “Amended and
      Restated Note Purchase Agreement”), with Sankaty and other “Note Purchasers”,
      Encompass Parts, as issuer, and us, Tritronics, SpectruCell, Inc., Hudson Street
      Investments, Inc., Cyber-Test and Vance Baldwin, as guarantors (the
“Guarantors”). Pursuant to the Amended and Restated Note Purchase Agreement,
      Encompass Parts issued an additional $13,265,306 in aggregate principal amount
      of its Series B senior subordinated notes for an aggregate purchase price of
      $13,000,000 (the “Series B Subordinated Notes” and, collectively with the Series
      A Subordinated Notes, the “Subordinated Notes”).


22


Under
      the
      Amended and Restated Note Purchase Agreement, the terms and conditions of the
      Senior Notes are substantially similar to those in the Note Purchase Agreement
      as described above. The Senior Notes are guaranteed by us and the other
      Guarantors, each a direct or indirect wholly-owned subsidiary of the Company.
      The Senior Notes are subject to events of default customary for a secured
      financing.




The
      Subordinated Notes, including the newly issued Series B Subordinated Notes,
      bear
      interest, payable quarterly, in arrears, at 13% per annum, plus an increment
      based on the debt to EBITDA leverage ratio. The increment will amount to 0%
      to
      4% as the ratio ranges from 2.5:1 or below to 3.5:1 or higher. The Subordinated
      Notes have a term through August 17, 2013. We may redeem the Subordinated Notes
      only following repayment of the Senior Notes in full, subject to a 3% redemption
      premium for both the Series A Subordinated Notes and Series B Subordinated
      Notes, if the redemption occurs prior to the first anniversary date of their
      respective issuances, and a 2% redemption premium for both the Series A and
      Series B Subordinated Notes if the redemption occurs between the first and
      second anniversary dates of their respective issuances, and a 1% redemption
      premium for both the Series A and Series B Subordinated Notes if the redemption
      occurs between the second and third anniversary dates of their respective
      issuances. The Series B Subordinated Notes will have an additional 2% redemption
      premium (in addition to the premium described above) through maturity.  In
      certain circumstances in which Note Purchasers are not provided with rights
      of
      first refusal and rights of first offer (as described below), including in
      connection with a prepayment of the Series A Subordinated Notes within 18 months
      of August 17, 2007 that occurs in connection with a purchase of a potential
      acquisition target, the Subordinated Notes may also be subject to a 10%
      redemption premium. The Subordinated Notes are secured by a second priority
      security interest in our assets and those of our subsidiaries pursuant to an
      amended and restated Second Lien Pledge and Security Agreement among the
      Guarantors and Sankaty, as the Second Lien Collateral Agent. The Subordinated
      Notes are guaranteed by the Guarantors pursuant to the Amended and Restated
      Note
      Purchase Agreement. The Subordinated Notes are subject to events of default
      customary for a secured financing. Until August 17, 2009, we may issue up to
      an
      additional $500,000 in Series A Subordinated Notes if we meet a certain
      financial covenant tests and other conditions.




If,
      on
      August 1, 2009, the Senior Notes and Subordinated Notes have not been repaid
      or
      refinanced and the debt to EBITDA leverage ratio for the twelve months prior
      to
      August 1, 2009 exceeds 3.50:1 the Note Purchasers will be entitled to receive
      warrants, for no or nominal additional consideration, to purchase 3.5% of the
      shares of our outstanding common stock on a fully diluted basis (the “Initial
      Warrants”). If, on each of February 1, 2010 and August 1, 2010, the Senior Notes
      and Subordinated Notes have not been repaid or refinanced and the debt to EBITDA
      leverage ratio for the twelve month period prior to February 1, 2010 or August
      1, 2010, as applicable, exceeds 3.50:1, the Note Purchasers will be entitled
      to
      receive on each such date, for no or nominal additional consideration, warrants
      to purchase 5.5% and 7.5% (in each case minus the percentage of warrants
      previously issued to the Note Purchasers pursuant to this provision) of the
      shares of our outstanding common stock on a fully diluted basis (“Additional
      Warrants” and, together with the Initial Warrants, the “Warrants”) on each such
      date. The Warrants expire on the first anniversary of their issuance, have
      anti-dilution protections and benefit from other customary protections.




Under
      the
      terms of the Senior Notes and the Subordinated Notes, we are permitted to incur
      purchase money secured indebtedness to suppliers of up to certain agreed
      amounts. We are not permitted to make any mandatory or optional dividends or
      distributions, and are not permitted to redeem any capital stock.




Under
      certain circumstances, holders of the Senior Notes and the Subordinated Notes
      have a right of first refusal and first offer to purchase debt securities and
      certain types of preferred stock in connection with the financing of additional
      acquisitions by us.




*Preferred
      Stock*





*Series
      A-2 Preferred*





On
      May 5,
      2008, the shares of our Series A-2 Convertible Preferred Stock, par value $0.01
      per share (the “Series A-2 Preferred”), converted automatically into
      8,412,206,667 shares of our common stock following shareholder approval and
      the
      requisite state filing of a charter amendment that increased the number of
      authorized shares of common stock to 230,000,000,000. As of June 30, 2008,
      no
      shares of Series A-2 Preferred were outstanding. In connection with the
      recapitalization on August 17, 2007, we exchanged shares of the Series A-2
      Preferred for all outstanding shares of our Series A, Series A-1 and Series
      B
      convertible preferred stock with liquidation values of $3,006,000, $40,000
      and
      $340,000, respectively, resulting in a deemed dividend of $819,905 attributable
      to the Series A-2 Preferred having a fair market value higher than the carrying
      value of the exchanged issues.


23





*Series
      C Preferred*





As
      of
      June 30, 2008, we had 1,000 shares of our Series C Convertible Preferred Stock,
      par value of $0.01 per share (“Series C Preferred”). Dividends accrue on a
      cumulative basis on the Series C Preferred at a rate per annum of 12% through
      the date of a sale of assets, merger, liquidation, dissolution or winding up
      of
      the Company. The right to dividends on the Series C Preferred will extinguish
      upon conversion of the Series C Preferred.





In
      the
      event of a sale of assets, merger, liquidation, dissolution or winding up of
      the
      Company, the holders of shares of Series C Preferred will be entitled to receive
      payment (the “Series C Liquidation Value”) equal to the greater of (i)
      $6,300,000 (the “Series C Preference Amount”) plus all accrued and unpaid
      dividends thereon or (ii) the Assumed Conversion Amount (as defined below).
      The
      Series C Liquidation Value will be paid before any payment or distribution
      of
      the assets of the Company, or proceeds therefrom, to the holders of shares
      of
      any Junior Stock. The “Assumed Conversion Amount” means the total amount of
      proceeds that would be payable to the holder of a share of Series C Preferred
      upon the liquidation, dissolution or winding up of the Company if, immediately
      prior to such event, each outstanding share of Series C Preferred were deemed
      to
      be converted into a number of shares of Common Stock at the applicable “Series C
      Conversion Rate.”





Pursuant
      to the formula for determining the Series C Conversion Rate set forth in the
      Certificate of Designation for the Series C Preferred, the holders of the Series
      C Preferred, in the aggregate, will be entitled to receive shares of Common
      Stock equal to 79.5% (before dilution for stock options issued to management
      in
      connection with the recapitalization) of (A) the number of issued and
      outstanding shares of common stock as of the recapitalization, plus (B) the
      total number of shares of common stock issuable upon conversion of all of the
      shares of Series C Preferred and Series D Preferred outstanding as of the
      recapitalization, plus (C) 80,000,000 shares of restricted common stock issuable
      to Messrs. Donahue and Miller under their prior employment agreements with
      us,
      plus (D) any shares of common stock issued pursuant to the convertible
      promissory notes of $1,000,000 and $206,146 described under the
      caption *Other Indebtedness/Promissory Notes* below
      (collectively, the “Outstanding Amount”). The foregoing conversion rate will be
      subject to further adjustment (downward to a floor of 72.5% of the Outstanding
      Amount) if the return, or deemed return, per share of Series C Preferred meets
      certain targets (as further described in the Certificate of Designation for
      the
      Series C Preferred). In the event that the number of shares of outstanding
      Common Stock is changed by any stock dividend, stock split, reclassification
      or
      recapitalization at any time shares of Series C Preferred are outstanding,
      the
      Series C Conversion Rate will be proportionately adjusted.





*Series
      D Preferred*





As
      of
      June 30, 2008, we had 1,000 shares of our Series D Convertible Preferred Stock,
      par value $0.01 per share (“Series D Preferred”) outstanding. Dividends accrue
      on a cumulative basis on the Series D Preferred at a rate per annum of 12%
      through the date of a sale of assets, merger, liquidation, dissolution or
      winding up of the Company. The right to dividends on the Series D Preferred
      will
      extinguish upon conversion of the Series D Preferred.





In
      the
      event of a sale of assets, merger, liquidation, dissolution or winding up of
      the
      Company, before any distribution or payment shall be made to any of the holders
      of the common stock or any series of preferred stock ranking junior to the
      Series D Preferred and subject to the rights of the holders of Series C
      Preferred, the holders of Series D Preferred will be entitled to receive out
      of
      the assets of the Company a liquidation amount per share of Series D Preferred
      equal to the greater of (i) $634,000 (the “Series D Preference Amount”) or (ii)
      the “Assumed Conversion Amount.” The Assumed Conversion Amount means the total
      amount of proceeds that would be payable to the holder of a share of Series
      D
      Preferred on any liquidation, dissolution or winding up of the Company, if,
      immediately prior to such event, each outstanding share of Series D Preferred
      were deemed to be converted into a number of shares of Common Stock at the
      applicable Series D Conversion Rate.


24


Pursuant
      to the formula for determining the Series D Conversion Rate as set forth in
      the
      Certificate of Designation for the Series D Preferred, the holders of the Series
      D Preferred, in the aggregate, will be entitled to receive shares of Common
      Stock equal to 8% of the Outstanding Amount. In the event that the number of
      shares of outstanding Common Stock is changed by any stock dividend, stock
      split, reclassification or recapitalization at any time shares of Series D
      Preferred are outstanding, the Series D Preferred conversion rate will be
      proportionately adjusted. Conversion of the Series D Preferred will occur as
      follows:





•
            at
                any time after the second anniversary of the initial issuance of
                the
                Series D Preferred, any holder of shares of Series D Preferred may
                elect
                to convert all, but not less than all, of his, her or its shares
                of Series
                D Preferred into shares of common stock at the applicable Series
                D
                Conversion Rate; or





•
            upon
                any conversion of Series C Preferred into common stock after which
                conversion less than 50% of the shares of Series C Preferred outstanding
                August 17, 2007 will remain outstanding, all of the issued and outstanding
                shares of Series D Preferred shall automatically convert into shares
                of
                common stock at the applicable Series D Conversion
                Rate.





As
      of
      June 30, 2008, we had no shares of any other class of preferred stock
      outstanding with the exception of the Series C and D Preferred described
      above.





The
      Series C and Series D Preferred shares both rank junior to the Series E
      Preferred shares as described below.





*Series
      E Preferred*





On
      August
      1, 2008, we sold 908.57 shares of our newly designated Series E Preferred Stock,
      par value of $0.01 per share (“Series E Preferred”). On August 13, 2008, we
      completed a subsequent closing of the sale of Series E Preferred and sold an
      additional 91.43 shares of Series E Preferred. As of August 31, 2008, we had
      an
      aggregate of 1,000 shares of Series E Preferred outstanding.





Dividends
      accrue cumulatively on a daily basis on the Series E Base Amount (as defined
      below) for each share of Series E Preferred at a rate per annum of 20% until
      February 28, 2010 and 30% thereafter. Dividends accrue from the date of issuance
      through the date of redemption, liquidation, dissolution or winding up of the
      Company. The Series E Preferred is not convertible into the Company’s common
      stock.





In
      the
      event of the liquidation, dissolution or winding up of the Company or sale
      of
      substantially all of the assets of the Company, the holders of shares of Series
      E Preferred will be entitled to receive the Series E Redemption Value (as
      defined below) for those shares. In the event of such a liquidation event,
      the
      Series E Redemption Value will be paid before any payment or distribution of
      the
      assets of the Company, or proceeds therefrom, to the holders of shares of common
      stock or any class of preferred stock ranking junior to the Series E
      Preferred.





At
      the
      option of the Board of Directors, the Company may, at any time, redeem all
      but
      not less than all of the Series E Preferred by paying to the holders of the
      Series E Preferred in cash an amount equal to the Series E Redemption Value.
      In
      addition, the Company must redeem all of the outstanding Series E Preferred
      upon
      the (i) refinancing, repayment, redemption or other discharge in full of the
      Company’s senior notes and subordinated notes issued pursuant to the Amended and
      Restated Note Purchase Agreement or (ii) consolidation or merger of the Company
      with or into any other person or entity in which less than a majority of the
      outstanding voting power of the surviving entity is held by persons who were
      shareholders of the Company prior to the event (each a “Mandatory Redemption
      Event”). Upon a Mandatory Redemption Event, the holders of the Series E
      Preferred will be entitled to be paid the Series E Redemption Value.





The
      “Series E Redemption Value” means a payment per share equal to (i) $4,166.66 per
      share (the “Series E Base Amount”) plus all accrued and unpaid dividends thereon
      multiplied by (ii) the Redemption Percentage. The “Redemption Percentage” shall
      be (i) 100% until July 31, 2009, (ii) 105% from August 1, 2009 until February
      28, 2010 and (iii) 110% from March 1, 2010 until July 31, 2010. The Redemption
      Percentage shall increase by another 5% each March 1 and August 1 thereafter.
      By
      way of example, the Redemption Percentage will increase to be 115% on August
      1,
      2010 and 120% on March 1, 2011.


25


The
      holders of Series E Preferred have agreed that in the event that (i) the Board
      of Directors of the Company, (ii) an independent committee comprised of
      disinterested members of the Board of Directors of the Company and (iii) a
      majority of the holders of the Series E Preferred agree to convert or redeem
      or
      refinance the Series E Preferred (an “Exchange Transaction”), then each holder
      of the Series E Preferred shall to enter into such transaction.




The
      order
      of liquidation preference of the Company’s outstanding preferred stock, from
      senior to junior, is Series E, Series C and Series D. Each of the Certificates
      of Designation governing the Series C and E Preferred prohibits the Company
      from
      declaring or paying dividends or any other distribution on the common stock
      or
      any other class of stock ranking junior as to dividends and upon liquidation
      unless all dividends on the senior series of preferred stock for the dividend
      payment date immediately prior to or concurrent with the dividend or
      distribution as to the junior securities are paid unless:





·
            The
                Company obtains the written consent of the holders of a majority
                of the
                outstanding shares of the senior series of preferred stock;
                or·
            The
                Company is a party to an agreement with any officer, employee or
                director
                of the Company pursuant to which the Company is entitled or required
                to
                repurchase shares of common stock or any preferred stock (or options
                therefore) from such officer, employee or director.





The
      Company will accrue dividends for the Series E Preferred stock.





*Other
      Indebtedness/Promissory Notes*





On
      August
      17, 2007, we incurred other debt obligations as follows:





·
            We
                entered into a new agreement with the consulting company of our Chief
                Executive Officer, Wayne I. Danson, to pay the consulting company
                $310,000, plus interest accruing at the rate of 7% per annum, upon
                the
                earlier of a change of control of the Company or August 17, 2013
                for
                unpaid compensation under a now-terminated consulting agreement.




·
            We
                entered into an agreement with Mr. Danson to restructure a potential
                $250,000 bonus until such time as the Company satisfies certain milestones
                as described in Mr. Danson’s employment
                agreement.




·
            We
                issued unsecured convertible promissory notes in the amount of $1,000,000
                to then sole stockholder of Vance Baldwin and $206,146 to a creditor.
                The
                notes will accrue interest at the rate of 7% per annum, payable
                semi-annually, in arrears, on each January 30 and July 30, and are
                due and
                payable on October 17, 2012 to the extent the holders have not exercised
                their conversion rights thereunder. During the year ended June 30,
                2008,
                we incurred $74,000 of interest expense related to these notes. Scheduled
                semi-annual interest payments to date have been made.




On
      August
      1, 2008, we issued a subordinated promissory note issued in favor of Tritronics
      with an original principal amount of $1,000,000. This note will accrue interest
      at the rate of 7% per annum, payable semi-annually, in arrears, on each January
      31 and July 31. The outstanding principal balance under the note and any accrued
      but unpaid interest thereon is due and payable on August 1, 2014, subject to
      extension under certain circumstances if the Company’s senior indebtedness (as
      described above) is not paid in full as of August 1, 2014.





*Capital
      Expenditures*





Capital
      expenditures during the year ended June 30, 2008 were $238,000 for equipment,
      computer hardware and software and leasehold improvements. Management forecasts
      that capital expenditures during fiscal 2009 will not exceed $850,000.
      Management expects future capital expenditures will include purchases for
      equipment, computer hardware and software and leasehold
      improvements.




*Cash
      Balances*




The
      Company’s cash balances may be diminished over 2009 due to many factors,
      including the use of cash for operations, changes in working capital, capital
      expenditures, quarterly and principal payments required by our debt facility,
      additional acquisitions of businesses and other factors. Despite these factors,
      the Company believes that available funds and cash flows expected to be
      generated by current operations will be sufficient to meet its anticipated
      cash
      needs for working capital and capital expenditures for its existing operations
      for at least the next twelve months.


26




***Funding
      Requirements***





We
      believe that our present and future sales levels will, for the foreseeable
      future, generate cash flows that will, together with the $500,000 in available
      borrowing capacity under our senior and senior subordinated debt facility,
      be
      sufficient to fund our operating working capital needs, as well as capital
      expenditures and quarterly interest and principal payments that are required
      by
      our debt facility. We intend to implement internal growth initiatives to
      increase sales levels and to seek significant business acquisitions in the
      future which will likely require additional borrowings and, in all likelihood,
      additional equity. Our debt agreement requires an annual sweep of excess cash
      flow (as defined therein) which may limit our ability to use operating cash
      flow
      to fund acquisitions.  We
      cannot
      be certain that additional funding will be available on acceptable terms, or
      at
      all.




**Certain
      Related Party Transactions**





In
      addition to the transactions described above under the caption *Liquidity
      and Capital Resources – Sources of Liquidity -* *Senior
      Notes and Senior Subordinated Notes and Senior Secured Credit Facility,* see *Part
      III, Item 12. Security Ownership of Certain Beneficial Owners and Management
      and
      Related Stockholder Matters – Changes in Control* and *Part
      III, Item 13 – Certain Relationships and Related Transactions, and
      Directors Independence* below
      for further descriptions of the Company’s transactions with related parties
      during fiscal 2008 and 2007.





**Off-Balance
      Sheet Arrangements**





There
      are
      no off-balance sheet arrangements between the Company and any other entity
      that
      have, or are reasonably likely to have, a current or future effect on the
      Company’s financial condition, changes in financial condition, revenues or
      expenses, results of operations, liquidity, capital expenditures, or capital
      resources that is material to investors. The Company does not have any
      non-consolidated special purpose entities.




**Recently
      Issued Accounting Standards**





The
      Company adopted the provisions of Statement of Financial Accounting Standards
      No. 157 *–* Fair Value Measurements (“SFAS 157”)for its financial assets
      and liabilities for which it has recognized or disclosed at fair value on a
      recurring basis effective July 1, 2008. In February 2008, the Financial
      Accounting Standards Board issued FASB Staff Position (“FSP”) No. 157-2, *“Effective
      Date of FASB No. 157,”* which
      delays the effective date for non-financial assets and non-financial liabilities
      to fiscal years beginning after November 15, 2008, except for items that are
      measured at fair value in the financial statements on a recurring basis (at
      least annually). As provided by FSP No. 157-2, the Company has elected to defer
      the adoption of SFAS No. 157 for certain of its non-financial assets and
      non-financial liabilities, primarily goodwill and intangible assets, until
      July
      1, 2009.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an Amendment of FASB
      Statement No. 115.” This Standard allows entities to voluntarily choose, at
      specified election dates, to measure many financial assets and financial
      liabilities (as well as certain non-financial instruments that are similar
      to
      financial instruments) at fair value. The election is made on an
      instrument-by-instrument basis and is irrevocable. If the fair value option
      is
      elected for an instrument, the Statement specifies that all subsequent changes
      in fair value for that instrument shall be reported in earnings. SFAS No. 159
      is
      effective beginning after November 15, 2008. Management does not expect this
      pronouncement will have a material impact on the financial statements of the
      Company.





The
      Financial Accounting Standards Board has issued Statement No. 141 (R), “Business
      Combinations”. This statement retains the fundamental requirements in Statement
      No. 141 that the acquisition method of accounting (which Statement No. 141
      called the “purchase method”) be used, and applies to the all business entities,
      including mutual entities that previously used the pooling of interest method
      of
      accounting for some business combinations. The statement is effective for
      transactions within the annual reporting period beginning on or after December
      15, 2008. Management is currently evaluating the impact this new standard could
      have on the Company’s financial position and results of operations.




27




The
      Financial Accounting Standards Board has issued Statement No. 160,
“Non-controlling Interests in Consolidated Financial Statements.” This statement
      changes the way the consolidated income statement is presented when
      non-controlling interests are present. It requires consolidated net income
      to be
      reported at amounts that include the amounts attributable to both the parent
      and
      the non-controlling interest, and is effective for periods beginning on or
      after
      December 15, 2008. Management is currently evaluating the impact this new
      standard could have on the Company’s financial position and results of
      operations.





In
      April
      2008, the Financial Accounting Standards Board issued Final FASB Staff Position
      (FSP) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”.
      The guidance is intended to improve the consistency between the useful life
      of a
      recognized intangible asset under Statement of Financial Accounting Standards
      (SFAS) No. 142, “Goodwill and Other Intangible Assets”, and the period of
      expected cash flows used to measure the fair value of the asset under SFAS
      No.
      141(R), Business Combinations, and other guidance under accounting principles
      generally accepted in the United States of America. FSP No. FAS 142-3 is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and interim periods within those years. Early adoption is
      prohibited. Paragraph 11(d) of SFAS No. 142 requires entities to base
      assumptions for determining the useful life of a recognized intangible asset
      on
      the legal, regulatory, or contractual provisions that permit extending the
      asset’s useful life without appreciably adding to its cost. FSP No. FAS 142-3,
      requires that an entity must consider its own experience with similar
      arrangements in developing its assumptions. If an entity has had no similar
      arrangements, then it should consider the assumptions other market participants
      use. Management is currently evaluating the impact this new standard could
      have
      on the Company’s financial position and results of operations.





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (”SFAS No. 162”). SFAS No. 162 identifies the sources of
      accounting principles and provides entities with a framework for selecting
      the
      principles used in preparation of financial statements that are presented in
      conformity with GAAP. The Board believes the GAAP hierarchy should be directed
      to entities because it is the entity (not its auditors) that is responsible
      for
      selecting accounting principles for financial statements that are presented
      in
      conformity with GAAP. The adoption of FASB 162 is not expected to have a
      material impact on the Company’s financial position.





On
      June
      16, 2008, the FASB issued final Staff Position ("FSP") No. EITF 03-6-1,
      "Determining Whether Instruments Granted in Share-Based Payment Transactions
      Are
      Participating Securities", to address the question of whether instruments
      granted in share-based payment transactions are participating securities prior
      to vesting. The FSP determines that unvested share-based payment awards that
      contain rights to dividend payments should be included in earnings per share
      calculations. The guidance will be effective for fiscal years beginning after
      December 15, 2008. Management is currently evaluating the impact this new
      standard could have on the Company’s financial position and results of
      operations.




**Item
      7.A. Quantitative and Qualitative Disclosures about Market
      Risk**




As
      a
      smaller reporting company, the Company has elected scaled disclosure reporting
      obligations and therefore is not required to provide the information requested
      by this Item 7A.




**Item
      8. Financial Statements** **and Supplementary Data**




The
      financial statements required by Item 8 are included in this Annual Report
      on
      Form 10-K beginning on page F-1.




**Item
      9. Changes in and Disagreements With Accountants on Accounting and Financial
      Disclosure.**




None.




28




**Item
      9.A (T). Controls And Procedures**




***Evaluation
      Of Disclosure Controls And Procedures***




Prior
      to
      the filing of this Report on Form 10-K, an evaluation was performed under the
      supervision of and with the participation of the Company’s management, including
      the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
      effectiveness of the Company’s disclosure controls and procedures. Based on the
      evaluation, the CEO and CFO have concluded that, as of June 30, 2008, the
      Company’s disclosure controls and procedures are effective to ensure that
      information required to be disclosed by the Company in reports that it files
      or
      submits under the Exchange Act, is recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms, and is accumulated
      and
      communicated to the Company’s management, as appropriate, to allow timely
      decisions regarding required disclosure. It
      should
      be noted that the design of any system of controls is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions, regardless of how remote.




***Changes
      In Internal*** ***Control
      Over Financial Reporting***




There
      were no changes in the Company's internal control over
      financial reporting (as
      defined in Section 240.13a-15(f) or 240.15d-15(f)
      of the Exchange Act) during our
      fourth fiscal quarter
      ended June 30, 2008 that has materially affected, or is
      reasonably likely to materially affect, our internal control over
      financial reporting.




**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**




The
      management of the Company is responsible for establishing and maintaining
      adequate internal control over financial reporting as defined in Rules 13a-15(f)
      and 15d-15(f) under the Securities Exchange Act. The Company’s internal control
      over financial reporting is designed to provide reasonable assurance regarding
      the reliability of financial reporting and the preparation of financial
      statements for external purposes in accordance with generally accepted
      accounting principles. The Company’s internal control over financial reporting
      includes those policies and procedures that:




(i)
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                Company;




(ii)
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with U.S. generally
                accepted accounting principles, and that receipts and expenditures
                of the
                Company are being made only in accordance with authorizations of
                management and directors of the Company; and




(iii)
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of the Company’s assets that
                could have a material effect on the financial statements.




Because
      of inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




The
      Company’s management assessed the effectiveness of the Company’s internal
      control over financial reporting as of June 30, 2008. In making this
      assessment, management used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
      Control-Integrated Framework. Based on management’s assessment and those
      criteria, management has concluded that the Company’s internal control over
      financial reporting was effective as of June 30, 2008.




This
      Annual Report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management’s report
      in this Annual Report.





**I** **tem** **9.B. O** **ther** **I** **nformation**




Not
      applicable.




29




**Part
      III**





**Item
      10. Directors, Executive Officers and Corporate
      Governance.**





**Executive
      Officers and Directors**





**Name**
            
            **Age**
            
            **Position
                Held with the Company**Wayne
                I. Danson
            
            55
            
            President,
                Chief Executive Officer and DirectorJohn
                E. Donahue
            
            59
            
            Vice
                President and Chief Financial OfficerSteven
                J. Miller
            
            50
            
            Chief
                Operating OfficerWilbank
                J. Roche
            
            62
            
            DirectorJohn
                G. Ball
            
            69
            
            DirectorJohn
                R. Black
            
            44
            
            DirectorThomas
                R. Ketteler
            
            65
            
            DirectorWilliam
                J. Nolan IV
            
            34
            
            DirectorGerald
                E. Wedren
            
            71
            
            Director





All
      directors are elected to hold office until the next annual meeting of
      stockholders following election and until their successors are duly elected
      and
      qualified. Executive officers are appointed by the Board of Directors and serve
      at the discretion of the Board. There is no family relationship between any
      director and any executive officer.





**Wayne
      I. Danson** ***.*** **** ****** Mr.
      Danson has served as a Director since January 3, 2000, as President since April
      30, 2002, and as Chief Executive Officer since June 7, 2005. He served as our
      Chief Financial Officer from December 1, 1999 until September 25, 2006. Mr.
      Danson also serves as Chief Executive Officer and Chairman of the Board of
      Encompass Parts. Mr. Danson was the Managing Director and Founder of Danson
      Partners, LLC, a financial advisory firm that specialized in middle market
      companies in the real estate and technology industries. Prior to forming Danson
      Partners, LLC in May 1999, Mr. Danson was Managing Director of
      PricewaterhouseCoopers LLP’s Real Estate Capital Markets Group. Prior to
      rejoining PricewaterhouseCoopers in 1996, Mr. Danson was a Managing Tax Partner
      with Kenneth Leventhal & Company in New York and Washington D.C., where he
      was also Kenneth Leventhal’s National Director of its International and Debt
      Restructure Tax Practices. Prior to his involvement with Kenneth Leventhal
      in
      1988, Mr. Danson was a Managing Director with Wolper Ross & Co., Ltd. in New
      York, a closely held financial services company specializing in financial tax,
      pension consulting, designing financial instruments and providing venture
      capital and investment banking services. Mr. Danson graduated with honors from
      Bernard M. Baruch College with a BBA in Accounting and an MBA in Taxation.
      He is
      a certified public accountant and a member of the AICPA and the New York State
      Society of CPAs. Mr. Danson currently serves as a director of Herborium Group,
      Inc., the common stock of which is traded on the Over-the-Counter Bulletin
      Board
      under the symbol “HBRM.”





**John
      E. Donahue** .
      Mr.
      Donahue has served as our Vice President and Chief Financial Officer since
      September 25, 2006. Mr. Donahue served as Vice President and Chief Financial
      Officer of Online Benefits Inc., (a privately held HR solutions firm that
      provides Internet based applications for administering, communicating and
      presenting HR related information and data) from August 1999 until joining
      us.
      Prior to that, Mr. Donahue served as an Executive Vice President and Chief
      Financial Officer of Lead America, a marketer of insurance products to customers
      of financial institutions, Managing Director of Oxbridge Incorporated, a
      boutique investment banking firm, Chief Financial Officer at Mast Resources
      Inc., a merchant bank, and Chief Financial Officer at Catalyst Energy Corp.,
      a
      NYSE-listed independent power producer. Mr. Donahue was with Price Waterhouse
      from September 1972 to March 1985, including serving as a Senior Audit Manager.
      He holds a B.A. in Economics from Holy Cross College and an MBA from Rutgers
      University. Mr. Donahue is a former member of the Board of Directors of Pacific
      Magtron International Corp. Pacific Magtron and its subsidiaries filed for
      bankruptcy protection in May 2005.




30




**Steven
      J. Miller** .
      Mr.
      Miller has served as our Chief Operating Officer since September 25, 2006.
      For
      the prior ten years, Mr. Miller served as Senior Director of Service Operations
      for N.E.W. Customer Service Companies, Inc., the nation’s largest privately-held
      third-party administrator/reinsurer providing warranty policies for consumer
      electronic goods. There, Mr. Miller built and managed the team that developed
      new service offerings and delivered more than 3 million service events per
      year,
      representing $400 million in claims payments. Prior to that, he was the Director
      of North American Service Operations with Sharp Electronics with responsibility
      for all North American parts distribution, board level repairs and product
      refurbishment operations at Sharp’s headquarters in Romeoville, IL. Previously,
      for ten years he was responsible for shop and field service as well as parts
      inventory and parts sales for several large-market locations for General
      Electric/RCA, where he was Area Manager for GE Consumer Services. Mr. Miller
      is
      a past Board Member of NESDA (National Servicing Dealers Association of America)
      recently completing a three-year revolving membership. He earned his Bachelor’s
      Degree in Business Administration from The Detroit Institute of
      Technology.





**Wilbank
      J. Roche** .
      Mr.
      Roche was appointed a Director on March 25, 1999 and is currently a principal
      with the law firm of Roche & Holt in Los Angeles, California. Mr. Roche was
      an honors graduate from the University of Southern California in 1976, as well
      as from Loyola University School of Law, Los Angeles, in 1979. He was admitted
      to the California State Bar in 1979 and has been practicing law actively since
      that time. Mr. Roche worked for law firms in the Los Angeles area from 1976
      to
      1983, when he opened his own office. In 1985, he formed Roche & Holt. Mr.
      Roche’s law practice has revolved largely around representing small businesses
      and their owners. In that regard, he has provided legal services in connection
      with the formation, purchase, sale, and dissolution of numerous entities, as
      well as in connection with their on-going operations.





**John
      G. Ball** .
      Mr.
      Ball has served as a Director since August 2007. He is a cofounder and principal
      of XRoads Solutions Group, a 125 person professional services firm formed in
      1997, where he leads the services and manufacturing practices. While at XRoads,
      he was involved in leading and advising a number of temporary staffing firms.
      Prior to XRoads, Mr. Ball was a partner of High Performance Partners, a firm
      of
      financial, strategic planning, marketing and turnaround consultants from 1989
      to
      1997. In May 2007, Mr. Ball was appointed as a director of Westaff, Inc., a
      publicly traded light industrial staffing business based in California, and
      is a
      member of the Primary and Secondary Committees of the Compensation Committee
      of
      the Board of Directors of Westaff.




**John
      R. Black** .
      Mr.
      Black has served as a Director since August 2007. He is currently a managing
      director with H.I.G. Capital, a private equity firm headquartered in Miami
      with
      offices in Atlanta, Boston, San Francisco, London, Paris and Hamburg. He has
      11
      years of experience investing in middle market transactions. Prior to H.I.G.
      Capital, Mr. Black was a senior professional with several leading consulting
      firms, including Ernst & Young, where he began his business career. He sits
      on the boards of several portfolio companies of H.I.G. Capital as well as
      Westaff, a publicly traded light industrial staffing business based in
      California. Mr. Black graduated from Harvard University in 1987 with a dual
      degree in applied mathematics and economics.




**Thomas
      R. Ketteler** .
      Mr.
      Ketteler has served as a Director since August 2007. He is currently a
      consultant to Schottenstein Stores Corporation ("SSC") and a special advisor
      to
      the independent directors of American Eagle Outfitters. Previously, Mr. Ketteler
      served as Executive Vice President of Finance and Treasurer of Schottenstein
      Stores Corporation ("SSC"), a private company owned by the
      Schottenstein-Deshe-Diamond families. Mr. Ketteler served SSC as Chief Operating
      Officer from April 1995 through 2000, as a Director since 1985 and Vice
      President of Finance since 1981. Prior to SSC, he was a partner in the firm
      of
      Alexander Grant and Company, Certified Public Accountants. Mr. Ketteler has
      served as an officer and director of various other corporations owned or
      controlled by the Schottenstein family, the members of which beneficially own
      over ten percent of the common stock of American Eagle Outfitters, Inc. From
      1994 through 2003, Mr. Ketteler served as a director of American Eagle
      Outfitters, Inc., the common stock of which is listed on the New York Stock
      Exchange.




**William
      J. Nolan IV** .
      Mr.
      Nolan has served as a Director since August 2007. He is currently a principal
      with H.I.G. Capital, a private equity firm headquartered in Miami with offices
      in Atlanta, Boston, San Francisco, London, Paris and Hamburg. Prior to joining
      H.I.G. in 2003, he worked as a management consultant with Bain & Company in
      its private equity and consumer product practices. He sits on the boards of
      directors for several of H.I.G. Capital’s portfolio companies. Mr. Nolan earned
      an M.B.A. from Harvard Business School with High Honors in 2001 and a B.Cp.E
      from Villanova University in 1996.




31




**Gerald
      E. Wedren** .
      Mr.
      Wedren has served as a Director since August 2007. He is currently the owner
      and
      President of Craig Capital Co., a Washington D.C. and Miami based firm
      concentrating on mergers and acquisitions, business turnarounds and liquidations
      since 1972. Since 1960, he has been associated with several firms in both
      business and legal capacities. Mr. Wedren was the owner and President of Little
      Tavern Shops, a chain of approximately 30 fast food restaurants in the
      Washington, D.C. and Baltimore, M.D. areas from 1981 to 1988. He currently
      is a
      director of American Eagle Outfitters, Inc., having served since 1998, and
      he
      served as chairman of the Compensation Committee until June 2008. In May 2007,
      Mr. Wedren was appointed as a director of Westaff, Inc., a publicly-traded
      light
      industrial staffing business based in California, and serves as a member of
      its
      Audit Committee and Nominating and Governance Committee.





In
      connection with a recapitalization of the Company, which resulted in H.I.G.
      Capital L.L.C. becoming the beneficial owner of a majority of the equity and
      voting interests in the Company on a fully-diluted basis, three of the Company’s
      directors, Randall Prouty, Dr. Michael Finch and Jonathan Lichtman, resigned
      from the Board of Directors on August 17, 2007. At that time, the number of
      directors constituting the board of directors was increased to seven, and
      Messrs. Ball, Black, Ketteler, Nolan and Wedren were appointed to fill the
      vacancies on the board. Wayne I. Danson, our Chief Executive Officer, and
      Wilbank Roche did not resign from the Board as a result of the recapitalization
      and each continues to serve as a director. Our Board now consists of seven
      directors, six of whom are independent of Company management.





**Other
      Significant Employees**





*Lisa
      A. Welton, President and Chief Executive Officer of Cyber-Test,
      Inc.* From
      1990 to June 3, 2004, Ms. Welton served as President and Chief Executive Officer
      of Cyber-Test, where she was responsible for overseeing the company’s
      operational, marketing, contractual, and communications efforts, including
      business development and growth. Upon our acquisition of Cyber-Test's assets
      in
      June 2004, Ms. Welton was appointed to the same offices and given the same
      responsibilities with Cyber-Test. From 1987 to 1989, Ms. Welton served as the
      National Director of Business Development for Charlan Brock and Associates,
      an
      International architectural firm specializing in hotels and high-end custom
      home
      developments, where she secured architectural contracts for the firm’s clients
      in the United States and Europe. From 1985 to 1987, Ms. Welton was Senior
      Account Manager at Robison, Yesawich and Pepperdine, an advertising and public
      relations firm, where she coordinated hotel property grand openings and all
      subsequent press events. Ms. Welton graduated from the University of Wisconsin
      with a BS degree in advertising and marketing.




*Thomas
      Sutlive, Sr. Vice President of Cyber-Test, Inc* .
      From
      August 1995 to June 3, 2004, Mr. Sutlive was employed by Cyber-Test, where
      he
      served as Vice President, since January 2004, and was responsible for the
      overall service structure and establishment of purchasing policies and
      procedures. Upon our acquisition of Cyber-Test's assets in June 2004, Mr.
      Sutlive was appointed to the same offices and given the same responsibilities
      with Cyber-Test. Prior to Mr. Sutlive’s appointment to Vice President, he served
      as Cyber-Test’s Director of Operations from September 1999 to January 2004 and
      Purchasing Manager from August 1995 to September 1999. From 1989 to 1995, Mr.
      Sutlive was Lead Electric Technician with Sprague Electric, where he handled
      the
      operational readiness of specialized precision manufacturing equipment. Mr.
      Sutlive previously held the position of Systems Analyst with Dyncorp, a defense
      contractor, where he was responsible for generating failure analyses for naval
      missile tracking systems. Mr. Sutlive earned a bachelors degree from the
      University of Georgia and served six honorable years with the United States
      Navy.




*Robert
      Coolidge, President and Chief Executive Officer of Vance Baldwin,
      Inc* .
      Since
      August 1990, Mr. Coolidge has been employed by Vance Baldwin, Inc, where he
      served as General Manager, since 1994, he has assumed responsibility for
      business development and marketing. In 2001, Mr. Coolidge was promoted to Vice
      President and subsequently he was promoted to Senior Vice President responsible
      for business development, national sales and vendor relations, IT management
      and
      development, as well as integration management. Upon our acquisition of the
      stock of Vance Baldwin on August 17, 2007, Mr. Coolidge was appointed as the
      President of Vance Baldwin and effective August 17, 2008 Mr. Coolidge assumed
      the role of Chief Executive Officer. Mr. Coolidge graduated from Western
      Carolina University in 1990 with a Bachelor of Science in Business
      Administration with a concentration in marketing and computer science.




*Fred
      Baldwin, Chief Executive Officer-Emeritus of Vance Baldwin,
      Inc.* Since
      1973, Mr. Baldwin has been employed by Vance Baldwin, Inc. and, in 1984, he
      was
      appointed President and Chief Executive Officer. Upon our acquisition of the
      stock of Vance Baldwin on August 17, 2007, Mr. Baldwin resigned as President
      of
      Vance Baldwin. Effective August 17, 2008, Mr. Baldwin became Chief Executive
      Officer-Emeritus. Mr. Baldwin graduated from Florida State University with
      a
      Bachelor's degree in Marketing and Finance..




32




*Kim
      Wagner, President/CEO of Tritronics, Inc.* **** From
      1982
      to 1986, Ms. Wagner was employed by Tritronics in the Customer Service
      Department. After almost three years in the law firm of Smith, Somerville and
      Case, she returned to Tritronics in 1989 to oversee the call center and business
      development. She was promoted to Vice President in 1990 and continued in that
      capacity, overseeing administration, business development and the call center
      until the acquisition of Tritronics by Encompass on August 1, 2008, when she
      was
      promoted to President and CEO. Ms. Wagner graduated cum laude from Towson
      University in 1985 with a BS dual major in Political Science and Mass
      Communications, and earned a JD from the University of Baltimore, School of
      Law
      in 1988 and an MBA, with a concentration in International Business, from the
      Sellinger School of Business, Loyola College. Ms. Wagner received her Certified
      Service Manager designation from the National Electronic Service Dealers
      Association and is serving her second term on their Advisory Board.





*Jim
      Scarff, Executive Vice President of Tritronics, Inc.* From
      1979
      to 1985, Mr. Scarff worked for the Marriott Corporation where he served as
      Room
      Service Supervisor, Assistant Manager and then Restaurant Manager. He joined
      Tritronics in 1985 and worked in all aspects of the operations and purchasing
      departments. In 1990, he was promoted to Vice President and oversaw warehouse
      operations, purchasing, marketing, IT and the Florida branch at various times.
      He was promoted to Executive Vice President for Operations when Tritronics
      was
      acquired by Encompass on August 1, 2008. Mr. Scarff also serves as Vice
      President-Operations of the Company





*Randy
      Williams, Executive Vice President of Tritronics, Inc.* **** Mr.
      Williams joined Tritronics as Secretary and Director in 1982, after spending
      a
      brief career in the restaurant industry. He oversaw many aspects of this family
      owned and operated business, including warehouse operations, sales and
      purchasing. In 1990, Mr. Williams was promoted to Vice President and continued
      to share all aspects of managing the business, especially purchasing, warehouse
      operations and business development. He was promoted to Executive Vice President
      for Purchasing when Tritronics’ stock was acquired by Encompass on August 1,
      2008.




**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires that our directors and executive officers,
      and any persons who own more than ten percent of our common stock, file with
      the
      SEC initial reports of ownership and reports of changes in ownership of our
      common stock and other equity securities. Such persons are required by SEC
      regulations to furnish us with copies of all such reports that they file. To
      our
      knowledge, based upon our review of these reports, all Section 16 reports
      required to be filed by our directors, executive officers and ten percent
      beneficial owners during the fiscal year ended June 30, 2008 were filed on
      a
      timely basis with the exception of the following reports which were filed
      late:





o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by Steven J. Miller was filed late. This Form 4 disclosed the issuance
                to
                Mr. Miller of shares of our Series A-2 Preferred in exchange for
                shares of
                our Series A-1 Preferred in connection with our recapitalization
                on August
                17, 2007, as well as the issuance to Mr. Miller of options to purchase
                shares of our common stock.


o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by Randall H. Prouty was filed late. This Form 4 disclosed the purchase
                by
                Mr. Prouty of shares of our Series A-2 Preferred on August 17,
                2007.


o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by John E. Donahue was filed late. This Form 4 disclosed the issuance
                to
                Mr. Donahue of shares of our Series A-2 Preferred in exchange for
                shares
                of our Series A-1 Preferred in connection with our recapitalization
                on
                August 17, 2007, as well as the issuance to Mr. Donahue of options
                to
                purchase shares of our common
                stock.


o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by Wilbank J. Roche was filed late. This Form 4 disclosed the issuance
                to
                Mr. Roche of shares of our common stock in exchange for shares of
                our
                Series A-2 Preferred in connection with an automatic conversion on
                May 6,
                2008.


o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by John E. Donahue was filed late. This Form 4 disclosed the issuance
                to
                Mr. Donahue of shares of our common stock in exchange for shares
                of our
                Series A-2 Preferred in connection with an automatic conversion on
                May 6,
                2008.






33




o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by Steven J. Miller was filed late. This Form 4 disclosed the issuance
                to
                Mr. Miller of shares of our common stock in exchange for shares of
                our
                Series A-2 Preferred in connection with an automatic conversion on
                May 6,
                2008.


o
            The
                Statement of Changes in Beneficial Ownership of Securities on Form
                4 filed
                by Wayne I. Danson was filed late. This Form 4 disclosed the issuance
                to
                Mr. Danson of shares of our common stock in exchange for shares of
                our
                Series A-2 Preferred in connection with an automatic conversion on
                May 6,
                2008.





**Code
      of Ethics**





In
      April
      2004, we established a Code of Business Conduct and Ethics (the "Code"),
      applicable to all of our employees, including our principal executive,
      accounting and financial officers, which states that we are committed to the
      highest standards of legal and ethical conduct. This Code sets forth our
      policies with respect to the way we conduct ourselves individually and operate
      our business. The provisions of this Code are designed to deter wrongdoing
      and
      to promote honest and ethical conduct among our employees, officers and
      directors. The Code is incorporated by reference to Exhibit 14.1 to the
      Company’s Form 10-KSB filed with the SEC on November 3, 2004. We will satisfy
      our disclosure requirement under Item 5.05 of Form 8-K regarding certain
      amendments to, or waivers of, any provision of our Code by posting such
      information on our corporate website, www.encompassgroup.com. We will provide
      a
      copy of the Code, without charge, upon request. You may request a copy of the
      Code by writing to our corporate office located at 420 Lexington Avenue, Suite
      2739, New York, NY 10170.





**Corporate
      Governance**





*Procedures
      for Nomination of Directors by Security Holders*





There
      were no material changes to the procedures for nomination of directors by
      Encompass’s security holders during the year ended June 30, 2008.





*Audit
      Committee*





Encompass
      has a separately-designated standing Audit Committee, which was established
      on
      May 15, 2001 in accordance with Section 3(a)(58)(a) of the Exchange Act. During
      the first month of fiscal 2008, the Audit Committee was composed of Randall
      Prouty, who served as Chairman of the Audit Committee, and Dr. Michael Finch,
      each of whom resigned on August 17, 2007 in connection with our
      recapitalization. Each of Messrs. Prouty and Finch met the criteria for
      independence for audit committee members set forth in Rule 10A-3(b)(1)
      promulgated under the Exchange Act and under the relevant Marketplace Rules
      of
      The NASDAQ Stock Market LLC. On September 20, 2007, Messrs. Ball, Ketteler
      and
      Wedren were appointed to our Audit Committee, each of whom met such independence
      criteria. Mr. Ketteler was appointed as the Chairman of the Audit
      Committee.





*Audit
      Committee Financial Expert*





The
      Board
      of Directors has determined that Mr. Ketteler is an “audit committee financial
      expert” as defined under Item 407(d)(5)(ii) of Regulation S.K. Mr. Ketteler, a
      member of the Audit Committee and its chairman, is “independent,” as that term
      is defined under applicable SEC and NASDAQ rules.




**Item
      11. Executive Compensation.**





As
      a
“smaller reporting company,” the Company has elected to follow scaled disclosure
      requirements for smaller reporting companies with respect to *Part
      III, Item 11 – Executive Compensation* .
      Under
      the scaled disclosure obligations, the Company is not required to provide
      Compensation Discussion and Analysis and certain other tabular and narrative
      disclosures relating to executive compensation. Nor is the company required
      to
      quantify payments due to the named executives upon termination of employment.





34




**Summary
      Compensation of Executive Officers**





The
      table
      below sets forth information concerning compensation paid to Wayne I. Danson,
      John E. Donahue and Steven J. Miller in the fiscal years ended June 30, 2007
      and
      June 30, 2008. None of our named executive officers other than Messrs. Danson,
      Donahue and Miller received compensation of $100,000 or more in fiscal 2007
      or
      fiscal 2008. Mr. Nielson, who served as our Executive Vice President for less
      than a month of fiscal 2007, earned no compensation in fiscal 2007 and,
      therefore, is not included in the table below. As set forth below, our
      compensation program for our named executive officers consists of base salary
      and stock option awards.




**Summary
      Compensation Table**





Name and Principal
              Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-
              Equity
              Incentive
              Plan
              Compensation
              ($)
            
            Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            
            All Other
              Compensation
              ($)
            
            Total ($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)Wayne
                I. Danson
              President,
                Chief Executive Officer and Director
            
            
            2008
              2007
            
            $
              $
            306,000
              287,500
            (1)
            $
              $
            60,000
              50,000
            (2)
            $
              $
            0
              0
            
            $
              $
            283,091
              0
            (4)
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            (5)
            $
              $
            649,091
              337,500Steven
                J. Miller
              Chief
                Operating Officer
            
            
            2008
              2007
            
            $
              $
            192,000
              134,615
            
            $
              $
            50,000
              0
            (2)
            $
              $
            26,125
              18,875
            (3)
            $
              $
            220,182
              0
            (4)
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            (5)
            $
              $
            488,307
              153,490John
                E. Donahue
              Vice
                President and Chief Financial Officer
            
            
            2008
              2007
            
            $
              $
            239,000
              192,308
            
            $
              $
            50,000
                (2)
              0
            
            $
              $
            26,125
              18,875
            (3)
            $
              $
            125,818
              0
            (4)
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            (5)
            $
              $
            440,943
              211,183





(1)  Does
      not
      include $310,000 of deferred compensation evidenced by a six-year promissory
      note issued on August 17, 2007 to Danson Partners, LLC, an affiliate entity
      of
      Wayne Danson. Such deferred compensation includes $125,000 of unpaid fiscal
      2005
      bonus, $17,425 of accrued interest on such bonus and $167,575 of prior unpaid
      salary.





(2)  The
      amounts in column (d) for fiscal year 2008 represent discretionary cash bonuses
      awarded by the Compensation Committee to the named executive officers for their
      respective contributions in fiscal 2008. The named executives earned no
“performance bonuses” with respect to fiscal 2008 pursuant to their respective
      employment agreements with us.





(3)  The
      amounts in column (e) reflect the dollar amounts recognized for financial
      statement reporting purposes in accordance with SFAS 123(R) for the fiscal
      years
      ended June 30, 2008 and 2007 with respect to stock awards granted in and prior
      to fiscal 2007, specifically 50,000,000 shares of restricted common stock which
      were granted to each of Messrs. Donahue and Miller on September 25, 2006,
      10,000,000 shares of which vested immediately, and 40,000,000 shares the vesting
      of which was fully accelerated in connection with our recapitalization in August
      2007 as described in more details in the section “Employment Agreements and
      Post-Termination or Change-of-Control Payments” of this Annual Report. The
      50,000,000 shares granted in September 2006 vested 20% on September 25, 2006,
      and were to vest 30% on September 26, 2007 and 50% on September 26, 2008. The
      fair value was calculated using the closing price of Encompass stock on the
      date
      of grant. Assumptions used in the calculation of this amount are included in
      Note 8 of our audited financial statements for the fiscal year ended June 30,
      2007 included Note 9 of our audited financial statements for the fiscal year
      ended June 30, 2008 included in *Part
      II, Item 8 –  Financial Statements and Supplementary Data* of this
      Annual Report. This amount reflects our accounting expense for these awards,
      and
      does not correspond to the actual value that will be recognized by the named
      executives.





(4)  The
      amounts in column (f) reflect the dollar amount recognized for financial
      statement reporting purposes for the fiscal year ended June 30, 2008, in
      accordance with SFAS No. 123R, of awards of stock options. Specifically, the
      terms of the option awards are discussed below in this *Part
      III, Item 11 – Executive Compensation – Employment Agreements and Post
–Termination or Change-of-Control Payments – Equity Awards* .
      The
      Company utilizes a closed-form model (Black-Scholes) to estimate the fair value
      of stock option grants on the date of grant. Assumptions used in the calculation
      of this amount are included in Note 9 of our audited financial statements for
      the fiscal year ended June 30, 2008 included in *Part
      II, Item 8 – Financial Statements and Supplementary Data* of this
      Annual Report. This amount reflects our accounting expense for these awards,
      and
      does not correspond to the actual value that will be recognized by the named
      executives. ****





35




(5)  Messrs.
      Danson, Miller and Donahue each receive a car allowance with an estimated value
      of $750 per month to compensate each of them for the use of their respective
      car
      for business purposes, but such amount has not been included in this column
      as
      the total value of each such perquisite is less than $10,000 each for Messrs.
      Danson, Miller and Donahue for fiscal year 2008.




**Employment
      Agreements and Post***–***Termination or Change-of-Control
      Payments**





*FY
      2007- Pre-Recapitalization*





*Wayne
      I. Danson*




On
      March
      14, 2007, we entered into a two-year employment agreement with Mr. Danson
      pursuant to which Mr. Danson agreed to continue serving as our President and
      Chief Executive Officer. The employment agreement was effective as of January
      1,
      2007 and terminated on August 17, 2007 in connection with the recapitalization
      described herein.





Under
      the
      employment agreement, Mr. Danson was entitled to receive a base salary of
      $350,000 in the first year of employment and a base salary of $400,000 in the
      second year. Mr. Danson was also eligible to earn a signing bonus of $50,000
      upon execution of the Agreement which was payable on May 15, 2007 or earlier
      if
      we received certain financing and a bonus of between $250,000 and $500,000,
      as
      determined by our Compensation Committee, upon the consummation of certain
      acquisition transactions. In the employment agreement, we acknowledged accrued
      compensation owed pursuant to Mr. Danson’s recently expired Services Agreement
      in the amount of $342,575 which was payable on May 15, 2007, or earlier if
      we
      received certain financing. Certain of the payments owed to Mr. Danson under
      his
      employment agreement were paid as described below under the heading
“Post-Recapitalization.”





*John
      E. Donahue and Steven J. Miller*





On
      September 25, 2006, we entered into employment agreements with John E. Donahue
      and Steven J. Miller pursuant to which Mr. Donahue would serve as our Chief
      Financial Officer and Mr. Miller would serve as our Chief Operating Officer.
      These agreements were in place prior to the recapitalization. Under these
      employment agreements, Mr. Donahue was entitled to receive a base salary of
      $250,000 in the first and second years of employment and a base salary of
      $275,000 in the optional year, if we exercised our option. Mr. Miller was
      entitled to receive a base salary of $175,000 in the first year of employment,
      $200,000 in the second year and $225,000 in the optional year. The remaining
      terms of the employment agreements of Mr. Donahue and Mr. Miller are identical
      and are as follows:





·
            Each
                agreement was effective as of September 25, 2006 and expired on the
                second
                anniversary thereof unless terminated earlier in accordance with
                its
                terms.





·
            Each
                executive received an award of 50,000,000 restricted shares of common
                stock, priced at the closing price per share as of the date of grant,
                of
                which (i) 10,000,000 shares vested immediately upon September 25,
                2006,
                (ii) 15,000,000 shares would vest on September 26, 2007, and (iii)
                25,000,000 shares would vest on September 26, 2008; provided, as
                to each
                vesting tranche, that the executive is then employed by us.




·
            For
                each fiscal year or portion thereof during the term of each employment
                agreement, each executive was eligible to receive a discretionary
                annual
                performance bonus, in cash, options to purchase shares of common
                stock
                and/or restricted shares of common stock, in an amount determined
                by the
                Compensation Committee.




36




·
            We
                were obligated to provide a $1,000,000 term life insurance policy
                on each
                executive and to insure each executive under a $2,000,000 key man
                life
                insurance policy.





The
      agreements also provided for various post-termination and change-in-control
      payments to Messrs. Donahue and Miller. HIG’s investment and purchase of shares
      of the Series C Preferred in connection with the recapitalization constituted
      a
“change-in control” under the agreements, and we terminated the agreements. As
      described below under the heading “Post-Recapitalization,” in connection with
      the termination of their September 25, 2006 agreements, Messrs. Donahue’s and
      Miller’s unvested stock awards became immediately vested Under their agreement,
      a “change of control” was defined as any one of the following:





(i)  The
      date
      a “change in ownership” of Encompass occurs as determined under the Treasury
      Regulations promulgated under Code Section 409A;




(ii)  The
      date
      a “change in effective control” occurs as determined under the Treasury
      Regulations promulgated under Code Section 409A; or




(iii)  The
      date
      a “change in ownership of a substantial portion of the corporation’s assets”
occurs as determined under the Treasury Regulations promulgated under Code
      Section 409A. However, a change in ownership of a substantial portion of the
      corporation’s assets will not occur unless a person or group acquires (or has
      acquired during the 12-month period ending on the date of the most recent
      acquisition) assets from Encompass that have a total gross fair market value
      equal to or more than 40 percent of the total gross fair market value of all
      of
      the assets of Encompass immediately prior to such acquisition or
      acquisitions.





*FY
      2007 Post-Recapitalization and FY 2008*





Prior
      to
      the recapitalization, we were obligated to pay approximately $1,048,000 for
      accrued and unpaid management compensation, unreimbursed business expenses
      and
      the outstanding principal balance and accrued interest with respect to an
      unsecured promissory note dated April 24, 2006 issued by us to Wayne Danson.
      We
      satisfied the outstanding debts with management with an aggregate payment of
      approximately $488,000 and an agreement with Mr. Danson’s consulting company to
      pay the consulting company $310,000, plus interest accruing at the rate of
      7%
      per annum, upon the earlier of a change of control of us or the six-year
      anniversary of the closing of the transactions described herein. Mr. Danson
      also
      agreed to restructure a potential $250,000 bonus until such time as we satisfy
      certain milestones as described in Mr. Danson’s employment agreement (described
      below). In addition, each of Messrs. Danson, Donahue and Miller exchanged,
      in
      the aggregate, 275 (or $275,000) shares of our Series A-1 Preferred for our
      Series A-2 Preferred which on May 6, 2008 converted automatically into an
      aggregate 572,916,667 shares of common stock.





On
      August
      17, 2007, and in connection with the recapitalization, we entered into a new
      employment agreement with Wayne I. Danson to serve as our Chief Executive
      Officer and President. Under this agreement, we agreed to cause Mr. Danson
      to
      continue as one of our directors, and Mr. Danson agreed to serve as a director.
      In addition, at the request of our Board of Directors he will serve as a
      director or officer of any of our subsidiaries without additional compensation.
      Mr. Danson receives a base salary of $300,000 per year; if he earns a “success
      bonus” (as defined below), his base salary will be increased to $325,000 for the
      remaining employment term. Among other benefits, Mr. Danson receives an auto
      allowance of $750 per month. In addition, Mr. Danson is eligible to receive
      (i)
      a “success bonus,” which represents his deferred existing bonus in the amount of
      $250,000 to which he will be entitled if certain milestones, as specified in
      the
      agreement, are met, and (ii) an “exit bonus” to which, subject to certain
      conditions, he will be entitled if a change of control occurs while he is
      employed by us. In the event certain conditions are satisfied and a change
      of
      control occurs after Mr. Danson’s employment is terminated without “cause” or he
      resigns for “good reason”, Mr. Danson will be entitled to 50% of the “exit
      bonus”.





On
      the
      August 17, 2007, and in connection with the recapitalization, we entered into
      employment agreements with John E. Donahue to serve as our Vice President and
      Chief Financial Officer and Steven J. Miller to serve as our Chief Operating
      Officer. Under their respective agreements, Mr. Donahue’s base salary is
      $237,500 per year, and Mr. Miller’s base salary is $187,500 per year. In
      addition, to the extent a “success bonus” is earned, Messrs Donahue and Miller’s
      base salary will increase to $250,000 and $225,000 respectively.





37





Certain
      terms of the employment agreements of Messrs. Danson, Donahue and Miller are
      identical and are set forth below:





·
            Each
                executive is eligible to receive a “performance bonus.” A “performance
                bonus” is equal to a variable percentage of the executive’s base salary,
                determined by measuring actual EBITDA (as defined therein) against
                the
                target EBITDA (as defined therein) of any fiscal year during which
                the
                executive was employed for any portion of that year.




·
            Subject
                to certain conditions, the executive will receive a one time “exit bonus”,
                which will be payable to the executive in cash not later than 30
                days
                after a “Disposition Event” (as defined therein). The amount of the exit
                bonus will be determined pursuant to a formula set forth in the respective
                employment agreement, and will depend on executive’s current employment
                with us or the circumstances of executive’s termination of employment with
                us, but in no event will exceed $2,500,000 in the aggregate for Messrs.
                Danson, Donahue and Miller. In no event will the sum of the exit
                bonus and
                any other amounts required to be taken into account under Section
                280G of
                the Code in connection with the Disposition Event exceed 299% of
                the
                executive’s “Base Amount” as determined pursuant to Section 280G of the
                Code.




·
            The
                employment agreement contains restrictive covenants prohibiting the
                executive from competing with us or soliciting our employees or customers
                for another business during the term of the agreement and for a period
                of
                2 years after termination or the end of the employment term. In the
                event
                the Severance Period (as defined below) is equal to six months, such
                restrictive covenants will survive for a period of 1 year after
                termination or the end of
                employment.




·
            We
                are obligated to provide a $2,000,000 term life insurance policy
                on the
                executive’s life, with a beneficiary of his choosing, and, at our option,
                may insure the executive under a key man life insurance
                policy.




·
            We
                may terminate the employment agreement for “cause” as defined therein or
                in the event that the respective executive becomes “Permanently Disabled”
                as defined therein. The executive may terminate his agreement for
“Good
                Reason” as defined therein. The employment agreement will automatically
                terminate upon the executive’s death.




The
      agreements provide for the following post-termination and change-in-control
      payments to Messrs. Danson, Donahue and Miller:





·
            In
                the event that we terminate the executive’s employment without cause, we
                will pay to the executive (i) any accrued base salary and reimbursement
                for business expenses and, if applicable, auto expenses incurred
                prior to
                the termination date, (ii) any unpaid success and/or performance
                bonus, to
                the extent such bonus has been earned and (iii) a severance payment
                (the
                “Severance Payment”) equal to the additional amount of base salary which
                would have been payable to the executive during the six-month period
                immediately following the termination date or, if the executive earned
                a
                success bonus prior to termination, the twelve-month period immediately
                following the termination date (the “Severance Period”), which Severance
                Payment will be paid in accordance with our standard payroll practices
                over the course of the Severance Period after the date on which the
                executive incurs a “separation from service,” as such term is defined in
                Internal Revenue Code.




·
            In
                the event that the executive’s employment is terminated for any reason, we
                will pay to the executive any accrued base salary and reimbursement
                for
                business expenses and, if applicable, auto expenses incurred prior
                to the
                termination date and any accrued unpaid success and/or performance
                bonus,
                to the extent such bonus has been earned, which amounts shall be
                payable
                in cash to the executive in a lump sum no later than 30 days after
                the
                termination date. In addition, if we terminate the executive’s employment
                for any reason other than for Cause or by the executive for Good
                Reason,
                the executive will be deemed to have earned (i) a performance bonus
                if 270
                days have passed in any fiscal year, which performance bonus will
                be paid
                on a pro rata basis for the period of time the executive was employed
                prior to termination and (ii) a success bonus if the conditions set
                forth
                in the agreement occur within three months of such
                termination.




38




·
            We
                will indemnify the executive for any losses, damages, claims, costs
                and
                expenses incurred by the executive resulting from any act or omission
                of
                us or from our failure to perform any of our obligations under the
                respective agreement.




Specific
      EBITDA target levels are set forth in each of our employment agreements with
      Messrs. Danson, Donahue and Miller for the fiscal years ended June 30, 2008,
      2009 and 2010 for purposes of determining an annual “Performance Bonus”, as well
      as a one-time “Special Bonus” ’ for the five-month period ended December 31,
      2007.





Upon
      achieving a minimum of 80% of the FY Target EBITDA for the fiscal years ended
      June 30, 2008, 2009 and 2010, or achieving the Special Bonus Target EBITDA,
      each
      of the Company’s executive officers is entitled to receive an annual Performance
      Bonus, or the one-time Special Bonus, which represent a varying percentage
      of
      each such officer’s base salary as set forth in his respective employment
      agreement.





Further,
      Mr. Danson will receive a “Success Bonus” of $250,000, and an increase in his
      respective annual base salary for the remaining employment term, upon the
      occurrence of a certain event or the Company achieving a defined EBITDA target
      for purposes of earning the Success Bonus.





We
      treat
      these EBITDA targets as confidential information, generated solely for the
      purpose of providing incentive to the executive management team and circulated
      internally only among our senior management and our board of directors. We
      do
      not publish specific goals or targets for the financial measures since they
      are
      confidential information which, if disclosed, would create substantial
      competitive harm to us. We have formally requested confidential treatment of
      such EBITDA target levels from the SEC.





Under
      the
      terms of their prior employment agreements with us, Messrs. Donahue and Miller
      were entitled to each receive an aggregate of 40,000,000 shares of our
      restricted common stock upon a “change of control” as defined in the agreements.
      HIG’s investment and purchase of shares of the Series C Preferred constituted
      such a “change in control.” Therefore, our Board of Directors has granted and
      awarded an aggregate of 80,000,000 shares of restricted stock to Messrs. Donahue
      and Miller.





*Equity
      Awards in 2008*




During
      fiscal year 2008, our Compensation Committee recommended, and our full Board
      of
      Directors approved, stock awards to each of Mr. Donahue and Mr. Miller of
      40,000,000 shares of restricted stock pursuant to the terms of their prior
      employment agreements under which a “change of control” occurred with HIG’s
      investment and purchase of the Series C Preferred shares.





In
      connection with the recapitalization described herein, our Board of Directors
      also approved the issuance of options representing an aggregate of 10.0% of
      the
      available pool under our amended and restated 2005 Stock Plan to the following
      named executive officers pursuant to the terms of separate option
      agreements:





Wayne
                I. Danson,
              President
                and CEO
            4.5%John
                E. Donahue
              VP
                and CFO
            2.0%Steven
                J. Miller
              COO
            3.5%





Messrs.
      Danson’s, Donahue’s and Miller’s options will vest according to the following
      schedule:





•
            25%
                of the options awarded will be vested
                immediately,





•
            37.5%
                of the options awarded will vest quarterly in equal increments over
                three
                years, and




39




•
            37.5%
                of the options awarded over three years if certain EBITDA targets
                are
                met.





The
      above-referenced EBITDA targets refer to the “Base EBITDA Targets” set forth in
      each of the named executive’s stock option agreements with us. The full
      satisfaction of the Base EBITDA Targets in each of our fiscal years ending
      June
      30, 2008, 2009 and 2010 will cause one-third of the options designated as
“Performance Optioned Shares” in each stock option agreement to become vested.
      We treat these EBITDA targets as confidential information, generated solely
      for
      the purpose of providing incentive to the executive management team and
      circulated internally only among our senior management and our board of
      directors. We do not publish specific goals or targets for the financial
      measures since they are confidential information which, if disclosed, would
      create substantial competitive harm to us. We have formally requested
      confidential treatment of such targets from the SEC.




**Outstanding
      Equity Awards at 2008 Fiscal Year-End**




The
      following table and its notes provide information concerning outstanding equity
      awards in the form of stock options, a portion of which constitute equity
      incentive plan awards, for each of the named executives at June 30, 2008. No
      options or related stock appreciation rights were exercised in 2008. No named
      executive held unvested stock awards at the end of fiscal year 2008.




**Option awards****Name**
            
            **Option**
              **Grant Date**
              **(1)**
            
            **Number of**
              **securities**
              **underlying**
              **unexercised options**
              **(#) exercisable**
            
            **Number of**
              **securities**
              **underlying**
              **unexercised**
              **options****(#)**
              **unexercisable**
            
            **Equity incentive**
              **plan awards:**
              **Number of**
              **securities**
              **underlying**
              **unexercised**
              **unearned options**
              **(#)**
            
            **Option**
              **exercise**
              **price($)**
            
            **Option**
              **expiration**
              **date**Wayne I. Danson
            
            
            8-17-07
            
            
            1,373,832,541
            
            
            1,124,044,807
            
            
            1,498,726,409
            
            $
            .0075
            
            
            8-17-17Steven
                J. Miller
            
            
            8-17-07
            
            
            1,068,536,421
            
            
            874,257,072
            
            
            1,165,676,096
            
            $
            .0075
            
            
            8-17-17John
                E. Donahue
            
            
            8-17-07
            
            
            610,592,241
            
            
            499,575,470
            
            
            666,100,626
            
            $
            00.75
            
            
            8-17-17





(1)
                These options vest according to the following schedule: 25% of the
                options
                vested immediately as of August 17, 2007, 37.5% of the options will
                vest
                quarterly in equal increments over three years, and 37.5% of the
                options
                will vest over three years if certain EBITDA targets are met.




**Director
      Compensation**




**Director
      Compensation Policy**





At
      the
      beginning of fiscal year 2008, prior to the recapitalization, our compensation
      policy for our non-employee directors provided annual cash compensation of
      $25,000, payable $6,250 per quarter of services rendered. In addition, we paid
      the chairman of each of our audit and compensation committees an additional
      $5,000 in cash per committee. As of August 16, 2007, prior to the
      recapitalization, aggregate unpaid accrued director compensation totaled
      $365,000.





Following
      the recapitalization, we adopted new standards for the compensation of our
      independent directors. Our credit agreement with Sankaty Advisors limits our
      aggregate outside board fees to $60,000 if our EBITDA for such fiscal year
      is
      below $5,800,000. Under this policy, each independent director will receive
      an
      annual retainer of $10,000 per year and a committee retainer (for participation
      in one or multiple committees) of $2,000 per year. Such retainers may be
      increased if we meet higher EBITDA targets, with a maximum of $100,000 in
      aggregate outside board fees authorized under our credit agreement if EBITDA
      exceeds $6,200,000. Under this policy, each independent director will receive
      an
      annual retainer of $15,000 per year and a committee retainer (for participation
      in one or multiple committees) of $5,000 per year. Regardless of our EBITDA
      for
      any fiscal year, we will also pay our independent directors $500 per meeting
      for
      in-person attendance at a Board meeting and $250 per meeting for attendance
      at a
      Board meeting via teleconference.




40





In
      addition to the cash compensation described above and in connection with the
      recapitalization, Wilbank Roche, John G. Ball, Thomas R. Ketteler and Gerald
      E.
      Wedren, our independent directors, each received a one-time grant of stock
      options to purchase 50,000,000 shares of our common stock at an exercise price
      of $.00075 per share. These options, which vested on August 17, 2008, were
      granted under the amended and restated 2005 Stock Plan.





The
      Director Compensation table below summarizes the compensation that we paid
      to
      non-employee directors for the fiscal year ended June 30, 2008.





**2008
      Director Compensation Table**




**Name**
              **(a)**
            
            **Fees Earned**
              **or Paid in**
              **Cash ($)**
              **(b)**
            
            **Stock**
              **Awards**
              **($)**
              **(c)**
            
            **Option**
              **Awards**
              **($)**
              **(2) (3)**
              **(d)**
            
            **Non-Equity**
              **Incentive**
              **Plan**
              **Compensation**
              **($)**
              **(e)**
            
            **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings**
              **($)**
              **(f)**
            
            **All Other**
              **Compensation****($)**
              **(g)**
            
            **Total ($)**
              **(h)**Dr. Michael Finch
            
            $
            66,250
            (1)
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            66,250Jonathan
                J. Lichtman
            
            $
            96,250
            (1)
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            96,250Randall
                Prouty
            
            $
            106,250
            (1)
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            106,250Wilbank
                J. Roche
            
            $
            109,750
            (1)
            
            -
            
            $
            2,613
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            112,363John
                G. Ball
            
            $
            13,500
            
            
            -
            
            $
            2,613
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            16,113John
                R. Black
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            0Thomas
                Ketteler
            
            $
            13,500
            
            
            -
            
            $
            2,613
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            16,113William
                J. Nolan
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            0Gerald
                E. Wedren
            
            $
            13,500
            
            
            -
            
            $
            2,613
            
            $
            0
            
            
            -
            
            $
            0
            
            $
            16,113





(1)  On
      August
      17, 2007, Messrs. Prouty, Finch, Lichtman and Roche received an aggregate of
      $365,000 for accrued directors’ fees. These directors used $175,000 ($43,750 per
      director) of such funds to purchase shares of our Series A-2 Preferred stock.
      Messrs. Prouty, Finch and Lichtman resigned from our Board of Directors in
      connection with our recapitalization on August 17, 2007. Mr. Roche received
      $13,500 in directors’ fees under our new compensation policy for independent
      directors that became effective following our recapitalization in August
      2007.





(2)  As
      of
      June 30, 2008, the aggregate number of option awards outstanding for the
      directors were 50,000,000 each for Messrs. Roche, Ball, Ketteler and Wedren.
      These options vested on August 17, 2008. There are no stock awards outstanding
      for the directors.





(3)  The
      amounts in this column reflect the dollar amount recognized for financial
      statement reporting purposes for the fiscal year ended June 30, 2008, in
      accordance with SFAS 123(R) of awards of stock options. The expense included
      in
      the table represents pro-rata portions of the total expense for each grant
      related to the portion of the vesting period included in FY 2008. The total
      fair
      value of the option grants are being expensed over their respective one-year
      vesting periods. The Company utilizes a closed-form model (Black-Scholes) to
      estimate the fair value of stock option grants on the dates of grant.
      Assumptions used in the calculation of this amount are included in Note 9 of
      our
      audited financial statements for the fiscal year ended June 30, 2008 included
      in *Part
      II, Item 8 – Financial Statements and Supplementary Data* of this
      Annual Report





41




**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**





As
      of
      September 22, 2008, we had 16,286,151,226 shares of common stock, no shares
      of
      Series A-2 Preferred, 1,000 shares of Series C Preferred, 1,000 shares of Series
      D Preferred and 1,000 shares of Series E Preferred outstanding. The Series
      E
      Preferred is not convertible into shares of our common stock, and the holders
      of
      Series E Preferred are not entitled to any voting rights. The following table
      sets forth information concerning the ownership of our common and preferred
      stock except for Series E Preferred as of such date by each person known to
      us
      to be the beneficial owner of more than five percent of a class of our voting
      capital stock, by each of our directors and executive officers, and by our
      directors and executive officers, as a group. Due to certain factors relating
      to
      our convertible securities, the principles of the presentation below vary from
      the mechanics specified in Rule 13d- 3
      under
      the Exchange Act as described in Note 2 below.





**Common Stock Beneficially**
              **Owned (2)**
            
            **Series C Preferred Stock**
              **Beneficially Owned**
            
            **Series D Preferred Stock**
              **Beneficially Owned****Name and Address**
              **of Beneficial**
              **Owner(1)**
            
            **# of Shares**
            
            **% of**
              **Class**
            
            **# of Shares**
            
            **% of**
              **Class**
            
            **# of Shares**
            
            **% of**
              **Class****5% Beneficial Owners**ACT-DE
                LLC(3)
            
            
            52,660,626,486
            (6)
            
            60.76
            %
            
            913.8
            
            
            91.38
            %Sankaty
                Entities(4)
            
            
            4,918,618,578
            (7)
            
            5.68
            %
            
            85.4
            
            
            8.54
            %Fred
                Baldwin
            
            
            1,987,200,201
            (8)
            
            2.29
            %
            
            -
            
            
            -
            
            
            312.5
            
            
            31.25
            %Robert
                Coolidge
            
            
            3,743,485,519
            (9)
            
            4.34
            %
            
            -
            
            
            -
            
            
            562.5
            
            
            56.25
            %Scott
                Cameron
            
            
            794,880,081
            (10)
            
            *
            
            
            -
            
            
            -
            
            
            125.0
            
            
            12.50
            %Tritronics,
                LLC(5)
            
            
            2,796,232,989
            
            
            3.23
            %**Officers
                and Directors**Wayne
                I. Danson President, CEO & Director
            
            
            1,932,945,775
            (11)
            
            2.28
            %
            
            
            
            
            
            
            
            -
            
            
            -Steven
                J. Miller
              Chief
                Operating Officer
            
            
            1,625,315,770
            (12)
            
            1.88
            %John
                E. Donahue
              VP
                & Chief Financial Officer
            
            
            927,859,012
            (13)
            
            1.07
            %
            
            
            
            
            
            
            
            -
            
            
            -Wilbank
                J. Roche
              Director
            
            
            216,423,810
            (14)
            
            *
            
            
            
            
            
            
            
            
            -
            
            
            -John
                G. Ball
              Director
            
            
            50,000,000
            (15)
            
            *
            
            
            -
            
            
            -
            
            
            -
            
            
            -John
                R. Black
              Director
            
            
            52,660,626,486
            (16)
            
            60.76
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Thomas
                R. Ketteler
              Director
            
            
            50,000,000
            (17)
            
            *
            
            
            -
            
            
            -
            
            
            -
            
            
            -William
                J. Nolan IV
              Director
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gerald
                E. Wedren
              Director
            
            
            50,000,000
            (18)
            
            *
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Executive
                Officers and Directors as a group**
              **(9
                persons)**
            
            
            **62,065,365,621**
            
            
            **71.51**
            **%**
            
            
            
            
            
            
            
            **-**
            
            
            **-**





42




*
      Less
      than one percent (1%)


1
            
            Except
                as otherwise indicated, the address of each person named in the above
                table is c/o Encompass Group Affiliates, Inc., 420 Lexington Avenue,
                New
                York, NY 10170.2
            
            Common
                Stock which is issuable upon the exercise of a stock option which
                is
                presently exercisable or which becomes exercisable within sixty days
                is
                considered outstanding for the purpose of computing the percentage
                ownership (x) of persons holding such options, and (y) of officers
                and
                directors as a group with respect to all options held by officers
                and
                directors. The number of shares of common stock and the percent of
                the
                class in the table and these notes to the table have been calculated
                in
                accordance with Rule 13d-3 under the Exchange Act, except as described
                in
                this Note 2. The percentage calculations assume that each stockholder
                has
                converted all securities he owned that are convertible into common
                stock
                at the option of the holder currently or within 60 days of September
                22,
                2008, and that all of the other stockholders have converted similar
                securities. This varies from the provisions of Rule 13d-3 which generally
                requires the calculations to be made on the assumption that the
                stockholder for whom the calculation is being made has converted
                his
                convertible securities but that none of the other stockholders have
                converted convertible securities. We believe that our presentation
                is more
                meaningful than the presentation specified in Rule 13d-3 as the conversion
                rates on our Series C Preferred and Series D Preferred are interrelated
                with each other and vary depending on whether a convertible note
                held by
                Mr. Baldwin has been converted. Thus, the beneficial ownership of
                Common
                Stock of any particular Series C or Series D Preferred stockholder
                depends
                upon assumptions regarding the conversion of other convertible securities.
                All share of Series C Preferred Stock may currently be converted
                into
                57,628,805,837 shares of common stock. All share of Series D Preferred
                Stock may currently be converted into 6,359,040,644 shares of common
                stock. Information is provided in the footnotes below for each holder
                as
                to the number of shares of common stock included in the table for
                conversion of securities. The holders of common stock are entitled
                to one
                vote per share. Prior to any conversion into common stock, the holders
                of
                Series C Preferred and Series D Preferred, generally, will vote together
                with the holders of the common stock as a single class.3
            
            As
                reported in a Schedule 13D/A filed with the Securities and Exchange
                Commission on August 7, 2008, H.I.G.-ACT, Ltd., a Cayman Islands
                corporation (“HIG ACT”), is the sole member of ACT-DE LLC, a Delaware
                limited liability company (“ACT LLC”). As the sole member of ACT LLC, HIG
                ACT has the power to vote and dispose of the shares of our capital
                stock
                owned by the ACT LLC and, accordingly, may be deemed the beneficial
                owner
                of such shares. H.I.G. Capital Partners III, L.P., a Delaware limited
                partnership (“HIG CP III”), is a shareholder of HIG ACT. As a shareholder
                of HIG ACT, HIG CP III has the power to vote and dispose of the shares
                of
                our capital stock owned by ACT LLC and, accordingly, may be deemed
                the
                beneficial owner of such shares. H.I.G. Advisors III, L.L.C., a Delaware
                limited liability company (“HIG LLC”), is the general partner of HIG CP
                III. As the general partner of HIG CP III, HIG LLC has the power
                to vote
                and dispose of the shares of our capital stock owned by ACT LLC and,
                accordingly, may be deemed the beneficial owner of such shares. H.I.G.
                Investment Group III, L.P., a Cayman Islands limited partnership
                (“HIG IG
                III”) is a shareholder of HIG ACT. As a shareholder of HIG ACT, HIG IG
                III
                has the power to vote and dispose of the shares of our capital stock
                owned
                by ACT LLC and, accordingly, may be deemed the beneficial owner of
                such
                shares. H.I.G. Associates III, L.P., a Cayman Island limited partnership
                (“HIG Associates”) is the general partner of HIG IG III. As the general
                partner of HIG IG III, HIG Associates has the power to vote and dispose
                of
                the shares of our capital stock owned by ACT LLC and, accordingly,
                may be
                deemed the beneficial owner of such shares. H.I.G.-GPII, Inc., a
                Delaware
                corporation (“HIG GP”) is the manager of HIG LLC and the general partner
                of HIG Associates. As the manager of HIG LLC and the general partner
                of
                HIG Associates, HIG GP has the power to vote and dispose of the shares
                of
                our capital stock owned by ACT LLC and, accordingly, may be deemed
                the
                beneficial owner of such shares. Anthony Tamer and Sami Mnaymneh
                are the
                Co-Presidents of HIG GP, and in that capacity direct its operations.
                Therefore, Anthony Tamer and Sami Mnaymneh may be deemed to be beneficial
                owners of shares beneficially owned by HIG GP. Each of HIG Act, HIG
                CP
                III, HIG LLC, HIG IG III, HIG Associates, HIG GP, Mr. Tamer and Mr.
                Mnaymneh disclaim beneficial ownership except to the extent of their
                pecuniary interest in the shares. The address for HIG-DE LLC is c/o
                H.I.G.
                Capital L.L.C., 855 Boylston St., 11thFloor, Boston, MA 02116. ACT-DE LLC also owns 840 shares of our Series
                E
                Preferred, which represents 84% of the outstanding shares of Series
                E
                Preferred.4
            
            Includes
                Prospect Harbor Credit Partners, L.P., Sankaty Credit Opportunities
                II,
                L.P. and Sankaty Credit Opportunities III, L.P. The address of the
                Sankaty
                entities is 111 Huntington Avenue, Boston, MA 02199. These entities
                also
                own 160 shares of our Series E Preferred, which represents 16% of
                the
                outstanding shares of Series E
                Preferred.





43





5
            
            Kimberly
                Wagner, Randy Williams and James Scarff each hold 10% of the ownership
                interests in Tritronics, LLC. The address of these three individuals
                is
                c/o Tritronics, Inc., 1306 Continental Drive, Abingdon, MD
                21009****6
            
            The
                number of common shares in the table includes 52,660,626,486 shares
                of
                common stock that may be acquired upon conversion of Series C
                Preferred.7
            
            The
                number of common shares in the table includes 4,918,618,578 shares
                of
                common stock that may be acquired upon conversion of Series C
                Preferred.8
            
            The
                number of common shares in the table includes 1,987,200,201shares
                of common stock that may be acquired upon conversion of Series D
                Preferred.9
            
            The
                number of common shares in the table includes 166,525,157 shares
                of common
                stock held by Mr. Coolidge and 3,376,960,362 shares of common stock
                that
                may be acquired upon conversion of Series D Preferred.10
            
            The
                number of common shares in the table includes 794,880,081shares
                of common stock that may be acquired upon conversion of Series D
                Preferred.11
            
            The
                number of common shares in the table includes 309,325,499shares of
                common
                stock held by Mr. Danson and 1,623,620,276 shares which Mr. Danson
                may
                acquire by exercising options he holds.12
            
            The
                number of common shares in the table includes 362,500,000 shares
                of common
                stock held by Mr. Miller, including 50,000,000 shares of restricted
                stock
                previously granted to Mr. Miller and 1,262,815,770 shares which Mr.
                Miller
                may acquire by exercising options he holds.13
            
            The
                number of common shares in the table includes 206,250,000shares of
                common
                stock held by Mr. Donahue, including 50,000,000 shares of restricted
                stock
                previously granted to Mr. Donahue and 721,609,012 shares which Mr.
                Donahue
                may acquire by exercising options he holds.14
            
            The
                number of common shares in the table includes 166,423,810 shares
                of common
                stock held by Mr. Roche and 50,000,000 shares of common stock which
                Mr.
                Roche may acquire by exercising options he holds.15
            
            The
                number of common shares in the table includes 50,000,000 shares of
                common
                stock which Mr. Ball may acquire by exercising options he
                holds.16
            
            The
                number of common shares in the table includes 52,660,626,486 shares
                that
                may be acquired upon conversion of 913.79 shares of Series C Preferred
                held by ACT-DE, LLC. Mr. Black is a Managing Director of H.I.G. Capital,
                L.L.C., an affiliate of ACT-DE, LLC and, as such, may be deemed to
                beneficially own shares of Series C Preferred Stock held by ACT-DE,
                LLC.
                In addition, Mr. Black may be deemed to beneficially own 840 shares
                of
                Series E Preferred held by ACT-DE, LLC. Mr. Black disclaims beneficial
                ownership of such shares.17
            
            The
                number of common shares in the table includes 50,000,000 shares of
                common
                stock which Mr. Ketteler may acquire by exercising options he
                holds.18
            
            The
                number of common shares in the table includes 50,000,000 shares of
                common
                stock which Mr. Wedren may acquire by exercising options he
                holds.





**Changes
      in Control**





On
      August
      17, 2007 we entered into a series of transactions to effect a recapitalization
      which, among other transactions, included the following:




•  the
      acquisition of a new operating subsidiary, Vance Baldwin, Inc. for cash, a
      convertible note and shares of our Series D Preferred Stock;




•  the
      offer
      and sale of a significant preferred stock investment of more than $6 million
      by
      ACT-DE, LLC, an affiliate of H.I.G. Capital, LLC, which, together with certain
      other parties, received newly designated Series C Preferred Stock, constituting
      at that time approximately 79.5% of the ownership interest in us (before
      dilution for stock options issued to management as described herein); and




44




•  the
      issuance of approximately $23.5 million in senior and subordinated notes
      pursuant to a Note Purchase Agreement, for which Sankaty Advisors, LLC is the
      collateral agent.




In
      connection with the above-described recapitalization, we offered the holders
      of
      the Company’s Series A Convertible Preferred Stock, par value $.01 per share,
      Series A-1 Convertible Preferred Stock, par value $.01 per share (the “Series
      A-1 Preferred”), and Series B Convertible Preferred Stock, par value $.01 per
      share, the right to exchange such stock for the newly designated Series A-2
      Preferred (the “Exchange”). In the Exchange, the existing preferred stockholders
      provided a full release of any claims against us, but were not required to
      provide any other consideration other than the surrender of their outstanding
      shares of preferred stock. In connection with the recapitalization, we also
      paid
      off outstanding debts to certain creditors with an aggregate payment of
      approximately $3,600,000 in cash. One creditor received a convertible promissory
      note in addition to a cash payment. Certain of these creditors then purchased
      shares of the Series A-2 Preferred from one of the stockholders receiving such
      stock pursuant to the Exchange.





There
      are
      no other arrangements known to us the operation of which may result in a change
      in control of Encompass.




**Equity
      Compensation Plan Information**





The
      following table sets forth information as of June 30, 2008 regarding all of
      our
      existing compensation plans and individual compensation arrangements pursuant
      to
      which equity securities are authorized for issuance to employees, non-employee
      directors or non-employees (such as directors, consultants and advisors) in
      exchange for consideration in the form of services:





Plan Category
            
            Number of
              securities to be
              issued upon
              exercise of
              outstanding
              options, warrants
              and rights
            
            Weighted-average
              exercise price of
              outstanding
              options, warrants
              and rights
            
            Number of
              securities
              remaining
              available for future
              issuance under
              equity
              compensation
              plans (excluding
              securities reflected
              in column (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders: 2005 Stock
                Plan
            
            
            10,923,525,261
            
            $
            .00075
            
            
            4,076,474,739Equity
                compensation plans not approved by security holders:
            
            
            0
            
            
            0
            
            
            0Total
            
            
            10,923,525,261
            
            $
            .00075
            
            
            4,076,474,739





Our
      2005
      Stock Plan was adopted by the Board of Directors on June 26, 2005. In connection
      with the recapitalization described herein, our Board of Directors voted to
      amend and restate our 2005 Stock Plan (the “2005 Plan”) on August 16, 2007. The
      material revision to the 2005 Plan was an increase in the number of shares
      of
      common stock available for issuance under the 2005 Plan from 700,000,000 shares
      to 15,000,000,000 shares. Our stockholders approved the amendments to the 2005
      Stock Plan pursuant to a consent solicitation that concluded on May 5,
      2008.





The
      objectives of the 2005 Plan are to optimize the profitability and growth of
      Encompass through incentives which are consistent with Encompass’s goals and
      which link the personal interests of participants in the 2005 Plan to those
      of
      Encompass’s stockholders; to provide participants with an incentive for
      excellence in individual performance; and to promote teamwork among
      participants. The 2005 Plan is further intended to provide flexibility to
      Encompass in its ability to motivate, attract, and retain the services of
      employees, consultants and non-employee directors who make significant
      contributions to Encompass’s success and to allow participants to share in the
      success of Encompass. All employees of Encompass and its subsidiaries
      (“Employees”) and members of the Board who are not Employees (“Non-Employee
      Directors”) are eligible to participate in the 2005 Plan. Consultants and
      advisors who perform services for Encompass or any of our subsidiaries (“Key
      Advisors”) are also eligible to participate in the 2005 Plan if the Key Advisors
      render bona fide services to Encompass or our subsidiaries, the services are
      not
      in connection with the offer and sale of securities in a capital-raising
      transaction and the Key Advisors do not directly or indirectly promote or
      maintain a market for Encompass’s securities.




45




At
      September 23, 2008, there were approximately 360 Employees, Non-Employee
      Directors and Key Advisors of Encompass and its subsidiaries eligible to
      participate in the 2005 Plan.





The
      aggregate number of shares of our common stock, which may be issued under the
      2005 Plan, is 15,000,000,000 shares, subject to proportionate adjustment in
      the
      event of stock splits and similar events. There is no limitation on the number
      of shares which may be issued to any individual under the 2005 Plan, including
      any officer or director. No awards may be granted under the 2005 Plan on or
      after June 26, 2015. If any award granted under the 2005 Plan is canceled or
      terminates, expires or lapses for any reason, the number of shares subject
      to
      the award will again be available for purposes of the 2005 Plan.




**Item
      13.****Certain
      Relationships and Related Transactions, and Director
      Independence.**





**Certain
      Relationships and Related Transactions**





During
      the last two fiscal years, we have not entered into any material transactions
      or
      series of transactions which, in the aggregate, would be considered material
      in
      which any officer, director or beneficial owner of 5% or more of any class
      of
      our capital stock, or any immediate family member of any of the preceding
      persons, had a direct or indirect material interest, nor are any such
      transactions presently proposed, except as follows:





·
            Prior
                to January, 2007, we obtained the service of Mr. Danson through a
                services
                agreement with his wholly owned company, Danson Partners,
                LLC.




·
            In
                July 2006, we entered into a settlement agreement with Pacific Magtron
                International Corporation, Theodore S. Li, Hui Cynthia Lee and others
                with
                respect to the settlement of certain litigation and other potential
                claims, including the termination of Mr. Li and Ms. Lee’s employment
                contracts with us, involving Pacific Magtron, Encompass Parts
                Distribution, Inc.(one of our subsidiaries), Mr. Li, Ms. Lee, Martin
                Nielson, our then Executive Vice President, Wayne Danson, our Chief
                Executive Officer and us. Pacific Magtron’s entry into the settlement
                agreement was conditioned on bankruptcy court approval, which was
                obtained
                on August 11, 2006 in connection with confirmation of Pacific Magtron’s
                plan of reorganization. Pursuant to this plan of reorganization,
                we
                contributed $50,000 on behalf of Pacific Magtron’s stockholders to
                effectuate the plan of reorganization and a subsidiary of Pacific
                Magtron
                merged with an unrelated entity, Herborium, Inc. In connection with
                the
                merger, Pacific Magtron changed its name to Herborium Group, Inc.
                Upon
                closing of the merger, we paid an aggregate $325,000 in cash to Mr.
                Li and
                Ms. Lee. In addition, Mr. Li and Ms. Lee received 4,585,554 shares,
                in the
                aggregate, of common stock of Herborium Group valued at $175,000.
                A
                special stock distribution of shares of Herborium Group was made
                to the
                holders of our common stock as of the record date of August 11, 2006
                on
                the basis of a 0.001652911 share of Herborium common stock for each
                share
                of our common stock. A more detailed description of the terms of
                the
                settlement agreement is contained in our Current Report on Form 8-K
                filed
                with the SEC on August 16, 2006.




46




·
            On
                September 8, 2006, we entered into an investment agreement with each
                of
                Wayne Danson, John Donahue, Steve Miller, Anthony Lee and Dr. Gerald
                Holland, pursuant to which we agreed, among other things, to sell
                shares
                of Series A-1 Preferred stock to these investors. The transactions
                contemplated by the investment agreement closed on September 13,
                2006. At
                the closing, and pursuant to the investment agreement, we sold the
                investors an aggregate of 340 shares of Series A-1 Preferred at a
                purchase
                price of $1,000 per share. In connection with this sale, we received
                aggregate gross proceeds of $340,000 as follows: (a) $50,000 from
                one of
                our officers, (b) $225,000 from persons who were expected to become
                our
                employees and (c) $65,000 from outside investors. In addition to
                the
                rights applicable to all holders of Series A-1 Preferred, these investors
                were granted certain piggyback registration rights in the event that
                the
                shares of Series A-1 Preferred were converted into shares of our
                common
                stock.




·
            In
                connection with the recapitalization described under*Part
                III, Item 12. Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters*–*Changes
                in Control,*we
                entered into a five-year management agreement with H.I.G. Capital.
                HIG
                Capital is an affiliate of ACT-DE, LLC, which owns shares entitled
                to cast
                approximately 72% of the votes which may be cast by all of our
                stockholders. Under the management agreement, HIG Capital provides
                management and consulting services to us and our subsidiaries, subject
                to
                the supervision of the our Board of Directors. We pay a cash consulting
                and management fee to HIG Capital, currently not to exceed $500,000
                per
                annum. The fee is payable only to the extent permitted under a Note
                Purchase Agreement, for which Sankaty Advisors, LLC is the collateral
                agent, and the amount of the fee depends on whether we have met certain
                financial objectives. If payment of the fee is prohibited by the
                Note
                Purchase Agreement, the unpaid amount will accrue interest at the
                rate of
                5% per annum, compounded annually. In addition, we have agreed to
                reimburse HIG Capital for expenses incurred in connection with the
                performance of management and consulting services with respect to
                us. At
                the same time, we also entered into a five-year investment advisory
                services agreement with H.I.G. Capital, pursuant to which HIG Capital
                will
                provide certain financial advisory services to us and our subsidiaries,
                subject to the supervision of our Board of Directors. In connection
                with
                any transaction introduced, arranged, managed and/or negotiated by
                H..IG.
                Capital, including an acquisition, disposition, sale of us, or financing,
                we will pay H.I.G. Capital an investment banking fee and a supplemental
                management fee, each equal to a percentage of (i) the enterprise
                value of
                an acquisition or disposition, (ii) the financing amount, in connection
                with a debt or equity financing, or (iii) the benefit value, in connection
                with any other transaction not in the ordinary course of business.
                The
                investment banking fee and supplemental management fee with respect
                to
                future transactions will be payable only to the extent permitted
                under the
                Note Purchase Agreement. If payment of the fees is prohibited by
                the Note
                Purchase Agreement, the unpaid amount will accrue interest at the
                rate of
                5% per annum, compounded annually. We paid H.I.G. Capital a combined
                investment banking and supplemental management fee of $525,000 in
                connection with the purchase by certain investors, including H.I.G.
                Capital, of Series C Preferred Stock pursuant to a Series C Purchase
                Agreement. We paid H.I.G. Capital a combined investment banking and
                supplemental management fee of $200,000 in connection with the purchase
                by
                certain investors of Series E Preferred Stock pursuant to a Series
                E
                Purchase Agreement. Under both the management agreement and the investment
                advisory services agreement, we will reimburse H.I.G. Capital for
                expenses
                incurred in performance of its duties thereunder. Both agreements
                require
                us to indemnify H.I.G. Capital and its affiliates with respect to
                losses
                or claims arising from H.I.G. Capital’s performance of services, except as
                a result of its gross negligence or willful misconduct. Either party
                may
                terminate the management agreement or the investment advisory services
                agreement in the event of a breach of material terms by the other
                party,
                and H.I.G. Capital is entitled to recover damages in the event of
                such a
                breach by us.




·
            Our
                principal executive office is located at 420 Lexington Avenue, Suite
                2739,
                New York, New York 10170. We, through a license agreement effective
                August
                15, 2007 with Danson Partners, LLC, a party related to our chief
                executive
                officer, effectively assumed the Danson Partners’ lease obligation for a
                total of approximately 2,300 square feet of office space through
                May 31,
                2010, and licenses for its use all the furniture, fixtures, filing
                cabinets, computers, servers, office equipment, etc. that it needs
                to
                conduct its business.




·
            On
                August 17, 2007, we satisfied outstanding debts to our Chief Executive
                Officer, Vice President and Chief Financial Officer and Chief Operating
                Officer, to whom we were obligated to pay approximately $1,048,000
                for
                accrued and unpaid compensation, unreimbursed business expenses and
                the
                outstanding principal balance and accrued interest with respect to
                an
                unsecured promissory note dated April 24, 2006 issued by us to our
                Chief
                Executive Officer. We satisfied the outstanding debts with management
                with
                an aggregate payment of approximately $488,000 and the issuance of
                a note
                to Mr. Danson’s consulting company, Danson Partners, LLC, in the aggregate
                principal amount of $310,000, plus interest accruing at the rate
                of 7% per
                annum, upon the earlier of a change of control of us or August 17,
                2013.
                Mr. Danson also agreed to restructure a potential $250,000 bonus
                until
                such time as we satisfy certain milestones as described in Mr. Danson’s
                employment agreement.




47




·
            Upon
                the closing of the recapitalization, Dr. Finch and Messrs. Lichtman,
                Prouty and Roche, the four pre-closing directors of the Company received
                an aggregate of $365,000 for accrued directors’ and special committee fees
                of which $175,000 was used by the directors to purchase shares of
                Series
                A-2 Preferred.




·
            Pursuant
                to agreement entered into on March 7, 2006 by and between John E.
                Donahue,
                currently our Vice President and Chief Financial Officer, and Montgomery
                Scott, LLC (“Janney”), that served as our financial advisor and investment
                banker in connection with the recapitalization and acquisition of
                Vance
                Baldwin, Janney agreed to pay 5% of its advisory fees to Mr. Donahue
                as a
                finder’s fee. Janney paid this amount of Mr. Donahue in September 2007.
                Mr. Donahue entered into the agreement with Janney approximately
                six
                months prior to his joining the Company and prior to the Company
                discussing the possibility of Mr. Donahue joining the
                Company.




·
            On
                August 1, 2008, we sold 908.57 shares of our newly designated Series
                E
                Preferred for an aggregate purchase price of $3,785,714 in immediately
                available funds to ACT-DE, LLC and the other holders of its Series
                C
                Preferred (the “Other Series C Stockholders), pursuant to a Purchase
                Agreement (the “Series E Purchase Agreement”). We used the proceeds from
                the sale of the Series E Preferred, in conjunction with the debt
                proceeds
                described below, to fund the acquisition of Tritronics, Inc. and
                for
                working capital needs related to an agreement entered into with Philips
                Consumer Lifestyle North America as described on the Company's Form
                8-K
                filed with the SEC on July 18, 2008. On August 13, 2008, we completed
                a
                subsequent closing of the sale of shares of our Series E Preferred
                as
                contemplated by the Series E Stock Purchase Agreement at which we
                sold an
                additional 91.43 shares of our Series E Preferred, at a price of
                $4,167
                per share, to the holders of its Series C Preferred Stock, other
                than
                ACT-DE, LLC, for an aggregate cash purchase price of
                $380,957.




·
            On
                August 1, 2008, Encompass Parts entered into the Amended and Restated
                Note
                Purchase Agreement with Sankaty Advisors, LLC and other “Note Purchasers”,
                Encompass Parts Distribution, Inc., a Delaware corporation
                (“Encompass-DE”), as issuer, and us, Tritronics, SpectruCell, Inc., Hudson
                Street Investments, Inc., Cyber-Test and Vance Baldwin, as guarantors
                (the
                “Guarantors”).*See
                Part II, Management’s Discussion and Analysis of Financial Condition and
                Results of Operations – Liquidity and Capital Resources*–*Source of Liquidity – Senior**Notes
                and Senior Subordinated Notes and Senior Secured Credit
                Facility*above for a detailed description of the Amended and Restated Note
                Purchase
                Agreement. Certain affiliates of Sankaty are holders of our Series
                C and
                Series E Preferred. On August 1, 2008, we and the holders of Series
                C
                Preferred Stock entered into Amendment No. 1 to the Stockholder Agreement,
                dated August 17, 2007 (the “Amended Series C Stockholder Agreement”)
                originally entered into between such parties. Pursuant to the amendment,
                the shares of Series E Preferred issued to holders of Series C Preferred
                Stock are subject to the Series C Stockholder Agreement, including
                for
                purposes of transfer restrictions as well as co-sale rights on sales
                of
                preferred stock by the major Series C Preferred Stockholder in favor
                of
                the other Series C Stockholders. The Series C Stockholder Agreement
                was
                also amended to provide that we may not agree to an Exchange Transaction
                (as defined therein) without the prior written consent of the major
                Series
                C Preferred Stockholder and the prior written consent of holders
                of a
                majority of the outstanding shares of Series C Preferred held by
                the other
                Series C Stockholders.




**Director
      Independence**





During
      fiscal 2008, until their resignation on August 17, 2007, the following members
      of our Board of Directors were independent under the relevant Marketplace Rules
      of The NASDAQ Stock Market LLC: Messrs. Prouty and Roche and Dr. Finch. During
      fiscal 2008 until his resignation on August 17, 2007, Mr. Prouty served on
      the
      Audit Committee and the Compensation Committee. During 2008 until his
      resignation from the Board of Directors on August 17, 2007, Dr. Finch served
      on
      the Audit Committee. Mr. Roche also served on the Compensation Committee in
      fiscal 2008. Messrs. Prouty and Dr. Finch satisfied the criteria set forth
      under
      the Marketplace Rules of The NASDAQ Stock Market LLC relating to the heightened
      independence standards for members of the Audit Committee. Although Mr. Roche
      satisfied the independence criteria as a member of the Board of Directors,
      we
      have paid fees to the law firm of Roche & Holt, of which Mr. Roche is a
      principal, for legal services rendered to us.




48




During
      fiscal 2008, following the resignation of Mr. Prouty and Dr, Finch, the
      following members of our Board of Directors were independent under the relevant
      Marketplace Rules of The NASDAQ Stock Market LLC: Messrs. Ball, Black, Ketteler,
      Nolan, Roche and Wedren. During fiscal year 2008 and currently the members
      of
      the Audit Committee, Messrs. Ball, Ketteler and Wedren, satisfy both the
      separate independence requirements of NASDAQ and the SEC for members of the
      Audit Committee. Messrs. Nolan, Roche and Wedren currently serve on the
      Compensation Committee.





The
      Board
      of Directors did not consider any transaction, relationship or arrangement
      not
      otherwise disclosed below under the heading “Certain Relationships and Related
      Transactions” in determining the independence of Messrs. Ball, Black, Ketteler,
      Nolan, Roche and Wedren.





**Item
      14.****Principal
      Accounting Fees and Services.**




Berenson
      LLP (“Berenson”) served as our independent auditors for the fiscal year ended
      June 30, 2006 through May 11, 2007. J.H. Cohn LLP (“JH Cohn”) served as our
      independent auditors for the balance of fiscal year ended June 30, 2007 and
      for
      the fiscal year ended June 30, 2008. We have been or will be billed the fees
      set
      forth below in connection with services rendered by the independent auditors
      to
      us:


Fee
                  Category
              
              Fiscal
                  2008
              
              Fiscal
                  2007Audit
                  Fees1
              
              $
              284,000
              
              $
              112,000Audit-Related
                  Fees2
              
              $
              -
              
              $
              10,000Tax
                  Fees3
              
              $
              16,000
              
              $
              -All
                  Other Fees4
              
              $
              156,000
              
              $
              122,000TOTAL
              
              $
              456,000
              
              $
              244,000




1
Audit
      fees consisted of fees for the audit of our annual financial statements, review
      of quarterly financial statements as well as services normally provided in
      connection with statutory and regulatory filings or engagements, comfort
      letters, consents and assistance with and review of our documents filed with
      the
      SEC. This category includes (i) $70,000 billed by JH Cohn for the audit of
      our
      annual consolidated financial statements for the fiscal year ended June 30,
      2007
      and the review of our Form 10-KSB for the fiscal year ended June 30, 2007,
      (ii)
      $42,000 billed by Berenson for the reviews of our consolidated financial
      statements included in our Forms 10-QSB for the quarters ended September 30,
      2006, December 31, 2006 and March 31, 2007, (iii) $170,000 billed or to be
      billed by JH Cohn for the audit of our annual consolidated financial statements
      for the fiscal year ended June 30, 2008 and the review of our Form 10-K for
      the
      fiscal year ended June 30, 2008 and $23,000 billed in connection with a Form
      8K/A filed with the SEC, and (iv) $91,000 billed by JH Cohn for the reviews
      of
      our consolidated financial statements included in our Forms 10-QSB for the
      quarters ended September 30, 2007, December 31, 2007 and March 31, 2008.




2 Audit-related
      fees consisted of fees for assurance and related services, including primarily
      employee benefit plan audits, due diligence related to acquisitions, accounting
      consultations in connection with acquisitions, consultation concerning financial
      accounting and reporting standards and consultation concerning matters related
      to Section 404 of the Sarbanes Oxley Act of 2002. This category includes fees
      billed by Berenson for the fiscal year ended June 30, 2007 in the amounts of
      $10,000 for services rendered in connection with a restatement of certain annual
      and quarterly financial statements.





3 Tax
      fees
      consisted primarily of fees for tax compliance, tax advice and tax planning
      services.




4 Other
      than the services described above, the aggregate fees billed for services
      rendered by JH Cohn were $156,000 and $122,000 for the fiscal years ended June
      30, 2008 and 2007. These fees were related to the audits and due diligence
      services for acquiring certain business targets.




**Policy
      for Pre-Approval of Audit and Non-Audit Services**





All
      engagements of our independent auditor to perform any audit services and
      non-audit services were approved by the Audit Committee in accordance with
      its
      normal functions. During the fiscal years ended June 30, 2008 and 2007, no
      audit
      services or non-audit services were approved by the Audit Committee pursuant
      to
      Rule 2-01(c)(7)(i)(C) of Regulation S-X. The Board of Directors and the Audit
      Committee are in the process of creating a policy to pre-approve all audit
      services and all non-audit services that our independent auditor will perform
      for us under applicable federal securities regulations. As permitted by the
      applicable regulations, we anticipate that the Audit Committee’s policy will
      utilize a combination of specific pre-approval on a case-by-case basis of
      individual engagements of our independent auditor and general pre-approval
      of
      certain categories of engagements up to predetermined dollar thresholds that
      will be reviewed annually by the Audit Committee.





49




**Part
      IV**





**Item
      15. Exhibits and Financial Statement Schedules**




a)
      Financial Statements.




The
      Financial Statements and Supplementary Data are listed or are presented in
      Item
      8 of this Report on Form 10K.




(b)
      Financial Statement Schedules.




(c)
      Exhibits.




See
      Index
      to Exhibits which appears on Pages 51-56 of this Report on Form 10K.




50





**Exhibit No.**
            ****
            **Description**
            ****
            **Location(1)****2.1**
            ****
            **Asset
                Purchase Agreement dated May 27, 2004, by and between Cyber-Test,
                Inc., a
                Delaware corporation,and Cyber-Test, Inc., a Florida corporation.**
            ****
            **Incorporated
                by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on June18,2004****2.2**
            ****
            **Stock
                Purchase Agreement entered into by and between Encompass Group Affiliates,
                Inc. and Fred V. Baldwin, dated as of August 17,
                2007**
            ****
            **Incorporated
                by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****2.3**
            ****
            **Stock
                Purchase Agreement entered into by and between Encompass Group Affiliates,
                Inc., a Florida corporation, Encompass Group Affiliates, Inc., a
                Delaware
                corporation, Tritronics, Inc., Tritronics, LLC and the members of
                Tritronics, LLC listed on Schedule 2 thereto, dated as of August
                1,
                2008**
            ****
            **Incorporated
                by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****3(i)(a)**
            ****
            **Restated
                Articles of Incorporation of Advanced Communications Technologies,
                Inc.**
            ****
            **Incorporated
                by reference to Exhibit 3(i) to the Company’s Annual Report on Form 10-KSB
                filed with the SEC on September 28, 2007****3(i)(b)**
            ****
            **Articles
                of Amendment to the Articles of Incorporation of Advanced Communications
                Technologies, Inc. filed with the Secretary of State of Florida on
                May 6,
                2008**
            ****
            **Incorporated
                by reference to Exhibit 3(i)(b) to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****3(i)(c)**
            ****
            **Articles
                of Amendment to the Articles of Incorporation of Advanced Communications
                Technologies, Inc. filed with the Secretary of State of Florida on
                August
                1, 2008**
            ****
            **Incorporated
                by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****3(ii)**
            ****
            **Amended
                Bylaws of Advanced Communications Technologies,
                Inc.**
            ****
            **Incorporated
                by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****4.1**
            ****
            **Form
                of Exchange Agreement, dated June 24, 2004, by and among Advanced
                Communications Technologies, Inc. and certain debenture holders of
                Hy-Tech
                Technology Group, Inc.**
            ****
            **Incorporated
                by reference to Exhibit 10.40 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on November 3, 2004****4.2**
            ****
            **Form
                of Convertible Promissory Note issued in connection with Exhibit
                2.2**
            ****
            **Incorporated
                by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21,
                2007**




51




**4.3.1**
            ****
            **Note
                Purchase Agreement, dated as of August 17, 2007, by and among Encompass
                Group Affiliates, Inc. as Issuer, and Advanced Communications
                Technologies, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson
                Street
                Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers
                listed therein, and Sankaty Advisors, LLC**
            ****
            **Incorporated
                by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****4.3.2**
            ****
            **Form
                of Senior Note issued in connection with Exhibit
                4.3.1**
            ****
            **Incorporated
                by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****4.3.3**
            ****
            **Form
                of Subordinated Note issued in connection with Exhibit
                4.3.1**
            ****
            **Incorporated
                by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****4.3.4**
            ****
            **First
                Lien Pledge and Security Agreement, dated as of August 17, 2007,
                between
                Encompass Group Affiliates, Inc., Advanced Communications Technologies,
                Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test,
                Inc., Vance Baldwin, Inc. and Sankaty Advisors,
                LLC**
            ****
            **Incorporated
                by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****4.3.5**
            ****
            **Second
                Lien Pledge and Security Agreement , dated August 17, 2007, between
                Encompass Group Affiliates, Inc., Advanced Communications Technologies,
                Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test,
                Inc., Vance Baldwin, Inc. and Sankaty Advisors,
                LLC**
            ****
            **Incorporated
                by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****4.4**
            ****
            **Form
                of Subordinated Promissory Note issued in connection with Exhibit
                2.3**
            ****
            **Incorporated
                by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****4.5.1**
            ****
            **Amended
                and Restated Note Purchase Agreement, dated as of August 1, 2008,
                by and
                among Encompass Group Affiliates, Inc., a Delaware corporation as
                Issuer,
                Encompass Group Affiliates, Inc., a Florida corporation, Tritronics,
                Inc.,
                Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments,
                Inc. and
                SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein,
                and
                Sankaty Advisors, LLC.**
            ****
            **Incorporated
                by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7,
                2008**




52




**4.5.2**
            ****
            **Form
                of Series B Subordinated Note issued in connection with Exhibit
                4.5.1**
            ****
            **Incorporated
                by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****4.5.3**
            ****
            **Amended
                and Restated First Lien Pledge and Security Agreement, dated as of
                August
                1, 2008, between Encompass Group Affiliates, Inc., a Delaware corporation,
                Encompass Group Affiliates, Inc., a Florida corporation, Tritronics,
                Inc.,
                SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc.,
                Vance Baldwin, Inc. and Sankaty Advisors, LLC**
            ****
            **Incorporated
                by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****4.5.4**
            ****
            **Amended
                and Restated Second Lien Pledge and Security Agreement, dated August
                1,
                2008, between Encompass Group Affiliates, Inc., a Delaware corporation,
                Encompass Group Affiliates, Inc., a Florida corporation, Tritronics,
                Inc.,
                SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc.,
                Vance Baldwin, Inc. and Sankaty Advisors, LLC.**
            ****
            **Incorporated
                by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****10.1**
            ****
            **Employment
                Agreement, dated June 3, 2004, by and between Cyber-Test, Inc., a
                Delaware
                corporation, and Lisa Welton.**
            ****
            **Incorporated
                by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
                filed with the SEC on June 18, 2004****10.2**
            ****
            **Employment
                Agreement, dated June 3, 2004, by and between Cyber-Test, Inc., a
                Delaware
                corporation, and Thomas Sutlive.**
            ****
            **Incorporated
                by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K
                filed with the SEC on June 18, 2004****10.3***
            ****
            **Employment
                Agreement dated September 21, 2006 between Advanced Communications
                Technologies, Inc. and John E. Donahue**
            ****
            **Incorporated
                by reference to Exhibit 10.23 to the Company’s Current Report on Form 8-K
                filed with the SEC on September 29, 2006****10.4***
            ****
            **Employment
                Agreement dated September 8, 2006 between Advanced Communications
                Technologies, Inc. and Steven J. Miller**
            ****
            **Incorporated
                by reference to Exhibit 10.23 to the Company’s Current Report on Form 8-K
                filed with the SEC on September 29, 2006****10.5**
            ****
            **Stockholders
                Agreement by and among Advanced Communications Technologies, Inc.,
                the
                holders of the Series C Convertible Preferred Stock and the holders
                of the
                Series D Convertible Preferred Stock, dated as of August 17,
                2007**
            ****
            **Incorporated
                by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21,
                2007**




53




**10.6.1**
            ****
            **Purchase
                Agreement entered into by and among Advanced Communications Technologies,
                Inc., ACT-DE, LLC and the other Buyers identified on Schedule 1 thereto,
                dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****10.6.2**
            ****
            **Registration
                Rights Agreement entered into by and among Advanced Communications
                Technologies, Inc., ACT-DE, LLC and the persons and entities identified
                on
                Schedule 1 thereto, dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****10.6.3**
            ****
            **Stockholders
                Agreement by and among Advanced Communications Technologies, Inc.,
                ACT-DE,
                LLC and the persons and entities identified on Schedule 1 thereto,
                dated
                as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****10.7**
            ****
            **Exchange
                Agreement entered into by and among Advanced Communications Technologies
                and the parties listed on the signature pages thereto, dated as of
                August
                17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****10.8.1***
            ****
            **Amended
                and Restated 2005 Stock Plan**
            ****
            **Incorporated
                by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****10.8.2***
            ****
            **Form
                of Option Agreement for Executive Officers under the Amended and
                Restated
                2005 Stock Plan**
            ****
            **Incorporated
                by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 21, 2007****10.9**
            ****
            **Management
                Agreement entered into by Advanced Communications Technologies, Inc.
                and
                H.I.G. Capital L.L.C., dated as of August 17,
                2007**
            ****
            **Incorporated
                by reference to Exhibit 10.33 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.10**
            ****
            **Investment
                Advisory Services Agreement entered into by Advanced Communications
                Technologies, Inc. and H.I.G. Capital L.L.C., dated as of August
                17,
                2007**
            ****
            **Incorporated
                by reference to Exhibit 10.34 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.11***
            ****
            **Letter
                Agreement among Wayne I. Danson, Danson Partners LLC and Advanced
                Communications Technologies, Inc. dated as of August 17,
                2007**
            ****
            **Incorporated
                by reference to Exhibit 10.36 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.12***
            ****
            **Employment
                Agreement between Wayne Danson and Advanced Communications Technologies,
                Inc., dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.37 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007**




54




**10.13***
            ****
            **Employment
                Agreement between John Donahue and Advanced Communications Technologies,
                Inc. dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.38 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.14***
            ****
            **Employment
                Agreement between Steven Miller and Advanced Communications Technologies,
                Inc. dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.39 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.15***
            ****
            **Stock
                Option Agreement between Wayne Danson and Advanced Communications
                Technologies, Inc., dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.40 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.16***
            ****
            **Stock
                Option Agreement between John Donahue and Advanced Communications
                Technologies, Inc., dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.41 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.17***
            ****
            **Stock
                Option Agreement between Steven Miller and Advanced Communications
                Technologies, Inc., dated as of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 10.42 to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.18**
            ****
            **Side
                Letter between H.I.G. Capital L.L.C. and Sankaty Advisors, LLC, dated
                as
                of August 17, 2007**
            ****
            **Incorporated
                by reference to Exhibit 3(i)(b) to the Company’s Annual Report on Form
                10-KSB filed with the SEC on September 28,
                2007****10.19**
            ****
            **Stock
                Purchase Agreement entered into by and among Encompass Group Affiliates,
                Inc., ACT-DE, LLC and the persons and entities identified on Schedule
                1
                thereto, dated August 1, 2008.**
            ****
            **Incorporated
                by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****10.20**
            ****
            **Amendment
                No. 1 to Stockholder Agreement, among Encompass Group Affiliates,
                Inc.,
                ACT-DE, LLC, and the persons and entities identified on Schedule
                1
                thereto, dated August 1, 2008.**
            ****
            **Incorporated
                by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
                filed with the SEC on August 7, 2008****10.21**
            ****
            **Spare
                Parts Agreement between Vance Baldwin Electronics, a wholly-owned
                subsidiary of Encompass Group Affiliates, Inc. and Philips Consumer
                Lifestyle North America, a division of Philips Electronics North
                America
                Corporation, dated July 14, 2008.**
            ****
            **Filed
                herewith (subject to request for confidential
                treatment)****14**
            ****
            **Code
                of Business Conduct and Ethics for Advanced Communications Technologies,
                Inc.**
            ****
            **Incorporated
                by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB
                filed with the SEC on November 3, 2004****21**
            ****
            **Subsidiaries
                ofEncompass Group Affiliates.**
            ****
            **Filed
                herewith**




55




**31.1**
            ****
            **Certification
                byChief
                Executive Officer****pursuant to Sarbanes**–**Oxley Section
                302**
            ****
            **Filed
                herewith****31.2**
            ****
            **Certification
                by Chief Financial Officer pursuant to Sarbanes-Oxley Section
                302**
            ****
            **Filed
                herewith****32.1**
            ****
            **Certification
                byChief
                Executive Officerpursuant to 18 U.S.C. Section 1350**
            ****
            **Filed
                herewith****32.2**
            ****
            **Certification
                byChief
                Financial Officerpursuant to 18 U.S.C. Section 1350**
            ****
            **Filed
                herewith**




***
      Management contract or management compensatory plan or
      arrangement.**




**(1)
      In the case of incorporation by reference to documents filed by the Company
      under the Exchange Act, the Company’s file number under the Exchange Act is
      000-30486.**




56




**Signatures**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this amended report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




**Encompass
                Group Affiliates, Inc.**By:
            */s/
                Wayne I. Danson*Name:
            Wayne
                I. DansonTitle:
            President
                and Chief Executive OfficerDate:
            October
                14, 2008


In
      accordance with the Exchange Act, this amended report has been signed below
      by
      the following persons on behalf of the registrant and in the capacities and
      on
      the dates indicated.




**Signature**
              
              **Title**
              
              **Date***/s/
                  Wayne I. Danson*Wayne
                  I. Danson
              
              President
                  and Chief Executive Officer (Principal
                Executive
                  Officer) and Director
              
              October
                  14, 2008*/s/
                  John E. Donahue*John
                  E. Donahue
              
              Vice
                  President and Chief Financial Officer
                (Principal
                  Accounting Officer)
              
              October
                    14, 2008*/s/
                  John Black*John
                  Black
              
              Director
              
              October
                    14, 2008*/s/
                  J.G. (Pete) Ball*J.G.
                  (Pete) Ball
              
              Director
              
              October
                    14, 2008*/s/
                  Thomas R. Ketteler*Thomas
                  R. Ketteler
              
              Director
              
              October
                    14, 2008*/s/
                  Wilbank J. Roche*Wilbank
                  J. Roche
              
              Director
              
              October
                    14, 2008*/s/
                  William J. Nolan*William
                  J. Nolan
              
              Director
              
              October
                    14, 2008*/s/
                  Gerald E. Wedren**Gerald
                  E. Wedren*
              
              Director
              
              October
                    14, 2008




57




**Encompass
      Group Affiliates, Inc. And Subsidiaries**





**Contents**





PageF-2
            
            
            Report
                of independent registered public accounting firmF-3
            
            
            Consolidated
                balance sheets as of June 30, 2008 and 2007F-4
            
            
            Consolidated
                statements of operations for the years ended June 30, 2008, 2007
                and
                2006F-5
            
            
            Consolidated
                statements of changes in stockholders’ equity (deficiency) for the years
                ended June 30, 2008, 2007 and 2006F-6
            
            
            Consolidated
                statements of cash flows for the years ended June 30, 2008, 2007
                and
                2006F7 – F-28
            
            
            Notes
                to consolidated financial statements


F-1


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors


Encompass
      Group Affiliates, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Encompass Group
      Affiliates, Inc. (formerly Advanced Communications Technologies, Inc.), and
      Subsidiaries as of June 30, 2008 and 2007 and the related consolidated
      statements of operations, changes in stockholders' equity (deficiency) and
      cash
      flows for each of the years in the three-year period ended June 30, 2008. These
      consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the auditing standards of the Public
      Company Accounting Oversight Board (United States). Those standards require
      that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly
      in all material respects, the financial position of Encompass Group Affiliates,
      Inc. and Subsidiaries as of June 30, 2008 and 2007, and their results of
      operations and cash flows for each of the years in the three-year period ended
      June 30, 2008 in conformity with accounting principles generally accepted in
      the
      United States of America.





J.H.
      COHN
      LLP


New
      York,
      New York


October
      14, 2008







F-2





**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**June 30,****2008**
            
            **2007****ASSETS**Current
                AssetsCash
                and cash equivalents
            
            $
            4,008,000
            
            $
            844,000Restricted
                cash
            
            
            394,000
            
            
            —Accounts
                receivable, net of allowance for doubtful accounts of $73,527 and
                $6,919
                at June 30, 2008 and 2007, respectively
            
            
            5,908,000
            
            
            429,000Inventory
            
            
            3,806,000
            
            
            —Replacement
                parts and equipment
            
            
            655,000
            
            
            371,000Due
                from vendors
            
            
            1,103,000
            
            
            —Deferred
                tax asset
            
            
            1,100,000
            
            
            —Prepaid
                expenses and other current assets
            
            
            870,000
            
            
            84,000Total
                Current Assets
            
            
            17,844,000
            
            
            1,728,000Property
                and equipment, net
            
            
            550,000
            
            
            262,000Other
                AssetsIntangible
                assets, net
            
            
            9,610,000
            
            
            —Goodwill
            
            
            14,075,000
            
            
            2,624,000Deferred
                tax asset
            
            
            3,400,000
            
            
            —Other
                assets
            
            
            1,133,000
            
            
            893,000Total
                Other Assets
            
            
            28,218,000
            
            
            3,517,000**TOTAL
                ASSETS**
            
            **$**
            **46,612,000**
            
            **$**
            **5,507,000****LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIENCY)****LIABILITIES**Current
                LiabilitiesAccounts
                payable and accrued expenses
            
            $
            8,450,000
            
            $
            3,573,000Escrow
                liability
            
            
            394,000
            
            
            —Senior
                notes payable, current portion
            
            
            507,000
            
            
            617,000Capitalized
                lease obligation, current portion
            
            
            34,000
            
            
            15,000Total
                Current Liabilities
            
            
            9,385,000
            
            
            4,205,000Long
                Term LiabilitiesSenior
                Notes, net of unamortized original issue discount and less current
                portion
            
            
            11,649,000
            
            
            —Senior
                Subordinated Notes, net of unamortized original issue
                discount
            
            
            11,552,000
            
            
            —Convertible
                notes payable
            
            
            1,206,000
            
            
            —Note
                payable, officer
            
            
            310,000
            
            
            —Capitalized
                lease obligation, less current portion
            
            
            42,000
            
            
            —Convertible
                Preferred StockSeries
                A convertible preferred stock, $.01 par value
            
            
            —
            
            
            3,006,000Series
                A-1 convertible preferred stock, $.01 par value
            
            
            —
            
            
            340,000Series
                B convertible preferred stock, $.01 par value
            
            
            —
            
            
            40,000Total
                Long Term Liabilities
            
            
            24,759,000
            
            
            3,386,000**TOTAL
                LIABILITIES**
            
            
            34,144,000
            
            
            7,591,000**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS'
                EQUITY (DEFICIENCY)**Preferred
                stock, $.01 par value, 25,000 authorized, 2,000
                shares issued and outstanding in 2008:Series
                C convertible preferred stock, $.01 par value, 1,000 shares authorized,
                1,000 shares issued and outstanding (liquidation value of $6,957,000)
                in
                2008
            
            
            —
            
            
            —Series
                D convertible preferred stock, $.01 par value, 1,000 shares authorized,
                1,000 shares issued and outstanding (liquidation value of $700,000)
                in
                2008
            
            
            —
            
            
            —Common
                stock, no par value, 230,000,000,000 shares authorized in 2008 and
                5,000,000,000 in 2007, 13,489,918,237 and 4,997,711,570 shares issued
                and
                outstanding in 2008 and 2007, respectively
            
            
            35,350,000
            
            
            31,092,000Additional
                paid-in capital
            
            
            8,347,000
            
            
            1,280,000Accumulated
                deficit
            
            
            (31,229,000
            )
            
            (34,456,000
            )Total
                Stockholders' Equity (Deficiency)
            
            
            12,468,000
            
            
            (2,084,000
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **46,612,000**
            
            **$**
            **5,507,000**





See
      accompanying notes to consolidated financial statements


F-3


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**For The Years Ended June 30,****2008**
            
            **2007**
            
            **2006****NET
                SALES**
            
            $
            64,327,000
            
            $
            9,244,000
            
            $
            9,183,000**COST
                OF SALES**
            
            
            50,543,000
            
            
            6,133,000
            
            
            5,959,000**GROSS
                PROFIT**
            
            
            13,784,000
            
            
            3,111,000
            
            
            3,224,000**OPERATING
                EXPENSES**Depreciation
                and amortization
            
            
            1,245,000
            
            
            75,000
            
            
            98,000Selling,
                general and administrative expenses
            
            
            10,299,000
            
            
            3,743,000
            
            
            3,837,000Asset
                impairment charge
            
            
            —
            
            
            400,000
            
            
            —**TOTAL
                OPERATING EXPENSES**
            
            
            11,544,000
            
            
            4,218,000
            
            
            3,935,000Income
                (Loss) From Operations
            
            
            2,240,000
            
            
            (1,107,000
            )
            
            (711,000
            )**OTHER
                INCOME (EXPENSE)**Litigation
                settlement
            
            
            —
            
            
            —
            
            
            220,000Other
                income
            
            
            59,000
            
            
            —
            
            
            —Interest
                expense, net
            
            
            (2,752,000
            )
            
            (143,000
            )
            
            (83,000
            )**TOTAL
                OTHER INCOME (EXPENSE), NET**
            
            
            (2,693,000
            )
            
            (143,000
            )
            
            137,000Loss
                before income tax benefit
            
            
            (453,000
            )
            
            (1,250,000
            )
            
            (574,000
            )Income
                tax benefit, deferred
            
            
            4,500,000
            
            
            —
            
            
            —**NET
                INCOME (LOSS)**
            
            
            4,047,000
            
            
            (1,250,000
            )
            
            (574,000
            )Deemed
                dividend on preferred stock
            
            
            (820,000
            )Cumulative
                preferred stock dividend
            
            
            (723,000
            )
            
            —
            
            
            —**NET
                INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS**
            
            $
            2,504,000
            
            $
            (1,250,000
            )
            $
            (574,000
            )Basic
                net income (loss) per share
            
            $
            —
            
            $
            —
            
            $
            —Basic
                weighted average number of shares outstanding
            
            
            6,300,625,470
            
            
            4,821,987,000
            
            
            3,514,362,000Diluted
                net income (loss) per share
            
            $
            —
            
            $
            —
            
            $
            —Diluted
                weighted average number of shares outstanding
            
            
            72,298,715,284
            
            
            4,821,987,000
            
            
            3,514,362,000





See
      accompanying notes to consolidated financial statements


F-4


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)**




**PREFERRED
                  STOCK**
              
              **COMMON STOCK**
              
              **ADDITIONAL**
              
              
              
              **DEFFERED**
                  **COMMITMENT****SHARES**
              
              **AMOUNT**
              
              **SHARES**
              
              **AMOUNT**
              
              **PAID IN**
                **CAPTIAL**
              
              **ACCUMULATED**
                **DEFICIT**
              
              **AND EQUITY**
                **FINANCING FEE**
              
              **DEFERRED**
                **COMPENSATION**
              
              **TOTAL****BALANCE
                  AT JULY 1, 2005**
              
              
              —
              
              $
              —
              
              
              **3,151,774,000**
              
              **$**
              **29,752,000**
              
              **$**
              **1,570,000**
              
              **$**
              (32,421,000
              )
              **$**
              (25,000
              )
              **$**
              (250,000
              )
              **$**
              **(1,374,000**Stock
                  issued on conversion of Series A preferred stock
              
              
              —
              
              
              —
              
              
              885,994,000
              
              
              635,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              635,000Stock
                  issued on conversion of Series B preferred stock
              
              
              —
              
              
              —
              
              
              63,492,000
              
              
              40,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              40,000Escrow
                  of contingent stock
              
              
              —
              
              
              —
              
              
              16,667,000
              
              
              13,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              13,000Stock
                  issued for executive bonus
              
              
              —
              
              
              —
              
              
              50,000,000
              
              
              35,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              35,000Amortization
                  of deferred compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (375,000
              )
              
              —
              
              
              —
              
              
              250,000
              
              
              (125,000Amortization
                  of deferred commitment & financing fees
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              25,000
              
              
              —
              
              
              25,000Accrued
                  distribution of Herborium Inc.'s common shares to
                  shareholders
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (50,000
              )
              
              —
              
              
              —
              
              
              (50,000Net
                  loss for the year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (574,000
              )
              
              —
              
              
              —
              
              
              (574,000**BALANCE
                  AT JUNE 30, 2006**
              
              
              —
              
              
              —
              
              
              **4,167,927,000**
              
              
              **30,475,000**
              
              
              **1,195,000**
              
              
              (33,045,000
              )
              
              **—**
              
              
              **—**
              
              
              **(1,375,000**Stock
                  issued on conversion of Series A preferred stock
              
              
              —
              
              
              —
              
              
              789,785,000
              
              
              559,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              559,000Stock
                  issued on conversion of Series B preferred stock
              
              
              —
              
              
              —
              
              
              20,000,000
              
              
              20,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              20,000Common
                  stock issued to officers
              
              
              —
              
              
              —
              
              
              20,000,000
              
              
              38,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              38,000Accrued
                  distribution of Herborium Inc.'s common shares to
                  shareholders
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (161,000
              )
              
              —
              
              
              —
              
              
              (161,000Beneficial
                  conversion feature attributable to Series A-1 preferred
                  stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              85,000
              
              
              —
              
              
              —
              
              
              —
              
              
              85,000Net
                  loss for the year
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,250,000
              )
              
              —
              
              
              —
              
              
              (1,250,000
  F-5
  **ENCOMPASS
          GROUP AFFILIATES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)**
 **PREFERRED
                  STOCK**
              
              
              **COMMON STOCK**
              
              
              **ADDITIONAL**
              
              
              
              
              
              **DEFFERED**
                **COMMITMENT****SHARES**
              
              
              **AMOUNT**
              
              
              **SHARES**
              
              
              **AMOUNT**
              
              
              **PAID IN**
                **CAPTIAL**
              
              
              **ACCUMULATED**
                **DEFICIT**
              
              
              **AND EQUITY**
                **FINANCING FEE**
              
              
              **DEFERRED**
                **COMPENSATION**
              
              
              **TOTAL****BALANCE
                  AT JUNE 30, 2007**
              
              
              —
              
              
              —
              
              
              **4,997,712,000**
              
              
              **31,092,000**
              
              
              **1,280,000**
              
              
              (34,456,000
              )
              
              **—**
              
              
              **—**
              
              
              **(2,084,000**Exchange
                  of Series A, Series B and Series A-1 convertible preferred stock
                  for
                  Series A-2 convertible preferred stock, resulting in a deemed dividend
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (820,000
              )
              
              —
              
              
              —
              
              
              (820,000Issuance
                  of Series C and Series D convertible preferred stock
              
              
              2,000
              
              
              —
              
              
              —
              
              
              —
              
              
              6,443,000
              
              
              —
              
              
              —
              
              
              —
              
              
              6,443,000Reclassification
                  of Series A-2 convertible preferred stock from debt to stockholders’
                  equity
              
              
              8,412
              
              
              4,206,000
              
              
              
              
              
              
              
              
              —
              
              
              
              
              
              
              
              
              
              
              
              4,206,000Conversion
                  of Series A-2 convertible preferred stock into common stock
              
              
              (8,412
              )
              
              (4,206,000
              )
              
              8,412,206,000
              
              
              4,206,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —Stock-based
                  compensation - issuance of common shares to officers
              
              
              —
              
              
              —
              
              
              80,000,000
              
              
              52,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              52,000Stock-based
                  compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              624,000
              
              
              
              
              
              —
              
              
              —
              
              
              624,000Net
                  income for the year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              4,047,000
              
              
              —
              
              
              —
              
              
              4,047,000**BALANCE
                  AT JUNE 30, 2008**
              
              
              **2,000**
              
              **$**
              **—**
              
              
              **13,489,918,000**
              
              **$**
              **35,350,000**
              
              **$**
              **8,347,000**
              
              **$**
              (31,229,000
              )
              **$**
              **—**
              
              **$**
              **—**
              
              **$**
              **12,468,000**




See
      accompanying notes to consolidated financial statements


F-6


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**AS
      OF JUNE 30, 2008**





**For
                the Years Ended June 30,****2008**
            
            **2007**
            
            **2006****CASH
                FLOWS PROVIDED BY OPERATIONS:**Net
                income (loss)
            
            $
            4,047,000
            
            $
            (1,250,000
            )
            $
            (574,000
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            1,245,000
            
            
            75,000
            
            
            98,000Deferred
                income taxes
            
            
            (4,500,000
            )
            
            —
            
            
            —Provision
                for doubtful accounts
            
            
            5,000
            
            
            2,000
            
            
            —Stock-based
                compensation
            
            
            676,000
            
            
            38,000
            
            
            (90,000
            )Beneficial
                conversion feature of Series A-1 preferred stock
            
            
            —
            
            
            85,000
            
            
            —Asset
                impairment charge
            
            
            —
            
            
            400,000
            
            
            —Loss
                on sale of marketable securities
            
            
            —
            
            
            5,000
            
            
            —Stock
                distribution received from Herborium, Inc.
            
            
            —
            
            
            (1,000
            )
            
            —Litigation
                settlement
            
            
            —
            
            
            —
            
            
            (220,000
            )Changes
                in operating assets and liabilities:(Increase)
                decrease in assets:Accounts
                receivables
            
            
            315,000
            
            
            (59,000
            )
            
            (8,000
            )Inventory
            
            
            (820,000
            )
            
            —
            
            
            —Replacement
                parts and equipment
            
            
            (284,000
            )
            
            43,000
            
            
            (47,000
            )Due
                from vendors
            
            
            (337,000
            )
            
            —
            
            
            —Prepaid
                expense and other assets
            
            
            (506,000
            )
            
            20,000
            
            
            (4,000
            )Increase
                in liabilities:Accounts
                payable and accrued expenses
            
            
            311,000
            
            
            984,000
            
            
            1,169,000Net
                cash provided by operating activities
            
            
            152,000
            
            
            342,000
            
            
            324,000**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Purchase
                of business, net of cash acquired
            
            
            (22,321,000
            )
            
            —
            
            
            —Increase
                in acquisition costs
            
            
            (2,769,000
            )
            
            (176,000
            )
            
            (302,000
            )Purchase
                of property and equipment
            
            
            (238,000
            )
            
            (108,000
            )
            
            (42,000
            )Funds
                received from PMIC bankruptcy trustee
            
            
            —
            
            
            27,000
            
            
            —Decrease
                (increase) in other assets
            
            
            (33,000
            )
            
            12,000
            
            
            8,000Net
                cash used in investing activities
            
            
            (25,361,000
            )
            
            (245,000
            )
            
            (336,000
            )**CASH
                FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:**Principal
                payments on notes payable and capitalized leases
            
            
            (1,026,000
            )
            
            (349,000
            )
            
            (104,000
            )Proceeds
                from issuance of promissory note
            
            
            —
            
            
            —
            
            
            35,000Proceeds
                from sale of preferred stock
            
            
            6,300,000
            
            
            —
            
            
            —Proceeds
                from sale of senior and subordinated notes
            
            
            24,000,000
            
            
            —
            
            
            —Payment
                of debt and equity issuance costs
            
            
            (901,000
            )
            
            —
            
            
            —Proceeds
                from sale of Series A-1 preferred stock
            
            
            —
            
            
            340,000
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            28,373,000
            
            
            (9,000
            )
            
            (69,000
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            3,164,000
            
            
            88,000
            
            
            (81,000
            )Cash
                and cash equivalents at beginning of year
            
            
            844,000
            
            
            756,000
            
            
            837,000**CASH
                AND CASH EQUIVALENTS AT END OF YEAR**
            
            **$**
            **4,008,000**
            
            **$**
            **844,000**
            
            **$**
            **756,000**




F-7


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**




**NOTE
      1.**  **BASIS
      OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES**




***Organization***




Unless
      the context requires otherwise, “we”, “us”, “our”, “Encompass Group” or the
“Company” refers to Encompass Group Affiliates, Inc., a Florida corporation, and
      its wholly and majority-owned subsidiaries on a consolidated basis. Our
      shareholders approved a proxy solicitation that closed May 5, 2008 to, among
      other actions, amended the company Articles of Incorporation to change its
      name
      to Encompass Group Affiliates, Inc. from Advanced Communications Technologies,
      Inc.




We
      are a
      New York-based public holding company specializing in the technology aftermarket
      service and supply chain, known as reverse logistics. Our wholly-owned
      subsidiary and principal operating unit, Encompass Parts Distribution, Inc.
      (formerly known as Encompass Group Affiliates, Inc.) ("Encompass Parts"), a
      Delaware corporation, acquires and operates businesses that distribute
      replacement parts for consumer electronics and computers as well as printers
      and
      office supplies and provide complimentary computer and electronic equipment
      repair and end-of-life cycle services. On June 2, 2004, Encompass Parts acquired
      Cyber-Test, Inc., a Delaware corporation ("Cyber-Test"). Cyber-Test, which
      had
      been our principal operating business prior to the acquisitions described below,
      is an electronic equipment depot repair company based in Florida.





Cyber-Test
      operates as an independent service organization that provides board-level repair
      of technical products to third-party warranty companies, OEMs, national
      retailers and national office equipment dealers. Service options include advance
      exchange, depot repair, call center support, parts and warranty management.
      Cyber-Test's technical competency extends from office equipment and fax machines
      to printers, scanners, laptop computers, monitors, multi-function units and
      high-end consumer electronics such as PDA’s and digital cameras. Programs are
      delivered nationwide through proprietary systems that feature real-time EDI,
      flexible analysis tools and repair tracking.





On
      August
      17, 2007, Encompass completed the acquisition of Vance Baldwin, Inc., an
      Original Equipment Manufacturer (OEM) Parts Distributor that has been a leader
      in the industry for over fifty years. Vance Baldwin has operations in southern
      Florida and suburban Atlanta and distributes parts ranging from consumer
      electronics and computers to printers and office supplies. In addition, Vance
      Baldwin provides service aids and industrial products such as cable, tools,
      test
      equipment, cleaners and other installation equipment. Further, on August 1,
      2008, Encompass completed the acquisition of Tritronics, Inc., also an OEM
      Parts
      Distributor, with operations in suburban Baltimore and Miami. (See *Note
      17* for
      further information concerning this acquisition and the related financing
      transactions.)





***Financial
      Statement Presentation and Principles of Consolidation***





The
      consolidated financial statements include the Company and all of its
      wholly-owned subsidiaries. All significant inter-company transactions have
      been
      eliminated in consolidation.





***Use
      of Estimates***




The
      preparation of the consolidated financial statements of the Company in
      conformity with accounting principles generally accepted in the United States
      of
      America requires management to make estimates and assumptions that affect the
      reported amount of assets and liabilities at the date of the financial
      statements and the reported amount of revenues and expenses during the period.




***Allowance
      for Doubtful Accounts***




We
      make
      judgments as to our ability to collect outstanding trade receivables and provide
      allowances for the portion of receivables when collection becomes doubtful.
      Provisions are made based upon a specific review of all significant outstanding
      invoices. For those invoices not specifically reviewed, provisions are provided
      at differing rates, based upon the age of the receivable. In determining these
      percentages, we analyze our historical collection experience and current
      economic trends. If the historical data we use to calculate the allowance
      provided for doubtful accounts does not reflect our future ability to collect
      outstanding receivables, additional provisions for doubtful accounts may be
      needed and the future results of operations could be materially affected.


F-8


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





***Long-Lived
      Assets***




Long-lived
      assets to be held and used are reviewed for impairment whenever events or
      changes in circumstances indicate that the carrying amount of an asset may
      not
      be recoverable. If such review indicates that the asset is impaired when the
      carrying amount of an asset exceeds the sum of its expected future cash flows,
      on an undiscounted basis, the asset’s carrying amount is written down to fair
      value. Long-lived assets to be disposed of are reported at the lower of carrying
      amount or fair value, net of disposal costs.





***Goodwill
      and Intangible Assets***





In
      accordance with Statement of Financial Accounting Standards 
(“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”), the Company
      allocates the purchase price of its acquisitions to the tangible assets,
      liabilities and identifiable intangible assets acquired based on their estimated
      fair values. The excess purchase price over those fair values is recorded as
      “Goodwill”. In accordance with Statement of Financial Accounting Standards No.
      144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
      144”), purchased intangibles with finite lives are reviewed periodically
      for impairment. In
      accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS No. 142”), goodwill and purchased intangibles with indefinite lives are
      not amortized, but are reviewed periodically for impairment. The
      Company amortizes intangible assets with finite lives on a
      straight-line basis over their respective useful lives. During the year ended
      June 30, 2008 and 2007, goodwill and intangible assets were tested for
      impairment and, as a result, a write off in the amount of $400,000 was recorded
      in the year ended June 30, 2007 for intangible assets determined to be
      impaired.





As
      described in *Note
      3* ,
      on
      August 17, 2007, the Company acquired 100% of the outstanding common stock
      of
      Vance Baldwin, Inc. The business acquired is a recognized leader in its
      industry, has had long-term relationships with its major vendors and customers,
      a history of increasing levels of annual sales and earnings, and introduces
      a
      number of favorable strategic opportunities to the Company; accordingly, the
      Company believes that the excess of purchase price over net assets acquired
      is
      justified.





***Inventory,
      Replacement Parts and Equipment***





Inventory
      of OEM parts purchased for resale within the reverse logistics industry, which
      consists solely of finished goods, is valued at the lower of cost (first-in,
      first-out basis) or market.





Replacement
      parts and equipment consist primarily of repair parts, as well as consumable
      supplies for resale and used machines that are held for resale, that are stated
      at the lower of weighted average cost or market. The weighted average cost
      of
      replacement parts and equipment approximates the first-in, first-out (“FIFO”)
      method.





Management
      performs periodic assessments to determine the existence of obsolete,
      slow-moving inventory and non-usable replacement parts and equipment and records
      necessary provisions to reduce such inventory and replacement parts and
      equipment to net realizable value.





***Income
      (Loss) Per Share***




Net
      income (loss) per share is computed in accordance with SFAS No. 128,
“Earnings Per Share.” Basic net income (loss) per share is computed by dividing
      income (loss) available to common stockholders by the weighted average number
      of
      common shares outstanding for the period. Diluted net income per share is based
      upon the addition of the effect of common stock equivalents (convertible
      preferred stock and convertible notes payable, potentially dilutive stock
      options and warrants) to the denominator of the basic net income per share
      calculation using the treasury stock method, if their effect is dilutive. The
      computation of net income per share for the fiscal year ended June 30,
      2008:


F-9


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





**Year ended June 30, 2008****Income**
            
            **Shares**
            
            **Per Share**
              **Amount****Basic
                EPS**Net
                income available to common stockholders
            
            $
            2,504,000
            
            
            6,300,625,470
            
            $
            —**Effect
                of Dilutive Securities**Convertible
                preferred stock
            
            
            723,000
            
            
            63,987,846,481Convertible
                notes
            
            
            74,000
            
            
            2,010,243,333**Diluted
                EPS**Net
                income available to common stockholders
            
            $
            3,301,000
            
            
            72,298,715,284
            
            $
            —





During
      the fiscal years ended June 30, 2007 and 2006, potentially dilutive securities
      that could have been issued were excluded from the calculation of diluted loss
      per share as their effect would have been anti-dilutive. At June 30, 2008 and
      2007, potentially dilutive securities totalled 75,323,089,814 and 5,841,667,000,
      respectively.





Options
      to purchase 9,325,000,000 shares of common stock at $.00075 were outstanding
      during the period subsequent to August 17, 2007 but were not included in the
      computation of diluted EPS because the options’ exercise price was greater than
      the average market price of the common shares. The options, which expire on
      August 17, 2017, were still outstanding as of June 30, 2008.





***Core
      Charges***




The
      vendors of products distributed by the Company frequently add a "core charge"
      to
      the cost of certain high value inventory items that the Company distributes
      as a
      means of encouraging the return of certain replaced components, most frequently
      circuit boards, which are defective. These defective replaced components are
      ultimately repaired and re-enter the distribution channel.





Core
      charges borne by the Company associated with goods in inventory are not included
      in inventory, but are classified separately in current assets. Customers either
      receive a credit for cores when returned, or are obligated to pay the billed
      core charge in the event a core is not returned. This payment effectively
      compensates the Company for the core charge it is obligated to pay vendors.
      Core
      charges associated with goods in inventory in the amount of $749,000 and $0
      are
      included in prepaid expenses and other current assets as of June 30, 2008 and
      2007, respectively.





***Property
      and Equipment***




Property
      and equipment are stated at cost, less accumulated depreciation. When equipment
      is sold or otherwise disposed of, the cost and related accumulated depreciation
      are eliminated from the accounts and any resulting gain or loss is reflected
      in
      operations. Assets are depreciated using the straight-line method based on
      the
      following estimated useful lives:




Machinery
                and equipment
            3
                to 7 yearsFurniture
                and fixtures
            5
                to 7 yearsLeasehold
                improvements
            Estimated
                useful life or length of the lease, whichever is
                shorter





The
      Company leases certain equipment and software under agreements that are
      classified as capital leases and are included in the accompanying balance sheet
      under property and equipment. Amortization of equipment held under capital
      leases is included in depreciation expense. Maintenance and repairs are charged
      to expense when incurred.


F-10


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





***Warranty
      Reserve***





Refurbished
      peripheral computer equipment sold to customers and the repair of customer
      owned
      equipment is guaranteed for a period of ninety days and a period of 12 months
      for the repair of circuit boards. Any defective refurbished equipment is
      replaced free of charge and customer owned equipment is repaired without charge
      during the warranty period. Cyber-Test provides a reserve for warranty repairs
      based on historical failure rates and the estimated cost to repair. During
      fiscal 2008, 2007 and 2006, the provision for warranty costs and costs charged
      against the reserve were as follows:




**2008**
            
            **2007**
            
            **2006**Balance
                at beginning of year
            
            $
            72,000
            
            $
            64,000
            
            $
            34,000Provision
                recorded
            
            
            774,000
            
            
            646,000
            
            
            684,000Warranty
                costs incurred
            
            
            760,000
            
            
            638,000
            
            
            654,000Balance
                at end of year
            
            $
            86,000
            
            $
            72,000
            
            $
            64,000




***Fair
      Value of Financial Instruments***




The
      carrying amounts of the Company’s financial instruments including cash and cash
      equivilents, accounts receivable, accounts payable, accrued liabilities,
      debentures, and loans payable approximate fair value due to the relatively
      short
      period to maturity for these instruments.




***Revenue
      Recognition***





The
      Company recognizes revenue upon delivery of goods to a common carrier for
      delivery to the customer, at which point title passes, at a sales price that
      is
      fixed and determinable and collectability is reasonably assured. Provisions
      for
      product returns and core returns are accounted for as sales reductions in
      determining sales in the same period that the related sales are recorded. The
      Company also recognizes revenue from the sale of refurbished computer equipment
      and related products upon delivery of goods to a common carrier for delivery
      to
      the customer. Revenue for the repair of customer-owned equipment is recognized
      upon completion of the repair. The Company assumes the risk of loss due to
      damage or loss of refurbished products during shipment and is reimbursed by
      the
      common carriers for shipping damage and lost products.




***Shipping
      and Handling Costs***





The
      Company includes shipping costs in cost of sales. Total shipping costs included
      in cost of sales for the years ended June 30, 2008, 2007 and 2006 were
      approximately $4,959,000, $1,621,000 and $1,469,000, respectively.




***Income
      Taxes***




The
      Company accounts for income taxes under SFAS No. 109,
      " *Accounting
      for Income Taxes* "
      (“SFAS
      No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are
      recognized for the future tax consequences attributable to differences between
      the financial statement carrying amounts of existing assets and liabilities
      and
      their respective tax bases. Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years in
      which those temporary differences are expected to be recovered or settled.
      Under
      SFAS No. 109, the effect on deferred tax assets and liabilities of a change
      in
      tax rates is recognized in income in the period that includes the enactment
      date. A valuation allowance has been used to offset the recognition of any
      deferred tax assets arising from net operating loss carryforwards due to the
      uncertainty of future realization. The use of any tax loss carryforward benefits
      may also be limited as a result of changes in control of Company.


F-11


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





The
      amount of income taxes a Company pays is subject to periodic audits by federal
      and state tax authorities and these audits may result in proposed deficiency
      assessments. In June 2006, the FASB issued FASB Interpretation No. 48,
      Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109 (“FIN 48”) which clarifies the accounting for uncertainty in income
      taxes in an enterprise’s financial statements in accordance with SFAS
      No. 109. FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition. The Company recognizes interest
      and
      penalties, if any, related to uncertain tax positions in income tax expense.





The
      Company defines the federal jurisdiction as well as various multi-state
      jurisdictions as “major” jurisdictions (within the meaning of FIN 48). As of
      June 30, 2008, fiscal 2005, 2006 and 2007 remain open to examination. The
      Company adopted FIN 48 as of July 1, 2007, with no impact on the
      consolidated financial statements.





***Concentration
      of Credit Risk***




We
      have
      certain financial instruments that potentially subject us to significant
      concentrations of credit risk which consist principally of cash and cash
      equivalents and accounts receivable. We maintain cash and cash equivalents
      in
      short-term money market accounts with high quality financial institutions and
      in
      short-term, investment grade commercial paper. Deposits held with banks may
      exceed the amount of insurance provided on such deposits. Generally, these
      deposits may be redeemed upon demand and therefore bear minimal
      risk.  The
      Company has not experienced any losses in such accounts and believes it is
      not
      exposed to any significant credit risk on cash and cash
      equivalents.





***Cash,
      Cash Equivalents and Restricted Cash***




The
      Company considers all short-term investments with a maturity date of three
      months or less when acquired to be cash equivalents. Cash equivalents include
      commercial paper, money market funds and certain certificates of
      deposit.




Restricted
      cash consists of funds representing a portion of the purchase price that is
      held
      in escrow in connection with the purchase of Vance Baldwin until earlier of
      (I)
      the completion of an audit of the financial statements of Vance Baldwin as
      of
      and for the year ending December 31, 2007, or (II) August 17, 2008, and the
      subsequent determination as to the existence of claims to be made against the
      escrow fund. On April 24, 2008, the Company agreed to a partial early release
      of
      $375,000 of the escrowed funds. On August 17, 2008, the Company released the
      balance of the escrowed funds to the seller.




***Stock-Based
      Compensation***




The
      Company determines the value of grants of restricted common stock to employees
      and others based on the closing price per share at the date of grant and
      amortizes the cost as compensation expense over the period of vesting. The
      Company recognizes compensation on a straight-line basis over the requisite
      period for the entire award. The exercise price of stock options granted is
      equal to or greater than fair market value at the date of grant as determined
      by
      the closing price per share. The fair value of stock option grants is calculated
      using the Black-Scholes Option Pricing Model.


F-12


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





***Deferred
      Finance Costs***




Costs
      associated with the Company’s debt obligations are capitalized and amortized
      using the interest method over the life of the related debt obligation. As
      of
      June 30, 2008 and 2007, $390,000 and $0, respectively, of such costs were
      capitalized, or $347,000 and $0, respectively, net of amortization.




***Classification
      of Preferred Stock***




Under
      the
      guidance in paragraph 20 of Emerging Issues Task Force 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” (“EITF 00-19”), a company is required to classify
      convertible preferred stock as a liability rather than as a component of
      stockholders’ equity if it cannot conclude that it has sufficient available
      authorized and unissued shares of common stock to meet the issues’ conversion
      requirements. As of June 30, 2007, the Company was required to reclassify its
      Series A, Series A-1 and Series B issues of convertible preferred stock as
      a
      liability rather than as a component of stockholders’ equity for this reason.
      With the stockholder approval in May 2008 of an increase in the number of
      authorized shares of common stock from 5,000,000,000 to 230,000,000,000, the
      Company has sufficient available authorized and unissued shares of common stock
      to meet the all conversion and stock option exercise requirements and has
      classified its Series C and Series D issues of convertible preferred stock
      as a
      component of stockholders’ equity as of June 30, 2008.




***Recent
      Accounting Pronouncements***




The
      Company adopted the provisions of SFAS No. 157 - Fair Value Measurements (“SFAS
      157”)for its financial assets and liabilities for which it has recognized or
      disclosed at fair valueon a recurring basis effective July 1, 2008. In February
      2008, the Financial Accounting Standards Board issued FASB Staff Position
      (“FSP”) No. 157-2, *“Effective
      Date of FASB No. 157,”* which
      delays the effective date for non-financial assets and non-financial liabilities
      to fiscal years beginning after November 15, 2008, except for items that are
      measured at fair value in the financial statements on a recurring basis (at
      least annually). As provided by FSP No. 157-2, the Company has elected to defer
      the adoption of SFAS No. 157 for certain of its non-financial assets and
      non-financial liabilities, primarily goodwill and intangible assets, until
      July
      1, 2009.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an Amendment of FASB
      Statement No. 115.” This Standard allows entities to voluntarily choose, at
      specified election dates, to measure many financial assets and financial
      liabilities (as well as certain non-financial instruments that are similar
      to
      financial instruments) at fair value. The election is made on an
      instrument-by-instrument basis and is irrevocable. If the fair value option
      is
      elected for an instrument, the Statement specifies that all subsequent changes
      in fair value for that instrument shall be reported in earnings. SFAS No. 159
      is
      effective beginning after November 15, 2008. Management does not expect this
      pronouncement will have a material impact on the financial statements of the
      Company.





The
      FASB
      has issued Statement No. 141 (R), “Business Combinations”. This statement
      retains the fundamental requirements in Statement No. 141 that the acquisition
      method of accounting (which Statement No. 141 called the “purchase methobd”) be
      used, and applies to the all business entities, including mutual entities that
      previously used the pooling of interest method of accounting for some business
      combinations. The statement is effective for transactions within the annual
      reporting period beginning on or after December 15, 2008. Management is
      currently evaluating the impact this new standard could have on the Company’s
      financial position and results of operations.





The
      FASB
      has issued Statement No. 160, “Non-controlling Interests in Consolidated
      Financial Statements.” This statement changes the way the consolidated income
      statement is presented when non-controlling interests are present. It requires
      consolidated net income to be reported at amounts that include the amounts
      attributable to both the parent and the non-controlling interest, and is
      effective for periods beginning on or after December 15, 2008. Management is
      currently evaluating the impact this new standard could have on the Company’s
      financial position and results of operations.




F-13


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





In
      April
      2008, the FASB issued Final FASB
      Staff Position (FSP)
      No.
      FAS 142-3, “Determination of the Useful Life of Intangible Assets”. The guidance
      is intended to improve the consistency between the useful life of a recognized
      intangible asset under Statement of Financial Accounting Standards (SFAS)
      No. 142, “Goodwill and Other Intangible Assets”, and the period of expected cash
      flows used to measure the fair value of the asset under SFAS
      No.
      141(R), Business Combinations, and other guidance under accounting principles
      generally accepted in the United States of America. FSP No. FAS 142-3 is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and interim periods within those years. Early adoption is
      prohibited. Paragraph
      11(d) of SFAS No. 142 requires entities to base assumptions for determining
      the
      useful life of a recognized intangible asset on the legal, regulatory, or
      contractual provisions that permit extending the asset’s useful life without
      appreciably adding to its cost. FSP No. FAS 142-3, requires that an entity
      must
      consider its own experience with similar arrangements in developing its
      assumptions. If an entity has had no similar arrangements, then it should
      consider the assumptions other market participants use. Management is currently
      evaluating the impact this new standard could have on the Company’s financial
      position and results of operations.





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (”SFAS No. 162”). SFAS No. 162 identifies the sources of
      accounting principles and provides entities with a framework for selecting
      the
      principles used in preparation of financial statements that are presented in
      conformity with GAAP. The Board believes the GAAP hierarchy should be directed
      to entities because it is the entity (not its auditors) that is responsible
      for
      selecting accounting principles for financial statements that are presented
      in
      conformity with GAAP. The adoption of FASB 162 is not expected to have a
      material impact on the Company’s financial position.





On
      June
      16, 2008, the FASB issued final Staff Position ("FSP") No. EITF 03-6-1,
      "Determining Whether Instruments Granted in Share-Based Payment Transactions
      Are
      Participating Securities", to address the question of whether instruments
      granted in share-based payment transactions are participating securities prior
      to vesting. The FSP determines that unvested share-based payment awards that
      contain rights to dividend payments should be included in earnings per share
      calculations. The guidance will be effective for fiscal years beginning after
      December 15, 2008. Management is currently evaluating the impact this new
      standard could have on the Company’s financial position and results of
      operations.




**NOTE
      2.**  **PROPERTY
      AND EQUIPMENT**




The
      following is a summary of property and equipment as of June 30, 2008 and
      2007:





**2008**
            
            **2007**Computer,
                office equipment and fixtures
            
            $
            546,000
            
            $
            237,000Machinery
                and equipment
            
            
            256,000
            
            
            85,000Leasehold
                improvements
            
            
            114,000
            
            
            109,000916,000
            
            
            431,000Less:
                Accumulated depreciation
            
            
            366,000
            
            
            169,000Property
                and equipment, net
            
            $
            550,000
            
            $
            262,000





Depreciation
      expense for the years ended June 30, 2008, 2007 and 2006 was $197,000, $75,000
      and $73,000, respectively.




**NOTE
        3. **RECAPITALIZATION
        AND ACQUISITION VANCE BALDWIN, INC.****




On
      August
      17, 2007 (the “Recapitalization Date”), the Company entered into a series of
      transactions to effect a recapitalization which included the acquisition of
      a
      new operating subsidiary for an aggregate purchase price of
      $27,900,000 (including transaction costs), the completion of a significant
      preferred stock issuance of $6,300,000, the issuance of $23,400,000 in senior
      and subordinated notes and the settlement of substantially all of the Company’s
      notes payable, accounts payable and accrued expenses. On the Recapitalization
      Date, the Company acquired all of the outstanding equity interests in Vance
      Baldwin, Inc., a privately-held Florida subchapter S corporation doing business
      as Vance Baldwin Electronics and engaged in distribution and shipping of parts
      for consumer electronics, printers, appliances, and computers (“Vance Baldwin”).
      Management believes that the business and operations of Vance Baldwin, which
      has
      its headquarters in Ft. Lauderdale, Florida and a substantial distribution
      facility in Lawrenceville, Georgia, will complement the business and operations
      offered by Cyber-Test and significantly expand the Company’s presence in the
      reverse logistics business. Results of operations include Vance Baldwin since
      the Recapitalization Date.


F-14


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





Consideration
      consisted of the following: (i) $23,920,755 in cash, $750,000 of which was
      placed into an escrow account to serve as a source of funds to satisfy any
      indemnification obligations under the Vance Baldwin Purchase Agreement, (ii)
      312.50 shares of the Company’s newly designated Series D Convertible Preferred
      Stock, par value $0.01 per share (“Series D Preferred”), and a convertible
      promissory note in the amount of $1,000,000. The convertible note accrues
      interest at the rate of 7% per annum, payable semi-annually, in arrears, on
      each
      January 30 and July 30, and is due and payable on October 17, 2012 to the extent
      the holder has not exercised its conversion rights thereunder. The fair value
      of
      the Series D Convertible Preferred Stock was determined based on the implicit
      value of the Series C Convertible Preferred Stock based on the ratio of the
      amount received for the sale of shares of such issue to the equity interest
      sold.





The
      purchase price of the acquisition is set forth below:





Cash
                paid to seller
            
            $
            23,921,000Issuance
                of Series D convertible preferred stock to seller
            
            
            198,000Issuance
                of convertible note issued to seller
            
            
            1,000,000Total
                consideration paid to seller
            
            
            25,119,000Additional
                cash paid for transaction costs
            
            
            2,769,000Total
                purchase price
            
            
            27,888,000Less:
                noncash item of issuance of Convertible Preferred Stock
            
            
            (198,000
            )Less:
                noncash item of note issued to seller
            
            
            (1,000,000
            )Less:
                cash acquired in the acquisition
            
            
            (1,600,000
            )Net
                cash paid for acquisition
            
            $
            25,090,000





The
      allocation of the purchase price consideration paid at closing to the assets
      acquired and liabilities assumed is based upon an appraisal of the fair market
      value of the acquired assets and liabilities assumed in accordance with FAS
      141.
      The business acquired is a recognized leader in its industry, has had long-term
      relationships with its major vendors and customers, a history of increasing
      levels of annual sales and earnings, and introduces a number of favorable
      strategic opportunities to the Company; accordingly, the Company believes that
      the excess of purchase price over net assets acquired is justified.




The
      fair
      value of the assets acquired and liabilities assumed is set forth below:




Assets
                acquired:Current
                assets
            
            $
            11,349,000Property
                and equipment
            
            
            247,000Intangible
                assets
            
            
            10,580,000Long-term
                assets
            
            
            37,000Total
                assets acquired
            
            
            22,213,000Liabilities
                assumed:Current
                liabilities
            
            
            5,712,000Non-current
                liabilities
            
            
            63,000Total
                liabilities assumed
            
            
            5,775,000Net
                identifiable assets acquired
            
            
            16,438,000Costs
                in excess of net identifiable assets acquired (recorded goodwill)
            
            
            11,450,000Total
                fair value of net identifiable assets acquired and goodwill
            
            $
            27,888,000




F-15


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**




The
      following unaudited pro forma financial information presents the results of
      operations of the Company as if the acquisition had occurred at the beginning
      of
      fiscal 2008 and fiscal 2007. Adjustments to the financial information related
      to
      the acquisition that affect the results of operations include the increase
      on
      cost of sales from the fair valuation of inventory acquired, interest expense
      associated with the debt issued in conjunction with the acquisition,
      amortization of the fair value of intangible assets and deferred debt financing
      costs and stock-based compensation. This pro forma information does not purport
      to be indicative of what would have occurred had the acquisition occurred as
      of
      July 1, 2008 and 2007 or of results of operations that may occur in the
      future.




**For the year ended****June 30,****2008**
            
            **2007**Net
                sales
            
            $
            70,590,000
            
            $
            50,077,000Operating
                income
            
            
            2,741,000
            
            
            1,670,000Net
                income (loss)
            
            
            3,954,000
            
            
            (965,000
            )Net
                income (loss) basic and diluted per common share
            
            $
            0.00
            
            $
            0.00




**NOTE
      4.**  **GOODWILL
      AND INTANGIBLE ASSETS**




As
      described in *Note
      3* ,
      on
      August 17, 2007, the Company acquired 100% of the outstanding common stock
      of
      Vance Baldwin, Inc. The business acquired is a recognized leader in its
      industry, has had long-term relationships with its major vendors and customers,
      a history of increasing levels of annual sales and earnings, and introduces
      a
      number of favorable strategic opportunities to the Company; accordingly, the
      Company believes that the excess of purchase price over net assets acquired
      is
      justified.





Goodwill
      and intangible assets consisted of the following:





**June 30, 2008**
            
            **June 30, 2007**Goodwill
            
            $
            14,075,000
            
            $
            2,624,000Intangible
                assets, primarily consisting of customer lists
            
            $
            10,580,000
            
            $
            —Less
                accumulated amortization
            
            
            (970,000
            )
            
            —Total
                net intangible assets
            
            $
            9,610,000
            
            $
            —





Amortization
      expense for intangible assets, which are being amortized over 10 years based
      on
      the straight line method, amounted to $970,000 for the year ended June 30,
      2008.
      Based on the carrying value of intangible assets as of June 30, 2008, future
      amortization expense will amount to the following:





For
                the year ending    June 30, 2009
            
            $
            1,058,000June 30, 2010
            
            $
            1,058,000June 30, 2011
            
            $
            1,058,000June 30, 2012
            
            $
            1,058,000June 30, 2013
            
            $
            1,058,000


F-16


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**




**NOTE
      5.**  **DEFERRED
      ACQUISITION COSTS**




The
      Company has incurred and deferred certain legal, accounting, advisory and
      consulting costs relating to acquiring certain targeted businesses. Upon the
      closing of an acquisition, such deferred costs are included with the purchase
      price in determining the total cost of acquiring the assets or capital stock
      of
      the acquired business. As of June 30, 2008 and 2007, $617,000 and $885,000,
      respectively, of these deferred costs relating to active potential acquisitions
      ongoing at each date have been deferred by the Company and included in other
      assets.




**NOTE
      6.**  **ASSET
      IMPAIRMENT**




On
      May
      27, 2004, Encompass entered into an Agreement with Hy-Tech Technology Group,
      Inc
      and Hy-Tech Computer Systems, Inc (collectively “Hy-Tech”) to license and use on
      an exclusive, worldwide, royalty-free, perpetual, non-terminable and irrevocable
      right basis, various intangible assets of Hy-Tech including its customer lists
      and corporate web addresses. The Company originally recorded $400,000 for these
      licensed intangibles. During the year ended June 30, 2007, these intangible
      assets were tested for impairment and, as a result of a determination that
      these
      assets were impaired, an impairment charge in the amount of $400,000 was
      recorded in fiscal 2007.




**NOTE
      7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS**




In
      connection with the recapitalization effective August 17, 2007 described in *Note
      3* ,
      substantially all of the then outstanding notes payable and related accrued
      interest were satisfied in full as of that date.




Notes
      payable and capital lease obligations consist of the following at June 30,
      2008
      and 2007:




**2008**
            
            **2007**12%
                Note Payable
            
            $
            —
            
            $
            58,000Note
                Payable to Officer
            
            
            310,000
            
            
            35,000Note
                Payable to Cornell Capital
            
            
            —
            
            
            275,0006%
                Unsecured Note
            
            
            —
            
            
            249,000Senior
                notes (net of unamortized discount of $154,000)
            
            
            12,156,000
            
            
            —Senior
                subordinated notes (net of unamortized discount of
                $183,000)
            
            
            11,552,000
            
            
            —Convertible
                notes
            
            
            1,206,000
            
            
            —Capitalized
                Lease
            
            
            76,000
            
            
            15,000Total
                notes Payable and capital lease obligations
            
            
            25,300,000
            
            
            632,000Less:
                current portion
            
            
            (541,000
            )
            
            (632,000
            )Notes
                payable and capital lease obligations, less current
                portion
            
            $
            24,759,000
            
            $
            —




The
      Company entered into **** an
      unsecured note with the consulting company of its Chief Executive Officer to
      pay
      the consulting company $310,000, plus interest accruing at the rate of 7% per
      annum, upon the earlier of a change of control of the Company or the six-year
      anniversary of the closing of the transactions described herein, for unpaid
      compensation under a now-terminated consulting agreement. Our Chief Executive
      Officer also agreed to restructure a potential $250,000 bonus until such time
      as
      the Company satisfies certain milestones as described in Mr. Danson’s employment
      agreement.




On
      the
      Recapitalization Date, the Company entered into a Note Purchase Agreement with
      Sankaty Advisors, LLC (“Sankaty”). Pursuant to the Note Purchase Agreement, the
      Company issued $12,690,000 in aggregate principal amount of Senior Notes for
      an
      aggregate purchase price of $12,500,000 and $10,714,000 in aggregate principal
      amount of Subordinated Notes for an aggregate purchase price of $10,500,000.
      The
      aggregate discount of $405,000, or $337,000 net of accumulated amortization
      as
      of June 30, 2008, is being amortized using the interest method over the terms
      of
      the notes. Net proceeds amounted to $22,609,000 after related transaction
      expenses of $391,000, which is being amortized using the interest method over
      the terms of the notes. Under the Note Purchase Agreement, the Company is
      required to meet a Minimum Fixed Charge Coverage Ratio, a Maximum Total Leverage
      Ratio and a Minimum Adjusted EBITDA level, as defined. Further, the Company
      is
      subject to an annual Excess Cash Flow Sweep whereby it is required to apply
      an
      amount equal to 50% of Excess Cash Flow (as defined) to the prepayment of Senior
      Notes. The Excess Cash Flow Sweep will not result in any additional amount
      to be
      paid during the year ended June 30, 2009.


F-17


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





The
      Senior Notes bear interest at LIBOR plus 3.75%, per annum payable quarterly,
      in
      arrears, and have a five-year term through August 17, 2012 (the “Maturity
      Date”). As of June 30, 2008, the interest rate for the Senior Notes was 6.55%.
      They are repayable in consecutive quarterly installments of 1% of the original
      principal amount, or approximately $127,000, through August 17, 2012. At the
      Maturity Date the remaining principal amount and any unpaid and accrued interest
      on the Senior Notes shall be due. The Company is required to prepay the Senior
      Notes from any new equity or debt financing, certain excess cash flow or the
      cash proceeds of asset sales and casualty events, subject to stipulated
      exceptions. The Company may redeem the Senior Notes at any time, subject to
      a
      redemption premium, as defined. The Senior Notes are secured by a first priority
      security interest in the assets of the Company and its subsidiaries and are
      guaranteed by the direct or indirect wholly-owned subsidiaries of the
      Company.





The
      Subordinated Notes bear interest, payable quarterly, in arrears, at 13% per
      annum, plus an increment of up to 4% based on a Maximum Total Leverage Ratio
      financial covenant. The Subordinated Notes have a six-year term through August
      17, 2013. The Company may redeem the Subordinated Notes only following repayment
      of the Senior Notes in full, subject to a redemption premium, as defined. The
      Subordinated Notes are secured by a second priority security interest in the
      assets of the Company and its subsidiaries and are guaranteed by the direct
      or
      indirect wholly-owned subsidiaries of the Company. Interest is currently payable
      at 17%.





Under
      the
      Note Purchase Agreement, the Company could borrow up to $2,500,000 from Sankaty
      by issuing additional Senior Notes and/or Senior Subordinated Notes. Such notes
      will be Senior Notes, Subordinated Notes, or a combination thereof, depending
      upon the Company’s performance measured against the Maximum Total Leverage Ratio
      financial covenant. On September 27, 2007, the Company issued an additional
      $1,020,000 in principal amount of Senior Subordinated Notes for a purchase
      price
      of $1,000,000 under the terms described above for Senior Subordinated
      Notes.





In
      connection with the transaction effective August 1, 2008 described in *Note
      17* ,
      the
      remaining amount the Company may borrow from Sankaty by issuing additional
      Senior Notes and/or Senior Subordinated Notes was amended to $500,000, which
      amount is available to borrow until August 17, 2009.





On
      the
      Recapitalization Date, the Company issued an unsecured convertible promissory
      notes in the amount of $1,000,000 to the seller and $206,146 to a creditor.
      The
      notes accrue interest at the rate of 7% per annum, payable semi-annually, in
      arrears, on each January 30 and July 30, and are due and payable on October
      17,
      2012 to the extent the holders have not exercised their conversion rights
      thereunder.





The
      future minimum scheduled maturities of notes payable for each of the next five
      years are as follows:





Year
                ending June 30,
            
            
            2009
            
            $
            508,0002010
            
            
            508,0002011
            
            
            508,0002012
            
            
            508,0002013
            
            
            11,485,000


F-18


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





The
      Company leases certain computer equipment and software and a conveyer belt
      system under agreements that are classified as capital leases. The cost of
      equipment leased in fiscal 2008 and 2007 was $156,000 and $70,000, respectively,
      and is included in the accompanying balance sheet as property, plant, and
      equipment at June 30, 2008 and 2007. Accumulated amortization of the leased
      equipment was $53,000 and $31,000 as of June 30, 2008 and 2007, respectively.





The
      future minimum lease payments required under capital leases and the present
      value of the net minimum lease payments as of June 30 2008, are as
      follows:





Year
                ending June 30,
            
            
            2009
            
            $
            41,0002010
            
            
            30,0002011
            
            
            17,00088,000Total
                minimum lease paymentsLess:
                Amount representing interest
            
            
            
            
            
            (12,000
            )Present
                value of net minimum lease payments
            
            
            
            
            
            76,000Less:
                Current maturities of capital lease obligations
            
            
            
            
            
            (34,000
            )Long-term
                capital lease obligations
            
            
            
            
            $
            42,000




**NOTE
      8.** **PREFERRED
      STOCK**




On
      the
      Recapitalization Date, the Company sold 1,000 shares of its newly designated
      Series C Convertible Preferred Stock, having a par value of $0.01 per share
      (“Series C Preferred”), for an aggregate purchase price of $6,300,000 in
      immediately available funds, net proceeds of $5,809,000 after related
      transaction expenses of $491,000, to certain accredited investors, principally
      including ACT-DE, LLC, an affiliate of H.I.G. Capital, LLC (“HIG”), pursuant to
      a Purchase Agreement. Also on that date, the Company and the holders of the
      Series C Preferred entered into a Registration Rights Agreement and a
      Stockholders Agreement. HIG and certain other holders have certain demand
      registration rights with respect to shares of common stock that it may hold,
      subject to certain limitations, and HIG and certain other stockholders,
      including the holders of Series D Preferred, have piggy-back registration rights
      with respect to shares of common stock that they may hold. The Series C
      Preferred rank senior to the common stock and all other currently designated
      series of preferred stock of the Company (with the exception of Series E
      Preferred subsequently issued in August 2008).





Pursuant
      to the formula for determining the Series C Conversion Rate set forth in the
      Certificate of Designation for the Series C Preferred, the holders of the Series
      C Preferred, in the aggregate, will be entitled to receive shares of common
      stock equal to 79.5% of common stock on a fully diluted basis except for
      dilution for stock options issued to management as described in *Note
      9* (the
‘Outstanding Amount”). This conversion rate will be subject to adjustment
      downward to a floor of 72.5% if the return, or deemed return, per share of
      Series C Preferred meets certain targets. These ranges, which take into account
      the Series D Preferred Stock issue, could change if there are new issuances
      of convertible preferred and common stock, excluding stock options exercised.





The
      Series D Preferred Stock, having a par value of $0.01 per share (“Series D
      Preferred”), issued in the amount of $634,000 rank senior to the common stock
      and all other currently designated series of preferred stock of the Company
      with
      the exception of the Series C Preferred and the subsequently issued Series
      E
      Preferred. Pursuant to the formula for determining the Series D Conversion
      Rate
      as set forth in the Certificate of Designation for the Series D Preferred,
      the
      holders of the Series D Preferred, in the aggregate, will be entitled to receive
      shares of common stock equal to 8% of the Outstanding Amount. This interest
      could change if there were new issuances of equity, excluding current stock
      options granted. The shares of Series D Preferred are convertible into a fixed
      amount of shares of common stock at the Series D Conversion Rate, subject to
      certain limitations during a two-year period.





Dividends
      on the Series C and Series D Preferred, which accrue cumulatively at the rate
      of
      12%, are only payable upon a sale of assets, merger, liquidation, dissolution
      or
      winding up of the Company. The right to such will extinguish upon conversion
      of
      the Series C and Series D Preferred. As of June 30, 2008, cumulative, undeclared
      dividends, accrued but not recorded amounted to $657,000 and $66,000 for the
      Series C and Series D Preferred, respectively, or $657 and $66 per share,
      respectively.


F-19


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





Also
      on
      the Recapitalization Date, the Company entered into a series of transactions
      with the holders of the Company’s Series A Convertible Preferred Stock, Series
      A-1 Convertible Preferred Stock, Series B Convertible Preferred Stock and
      certain trade creditors and note holders of the Company (the “Creditors”)
      pursuant to which the following transactions were effected: (i) the holders
      of
      the Series A Preferred, the Series A-1 Preferred and Series B Preferred
      exchanged such preferred stock for (a) an aggregate of 8,412.21 shares of the
      Company’s newly designated Series A-2 Convertible Preferred Stock, par value
      $0.01 per share (the “Series A-2 Preferred”) valued at $4.1 million, and (b) a
      full release of all claims against the Company; (ii) the Company satisfied
      the
      outstanding debts to the Creditors with an aggregate payment of approximately
      $3,600,000 in cash and the issuance of a convertible promissory note in the
      approximate principal amount of $206,146. The terms and conditions of this
      note
      are substantially the same as those of the convertible promissory note discussed
      above. The value of the Series A-2 Convertible Preferred Stock was determined
      based on the market price per share of the Company’s common stock on August 16,
      2007. The exchange of Series A Convertible Preferred Stock, Series A-1
      Convertible Preferred Stock and Series B Convertible Preferred Stock and certain
      obligations for shares of Series A-2 Convertible Preferred Stock resulted in
      a
      deemed dividend in the amount of $820,000 for the year ended June 30,
      2008.





The
      holders of the Series A-2 Preferred include the Company’s Chief Executive
      Officer and President, Chief Operating Officer and Vice President and Chief
      Financial Officer who formerly held 275 shares (or $275,000) of the Series
      A-1
      Preferred. Additionally, the Company’s Creditors also included the
      aforementioned officers, to whom the Company was obligated to pay approximately
      $1,048,000 for accrued and unpaid compensation, unreimbursed business expenses
      and the outstanding principal balance and accrued interest with respect to
      an
      unsecured promissory note dated April 24, 2006 issued by the Company to its
      Chief Executive Officer and President. The Company satisfied the outstanding
      debts with management with an aggregate payment of approximately $488,000 and
      an
      agreement with Mr. Danson’s consulting company to pay the consulting company
      $310,000, plus interest accruing at the rate of 7% per annum, upon the earlier
      of a change of control of the Company or the six-year anniversary of the closing
      of the transactions described herein. The Chief Executive Officer and President
      also agreed to restructure a potential $250,000 bonus until such time as the
      Company satisfies certain milestones as described in his employment agreement.





Pursuant
      to separate agreements between certain of the Creditors and the former majority
      holder of the Series A Preferred, certain of the Creditors purchased an
      aggregate of 1,136.69 shares of Series A-2 Preferred from the former holder
      of
      the Series A Preferred for an aggregate purchase price of $682,014.




In
      April
      and through May 5, 2008, the Company solicited and received sufficient
      affirmative written consents from common and preferred stockholders (voting
      on
      an as-converted basis) approving amendments to the Company’s Articles of
      Incorporation to, among other things, (i) change the name of the Company to
      Encompass Group Affiliates, Inc. and (ii) increase the number of authorized
      shares of common stock from 5,000,000,000 to 230,000,000,000. Shareholders
      also
      approved an amendment of the Company’s 2005 Stock Plan to increase the number of
      shares of common stock available for issuance under such plan from 700,000,000
      to 15,000,000,000.


F-20


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





With
      the
      approved increase in the number of authorized shares of common stock, the
      Company has sufficient common shares for (i) the automatic conversion of Series
      A-2 Preferred into 8,412,206,677 shares of common stock, (ii) the issuance
      of
      80,000,000 shares of restricted stock to two executives per terms of employment
      agreements, (iii) the effect of future conversions of Series C Preferred, Series
      D Preferred and Convertible Notes and (iv) the effect of future exercises of
      stock options. Accordingly, the Company has classified Series C and Series
      D
      Preferred stock in stockholders’ equity in the accompanying balance sheet. In
      addition, prior to the increase in the number of authorized shares of common
      stock, the Company was required to classify its Series A, Series A-1 and Series
      B issues of convertible preferred stock as a liability on its consolidated
      balance sheet as of June 30, 2007, rather than as a component of stockholders’
equity, since there was no minimum conversion price for each of the three issues
      of convertible preferred stock. An election to convert any or part of one or
      more of the issues could have resulted in the conversion into an indeterminable
      number of shares of common stock. Therefore, under the guidance in paragraph
      20
      of EITF 00-19, the Company was prohibited from concluding that it had sufficient
      available authorized and unissued shares to meet the issues’ conversion
      requirements and, therefore, settlement was not within the control of the
      Company. Such circumstances required classification of the convertible preferred
      stock issues as a liability rather than as a component of stockholders’ equity
      as of June 30, 2007.




**NOTE
          9.** **STOCK-BASED
          COMPENSATION**





In
      connection with the recapitalization effective August 17, 2007 as described
      in *Note
      3* ,
      the
      Company’s 2005 Stock Plan was amended and restated as of that date. The material
      revision to the plan was an increase in the number of shares of common stock
      available for issuance under the Stock Plan from 700,000,000 shares to
      15,000,000,000 shares.





On
      August
      17, 2007, the Board of Directors of the Company approved the issuance of options
      to certain executive and subsidiary officers of the Company and independent
      directors to purchase 9,325,000,000 and 200,000,000 shares, respectively, of
      the
      Company’s common stock under the amended and restated Stock Plan pursuant to the
      terms of separate option agreements. The exercise price of these options is
      $.00075 per share, a price that was greater than fair market value at the date
      of grant. The aggregate intrinsic value at date of grant was $0. The options
      have a term of 10 years and vest according to the following
      schedule:





•
            25%
                of the options awarded vested
                immediately,


•
            37.5%
                of the options awarded vest quarterly in equal increments over three
                years, and


•
            37.5%
                of the options awarded vest over three years if certain EBITDA targets
                are
                met.





The
      following summaries the status of the stock option grant as of or for the fiscal
      year ended June 30, 2008:





**Shares**Stock
                Options:Granted
            
            
            9,325,000,000Exercisable
            
            
            3,206,000,000Unvested
            
            
            6,120,000,000Shares
              expected to
              vest
            
            
            2,623,000,000Shares
                exercised
            
            
            —Shares
                forfeited
            
            
            —Total
                value of shares vested
            
            $
            682,000Unrecognized
                compensation expense
            
            $
            649,000Weighted
                average of remaining contractual term
            
            
            9.1
                yearsExpected
                period for cost to be recognized
            
            
            2.1
                yearsAggregate
                intrinsic value for outstanding, vested and expected to vest stock
                options
            
            $
            —


F-21


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





There
      were no stock options granted as of June 30, 2007.





The
      Black-Scholes Option Pricing Model (which models the value over time of
      financial instruments) was used to estimate the fair value of the options at
      an
      assumed measurement date. The Black-Scholes Option Pricing Model uses several
      assumptions to value an option. We used the following assumptions:




Expected
      Dividend Yield—because we do not currently pay dividends, our expected dividend
      yield is zero.




Expected
      Volatility in Stock Price—reflects the historical change in our stock price over
      the expected term of the stock option.




Risk-free
      Interest Rate—reflects the average rate on a United States Treasury bond with
      maturity equal to the expected term of the option.




Expected
      Life of Stock Awards—reflects the simplified method to calculate an expected
      life based on the midpoint between the vesting date and the end of the
      contractual term of the stock award.




The
      weighted-average assumptions used in the option pricing model for stock option
      grants were as follows:




Year Ended June 30, 2008Expected
                Volatility in Stock Price
            
            
            25.7
            %Risk-Free
                Interest Rate
            
            
            4.39
            %Expected
                Life of Stock Awards—Years
            
            
            6Weighted
                Average Fair Value at Grant Date
            
            $
            .0006





Under
      now
      superseded employment agreements the Company entered into with two executives
      on
      September 25, 2006, the Company awarded an aggregate of 100,000,000 restricted
      shares of common stock with a fair market value of $90,000, of which 20% vested
      September 25, 2006, with 30% and 50% to vest on September 26, 2007 and September
      26, 2008, respectively, subject to continued employment. In connection with
      this
      restricted stock grant, during the year ended June 30, 2008, $51,750 was charged
      to stock-based compensation expense, including $49,500 for unvested restricted
      shares that vested on an accelerated basis due to the August 17, 2007
      recapitalization and change in control. During the year ended June 30, 2007,
      $38,000 was charged as stock-based compensation expense.





Stock-based
      compensation expense (income) for the year ended June 30, 2008, 2007 and 2006
      amounted to $676,000, $38,000 and $(90,000), respectively.





**NOTE
          10.** **INCOME
          TAXES**





The
      Company did not record an income tax benefit or expense for the years ended
      June
      30, 2008, 2007 and 2006. The following summarizes the differences between the
      income tax (benefit) expense and the amount computed by applying the federal
      income tax rate of 34% in fiscal 2008, 2007 and 2006 to income before income
      taxes:





2008
            
            2007
            
            2006Federal
                income tax benefit at statutory rate
            
            $
            154,000
            
            $
            425,000
            
            $
            195,000Change
                in deferred tax assets
            
            
            (956,000
            )
            
            54,000
            
            
            48,000Permanent
                differences
            
            
            (80,000
            )
            
            31,000
            
            
            —Change
                in valuation allowance
            
            
            5,382,000
            
            
            (510,000
            )
            
            (243,000
            )Income
                tax benefit
            
            $
            4,500,000
            
            $
            —
            
            $
            —


F-22


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





The
      Company recorded a valuation allowance for its net deferred tax assets,
      including its federal and state net operating loss as of June 30, 2008 and
      2007.





As
      of
      June 30, 2008, the Company had total net operating loss carryforwards (NOL)
      available to offset future Federal taxable income of approximately $32,000,000
      expiring in the fiscal years from 2016 through 2027. As of June 30, 2008, the
      Company also had approximately $200,000 of capital loss carryforwards, expiring
      in fiscal 2010 that could be used to offset future federal taxable income.
      A
      capital loss carryforward of approximately $3,800,000 incurred in fiscal year
      June 30, 2003 expired unused within the statutory five year period. As of June
      30, 2008, the Company had NOLs available for various state jurisdictions that
      will expire from fiscal year 2019 through 2028. Due to the August 17, 2007
      recapitalization and change in control, the Company is subject to an annual
      Section 382 limitation regarding its loss carryforward that can be utilized
      to
      offset taxable income.





Deferred
      tax assets and liabilities as of June 30, 2008 and 2007 were comprised of the
      following:





2008
            
            2007Deferred
                tax assets (liabilities):Capital
                loss carryover
            
            $
            69,000
            
            $
            1,352,000Stock-based
                compensation
            
            
            105,000
            
            
            —Other
            
            
            84,000
            
            
            —Net
                operating loss carryover
            
            
            14,318,000
            
            
            13,965,00014,576,000
            
            
            15,317,000Valuation
                allowance
            
            
            (9,728,000
            )
            
            (15,110,000
            )4,848,000
            
            
            207,000Property
                and equipment
            
            
            (348,000
            )
            
            (207,000
            )Net
                deferred tax assets
            
            $
            4,500,000
            
            $
            —




The
      Company periodically assesses its ability to realize our deferred tax assets
      by
      considering whether it is more likely than not that some portion or all of
      deferred tax assets will be realized. Several factors are evaluated, including
      the amount and timing of the scheduled expiration and reversals of net operating
      loss carry forwards (NOLs) and deferred tax items, respectively, as well as
      potential generation of future taxable income over the periods for which the
      NOLs are applicable. Certain estimates used in this analysis are based on the
      current beliefs and expectations of management, as well as assumptions made
      by,
      and information currently available to, management. Although the Company
      believes the expectations reflected in these estimates are based upon reasonable
      assumptions, there can be no assurance that actual results will not differ
      materially from these expectations. Accordingly, as of June 30, 2008, the
      Company re-evaluated its fully reserved deferred tax asset balance and
      determined that $4,500,000 should be recognized. The recognition of the asset
      is
      reflected as an income tax benefit included in net income for the fiscal year
      ended June 30, 2008.





**NOTE
      11. MAJOR CUSTOMERS**





Sales
      to
      the Company’s three largest customers during the fiscal year ended June 30, 2008
      accounted for approximately 23%, 19% and 10%, respectively, of total sales.
      Sales to the Company’s two largest customers during the fiscal years ended June
      30, 2007 and 2006 accounted for approximately 44% and 41% and 39% and 51%,
      respectively, of total sales.


F-23


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**




NOTE
      12.LITIGATION
      SETTLEMENT




On
      May
      11, 2005, Pacific Magtron International Corp. (“PMIC”), a then majority owned
      subsidiary, and its subsidiaries filed voluntary petitions to reorganize their
      businesses under Chapter 11 of the United States Bankruptcy Code. Also, on
      that
      date the Company filed a complaint in the United States District Court against
      the former officers and principal shareholders of PMIC, for the recovery of
      damages and costs for securities fraud, breach of contract and other counts
      in
      connection with the Stock Purchase Agreement dated December 10, 2004 among
      the
      Company and the former officers and principal shareholders of PMIC.




In
      July
      2006, all parties entered into a Mutual Settlement Agreement and Release with
      respect to the settlement of this litigation and other potential claims. The
      bankruptcy court approved this settlement agreement on August 11, 2006. Under
      PMIC’s Plan of Reorganization, the Company contributed $50,000 on behalf of
      PMIC’s stockholders to effectuate the plan of reorganization and a subsidiary of
      PMIC merged with an unrelated entity, Herborium, Inc. Upon closing of the
      merger, the Company paid an aggregate $325,000 in cash to the former officers
      and principal shareholders of PMIC. A special stock distribution of shares
      of
      Herborium was made directly to the holders of our common stock as of the record
      date of August 11, 2006, representing approximately an 8% interest in Herborium.
      The Company recorded a charge to accumulated deficit in fiscal 2007 in the
      amount of $161,000 for this distribution.





**NOTE
      13.**  **COMMITMENTS
      AND CONTINGENCIES**





***Employment
      Agreements***





On
      the
      Recapitalization Date, the Company entered into three separate, two-year
      employment agreements with our executive officers, with each agreement having
      a
      one-year option at the Company’s election and replacing prior employment
      agreements. Under the terms of the agreements, the Company is obligated to
      pay
      aggregate base salaries of $725,000 in the first year, $750,000 in the second
      year and $750,000 in the option year. The executives are eligible to receive
      cash “performance” bonuses determined by measuring actual EBITDA against the
      target EBITDA established for a fiscal year and “exit” bonuses after a
“Disposition Event”, as defined, restricted shares of common stock, or options
      under the employment agreements, with a vesting schedule and other terms
      established by the Company’s Compensation Committee in its sole discretion. In
      fiscal 2008, no “performance” bonuses were achieved.





In
      addition, as a result of the change in control that occurred in connection
      with
      the recapitalization, the vesting of an aggregate of 80,000,000 shares of
      restricted stock previously issued to Messrs. Donahue and Miller as a bonus
      was
      accelerated in the three months ended September 30, 2007. *See
      Note 9* .
      Such
      shares were issued following shareholder approval of an increase in the number
      of authorized shares of common stock in May 2008.





Also
      on
      the Recapitalization Date, the Company entered into separate, two- or three-year
      employment agreements with certain officers of Vance Baldwin, with the
      three-year agreement having a one-year option at the Company’s election.
      Effective August 17, 2008, the Company amended one of the executive’s employment
      contracts to reduce the annual compensation to that executive to reflect a
      reduction in working days. Under the terms of the agreements, the Company is
      obligated to pay aggregate base salaries of $590,000 in the first year, $535,000
      in the second year and $350,000 in the third year. Two of the employees are
      eligible to receive cash “performance” bonuses determined by measuring actual
      EBITDA against the target EBITDA of fiscal year, and restricted shares of common
      stock, or options under the employment agreements, with a vesting schedule
      and
      other terms established by the Company’s Compensation Committee in its sole
      discretion. Further, also on the Recapitalization Date, two of these employees
      received an aggregate of 687.5 shares of Series D Preferred Stock with a value
      of $435,000.


F-24


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**




***Operating
      Lease Commitments***




The
      Company is obligated under leases for office and warehouse facilities expiring
      at various dates through 2011. For the fiscal years ended June 30, 2008, 2007
      and 2006, rent expense amounted to $796,000, $231,000 and $200,000,
      respectively.




Future
      minimum aggregate lease payments as of June 30, 2008 are approximately as
      follows:





For
                the year ending    June 30, 2009
            
            $
            788,000June 30, 2010
            
            
            517,000June 30, 2011
            
            
            401,000Total
            
            
            1,706,000




Subsequent
      to June 30, 2008 and in connection with the distribution agreement described
      in
      Note 17, the Company entered into a new lease for a 50,900 square foot
      office/warehouse facility for a term expiring on October 10, 2013 and rent
      commencing at $199,000 per annum.




***Legal
      Matters***




The
      Company has been, and may in the future be involved as, a party to various
      legal
      proceedings, which are incidental to the ordinary course of its business. Management regularly analyzes current information and, as necessary,
      provides accruals for probable liabilities on the eventual disposition of these
      matters. In the opinion of management, as of June 30, 2008, there were no
      threatened or pending legal matters that would have a material impact on the
      Company's consolidated results of operations, financial position or cash flows.
      See *Note
      12* for a
      description of certain legal proceeding settled in fiscal 2007.




***Advisory
      Agreements***




Pursuant
      to a financial advisory agreement between Janney Montgomery Scott, LLC
      (“Janney”) and the Company, as amended, Janney served as financial advisor and
      investment banker for the Company in connection with the acquisition of Vance
      Baldwin, the sale of the Series C Preferred and the related transactions.
      Pursuant to the amended agreement, Janney received total fees of $560,000 in
      cash, $100,000 of which was used to purchase 166.7 shares of Series A-2
      Preferred, which agreement also provides for additional fees upon the
      consummation of certain types of transactions in the future.





On
      the
      Recapitalization Date, the Company entered into a five-year Management Agreement
      with H.I.G. pursuant to which it will provide management and consulting services
      to the Company and its subsidiaries. The Company will pay a cash consulting
      and
      management fee to H.I.G., currently not to exceed $500,000 per annum. The
      Company also entered into a five-year Investment Advisory Services Agreement
      with H.I.G. pursuant to which it will provide certain financial advisory
      services to the Company and its subsidiaries. The Company paid HIG a combined
      investment banking and supplemental management fee of $525,000 in connection
      with the acquisition and recapitalization.


F-25


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**




**NOTE
      14.**  **RELATED
      PARTIES**




As
      described in *Note
      13* ,
      on
      August 17, 2007, the Company entered into a Management Agreement and Investment
      Advisory Services Agreement with H.I.G.





As
      described in *Note
      7* ,
      on
      August 17, 2007, the Company entered into a note agreement for $310,000 with
      Danson Partners, LLC (DPL), the consulting firm of its Chief Executive Officer,
      for compensatory services and reimbursable expenses under a prior Service
      Agreement that terminated December 31, 2005.





In
      connection with the recapitalization effective August 17, 2007 as described
      in *Note
      3* ,
      the
      Company and DPL entered into a new license agreement whereby the Company
      effectively assumed the Danson Partners’ lease obligation for a total of
      approximately 2,300 square feet of office space, as well as agreed to lease
      certain furniture, fixtures computers, servers and software. The license
      agreement is co-terminus with the underlying office lease that expires May
      31,
      2010. Prior thereto, the Company, through a license agreement with DPL that
      commenced December 1, 2004, licensed a portion of the office facility. The
      term
      of this license agreement was month-to-month and the license payment was at
      fair
      value.




Pursuant
      to an agreement dated March 7, 2006 between Janney Montgomery Scott, LLC
      (“Janney”), who served as financial advisor and investment banker for the
      Company in connection with the recapitalization and acquisition of Vance
      Baldwin, and the Company’s Chief Financial Officer, approximately six months
      prior to his joining the Company (and prior to the Company discussing the
      possibility of this individual joining the Company), Janney agreed to pay 5%
      of
      its advisory fees to Company’s Chief Financial Officer as a finder’s
      fee.




**NOTE
      15.**  **SEGMENT
      INFORMATION**





The
      Company applies Statement of Financial Accounting Standards No. 131 “Disclosures
      about Segments of an Enterprise and Related Information”. For the fiscal year
      ended June 30, 2008, 2007 and 2006, the Company primarily operated in one
      segment, the reverse logistics industry, involving the repair of office and
      consumer electronic products and the supplying of replacement parts for such
      repairs, which expanded with the acquisition of Vance Baldwin.





**NOTE
      16.**  **SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATION**





The
      following are the payments made during the fiscal years ended June 30, 2008,
      2007 and 2006 for income taxes and interest:




**2008**
            
            **2007**
            
            **2006**Income
                taxes
            
            $
            —
            
            $
            —
            
            $
            —Interest
            
            $
            2,135,000
            
            $
            4,000
            
            $
            16,000





Fiscal
      Year Ended June 30, 2008:




(1)
            The
                Company issued 80,000,000 restricted shares of common stock to the
                Chief
                Operating Officer and Chief Financial Officer in accordance with
                the
                provisions of employment agreements with the
                Company.


(2)
            In
                connection with the recapitalization and acquisition of Vance Baldwin,
                the
                Company issued: (i) a non-cash unsecured note of $310,000 to an officer
                in
                settlement of outstanding obligations, (ii) a noncash unsecured
                convertible note of $206,000 to a creditor in settlement of outstanding
                obligations, (iii) a noncash unsecured convertible note of $1 million
                to
                the stockholder of Vance Baldwin as part of the purchase price, (iv)
                Series A-2 convertible preferred stock in exchange for all outstanding
                shares of Series A, Series A-1 and Series B convertible preferred
                stock
                with liquidation values of $3,006,000, $40,000 and $340,000, respectively,
                resulting in a deemed dividend of $819,905 attributable to Series
                A-2
                having a fair market value higher than the carrying value of the
                exchanged
                issues, (v) Series D convertible preferred stock of $198,113 to the
                stockholder of Vance Baldwin as part of the purchase price, and (vi)
                Series D convertible preferred stock of $435,849 in satisfaction
                of an
                assumed obligation of Vance Baldwin.


F-26


**ENCOMPASS
      GROUP AFFILIATES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF JUNE 30, 2008**





(3)
            8,412
                shares of Series A-2 Preferred Shares were converted into 8,412,206,607
                shares of the Company’s common
                stock.


**


Fiscal
      Year Ended June 30, 2007:




(1)
            The
                Company issued 20,000,000 restricted shares of common stock to a
                Chief
                Operating Officer and Chief Financial Officer in accordance with
                the
                provisions of employment agreements with the Company.**


(2)
            615
                shares of Series A Preferred Shares and 20 shares of Series B Preferred
                Shares were converted into 789,884,564 shares and 20,000,000 shares,
                respectively, of the Company’s common
                stock.





(3)
            The
                Company recorded a charge in the amount of $85,000 for the beneficial
                conversion feature associated with the Series A-1 Convertible
                PreferredStock.




Fiscal
      Year Ended June 30, 2006:





(1)
            The
                Company issued and transferred 16,666,667 shares of common stock
                valued at
                $13,333 into an escrow relating to the Earn-Out Shares.


(2)
            The
                Company issued a total of 50,000,000 shares of common stock valued
                at
                $35,000 to Ms. Welton and Mr. Sutlive for performance bonuses.


(3)
            615
                shares of Series A Preferred Shares and 40 shares of Series B Preferred
                Shares were converted into 885,994,544 shares and 63,492,064 shares,
                respectively, of the Company’s common stock.**




**NOTE
      17.**  **SUBSEQUENT
      EVENT**




***Acquisition***





On
      August
      1, 2008, the Company acquired all of the outstanding equity interests in
      Tritronics, Inc., a privately-held Maryland C corporation engaged in the
      distribution of replacement parts and accessories for consumer electronics
      products (“Tritronics”). Management believes that the business and operations of
      Tritronics, which has its headquarters and principal facility in Abingdon,
      Maryland and a second facility in Miami, Florida, will complement the business
      and operations offered by the Company’s two current operating subsidiaries,
      Cyber-Test and Vance Baldwin Electronics. Tritronics sales for the fiscal year
      ended April 30, 2008 amounted to $21,983,000.




Consideration
      consisted of the following: (i) $9,000,000 in cash less seller transaction
      expenses and certain indebtedness, $1,500,000 of which was placed in a escrow
      account to satisfy any indemnification obligations under the Tritronics Purchase
      Agreement, (ii) a subordinated promissory note in the amount of $1,000,000
      (the
“Tritronics Note”) and (iii) 2,796,232,989 shares of the Company’s common stock
      (the “Acquisition”) for an aggregate purchase price of $11,067,000. The purchase
      price may be reduced post-closing based on the calculation of Tritronic’s net
      working capital, as defined in the Tritronics Purchase Agreement, immediately
      prior to the closing of the Acquisition if the net working capital is determined
      to be less than $2,000,000. The adjustment shall be equal to the difference
      between $2,000,000 and the calculated net working capital. The Tritronics Note
      will accrue interest at the rate of 7% per annum, payable semi-annually, in
      arrears, on each January 31 and July 31. The outstanding principal balance
      under
      the Tritronics Note and any accrued but unpaid interest thereon is due and
      payable on August 1, 2014 (subject to extension under certain circumstances
      if
      the Company’s senior indebtedness is not paid in full as of August 1, 2014).





The
      purchase price of the acquisition is set forth below:


Cash
                  paid to seller
              
              $
              8,949,000Issuance
                  of common stock to seller
              
              
              1,118,000Issuance
                  of convertible note issued to seller
              
              
              1,000,000Total
                  consideration paid to seller
              
              
              11,067,000Additional
                  cash paid for transaction costs
              
              
              865,000Total
                  purchase price
              
              
              11,932,000Less:
                  noncash item of issuance of common stock
              
              
              (1,118,000
              )Less:
                  noncash item of notes issued to seller
              
              
              (1,000,000
              )Less:
                  cash acquired in the acquisition
              
              
              (626,000
              )Net
                  cash paid for acquisition
              
              $
              9,188,000




The
      allocation of the purchase price consideration paid at closing to the assets
      acquired and liabilities assumed will be based upon an appraisal of the fair
      market value of the acquired assets and liabilities assumed in accordance with
      FAS 141. The business acquired is a recognized leader in its industry, has
      had
      long-term relationships with its major vendors and customers, a history of
      increasing sales and earnings, and introduces a number of favorable strategic
      opportunities to the Company; accordingly, the Company believes that the excess
      of purchase price over net assets acquired is justified.




The
      preliminary estimate of the fair value of the assets acquired and liabilities
      assumed is set forth below:


Assets
                  acquired:Current
                  assets
              
              $
              4,362,000Property
                  and equipment
              
              
              248,000Long-term
                  assets
              
              
              17,000Total
                  assets acquired
              
              
              4,625,000Liabilities
                  assumed:Current
                  liabilities
              
              
              2,352,000Non-current
                  liabilities
              
              
              47,000Total
                  liabilities assumed
              
              
              2,399,000Net
                  tangible assets acquired
              
              
              2,226,000Costs
                  in excess of net tangible assets acquired (recorded goodwill and
                  intangible assets)
              
              
              9,706,000Total
                  fair value of net identifiable assets acquired and goodwill
              
              $
              11,932,000




It
      is
      expected that intangible assets will principally consist of customer lists
      and
      will be amortized on a straight-line basis over a ten year period.





F-27





***Equity***





On
      the
      Closing Date, in connection with the financing of the Acquisition, the Company
      sold 1,000 shares of its newly designated Series E Preferred Stock, having
      a par
      value of $0.01 per share (“Series E Preferred”), for an aggregate purchase price
      of $4,166,672, net proceeds of $4,035,675 after related transaction costs of
      $131,000, to ACT-DE, LLC and the other holders of Series C Preferred Stock
      pursuant to a Purchase Agreement (the “Series E Purchase Agreement”). The
      Company used the proceeds from the sale of the Series E Preferred, in
      conjunction with the debt proceeds described below, to fund the acquisition
      of
      Tritronics and for working capital needs related to an agreement entered into
      with Philips Consumer Lifestyle North America as described on the Company's
      Form
      8-K filed with the SEC on July 18, 2008.





The
      holders of Series E Preferred have agreed that in the event that (i) the Board
      of Directors of the Company, (ii) an independent committee comprised of
      disinterested members of the Board of Directors of the Company and (iii) a
      majority of the holders of the Series E Preferred agree to convert or redeem
      or
      refinance the Series E Preferred, then each holder of the Series E Preferred
      shall enter into such transaction.





The
      Series E Preferred will rank senior to the common stock and all other currently
      designated series of preferred stock of the Company. Dividends shall accrue
      cumulatively on a daily basis on the Series E Base Amount (as defined below)
      for
      each share of Series E Preferred at a rate per annum of 20% until February
      28,
      2010 and 30% thereafter. Dividends shall accrue from the date of issuance
      through the date of redemption, liquidation, dissolution or winding up of the
      Company. The Series E Preferred is not convertible into the Company’s common
      stock. So long as any shares of Series E Preferred are outstanding, no dividends
      may be paid or distributions made on the common stock or any class of preferred
      stock ranking junior to the Series E Preferred (collectively, “Junior Stock”)
      until all accrued but unpaid dividends, if any, on the Series E Preferred have
      been paid, unless:





·
            the
                Company obtains the written consent of the holders of a majority
                of the
                outstanding shares of the Series E Preferred; or·
            the
                Company is a party to an agreement with any officer, employee or
                director
                of the Company pursuant to which the Company is entitled or required
                to
                repurchase shares of common stock or any preferred stock (or options
                therefore) from such officer, employee or director.





At
      the
      option of the board of directors, the Company may, at any time, redeem all
      but
      not less than all of the Series E Preferred by paying to the holders of the
      Series E Preferred in cash an amount equal to the Series E Redemption Value.
      In
      addition, the Company must redeem all of the outstanding Series E Preferred
      upon
      the (i) refinancing, repayment, redemption or other discharge in full of the
      Company’s senior notes and subordinated notes issued pursuant to the Amended and
      Restated Note Purchase Agreement which the Company entered into in connection
      with the Acquisition or (ii) consolidation or merger of the Company with or
      into
      any other person or entity in which less than a majority of the outstanding
      voting power of the surviving entity is held by persons who were shareholders
      of
      the Company prior to the event (each a “Mandatory Redemption Event”). Upon a
      Mandatory Redemption Event, the holders of the Series E Preferred will be
      entitled to be paid the Series E Redemption Value. Holders of the Series E
      Preferred have priority in respect of any payment or distribution of the assets
      of the Company, or proceeds therefrom, to the holders of shares of any Junior
      Stock.





The
      “Series E Redemption Value” means a payment per share equal to (i) $4,166.66 per
      share (the “Series E Base Amount”) plus all accrued and unpaid dividends thereon
      multiplied by (ii) the Redemption Percentage. The “Redemption Percentage” shall
      be (i) 100% until July 31, 2009, (ii) 105% from August 1, 2009 until February
      28, 2010 and (iii) 110% from March 1, 2010 until July 31, 2010. The Redemption
      Percentage shall increase by another 5% each March 1 and August 1 thereafter.
      By
      way of example, the Redemption Percentage will increase to be 115% on August
      1,
      2010 and 120% on March 1, 2011.




F-28




The
        holders of Series E Preferred are not entitled to any voting rights. However,
        the consent of the holders of at least a majority of the outstanding shares
        of
        Series E Preferred, voting as a class, will be required for certain corporate
        actions, as defined.




On
      the
      Closing Date, the Company and the holders of Series C Preferred entered into
      Amendment No. 1 to the Stockholder Agreement, dated August 17, 2007 (the
“Amended Series C Stockholder Agreement”) originally entered into between such
      parties. Pursuant to the amendment, the shares of Series E Preferred issued
      to
      holders of Series C Preferred are subject to the Series C Stockholder Agreement,
      including for purposes of transfer restrictions as well as co-sale rights on
      sales of preferred stock by the major Series C Preferred Stockholder in favor
      of
      the other Series C Stockholders. The Series C Stockholder Agreement was also
      amended to provide that the Company may not agree to an Exchange Transaction
      (as
      defined therein) without the prior written consent of the major Series C
      Preferred Stockholder and the prior written consent of holders of a majority
      of
      the outstanding shares of Series C Preferred held by the other Series C
      Stockholders.





***Long-term
      Debt***





On
      the
      Closing Date, in connection with the Acquisition, the Company amended and
      restated the Note Purchase Agreement entered into on August 17, 2007 (the
“Amended and Restated Note Purchase Agreement”) with Sankaty Advisors, LLC.
      Pursuant to the Note Purchase Agreement, the Company previously issued
      $12,690,000 in aggregate principal amount of its Senior Notes for an aggregate
      purchase price of $12,500,000 and $10,714,000 in aggregate principal amount
      of
      Series A senior subordinated notes for an aggregate purchase price of
      $10,500,000 (the “Series A Subordinated Notes”). Pursuant to the Amended and
      Restated Note Purchase Agreement, the Company issued an additional $13,265,000
      in aggregate principal amount of its Series B senior subordinated notes for
      an
      aggregate purchase price of $13,000,000 (the “Series B Subordinated Notes” and,
      collectively with the Series A Subordinated Notes, the “Subordinated Notes”).
      Certain affiliates of Sankaty Advisors, LLC are holders of the Company’s Series
      C and Series E Preferred Stock.





With
      regards to the Senior Notes, the terms of the Amended and Restated Note Purchase
      Agreement are substantially similar to those in the August 17, 2007 Note
      Purchase Agreement.





The
      Series B Subordinated Notes will have an additional 2% redemption premium
      compared to the Series A Subordinated Notes through maturity.  In certain
      circumstances in which Note Purchasers are not provided with rights of first
      refusal and rights of first offer (as described below), including in connection
      with a prepayment of the Series A Subordinated Notes within 18 months of August
      17, 2007 that occurs in connection with a purchase of a potential acquisition
      target, the Subordinated Notes may also be subject to a 10% redemption premium.
      The Company may issue up to an additional $500,000 in Series A Subordinated
      Notes if it meets a certain financial covenant tests and other
      conditions.





If,
      on
      August 1, 2009, the Senior Notes and Subordinated Notes have not been repaid
      or
      refinanced and the debt to EBITDA leverage ratio for the twelve months prior
      to
      August 1, 2009 exceeds 3.50:1.00, the Note Purchasers will be entitled to
      receive warrants, for no or nominal additional consideration, to purchase 3.5%
      of the shares of the Company’s outstanding common stock on a fully diluted
      basis. If, on each of February 1, 2010 and August 1, 2010, the Senior Notes
      and
      Subordinated Notes have not been repaid or refinanced and the debt to EBITDA
      leverage ratio for the twelve month period prior to February 1, 2010 or August
      1, 2010, as applicable, exceeds 3.50:1.00, the Note Purchasers will be entitled
      to receive on each such date, for no or nominal additional consideration,
      warrants to purchase 5.5% and 7.5% (in each case minus the percentage of
      warrants previously issued to the Note Purchasers pursuant to this provision)
      of
      the shares of the Company’s outstanding common stock on a fully diluted basis
      (the “Warrants”) on each such date. The Warrants expire on the first anniversary
      of their issuance, have antidilution protections and benefit from other
      customary protections.





Under
      the
      terms of the Senior Notes and the Subordinated Notes, the Company is permitted
      to incur purchase money secured indebtedness to suppliers of up to certain
      agreed amounts. The Company is not permitted to make any mandatory or optional
      dividends or distributions, and is not permitted to redeem any capital stock.





Under
      certain circumstances, holders of the Senior Notes and the Subordinated Notes
      have a right of first refusal and first offer to purchase debt securities and
      certain types of preferred stock in connection with the financing of additional
      acquisitions by the Company.




***Distribution
      Agreement***





On
      July
      14, 2008, Vance Baldwin entered into an agreement with Philips Consumer
      Lifestyle North America (“Philips”), a division of Philips Electronics North
      America Corporation. Under the terms of the agreement, Vance Baldwin
      Electronics, as single primary authorized distributor, will assume the
      management and execution responsibilities for operational and order fulfillment
      of the replacement parts business for Philips’ digital flat panel display
      products. Philips may terminate the contract in the event that Vance Baldwin
      Electronics breaches the agreement and such breach, if curable, has not been
      cured within 30 days of notice from Philips, and, further, may terminate the
      agreement upon 60 days written notice for convenience when its business strategy
      requires.





In
      the
      event of termination as set forth above, Philips will purchase all remaining
      inventory from Vance Baldwin Electronics at contractually agreed upon prices
      and
      subject to other limitations pay other agreed upon charges. Under the terms
      of
      the agreement, Vance Baldwin has purchased approximately $4.2 million of
      inventory directly from Philips.





*~
      end
      of filing ~*


F-29