|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON,
  DC 20549            



---

FORM 10-Q

QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the
quarterly period ended February 28, 2006

Commission file number: 0-32789

|                                                      
|------------------------------------------------------
|EMTEC,
  INC.                                         
|(Exact name of registrant as specified in its charter)

|                                           |  |                                       
|------------------------------------------ |  | --------------------------------------
|Delaware                                   |  | 87-0273300                            
|(State of incorporation or
  organization) |  | (I.R.S. Employer Identification
  No.)

572
Whitehead Road, Bldg.#1
Trenton, New Jersey 08619
(Address of principal executive offices, including zip code)

(609)
528-8500
(Registrants telephone number, including area code)

Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x   No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (see definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act). (Check
one)

Large
accelerated filer o     Accelerated
filer o     
Non-accelerated filer x

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o   No x

As
of April 4, 2006 there were outstanding 14,381,286 shares of the registrants
common stock.

---



EMTEC, INC.
FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2006

Table of Contents

|                                                                    |                                                                     |   
|------------------------------------------------------------------- | ------------------------------------------------------------------- | --
|PART I  FINANCIAL INFORMATION                                      |                                                                    
|                                                                    |                                                                    
|Item 1 - Financial
  Statements                                     |                                                                    
|                                                                    |                                                                    
|                                                                    | Consolidated Balance Sheets                                         |   
|                                                                    | February 28,
  2006 (Unaudited) and August 31, 2005                 | 1 
|                                                                    |                                                                     |   
|                                                                    | Consolidated Statements of Operations                               |   
|                                                                    | Three and
  Six months ended February 28, 2006 and 2005 (Unaudited) | 2 
|                                                                    |                                                                     |   
|                                                                    | Consolidated Statements of Cash Flows                               |   
|                                                                    | Six months
  ended February 28, 2006  and 2005
  (Unaudited)        | 3 
|                                                                    |                                                                     |   
|                                                                    | Notes to Consolidated Financial Statements                          | 4 
|                                                                    |                                                                     |   
|Item 2 - Managements Discussion and
  Analysis of Financial        |                                                                    
|                                                                    | Condition and Result of Operations                                  | 11
|                                                                    |                                                                     |   
|Item 3  Quantitative and Qualitative Information About Market Risk | 26                                                                 
|                                                                    |                                                                    
|Item 4  Controls and Procedures                                    | 27                                                                 
|                                                                    |                                                                    
|PART II  OTHER INFORMATION                                         |                                                                    
|                                                                    |                                                                    
|Item 6  Exhibits                                                   | 28                                                                 
|                                                                    |                                                                    
|SIGNATURES                                                          | 29                                                                 

---



PART I  FINANCIAL INFORMATION

|        |                     
|------- | --------------------
|Item 1. | Financial Statements

EMTEC, INC.CONSOLIDATED BALANCE SHEET

|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ---------- | --------------- | - | ---------- | 
|                                                                                                                                                                                           |  | February 28, 2006
  (Unaudited) |            | August 31, 2005 |  
|                                                                                                                                                                                           |  |                                 |            |                 |  
|                                                                                                                                                                                           |  |                                 |            |                 |  
|Assets                                                                                                                                                                                     |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Current Assets                                                                                                                                                                             |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Cash and cash equivalents                                                                                                                                                                  |  | $                               | 320,384    |                 | $ | 1,021,237  | 
|Receivables:                                                                                                                                                                               |  |                                 |            |                 |   |            | 
|Trade, less allowance for doubtful
accounts                                                                                                                                                |  |                                 | 26,890,343 |                 |   | 34,541,373 | 
|Others                                                                                                                                                                                     |  |                                 | 1,605,497  |                 |   | 3,385,891  | 
|Inventories, net                                                                                                                                                                           |  |                                 | 4,808,533  |                 |   | 5,770,590  | 
|Prepaid expenses                                                                                                                                                                           |  |                                 | 400,064    |                 |   | 433,238    | 
|Deferred tax asset - current                                                                                                                                                               |  |                                 | 553,185    |                 |   | 603,533    | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|Total current assets                                                                                                                                                                       |  |                                 | 34,578,006 |                 |   | 45,755,862 | 
|                                                                                                                                                                                          
|Property and equipment, net                                                                                                                                                                |  |                                 | 1,194,539  |                 |   | 917,159    | 
|Customer relationships, net                                                                                                                                                                |  |                                 | 8,303,304  |                 |   | 8,592,844  | 
|Goodwill                                                                                                                                                                                   |  |                                 | 9,014,055  |                 |   | 8,974,610  | 
|Restricted cash                                                                                                                                                                            |  |                                 | 150,000    |                 |   | 5,650,000  | 
|Other assets                                                                                                                                                                               |  |                                 | 104,718    |                 |   | 119,443    | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Total assets                                                                                                                                                                               |  | $                               | 53,344,622 |                 | $ | 70,009,918 | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|Liabilities and Stockholders Equity                                                                                                                                                       |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                           |  |                                 |            |                 |  
|Current Liabilities                                                                                                                                                                        |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Line of credit                                                                                                                                                                             |  | $                               | 4,045,391  |                 | $ | 4,412,526  | 
|Accounts payable - trade                                                                                                                                                                   |  |                                 | 22,227,050 |                 |   | 29,738,061 | 
|Accounts payable - related party                                                                                                                                                           |  |                                 | 183,333    |                 |   | 133,333    | 
|Current portion of long term debt                                                                                                                                                          |  |                                 | 524,874    |                 |   | 524,874    | 
|Income taxes payable                                                                                                                                                                       |  |                                 |           |                 |   | 828,659    | 
|Accrued liabilities                                                                                                                                                                        |  |                                 | 3,156,323  |                 |   | 4,190,728  | 
|Due to former stockholders                                                                                                                                                                 |  |                                 | 631,415    |                 |   | 631,415    | 
|Customer deposits                                                                                                                                                                          |  |                                 | 237,130    |                 |   | 1,268,672  | 
|Deferred revenue                                                                                                                                                                           |  |                                 | 1,082,535  |                 |   | 1,125,205  | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Total current liabilities                                                                                                                                                                  |  |                                 | 32,088,051 |                 |   | 42,853,473 | 
|                                                                                                                                                                                          
|Accrued severance                                                                                                                                                                          |  |                                 | 328,409    |                 |   | 380,356    | 
|Deferred tax liability                                                                                                                                                                     |  |                                 | 2,761,604  |                 |   | 2,838,298  | 
|Long term debt                                                                                                                                                                             |  |                                 | 2,795,592  |                 |   | 3,010,219  | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Total liabilities                                                                                                                                                                          |  |                                 | 37,973,656 |                 |   | 49,082,346 | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|Stockholders Equity                                                                                                                                                                       |  |                                 |            |                 |   |            | 
|Common stock $0.01 par value; 25,000,000 shares
authorized; 17,245,875
  and 17,232,134 shares issued and 14,381,286 and 17,232,134 outstanding at
  February 28, 2006 and August 31, 2005 |  |                                 | 172,459    |                 |   | 172,321    | 
|Additional paid-in capital                                                                                                                                                                 |  |                                 | 19,920,577 |                 |   | 19,908,779 | 
|Retained earnings                                                                                                                                                                          |  |                                 | 873,977    |                 |   | 846,472    | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                           |  |                                 | 20,967,013 |                 |   | 20,927,572 | 
|Less: treasury stock, at cost                                                                                                                                                              |  |                                 | (5,596,047 | )               |   |           | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Total stockholders equity                                                                                                                                                                 |  |                                 | 15,370,966 |                 |   | 20,927,572 | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 
|                                                                                                                                                                                          
|Total liabilities and stockholders
equity                                                                                                                                                 |  | $                               | 53,344,622 |                 | $ | 70,009,918 | 
|                                                                                                                                                                                           |  |                                 |            |                 |   |            | 

The accompanying notes are integral parts of these consolidated
financial statements.

1

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EMTEC, INC.CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|-------------------------------------------------- |  | --------------------------------- | ---------- | ------------------------------- | - | ---------- | - | ---- | ----------- | - | - | ---------- | -
|                                                   |  | Three months ended
  February 28, |            | Six months ended
  February 28, |  
|                                                   |  |                                   |            |                                 |  
|                                                   |  | 2006                              |            | 2005                            |   | 2006       |   | 2005 |            
|                                                   |  |                                   |            |                                 |   |            |   |      |            
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Revenues                                           |  | $                                 | 41,419,415 |                                 | $ | 44,821,474 |   | $    | 126,200,100 |   | $ | 90,350,086 |  
|Cost of revenues                                   |  |                                   | 36,297,550 |                                 |   | 41,445,042 |   |      | 112,856,068 |   |   | 83,220,149 |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Gross profit                                       |  |                                   | 5,121,865  |                                 |   | 3,376,432  |   |      | 13,344,032  |   |   | 7,129,937  |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Operating expenses:                                |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Selling, general, and administrative
expenses      |  |                                   | 4,878,597  |                                 |   | 2,770,370  |   |      | 11,802,382  |   |   | 5,425,076  |  
|Management fee  related party                     |  |                                   | 87,501     |                                 |   | 87,500     |   |      | 175,001     |   |   | 175,000    |  
|Rent expense  related party                       |  |                                   | 88,933     |                                 |   | 45,000     |   |      | 177,087     |   |   | 90,000     |  
|Depreciation and amortization                      |  |                                   | 224,967    |                                 |   | 28,652     |   |      | 438,471     |   |   | 53,868     |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Total operating expenses                           |  |                                   | 5,279,998  |                                 |   | 2,931,522  |   |      | 12,592,941  |   |   | 5,743,944  |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Operating income (loss)                            |  |                                   | (158,133   | )                               |   | 444,910    |   |      | 751,091     |   |   | 1,385,993  |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Other expense (income):                            |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Interest income  other                            |  |                                   | (14,743    | )                               |   | (11,864    | ) |      | (24,067     | ) |   | (34,852    | )
|Interest expense                                   |  |                                   | 337,530    |                                 |   | 60,358     |   |      | 593,765     |   |   | 194,864    |  
|Other expense (income)                             |  |                                   | (753       | )                               |   | (408       | ) |      | (28,316     | ) |   | (954       | )
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|(Loss) Income before income taxes                  |  |                                   | (480,167   | )                               |   | 396,824    |   |      | 209,709     |   |   | 1,226,935  |  
|Provision for income taxes                         |  |                                   | (91,631    | )                               |   | 171,000    |   |      | 182,205     |   |   | 529,000    |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Net (loss) income                                  |  | $                                 | (388,536   | )                               | $ | 225,824    |   | $    | 27,504      |   | $ | 697,935    |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Preferred stock dividends                          |  |                                   |           |                                 |   | (19,726    | ) |      |            |   |   | (39,671    | )
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Net (loss) income available to common stockholders |  | $                                 | (388,536   | )                               | $ | 206,098    |   | $    | 27,504      |   | $ | 658,264    |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Net (loss) income per common share                 |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Basic and diluted                                  |  | $                                 | (0.03      | )                               | $ | 0.02       |   | $    | 0.00        |   | $ | 0.07       |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Weighted average shares outstanding                |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Basic                                              |  |                                   | 14,381,286 |                                 |   | 9,528,110  |   |      | 15,039,273  |   |   | 9,528,110  |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  
|Diluted                                            |  |                                   | 14,406,484 |                                 |   | 9,528,110  |   |      | 15,065,753  |   |   | 9,528,110  |  
|                                                   |  |                                   |            |                                 |   |            |   |      |             |   |   |            |  

The accompanying notes are integral parts of these consolidated
financial statements.

2

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EMTEC, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                     |  |                                 |            |   |      |            |  
|---------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | ---------- | -
|                                                     |  | Six months ended
  February 28, |           
|                                                     |  |                                 |           
|                                                     |  | 2006                            |            |   | 2005 |           
|                                                     |  |                                 |            |   |      |           
|                                                     |  |                                 |            |   |      |            |  
|Cash Flows from Operating Activities                 |  |                                 |            |   |      |            |  
|Net income                                           |  | $                               | 27,504     |   | $    | 697,935    |  
|                                                     |  |                                 |            |   |      |            |  
|Adjustments to Reconcile Net Income to Net           |  |                                 |            |   |      |            |  
|Cash (Used In) Provided By Operating
Activities      |  |                                 |            |   |      |            |  
|Depreciation and amortization                        |  |                                 | 438,471    |   |      | 53,869     |  
|Deferred income tax (benefit) expense                |  |                                 | (26,346    | ) |      |           |  
|Put option valuation                                 |  |                                 | (11,500    | ) |      |           |  
|                                                     |  |                                 |            |   |      |            |  
|Changes in Operating Assets and Liabilities          |  |                                 |            |   |      |            |  
|Receivables                                          |  |                                 | 9,431,424  |   |      | (98,742    | )
|Inventories                                          |  |                                 | 962,057    |   |      | (2,320,556 | )
|Prepaid expenses and other assets                    |  |                                 | 47,900     |   |      | 6,121      |  
|Accounts payable                                     |  |                                 | (7,461,011 | ) |      | (532,821   | )
|Customer deposits                                    |  |                                 | (1,031,541 | ) |      |           |  
|Income Taxes Payable                                 |  |                                 | (828,659   | ) |      | 268,419    |  
|Accrued liabilities                                  |  |                                 | (1,022,906 | ) |      | 1,317,049  |  
|Deferred compensation                                |  |                                 | (51,947    | ) |      | (44,000    | )
|Deferred revenue                                     |  |                                 | (42,670    | ) |      | (15,807    | )
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Net Cash Provided By (Used In) Operating
Activities  |  |                                 | 430,776    |   |      | (668,533   | )
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Cash Flows from Investing Activities                 |  |                                 |            |   |      |            |  
|Purchases of property and equipment                  |  |                                 | (426,311   | ) |      | (88,851    | )
|Decrease in restricted cash                          |  |                                 | 5,500,000  |   |      |           |  
|Business acquistion costs                            |  |                                 | (39,445    | ) |      |           |  
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Net Cash Provided By (Used In) Investing
Activities  |  |                                 | 5,034,244  |   |      | (88,851    | )
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Cash Flows from Financing Activities                 |  |                                 |            |   |      |            |  
|Net (decrease) increase in line of credit            |  |                                 | (367,135   | ) |      | 1,077,247  |  
|Proceeds from issuance of common stock               |  |                                 | 11,936     |   |      |           |  
|Purchase of treasury stock                           |  |                                 | (5,596,047 | ) |      |           |  
|Repayment of debt                                    |  |                                 | (214,627   | ) |      | (156,847   | )
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Net Cash (Used In) Provided By Financing
Activities  |  |                                 | (6,165,873 | ) |      | 920,400    |  
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Net (Decrease) Increase in Cash and Cash
Equivalents |  |                                 | (700,852   | ) |      | 163,016    |  
|                                                     |  |                                 |            |   |      |            |  
|Beginning Cash and Cash Equivalents                  |  |                                 | 1,021,237  |   |      | 1,215,917  |  
|                                                     |  |                                 |            |   |      |            |  
|                                                    
|Ending Cash and Cash Equivalents                     |  | $                               | 320,384    |   | $    | 1,378,933  |  
|                                                     |  |                                 |            |   |      |            |  
|                                                     |  |                                 |            |   |      |            |  
|Supplemental Disclosure of Cash Flow Information     |  |                                 |            |   |      |            |  
|Cash paid during the six months for:                 |  |                                 |            |   |      |            |  
|Income taxes                                         |  | $                               | 1,129,349  |   | $    | 297,350    |  
|                                                     |  |                                 |            |   |      |            |  
|Interest                                             |  |                                 | 322,918    |   |      | 111,061    |  
|                                                     |  |                                 |            |   |      |            |  

The accompanying notes are integral parts of these consolidated
financial statements.

3

---



EMTEC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of
Presentation

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and note
disclosures required by generally accepted accounting principles in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements. Quarterly results are
not necessarily indicative of results for the full year. For further
information, refer to the annual financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended August
31, 2005.

2. General

Description of Business

On August 5, 2005, Emtec, Inc. (Old Emtec)
completed a merger with Darr Westwood Technology Corporation (Darr) pursuant
to which the two companies merged (the Merger) and now operate as a
consolidated entity that has retained the name Emtec, Inc. (the Company or
Emtec).Management concluded that the transaction resulted in a change
in control of the Company and that the transaction should be accounted for as a
reverse merger, whereby Darr was considered the accounting acquirer of Old
Emtec for financial reporting purposes. In what was regarded as a recapitalization, the historical stockholders
equity of Darr, the accounting acquirer, prior to the Merger was retroactively
restated for the equivalent number of shares received in the Merger after
giving effect to any difference in the par value of Old Emtecs and Darrs
stock with an offset to paid-in capital. Retained earnings of Darr were carried
forward after the Merger. Operations prior to the Merger are those of Darr.
Earnings per share for periods prior to the Merger were restated to reflect the
equivalent number of shares received in the Merger.

The
consolidated financial statements include the accounts and transactions of the
combined company for the three and six months ended February 28, 2006 and only
of Darr for the three and six months ended February 28, 2005.

The Company is
an information technology company, providing consulting, services and products
to commercial, federal, education, state and local verticals. The Companys
areas of specific practices include communications, data management, enterprise
computing, managed services, storage and data center planning and development.
The Companys client base is comprised of departments of the United States
Federal Government, U.S. state and local governments, schools and commercial
businesses throughout the United States. The most significant portion of the
Companys revenue is derived from activities as a reseller of Information
Technology (IT) products, such as workstations, servers, microcomputers, and
application software and networking and communications equipment.

The Company
considers all of its operating activity to be generated from a single operating
segment.

4

---



Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of revenues
and expenses during the reporting period, including, but not limited to,
receivable valuations, impairment of goodwill, and income taxes. Managements
estimates are based on historical experience, facts and circumstances available
at the time, and various other assumptions that are believed to be reasonable
under the circumstances. The Company reviews these matters and reflects changes
in estimates as appropriate. Actual results could differ from those estimates.

Goodwill

Goodwill represents costs in excess of fair values assigned to the
underlying net assets of acquired companies. Effective January 1, 2002, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and as a
result, goodwill is not amortized but tested for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The Company set an annual impairment testing date of June 1. An
impairment charge will be recognized only when the implied fair value of a
reporting unit, including goodwill, is less than its carrying amount.

Changes in the carrying amounts of goodwill for the six months ended
February 28, 2006 are as follows:

|                                                    |  |   |           | 
|--------------------------------------------------- |  | - | --------- | 
|Balance,
  beginning                                |  | $ | 8,974,610 | 
|                                                   
|Adjustement
  to previously recorded purchase price |  |   | 39,445    | 
|                                                    |  |   |           | 
|                                                   
|Balance,
  ending                                   |  | $ | 9,014,055 | 
|                                                    |  |   |           | 



Earnings
  Per Share



Basic
  earnings (loss) per share amounts are computed by dividing net (loss) income
  available to common stockholders (the numerator) by the weighted average shares
  outstanding, reduced by treasury shares, (the denominator), during the period.
  Shares issued during the period are weighted for the portion of the period that
  they were outstanding.



Diluted
  earnings (loss) per share amounts are similar to the computation of basic earnings
  per share except that the denominator is increased to include the number of
  additional common shares that would have been outstanding if dilutive options
  and warrants had been exercised. The assumed conversion of options and warrants
  resulted in 25,198 and 26,480 additional shares for the three months and six
  months ended February 28, 2006, respectively. Outstanding stock warrants to
  purchase 1,597,921 common shares as of February 28, 2006 were not included in
  the computation of diluted earnings per share for the three months and six months
  ended February 28, 2006 because the exercise price was greater than the average
  market price of the Companys common shares. There were no options or warrants
  outstanding during the three months and six months ended February 28, 2005 and
  therefore no adjustment was made to dilutive earnings per shares during the
  period.

3. Stock Options and Warrants

The Companys
1996 Stock Option Plan (amended in 1999) (the Plan) authorizes the granting
of stock options to directors and eligible employees. The Company has reserved
1,000,000 shares of its common stock for issuance under the Plan at prices not
less than 100% of the fair value of the Companys common stock on the date of
grant (110% in the case of shareholders owning more than 10% of the Companys
common stock). Options under the Plan typically terminate after 5 years and
vest over a four year period. Options were issued by Old Emtec prior to August
5, 2005 and no other options have been issued by the Company. No options were
granted or exercised during the three months ended February 28, 2006. Options
outstanding and exercisable at February 28, 2006 totaled 46,571 and their
weighted average exercise price is $0.86.

Because the
Company did not include the consent of its independent registered accounting
firm with its audited financial statements included in its Annual Report on
Form 10-K for the year ended August 31, 2005, the Company has not incorporated
those financial statements by reference to its registration statement on Form
S-8. As a result, until the receipt of a consent and completion of the Form
S-8, the Company will not be granting any options to purchase its common stock.

5

---





Effective
September 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123(R) (SFAS No. 123(R)), Share-Based Payment, using the
modified prospective transition method. Under the modified prospective
transition method, the Company is required to recognize compensation cost for
1) all share-based payments granted prior to, but not yet vested as of,
September 1, 2005 based on the grant date fair value estimated in accordance
with the original provisions of Statement of Financial Accounting Standards
123; and 2) for all share-based payments granted on or after September 1, 2005
based on the grant date fair value estimated in accordance with SFAS 123(R). In
accordance with the modified prospective method, the Company has not restated
prior period results.

The Company
did not grant any share-based compensation awards during the six months ended
February 28, 2006 and all outstanding stock options as of September 1, 2005
were fully vested, thus no compensation expense was recognized.

In connection
with the Merger, stock warrants were issued to the former Darr shareholders
that evidence the obligation of the Company to issue a variable number of
shares, in the aggregate, equal to 10% of the total issued and outstanding
shares of the Companys common stock, measured on a post exercise basis, at any
date during the 5 year term of the warrants, which ends August 5, 2010. The
aggregate exercise price of these warrants is fixed at $3,695,752. The exercise
price per warrant will vary based upon the number of shares issuable under the
warrants. The number of shares issuable under the warrants totaled 1,597,921
shares with an exercise price of $2.31 per share as of February 28,
2006. The outstanding stock warrants were anti-dilutive for the three and
six months ended February 28, 2006.

4. Line of Credit

On August 5,
2005, the Company entered into a credit facility under two agreements with GE
Commercial Distribution Finance Corporation (the Lender). The credit facility
finances purchases from specified vendors, as defined, and allows for
borrowings based on a percentage of eligible accounts receivable, as defined.
Borrowings under both agreements are limited to an aggregate borrowing of the
lesser of $35,000,000 or 85% of eligible accounts receivable, plus 100% of
unsold inventory financed by the Lender, minus a $3.15 million reserve.
Borrowings under both agreements bear interest at the greater of the prime rate
as published by JP Morgan Chase Bank or 4.0%. The underlying agreements allow
for an increased borrowing base during periods of high seasonal activity. On
November 22, 2005, the Lender increased the permitted aggregate borrowings
under the Companys credit facility from $35.0 million to $48.0 million. This
temporary increase was available to the Company through December 15, 2005.

The credit
facility is secured by substantially all of the Companys assets, and the
underlying agreements contain certain restrictive covenants that limit
dividends to stockholders and require the Company to meet defined financial
covenants. In addition, the credit facility requires that the Company maintain
a lock-box for all cash receipts related to trade accounts receivable, from
which the financing company releases funds to the Company for operations
pursuant to terms identified in the underlying agreements.

On February
13, 2006, the Company entered into an addendum to its credit facility with the
Lender. This addendum amended the credit facility by increasing the reserve
amount to $5.00 million and the

6

---



Company paid a
waiver fee of $50,000 for its non-compliance with certain financial covenants
as of November 30, 2005.

At February
28, 2006, the Company had a $4.05 million outstanding balance under the
accounts receivable credit facility, and a $3.55 million (included in the
Companys accounts payable) outstanding balance plus $2.49 million in open
approvals under the floor plan credit facility with Lender. Net availability of
$4.31 million was available under the accounts receivable credit facility, and
$20.61 million was available under the floor plan credit facility.

At February
28, 2006, the Company determined that it was in compliance with its financial
covenants with the Lender.

5. Concentration of Credit Risk and Significant
Clients

Financial
instruments that potentially subject the Company to a concentration of credit
risk consist principally of accounts receivable.

The Companys
revenues, by client type, are comprised of the following:

|                                              |  |                                           |            |      |       |   |  |   |            |  |  |       |  
|--------------------------------------------- |  | ----------------------------------------- | ---------- | ---- | ----- | - |  | - | ---------- |  |  | ----- | -
|                                              |  | For the
  Three Months Ended February 28, |           
|                                              |  |                                           |           
|                                              |  | 2006                                      |            | 2005 |      
|                                              |  |                                           |            |      |      
|Departments of the United
  States Government |  | $                                         | 17,514,707 |      | 42.3  | % |  | $ | 38,087,073 |  |  | 85.0  | %
|State and Local
  Governments                 |  |                                           | 8,938,469  |      | 21.6  |   |  |   | 3,338,766  |  |  | 7.4   |  
|Commercial Companies                          |  |                                           | 10,733,709 |      | 25.9  |   |  |   | 2,800,663  |  |  | 6.2   |  
|Education and other                           |  |                                           | 4,232,530  |      | 10.2  |   |  |   | 594,972    |  |  | 1.3   |  
|                                              |  |                                           |            |      |       |   |  |   |            |  |  |       |  
|Total Revenues                                |  | $                                         | 41,419,415 |      | 100.0 | % |  | $ | 44,821,474 |  |  | 100.0 | %
|                                              |  |                                           |            |      |       |   |  |   |            |  |  |       |  

The Companys
revenues, by client type, are comprised of the following:

|                                              |  |                                         |             |      |       |   |  |   |            |  |  |       |  
|--------------------------------------------- |  | --------------------------------------- | ----------- | ---- | ----- | - |  | - | ---------- |  |  | ----- | -
|                                              |  | For the
  Six Months Ended February 28, |            
|                                              |  |                                         |            
|                                              |  | 2006                                    |             | 2005 |      
|                                              |  |                                         |             |      |      
|Departments of the United
  States Government |  | $                                       | 71,054,112  |      | 56.3  | % |  | $ | 77,938,014 |  |  | 86.3  | %
|State and Local
  Governments                 |  |                                         | 15,970,876  |      | 12.7  |   |  |   | 5,943,451  |  |  | 6.6   |  
|Commercial Companies                          |  |                                         | 26,561,592  |      | 21.0  |   |  |   | 5,267,420  |  |  | 5.8   |  
|Education and other                           |  |                                         | 12,613,520  |      | 10.0  |   |  |   | 1,201,201  |  |  | 1.3   |  
|                                              |  |                                         |             |      |       |   |  |   |            |  |  |       |  
|Total Revenues                                |  | $                                       | 126,200,100 |      | 100.0 | % |  | $ | 90,350,086 |  |  | 100.0 | %
|                                              |  |                                         |             |      |       |   |  |   |            |  |  |       |  

The Company
does not require collateral or other security to support credit sales but
provides an allowance for doubtful accounts based on historical experience and
specifically identified risks. Accounts receivable are considered delinquent
when payment is not received within standard terms of sale and are charged off
against the allowance for doubtful accounts when management determines that
recovery is unlikely and the Company ceases its collection efforts.

7

---



The Company
provides an allowance for losses on trade receivables based on a review of the
current status of existing receivables and managements evaluation of periodic
aging of the accounts. The Trade account receivables consist of the following:

|                                  |  |                |            |      |   |            |  
|--------------------------------- |  | -------------- | ---------- | ---- | - | ---------- | -
|                                  |  | February
  28, |           
|                                  |  |                |           
|                                  |  | 2006           |            | 2005 |  
|                                  |  |                |            |      |  
|Trade
  receivables               |  | $              | 27,073,340 |      | $ | 34,766,373 |  
|Allowance
  for doubtful accounts |  |                | (182,997   | )    |   | (225,000   | )
|                                  |  |                |            |      |   |            |  
|Trade receivables, net            |  | $              | 26,890,343 |      | $ | 34,541,373 |  
|                                  |  |                |            |      |   |            |  

At February
28, 2006, accounts receivable related to bill and hold sales totaled to
$185,840. Total revenue from bill and hold sales were $185,840 with a gross
profit of $35,871which was included in the result of operations for the three
and six months ended February 28, 2006. The Company does not modify its normal
billing and credit terms for these customers. The customer is invoiced at the
date of revenue recognition when all of the criteria have been met.

6. Inventories

Inventory is
stated at the lower of average cost (specific identification) or market.
Inventory is finished goods purchased for resale and consists of computer
hardware, computer software, computer peripherals and related supplies. The
Company provides an inventory reserve for products it determines are obsolete
or where salability has deteriorated based on managements review of products
and sales. During the quarter ending February 28, 2006, the Company shipped products to a client via a
third party freight carrier which were damaged in-transit. As a result of the
damaged inventory, the Company is currently pursuing an insurance claim with
its insurance carrier and a negligence claim with its freight carrier. The
Company recorded a loss of $338,000 included in cost of sales during three
months ended February 28, 2006 pending a resolution of the claim.

The components
of inventory are as follows:

|                                          |  |                |           |      |   |           |  
|----------------------------------------- |  | -------------- | --------- | ---- | - | --------- | -
|                                          |  | February
  28, |          
|                                          |  |                |          
|                                          |  | 2006           |           | 2005 |  
|                                          |  |                |           |      |  
|Hardware, software, accessories and parts |  | $              | 4,945,778 |      | $ | 6,070,728 |  
|Less: inventory reserve                   |  |                | (137,245  | )    |   | (300,138  | )
|                                          |  |                |           |      |   |           |  
|Net inventories                           |  | $              | 4,808,533 |      | $ | 5,770,590 |  
|                                          |  |                |           |      |   |           |  

7. Customer
Relationships

Customer
relationships represent the value ascribed to customer relationships purchased
during the Merger. Customer relationships acquired totaled $8,661,712 and are
presented on the balance sheet net of accumulated amortization of $358,408 and
$68,868 as of February 28, 2006 and August 31, 2005, respectively.

8

---



8. Accrued Liabilities

Accrued
liabilities consisted of the following:

|                                   |  |                             |           |                           |   |           | 
|---------------------------------- |  | --------------------------- | --------- | ------------------------- | - | --------- | 
|                                   |  | As of
  February 28,
  2006 |           | As of
  August 31,
  2005 |  
|                                   |  |                             |           |                           |  
|Accrued payroll                    |  | $                           | 605,248   |                           | $ | 1,042,864 | 
|Accrued commissions                |  |                             | 751,189   |                           |   | 511,858   | 
|Accrued state sales taxes          |  |                             | 104,562   |                           |   | 366,432   | 
|Accrued third party
  service fees |  |                             | 453,752   |                           |   | 627,526   | 
|Industrial funding fee             |  |                             | 68,767    |                           |   | 216,126   | 
|Other accrued expenses             |  |                             | 1,172,805 |                           |   | 1,425,923 | 
|                                   |  |                             |           |                           |   |           | 
|                                   |  | $                           | 3,156,323 |                           | $ | 4,190,728 | 
|                                   |  |                             |           |                           |   |           | 

9. Related Party Transactions

The Company
accrues a monthly management fee of $29,166 per the management services
agreement between DARR Global Holdings, Inc. and Westwood Computer Corporation,
dated April 16, 2004. DARR Global Holdings, Inc. is a management consulting
company 100% owned by the Companys Chief Executive Officer. For each of the
three months ended February 28, 2006 and 2005, respectively, the Company
recorded $87,500 for this management fee in the accompanying consolidated
statements of operations. For each of the six months ended February 28, 2006
and 2005, respectively, the Company recorded $175,000 for this management fee
in the accompanying consolidated statements of operations.

One of the
Companys facilities is leased under a non-cancelable operating lease agreement
with an entity that is owned by officers of the Company. Rent expense was
$90,000 for each of the six months ended February 28, 2006 and 2005,
respectively. The facilities consist of office and warehouse space totaling
43,000 square feet, located in Springfield, New Jersey. Management believes the
lease payments are at or below market rate for similar facilities.

The Company is
occupying approximately 21,000 square feet of office and warehouse space in a
70,000 square foot building. This space is leased from GS&T Properties,
LLC, in which certain officers of the Company are passive investors, owning
approximately 20% equity interest. The lease term is for 5 years with monthly
base rent of $12,500. During the three months ended February 28, 2006, the
Company recorded $44,322 in expense under this lease. During the six months
ended February 28, 2006, the Company recorded $87,476 in expense under this
lease. The lease commenced on November 30, 2004 with Old Emtec, and thus there
was no related party expense during the six months ended February 28, 2005.

10. Treasury Stock

Pursuant to
the Merger, the Company initiated a self tender offer on September 7, 2005.
When the self tender offer closed on October 4, 2005, 4,984,185 shares had been
properly tendered and not withdrawn. Because the number of shares of common
stock tendered exceeded the number of shares that the Company offered to
purchase, 57.473 percent of the shares that were tendered were repurchased by
the Company. The Company funded the payment for the 2,864,584 shares of common

9

---



stock validly
tendered and accepted under the self tender offer from borrowings of $5.5
million under its revolving credit facility made prior to August 31, 2005.
Treasury stock of $5,596,047 was recorded during the quarter ended November 30,
2005 as follows:

|                                                 |  |   |           | 
|------------------------------------------------ |  | - | --------- | 
|Self tender offer *                              |  | $ | 5,500,000 | 
|                                                 |  |   |           | 
|Add: legal and transaction
  costs incurred      |  |   | 96,047    | 
|                                                 |  |   |           | 
|                                                 |  |   |           | 
|Treasury stock                                   |  | $ | 5,596,047 | 
|                                                 |  |   |           | 
|                                                 |  |   |           | 
|* Purchased 2,864,584
  shares @ $1.92 per share |  |   |           | 

11. Subsequent Event

On April 10, 2006, the Company executed an Addendum to Agreement
  for Wholesale Financing and Business Financing Agreement with the Lender. This
  addendum amended the credit facility by decreasing the reserve amount from $5.00
  million to $3.01 million, increasing eligibility of the all U.S. Federal Government
  accounts receivable up to 120 days from the date of the invoice, and set revised
  financial covenants for the quarter ending February 28, 2006 through May 31,
  2007. All other terms remain unchanged.

10

---



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

The
following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, the unaudited financial statements, including the
notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding
Forward-Looking Statements

You
should carefully review the information contained in this Quarterly Report on
Form 10-Q and in other reports or documents that we file from time to time with
the Securities and Exchange Commission (the SEC). In addition to historical
information, this Quarterly Report on Form 10-Q contains our beliefs of future
events and of our future financial performance. In some cases, you can identify
those so-called forward-looking statements by words such as may, will,
should, expects, plans, anticipates, believes, estimates,
predicts, potential, or continue or the negative of those words and other
comparable words. You should be aware that those statements are only our
predictions. Actual events or results may differ materially. We undertake no
obligation to publicly release any revisions to forward-looking statements
after the date of this report. In evaluating those statements, you should
specifically consider various factors, including the risk factors discussed in
our Annual Report on Form 10-K for the year ended August 31, 2005 and other
reports or documents that we file from time to time with the SEC. All
forward-looking statements attributable to us or a person acting on our behalf
are expressly qualified in their entirety by this cautionary statement.

Assumptions
relating to budgeting, marketing, and other management decisions are subjective
in many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause us to alter our marketing, capital expenditure, or other budgets, which
may in turn affect our business, financial position, results of operations, and
cash flows.

Overview of
Emtec

We
are an information technology company, providing consulting, services and
products to commercial, U.S. Federal Government, education, U.S. state and
local clients. Our services and products address technology needs of our
clients including communications, data management, enterprise computing,
managed services, storage and data center planning and development. Our
solutions are crafted to enable our clients to become more efficient and
effective, thereby making them more profitable and giving them a competitive
advantage. To date, the most significant portion of our revenues has been
derived from our activities as a reseller of IT products, such as workstations,
servers, microcomputers, application software and networking and communications
equipment. However, we are actively endeavoring to increase the portion of our
revenues that are derived from IT services.

Our
primary business objective is to become a leading single-source provider of
high quality and innovative IT consulting, services and products. With the
Merger, we
believe we have created a strong, stable platform for growth and management
depth. Through our strategic partners, we have an expanded array of products
and technology solutions to offer our clients.

11

---



Our goal is
to improve our profitability. In an effort to achieve the highest
level of operational efficiencies within the organization, we have undertaken
various costs containment initiatives including a review of personnel levels,
the elimination of certain non-essential services and making several
operational and management changes to our business. Many of the cost
containment strategies have been implemented in the current quarter and will be
implemented over the next several months. We continue to emphasize operating
efficiencies through cost containment strategies, re-engineering efforts and
improved service delivery techniques, particularly within the cost of services,
selling, marketing and general and administrative expenses.

Merger with Darr

On
August 5, 2005, we completed our merger under the Agreement and Plan of Merger
dated as of July 14, 2005 (the Merger Agreement), by and among us, Emtec
Viasub LLC, a Delaware limited liability company and our wholly-owned
subsidiary (MergerCo), and Darr Westwood Technology Corporation, a Delaware
corporation (Darr). Pursuant to the terms of the Merger Agreement, Darr
merged with and into MergerCo, with MergerCo remaining as the surviving company
(the Surviving Company) and a wholly-owned subsidiary of Emtec (the
Merger).

The
Merger has been
accounted for as a capital transaction followed by a recapitalization. Our management concluded that the
transaction resulted in a change in control of the Company and that the Merger
should be accounted for as a reverse acquisition. Accordingly, Darr is
deemed to be the acquiring company for financial reporting purposes and its
financial statements became the historical financial statements of Emtec. In
conjunction with the Merger, we
changed our fiscal year end from March 31 to August 31.

Overview of Financial Statements Presented
Herein

The
consolidated financial statements include the accounts and transactions of the
combined company for the three and six months ended February 28, 2006 and only
of Darr for the three and six months ended February 28, 2005.

12

---



Results of Operations

The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
each of the three months ended February 28, 2006 and 2005.

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended February 28,

|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|--------------------------------------------- |  | ----------------- | ---------- | ------------ | ---- | ----------------- |  | ------------ | ---------- | ------ | ---- | - | ---------- | - | ---------- | - |  | ------ | --
|                                              |  | Consolidated 2006 |            | % of Revenue |      | Only of Darr 2005 |  | % of Revenue |            | Change |      |   | %
  Change
|                                              |  |                   |            |              |      |                   |  |              |            |        |     
|Revenues                                      |  | $                 | 41,419,415 |              | 100  | %                 |  | $            | 44,821,474 |        | 100  | % |            | $ | (3,402,059 | ) |  | (7.6   | )%
|Cost of revenues                              |  |                   | 36,297,550 |              | 87.6 |                   |  |              | 41,445,042 |        | 92.5 |   |            |   | (5,147,492 | ) |  | (12.4  | )%
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Gross profit                                  |  |                   | 5,121,865  |              | 12.4 | %                 |  |              | 3,376,432  |        | 7.5  | % |            |   | 1,745,433  |   |  | 51.7   | % 
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Operating expenses:                           |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Selling, general, and administrative
expenses |  |                   | 4,878,598  |              | 11.8 |                   |  |              | 2,770,370  |        | 6.2  |   |            |   | 2,108,228  |   |  | 76.1   | % 
|Management fee  related party                |  |                   | 87,500     |              | 0.2  |                   |  |              | 87,500     |        | 0.2  |   |            |   |           |   |  | 0.0    | % 
|Rent expense  related party                  |  |                   | 88,933     |              | 0.2  |                   |  |              | 45,000     |        | 0.1  |   |            |   | 43,933     |   |  | 97.6   | % 
|Depreciation and amortization                 |  |                   | 224,967    |              | 0.5  |                   |  |              | 28,652     |        | 0.1  |   |            |   | 196,315    |   |  | 685.2  | % 
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Total operating expenses                      |  |                   | 5,279,998  |              | 12.7 | %                 |  |              | 2,931,522  |        | 6.5  | % |            |   | 2,348,476  |   |  | 80.1   | % 
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Operating income                              |  |                   | (158,133   | )            | (0.4 | )                 |  |              | 444,910    |        | 1.0  |   |            |   | (603,043   | ) |  | (135.5 | )%
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Other expense (income):                       |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Interest income  other                       |  |                   | (14,743    | )            | (0.0 | )                 |  |              | (11,864    | )      | (0.0 | ) |            |   | (2,879     | ) |  | 24.3   | % 
|Interest expense                              |  |                   | 337,530    |              | 0.8  |                   |  |              | 60,358     |        | 0.1  |   |            |   | 277,172    |   |  | 459.2  | % 
|Other expense (income)                        |  |                   | (753       | )            | (0.0 | )                 |  |              | (408       | )      | (0.0 | ) |            |   | (345       | ) |  | 84.6   | % 
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Income before income taxes                    |  |                   | (480,167   | )            | (1.2 | )                 |  |              | 396,824    |        | 0.9  |   |            |   | (876,991   | ) |  | (221.0 | )%
|Provision for income taxes                    |  |                   | (91,631    | )            | (0.2 | )                 |  |              | 171,000    |        | 0.4  |   |            |   | (262,631   | ) |  | (153.6 | )%
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   
|Net income                                    |  | $                 | (388,536   | )            | (0.9 | )%                |  | $            | 225,824    |        | 0.5  | % |            | $ | (614,360   | ) |  | (272.1 | )%
|                                              |  |                   |            |              |      |                   |  |              |            |        |      |   |            |   |            |   |  |        |   

Comparison of Three Months Ended February 28,
2006 and 2005

Total
Revenues

Total
revenues decreased by 7.6% or $3.40 million to $41.42 million for the three
months ended February 28, 2006, compared to $44.82 million for the three months
ended February 28, 2005. This decrease is mainly due to an overall decrease in
the federal government business during this quarter. Total revenue of $41.42
million for the three months ended February 28, 2006 includes $15.86 million of
revenues attributed to Old Emtec as a result of the Merger in August 2005.
Without this incremental revenue that resulted from the acquisition, our total
revenue would have decreased by 43.0% or $19.26 million to $25.56 million for
the three months ended February 28, 2006, compared to $44.82 million for the
three months ended February 28, 2005. This decrease is mainly due to a one-

13

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time sale to
the United States Department of Agriculture (USDA) of approximately $21.79
million during the three months ended February 28, 2005. We do not expect that
significant one-time sales like the one discussed above will continue to occur
in the future periods.

A
large portion of our revenue is drawn from various civilian and military U.S.
governmental departments and agencies. These clients include the Department of
Defense, Department of Justice, Department of Homeland Security, Department of
Health and Human Services, Department of Agriculture, Department of Commerce
and the GSA. During each of the three months ended February 28, 2006 and 2005,
U.S. governmental department and agency related revenues represented
approximately 42.3% and 85.0% of total revenues, respectively. The federal
government business typically experiences increased activity during the months
of August through November.

Revenues
from various commercial, education, state and local clients have increased as a
result of the Merger. Our revenues are comprised of the following client types
for the three months ended:

|                                              |  |                |            |      |       |   |  |   |            |  |  |       |  
|--------------------------------------------- |  | -------------- | ---------- | ---- | ----- | - |  | - | ---------- |  |  | ----- | -
|                                              |  | February
  28,
|                                              |  |               
|                                              |  | 2006           |            | 2005
|                                              |  |                |            |     
|Departments of the United
  States Government |  | $              | 17,514,707 |      | 42.3  | % |  | $ | 38,087,073 |  |  | 85.0  | %
|State and Local
  Governments                 |  |                | 8,938,469  |      | 21.6  |   |  |   | 3,338,766  |  |  | 7.4   |  
|Commercial Companies                          |  |                | 10,733,709 |      | 25.9  |   |  |   | 2,800,663  |  |  | 6.2   |  
|Education and other                           |  |                | 4,232,530  |      | 10.2  |   |  |   | 594,972    |  |  | 1.3   |  
|                                              |  |                |            |      |       |   |  |   |            |  |  |       |  
|Total Revenues                                |  | $              | 41,419,415 |      | 100.0 | % |  | $ | 44,821,474 |  |  | 100.0 | %
|                                              |  |                |            |      |       |   |  |   |            |  |  |       |  

Gross
Profit

Aggregate
gross profit increased by 51.7% or $1.74 million to $5.12 million for the three
months ended February 28, 2006 as compared to $3.38 million for the three
months ended February 28, 2005. This increase is primarily attributable to the
Merger with Old Emtec in August 2005. Gross profit associated with this
acquisition equaled $2.50 million for the three months ended February 28, 2006,
which represented approximately 143.2% of our total increase in gross profit.
Without this acquisition, our gross profit would have decreased by 22.3% or
$754,133 for the three months ended February 28, 2006. This decrease is mainly
due to the effect of the significant sale to the USDA discussed above in the
revenue section, and inventory damage that occurred to a large shipment during
this quarter. Gross profit associated with the USDA sales approximated $814,000
during three months ended February 28, 2005, and the cost of sales charge recorded
during the three months ended February 28, 2006 associated with inventory
damage approximated $338,000. Without this one-time sale and inventory loss,
our gross profit would have increased by $397,867 or 15.5% for the three months
ended February 28, 2006.

Measured
as a percentage of revenues, our gross profit margin increased to 12.4% of
total revenues for the three months ended February 28, 2006 from 7.5% for the
three months ended February 28, 2005. This increase is also mainly attributable
to the Merger. Gross profit margin of the Old Emtec business was 15.8% of Old
Emtec total revenues for the three months ended February 28, 2006. Excluding
Old Emtecs results, our gross profit margin would have increased to 10.3% of
total revenues for the three months ended February 28, 2006 from 7.5% for the
three months ended February 28, 2005. This percentage increase is primarily
attributable to greater selling efforts, favorable price drops and incentives
offered by manufacturers. We cannot predict that price drops and incentives are
going to repeat in the future.

14

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Factors
that may affect gross margins in the future include changes in product margins,
rebates and other incentives offered by various manufacturers, changes in
technical employee utilization rates, the mix of products and services sold,
and the decision to aggressively price certain products and services.

Selling,
General and Administrative Expenses

Selling,
general and administrative expenses increased by 76.1% or $2.11 million to
$4.88 million for the three months ended February 28, 2006, compared to $2.77
million for the three months ended February 28, 2005. This increase is mainly
due to the Merger. Selling, general and administrative expenses associated with
Old Emtec approximated $2.17 million for the three months ended February 28,
2006. Without this acquisition, our selling, general and administrative
expenses would have decreased by 2.3%, or $63,000. Selling, general and
administrative expenses include accounting related professional fees of
approximately $200,000 related to compliance costs associated with the
Securities and Exchange Commission.

In
an effort to improve operational efficiencies within the organization, we have
made several operational and management changes to our business. In recent
months, we eliminated approximately $1.4 million in annualized expenses related
to the integration of Darr and Old Emtec. We expect to see the impact of these
changes in future quarters and we will continue to emphasize operating
efficiencies through cost containment strategies, re-engineering efforts and
improved service delivery techniques, particularly within selling, marketing,
general and administrative expenses.

Factors
that may in the future have a negative impact on our selling, general and
administrative costs include costs associated with marketing and selling
activities, compliance costs associated with Securities and Exchange Commission
rules and increases in our insurance costs.

Management
Fee-Related Party

There
was no change in the management fee to a related party for the three months
ended February 28, 2006 compared to the three months ended February 28, 2005.
DARR Global Holdings, Inc. (DARR Global) is management services firm 100%
owned by our Chief Executive Officer. DARR Global charges us a management fee
of $350,000 annually.

Rent
Expense-Related Party

Rent
Expense-related party increased by 97.6% or $43,933 to $88,933 for the three
months ended February 28, 2006, compared to $45,000 for the three months ended
February 28, 2005. The increase in rent expense-related party is due to the
Merger. We occupy approximately 21,000 square feet of office and warehouse
space in a 70,000 square foot building in Suwannee, GA. This space is leased
from GS&T Properties, LLC, a company in which officers of our company are
passive investors, owning approximately 20% equity interest. The lease term is
for 5 years with monthly base rent of $12,500. During the period ended February
28, 2006, we recorded $43,933 in expense under this lease.

We
also occupy approximately 43,000 square feet of office and warehouse space in
Springfield, New Jersey. This space is leased from Westwood Property Holdings,
LLC, in which Keith Grabel, our director and an executive officer, Mary
Margaret Grabel, spouse of our director and an executive officer, and David
Micales, our Vice President of Operations, are members. The lease term is
through April 2009 with monthly base rent of $15,000. During the period ended
February 28, 2006, we recorded $45,000 in expense under this lease.

15

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Depreciation
and Amortization

Depreciation
and Amortization expense increased by 685.2% or $196,315 to $224,967 for the
three months ended February 28, 2006, compared to $28,652 for the three months
ended February 28, 2005. This increase is primarily attributable to the Merger.
Old Emtecs post-Merger depreciation and amortization accounted approximately
for $172,281 of increase. Additionally, we made fixed asset acquisitions of
$426,311 and $491,310 during each of the six months ended February 28, 2006 and
the year ended August 31, 2005, respectively, which increased our depreciation
expense. These capital assets acquisitions were primarily for the purchase of
computer equipment for internal use, the purchase of software licenses to
upgrade our accounting systems, and for furniture and fixtures.

Intangible
assets at February 28, 2006 and August 31, 2005 consisted of the value ascribed
to customer relationships of $8,661,712 less accumulated amortization of
$358,408 and $68,868, respectively. The assets ascribed to customer
relationships are being amortized on a straight-line basis over 13 to 15 years.
Amortization expense was $145,089 and $5,453 for each of the three months ended
February 28, 2006 and 2005, respectively. Amortization expense of $580,356 is
expected to be recorded each year through August 31, 2016, $573,085 for the
year ended August 31, 2017, $558,544 for each of the years ended August 31,
2018 and 2019, and $518,755 for the year ended August 31, 2020.

Interest
expense

Interest
expense increased by 459.2% or $277,172 to $337,530 for the three months ended
February 28, 2006, compared to $60,358 for the three months ended February 28,
2005. This is mainly due to a higher balance on our line of credit, a higher
interest rate due to an increasing prime rate, and higher days sales
outstanding during the period.

Income
Taxes

We
recorded an income tax benefit of $91,631 for the three months ended February
28, 2006 compared to an income tax expense of $171,000 for the three months
ended February 28, 2005. Income tax benefit of $91,631 is net of approximately
$73,000 in estimated income tax expense related to the Internal Revenue
Services (IRS) income tax audit for the prior years. Without this income tax
expense related to the income tax audit, our income tax benefit would have been
approximately $164,631. This is mainly due to decrease in taxable income.

16

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Comparison of Six Months Ended February 28,
2006 and 2005

The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
each of the six months ended February 28, 2006 and 2005.

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended February 28,

|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|--------------------------------------------- |  | ------------ | ----------- | ------- | ----- | ------------ |  | ------- | ---------- | ------ | ---- | - | ------ | - | ---------- | - |  | ------ | --
|                                              |  | Consolidated |             | % of    |       | Only of Darr |  | % of    |            |        |      |   | %     
|                                              |  | 2006         |             | Revenue |       | 2005         |  | Revenue |            | Change |      |   | Change
|                                              |  |              |             |         |       |              |  |         |            |        |      |  
|Revenues                                      |  | $            | 126,200,100 |         | 100.0 | %            |  | $       | 90,350,086 |        | 100  | % |        | $ | 35,850,014 |   |  | 39.7   | % 
|Cost of revenues                              |  |              | 112,856,068 |         | 89.4  |              |  |         | 83,220,149 |        | 92.1 |   |        |   | 29,635,919 |   |  | 35.6   | % 
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|Gross profit                                  |  |              | 13,344,032  |         | 10.6  | %            |  |         | 7,129,937  |        | 7.9  | % |        |   | 6,214,095  |   |  | 87.2   | % 
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|                                             
|Operating expenses:                           |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|Selling, general, and administrative
expenses |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|                                              |  |              | 11,802,383  |         | 9.4   |              |  |         | 5,425,076  |        | 6.0  |   |        |   | 6,377,307  |   |  | 117.6  | % 
|Management fee  related party                |  |              | 175,000     |         | 0.1   |              |  |         | 175,000    |        | 0.2  |   |        |   |           |   |  | 0.0    | % 
|Rent expense  related party                  |  |              | 177,087     |         | 0.1   |              |  |         | 90,000     |        | 0.1  |   |        |   | 87,087     |   |  | 96.8   | % 
|Depreciation and amortization                 |  |              | 438,471     |         | 0.3   |              |  |         | 53,868     |        | 0.1  |   |        |   | 384,603    |   |  | 714.0  | % 
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|Total operating expenses                      |  |              | 12,592,941  |         | 10.0  | %            |  |         | 5,743,944  |        | 6.4  | % |        |   | 6,848,997  |   |  | 119.2  | % 
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|Operating income                              |  |              | 751,091     |         | 0.6   |              |  |         | 1,385,993  |        | 1.5  |   |        |   | (634,902   | ) |  | (45.8  | )%
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|                                             
|Other expense (income):                       |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|Interest income  other                       |  |              | (24,067     | )       | (0.0  | )            |  |         | (34,852    | )      | (0.0 | ) |        |   | 10,785     |   |  | (30.9  | )%
|Interest expense                              |  |              | 593,765     |         | 0.5   |              |  |         | 194,864    |        | 0.2  |   |        |   | 398,901    |   |  | 204.7  | % 
|Other expense (income)                        |  |              | (28,316     | )       | (0.0  | )            |  |         | (954       | )      | (0.0 | ) |        |   | (27,362    | ) |  | 2868.1 | % 
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|                                             
|Income before income taxes                    |  |              | 209,709     |         | 0.2   |              |  |         | 1,226,935  |        | 1.4  |   |        |   | (1,017,226 | ) |  | (82.9  | )%
|Provision for income taxes                    |  |              | 182,205     |         | 0.1   |              |  |         | 529,000    |        | 0.6  |   |        |   | (346,795   | ) |  | (65.6  | )%
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   
|Net income                                    |  | $            | 27,504      |         | 0.0   | %            |  | $       | 697,935    |        | 0.8  | % |        | $ | (670,431   | ) |  | (96.1  | )%
|                                              |  |              |             |         |       |              |  |         |            |        |      |   |        |   |            |   |  |        |   

Total
Revenues

Total
revenues increased by 39.7% or $35.85 million to $126.20 million for the six
months ended February 28, 2006, compared to $90.35 million for the six months
ended February 28, 2005. This increase is primarily attributable to the Merger.
Total additional revenue attributed to this acquisition approximated $40.96
million for the six months ended February 28, 2006.  Without this incremental revenue that resulted from the
acquisition, our total revenue would have decreased by 5.7% or $5.11 million
for the six months ended February 28, 2006. This decrease is mainly due to our
one-time sale to the USDA of approximately $21.79 million during the three
months ended February 28, 2005.

17

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A
large portion of our revenue is drawn from various civilian and military U.S.
governmental departments and agencies. These clients include the Department of
Defense, Department of Justice, Department of Homeland Security, Department of
Health and Human Services, Department of Agriculture, Department of Commerce
and the GSA. During each of the six months ended February 28, 2006 and 2005,
U.S. governmental department and agency related revenues represented
approximately 55.8% and 86.3% of total revenues, respectively. The federal
government business typically experiences increased activity during the months
of August through November.

Revenues
from various commercial, education, state and local clients have increased as a
result of the Merger. Our revenues are comprised of the following client types
for the six months ended:

|                                              |  |                |             |  |       |   |  |   |            |  |  |       |  
|--------------------------------------------- |  | -------------- | ----------- |  | ----- | - |  | - | ---------- |  |  | ----- | -
|                                              |  | February
  28, |            
|                                              |  |                |            
|                                              |  | 2006           |             |  | 2005  |  
|                                              |  |                |             |  |       |  
|Departments of the United
  States Government |  | $              | 71,054,112  |  | 56.3  | % |  | $ | 77,938,014 |  |  | 86.3  | %
|State and Local
  Governments                 |  |                | 15,970,876  |  | 12.7  |   |  |   | 5,943,451  |  |  | 6.6   |  
|Commercial Companies                          |  |                | 26,561,592  |  | 21.0  |   |  |   | 5,267,420  |  |  | 5.8   |  
|Education and other                           |  |                | 12,613,520  |  | 10.0  |   |  |   | 1,201,201  |  |  | 1.3   |  
|                                              |  |                |             |  |       |   |  |   |            |  |  |       |  
|Total Revenues                                |  | $              | 126,200,100 |  | 100.0 | % |  | $ | 90,350,086 |  |  | 100.0 | %
|                                              |  |                |             |  |       |   |  |   |            |  |  |       |  

Gross Profit

Aggregate
gross profit increased by 87.2% or $6.21 million to $13.34 million for the six
months ended February 28, 2006 as compared to $7.13 million for the six months
ended February 28, 2005. This increase is primarily attributable to Old Emtecs
post-Merger gross profit of $5.72 million for the six months ended February 28,
2006, which represented approximately 92.1% of our total increase in gross
profit. The remainder of the $489,661 increase in our gross profit is
attributable to favorable price drops and incentives offered by manufacturers.
Overall gross profit for the six months ended February 28, 2006 includes a
reduction due to an inventory loss of approximately $338,000, as discussed in
the three months gross profit section above.

Measured
as a percentage of revenues, our gross profit margin increased to 10.6% of
total revenues for the six months ended February 28, 2006 from 7.9% for the six
months ended February 28, 2005. This increase is also mainly attributable to
the Merger. Gross profit margin of the Old Emtec business equaled to 14.0% of
Old Emtec total revenues for the six months ended February 28, 2006. Without
this acquisition, our gross profit margin would have only increased to 8.9% of
total revenues for the six months ended February 28, 2006 from 7.9% for the six
months ended February 28, 2005. This percentage increase is primarily
attributable to greater selling efforts, favorable price drops and incentives offered
by manufacturers. We cannot predict that price drops and incentives are going
to repeat in the future.

Factors
that may affect gross margins in the future include changes in product margins,
rebates and other incentives offered by various manufacturers, changes in
technical employee utilization rates, the mix of products and services sold,
and the decision to aggressively price certain products and services.

Selling,
General and Administrative Expenses

Selling, general and administrative
expenses increased by 117.6% or $6.38 million to $11.80 million for the six
months ended February 28, 2006, compared to $5.42 million for the six months

18

---



ended February 28, 2005. This increase is mainly due
to the Merger. Selling, general and administrative expenses associated with Old
Emtec approximated $4.88 million for the six months ended February 28, 2006.
Without this acquisition, our selling, general and administrative expenses
would have increased by 27.5%, or $1.49 million to $6.92 million for the six
months ended February 28, 2006. This increase in selling, general and
administrative expenses is mainly due to the following:

| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | Professional fees increased approximately $585,000
  due to compliance costs associated with the Securities and Exchange
  Commission and in connection with the Merger; and  
| |   |                                                                                                                                                                               
| | o | Compensation and benefits expense increased
  approximately $775,000 due to a company wide increase in head count
  associated with our long-term investment in new employees.

We
do not expect professional fees associated with the Merger to continue in
future periods. In addition, to improve operational efficiencies within the
organization, we have made several operational and management changes to our
business. In recent months, we eliminated approximately $1.4 million in
annualized expenses related to the integration of Darr and Old Emtec. We expect
to see the impact of these changes in future quarters and we will continue to
emphasize operating efficiencies through cost containment strategies,
re-engineering efforts and improved service delivery techniques, particularly
within selling, marketing, general and administrative expenses.

Factors
that may in the future have a negative impact on our selling, general and
administrative costs include costs associated with marketing and selling activities,
compliance costs associated with Securities and Exchange Commission rules and increases
in our insurance costs.

Management
Fee-Related Party

There
was no change in the management fee to DARR Global for the six months ended
February 28, 2006 compared to the six months ended February 28, 2005.

Rent
Expense-Related Party

Rent
Expense-related party increased by 96.8% or $87,087 to $177,087 for the six
months ended February 28, 2006, compared to $90,000 for the six months ended
February 28, 2005. The increase in rent expense-related party is due to the
Merger. We occupy
approximately 21,000 square feet of office and warehouse space out of a total
of approximately 70,000 square feet in Suwannee, GA. This space is leased from
GS&T Properties, LLC, a company in which officers of our company are
passive investors, owning approximately 20% equity interest. The lease term is
for 5 years with monthly base rent of $12,500. During the six months ended February
28, 2006, we recorded $87,087 in expense under this lease.

We
also occupy approximately 43,000 square feet of office and warehouse space in
Springfield, New Jersey. This space is leased from Westwood Property Holdings,
LLC, in which Keith Grabel, our director and an executive officer, Mary
Margaret Grabel, spouse of our director and an executive officer, and David
Micales, our Vice President of Operations, are members. The lease term is
through April 2009 with monthly base rent of $15,000. During the six months
ended February 28, 2006, we recorded $90,000 in expense under this lease.

Depreciation
and Amortization

Depreciation
and Amortization expense increased by 714.0% or $384,603 to $438,471 for the
six months ended February 28, 2006, compared to $53,868 for the six months
ended February 28, 2005. This increase is primarily attributable to the Merger.
Old Emtecs post-merger depreciation and amortization accounted approximately
for $339,100 of increase. Additionally, we made fixed asset

19

---



acquisitions of $426,311 and $491,310 during each of the
six months ended February 28, 2006 and the year ended August 31, 2005,
respectively, which increased our depreciation expense. These capital assets
acquisitions were primarily for the purchase of computer equipment for internal
use, the purchase of software licenses to upgrade our accounting systems, and
for furniture and fixtures.

Intangible
assets at February 28, 2006 and August 31, 2005 consisted of the value ascribed
to customer relationships of $8,661,712 less accumulated amortization of $358,408
and $68,868, respectively. The assets ascribed to customer relationships are
being amortized on a straight-line basis over 13 to 15 years. Amortization
expense was $289,541 and $10,906 for each of the six months ended February 28,
2006 and 2005, respectively.

Interest
expense

Interest
expense increased by 204.7% or $398,901 to $593,765 for the six months ended
February 28, 2006, compared to $194,864 for the six months ended February 28,
2005. This is mainly due to a higher balance on our line of credit, a higher
interest rate due to an increasing prime rate, and higher days sales
outstanding during the period.

Income
Taxes

Income
taxes decreased by 65.6% or $346,795 to $182,205 for the six months ended
February 28, 2006, compared to $529,000 for the six months ended February 28,
2005. Income tax expense of $182,205 includes approximately $73,000 in
estimated income tax expense related to the IRS income tax audit for the prior
years recorded during the three months ended February 28, 2006. Without this
income tax expense related to the income tax audit, our income tax expense
would have been approximately $109,205. This decrease is primarily attributable
to the decrease in taxable income.

Liquidity
and Capital Resources

Cash
and cash equivalents at February 28, 2006 of $320,384 represented a decrease of
$700,853 from $1.02 million at August 31, 2005. We are a net borrower;
consequently, we believe our cash and cash equivalents balance must be viewed
along with the available balance on our line of credit. Borrowings under our line
of credit at February 28, 2006 represented a decrease of $367,135 from $4.41
million at August 31, 2005. At February 28, 2006, our working capital was
approximately $412,000 less than that of at August 31, 2005.

Since
our inception, we have funded our operations primarily from borrowings under
our credit facility. On
August 5, 2005, our subsidiaries, Emtec, Inc. (Emtec NJ) and Westwood
Computer Corporation (Westwood and together with the Emtec NJ, the Borrower),
entered into a Business Financing Agreement with GE Commercial Distribution
Finance Corporation (the Lender) pursuant to which the Lender has agreed to
provide to Borrower an accounts receivable facility (the Credit Facility).
The Credit Facility provides for aggregate borrowings of the lesser of $35.0
million or 85% of eligible accounts receivable, plus 100% of unsold inventory
financed by the Lender, minus $3.15 million. The Credit Facility includes
certain financial covenants that we must maintain on a quarterly basis, and we
are also subject to certain mandatory prepayments upon the occurrence of
certain events, subject to certain exceptions, set forth in the Business
Financing Agreement.

Borrowings
under the Credit Facility bear interest at an annual rate equal to the greater
of (i) the rate of interest which JP Morgan Chase Bank (or its successor)
publicly announces from time to time as its prime rate or reference rate or
(ii) four percent (4%).

20

---



To
secure the payment of the obligations under the Credit Facility, the Borrower
granted to Lender a security interest in all of Borrowers interests in certain
of its assets, including inventory, equipment, fixtures, accounts, chattel
paper, instruments, deposit accounts, documents, general intangibles, letter of
credits rights, and all judgments, claims and insurance policies.

In
connection with the Credit Facility, Emtec NJ and Westwood (together, the Dealer)
entered into the Agreement for Wholesale Financing with the Lender on August 5,
2005 (the Wholesale Agreement). The Wholesale Agreement provides for an
extension of credit by the Lender to the Dealer from time to time, subject to
the maximum aggregate borrowings set forth in the Credit Facility, to purchase
inventory from approved vendors and for other purposes. The financial terms of
any advance by the Lender are not set forth in the Wholesale Agreement because
such terms depend upon many variable factors, including availability of vendor
discounts, payment terms or other incentives and purchase volume. The Wholesale
Agreement contains certain customary representations and warranties and events
of default, including the failure to pay interest, principal or fees, any
material inaccuracy of any representation and warranty, bankruptcy and
insolvency events.

In
addition, the Lender and MRA Systems, Inc. (dba GE Access), one of our trade
creditors, entered into an intercreditor agreement in which the Lender agreed
to give GE Access a first lien position on all future unbilled service
maintenance billings and which provide that, as regards to GE Access, all debt
obligations to the Lender are accorded priority.

On
February 13, 2006, we entered into an addendum to our Credit Facility and
Wholesale Agreement with GE CDF (the Addendum). This Addendum amended the
Credit Facility by increasing our reserve amount from $3.15 million to $5.0
million, and we paid a waiver fee of $50,000 for our non-compliance with
certain financial covenants as of three months ended November 30, 2005.

On
  April 10, 2006, we executed a second addendum to our Credit Agreement and Wholesale
  Agreement (the Second Addendum). The second addendum amended the
  Credit Facility by decreasing our reserve amount from $5.0 million to $3.01
  million, increasing the time period for eligibility of all U.S. federal government
  accounts receivable from 90 to 120 days from the date of the invoice, and revised
  our financial covenants from the quarter ending February 28, 2006 through May
  31, 2007. All other terms remain unchanged.

As
of February 28, 2006, we had a $4.04 million outstanding balance under the Credit
Facility, a $3.55 million outstanding balance, which is included in our
accounts payable, plus $2.49 million in open approvals under the Wholesale
Agreement with the Lender. Net availability of $4.31 million was available under
the Credit Facility, and $20.61 million was available under the Wholesale
Agreement. Upon execution of the Second Addendum our net availability increased
by $2.00 million mainly attributable to decrease in the reserve.

As
of February 28, 2006, we determined that we were in compliance with our
financial covenants with the Lender.

As
of February 28, 2006, we had outstanding balances under our open term credit
facilities with our primary trade vendors, including aggregators and manufacturers,
of $25.50 million with outstanding principal of approximately $14.41 million.
Under these lines, we are obligated to pay each invoice within 30-45 days from
the date of such invoice. These credit lines could be reduced or eliminated
without notice and this action could have material adverse affect our business,
result of operations, and financial condition.

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Capital
expenditures of $426,311 during the six months ended February 28, 2006 were
primarily for the purchase of computer equipment for internal use, purchase of
software licenses to upgrade our accounting systems, and furniture and
fixtures. We anticipate our capital expenditures for our fiscal year ending
August 31, 2006 will be approximately $650,000, of which approximately $540,000
will be for the upgrade of our organizational computer system, including the
implementation and data conversion costs, and the remaining $110,000 will
primarily be for the purchase of computer equipment for internal use.

We anticipate that our primary sources of liquidity in fiscal year 2006 will be
cash generated from operations, trade vendor credit and cash available to us
under our Credit Facility. Our future financial performance will depend on our
ability to continue to reduce and manage operating expenses as well as our
ability to grow revenues. Any loss of clients, whether due to price competition
or technological advances, will have an adverse affect on our revenues. Our
future financial performance could be negatively affected by unforeseen factors
and unplanned expenses. See Forward Looking Statements and Business  Risk
Factors discussed in our Annual Report on Form 10-K for the year ended August
31, 2005.

Although
we have no definite plans to undertake any future debt or equity financing, we
will continue to pursue all potential funding alternatives. Among the
possibilities for raising additional funds are issuances of debt or equity
securities and other borrowings under secured or unsecured loan arrangements.
There can be no assurances that additional funds will be available to us on
acceptable terms or in a timely manner.

We
have no arrangements or other relationships with unconsolidated entities or
other persons that are reasonably likely to materially affect liquidity or the
availability of or requirements for capital resources.

We
believe that funds generated from operations, trade vendor credit and bank
borrowings should be sufficient to meet our current operating cash requirements
through the next twelve months. However, there can be no assurance that all of
the aforementioned sources of cash can be realized.

Critical Accounting Policies

Our
financial statements are prepared in accordance with accounting principles that
are generally accepted in the United States. The methods, estimates, and
judgments we use in applying our most critical accounting policies have a
significant impact on the results we report in our financial statements. The
Securities and Exchange Commission has defined critical accounting policies as
policies that involve critical accounting estimates that require (i) management
to make assumptions that are highly uncertain at the time the estimate is made,
and (ii) different estimates that could have been reasonably used for the
current period, or changes in the estimates that are reasonably likely to occur
from period to period, which would have a material impact on the presentation
of our financial condition, changes in financial condition or in result of
operations. Based on this definition, our most critical policies include:
revenue recognition, allowance for doubtful accounts, inventory valuation
reserve, the assessment of recoverability of long-lived assets, the assessment
of recoverability of goodwill and intangible assets, rebates, and income taxes.

Revenue
Recognition

We
recognize revenue from the sales of products when risk of loss and title passes
which is upon client acceptance.

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Revenue
from the sale of warranties and support service contracts is recognized on a
straight-line basis over the term of the contract, in accordance with Financial
Accounting Standards Board Technical Bulleting No. 90-1, Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts (FTB 90-1).

We
may also enter into sales arrangements with clients that contain multiple
elements. We recognize revenue from sale arrangements that contain both
products and manufacturer warranties in accordance with Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables,
based on the relative fair value of the individual components. The relative
fair value of individual components is based on historical sales of the
components sold separately.

Product revenue
represents sales of computer hardware and pre-packaged software. These arrangements
often include software installations, configurations, and imaging, along with
delivery and set-up of hardware. We follow the criteria contained in EITF 00-21
and Staff Accounting Bulletin (SAB) 104 in recognizing revenue associated
with these transactions. We perform software installations, configurations and
imaging services at our locations prior to the delivery of the product. Some
client arrangements include set-up services performed at client locations
where our personnel perform the routine tasks of removing the equipment from
boxes, and setting up the equipment at client workstations by plugging in all
necessary connections. This service is usually performed the same day as
delivery. Revenue is recognized on the date of acceptance, except as follows:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In some instances, the set-up service is performed
  after date of delivery. We recognize revenue for the hardware component at
  date of delivery when the amount of revenue allocable to this component is
  not contingent upon the completion of set-up services and, therefore, our
  client has agreed that the transaction is complete as to the hardware
  component. In instances where our client does not accept delivery until set-up
  services are completed, we defer all revenue in the transaction until client
  acceptance occurs.                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | There are occasions when a client requests a
  transaction on a bill & hold basis. We follow the SAB 104 criteria and
  recognize revenue from these sales prior to date of physical delivery only
  when all the criteria of SAB 104 are met. At February 28, 2006, accounts receivable
  related to bill and hold sales totaled to $185,840. Total revenue from bill
  and hold sales were $185,840 with a gross profit of $35,871which was included
  in the result of operations for the three and six months ended February 28,
  2006. We do not modify our normal billing and credit terms for these
  customers. The customer is invoiced at the date of revenue recognition when
  all of the criteria have been met.

We have experienced
minimal customer returns. Since all eligible products must be returned to us
within 30 days from the date of the invoice, we reduce the product revenue and
cost of goods in each accounting period based on the actual returns that
occurred in the next 30 days after the close of the accounting period.

Service and consulting
revenue include time billings based upon billable hours charged to the clients,
fixed price short-term projects, hardware maintenance contracts, and
manufacturer support service contracts. These contracts generally are task
specific and do not involve multiple deliverables. Revenues from time billings
are recognized as services are delivered. Revenues from short-term fixed price
projects are recognized using the proportionate performance method by determining
the level of service performed based upon the amount of labor cost incurred on
the project versus the total labor costs to perform the project because this is
the most readily reliable measure of output. Revenues from hardware maintenance
contracts are recognized ratably over the contract period.

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Revenues from
manufacturer support service contracts where the manufacturer is responsible
for fulfilling the service requirements of the client are recognized
immediately on their contract sale date. Manufacturer support service contracts
contain cancellation privileges that allow our clients to terminate a contract
with 90 days written notice. In this event, the client is entitled to a
pro-rated refund based on the remaining term of the contract, and we would owe
the manufacturer a pro-rated refund of the cost of the contract. However, we
have experienced no client cancellations of any significance during our most
recent 3-year history and do not expect cancellations of any significance in
the future.

Trade
Receivables

We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our clients to make required payments. We base our estimates
on the aging of our accounts receivable balances and our historical write-off
experience, net of recoveries. If the financial condition of our clients were
to deteriorate, additional allowances may be required. We believe the
accounting estimate related to the allowance for doubtful accounts is a critical
accounting estimate because changes in it can significantly affect net income.

Inventories

Inventory
is stated at the lower of average cost (specific identification) or market. Inventory
is entirely finished goods purchased for resale and consists of computer
hardware, computer software, computer peripherals and related supplies. We
provide an inventory reserve for products we determine are obsolete or where
salability has deteriorated based on managements review of products and sales.

Goodwill
and Intangible Assets

We
have adopted Statement of Financial Accounting Standards No. 142 Goodwill and
Other Intangible Assets (SFAS 142). As a result, amortization of goodwill
was discontinued. Goodwill
is the excess of the purchase price over the fair value of the net assets
acquired in a business combination accounted for under the purchase method. We
test goodwill and indefinite-lived assets for impairment at least annually in
accordance with SFAS 142. Our annual
impairment test is made on June 1 of each year. Intangible assets that have finite
useful lives are amortized over their useful lives.

Intangible
assets at February 28, 2006 and August 31, 2005 consisted of the value ascribed
to customer relationships. The assets ascribed to customer relationships are
being amortized on a straight-line basis over 13 to 15 years. Intangible assets are tested for
recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable in accordance with Statement of
Financial Accounting Standards No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. Recoverability of long-lived assets is assessed
by a comparison of the carrying amount to the estimated undiscounted future net
cash flows expected to result from the use of the assets and their eventual
disposition. If estimated undiscounted future net cash flows are less than the
carrying amount, the asset is considered impaired and a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the asset.

Rebates

Rebates
are recorded in the accompanying consolidated statements of income as a
reduction of the cost of revenues in accordance with Emerging Issues Task Force
Abstract No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor
(EITF 02-16).

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Income
Taxes

Income
taxes are accounted for under an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. In estimating future tax consequences, we generally consider all
expected future events other than the enactment of changes in tax laws or
rates. A valuation allowance is recognized if, on weight of available evidence,
it is more likely than not that some portion or all the deferred tax assets
will not be realized.

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Item 3.     Quantitative
and Qualitative Information About Market Risk

We
do not engage in trading market risk sensitive instruments and do not purchase
hedging instruments or other than trading instruments that are likely to
expose us to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. We have issued no debt instruments,
entered into no forward or future contracts, purchased no options and entered
into no swaps. Our primary market risk exposures are those of interest rate
fluctuations. A change in interest rates would affect the rate at which we
could borrow funds under our revolving credit facility. Our balance on the line
of credit at February 28, 2006 was approximately $4.01 million. Assuming no
material increase or decrease in such balance, a one percent change in the
interest rate would change our interest expense by approximately $40,000
annually.

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Item 4.     Controls
and Procedures

(a)
Our management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13(a)-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of February
28, 2006. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission. 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 the stated goals under all potential future
conditions, regardless of how remote.

(b) There
has not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13a-15(d) under the Exchange Act
that occurred during the quarter ended February 28, 2006 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

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PART
II  OTHER INFORMATION

Item
6.     Exhibits

| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit 10.1  Addendum to Business Financing Agreement and
  Agreement for Wholesale Financing, dated February 13, 2005, by and between GE
  Commercial Distribution Finance Corporation and subsidiaries of Registrant.
| |                                                                                                                                                                                                                          
| | Exhibit 10.2  Addendum to Business Financing Agreement and
  Agreement for Wholesale Financing, dated April 10, 2006, by and between GE
  Commercial Distribution Finance Corporation and subsidiaries of Registrant.   
| |                                                                                                                                                                                                                          
| | Exhibit 31.1
  - Rule 13a-14(a)/15 d-14(a) Certification of Dinesh R. Desai, Principal
  Executive Officer, of Emtec, Inc. dated April 14, 2006.                                                                         
| |                                                                                                                                                                                                                          
| | Exhibit 31.2
  - Rule 13a-14(a)/15 d-14(a) Certification of Stephen C. Donnelly, Principal
  Financial Officer, of Emtec, Inc. dated April 14, 2006.                                                                     
| |                                                                                                                                                                                                                          
| | Exhibit 32.1
  - Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer,
  of Emtec, Inc. dated April 14, 2006.                                                                                        
| |                                                                                                                                                                                                                          
| | Exhibit 32.2
  - Section 1350 Certificate of Stephen C. Donnelly, Principal Financial
  Officer, of Emtec, Inc. dated April 14, 2006.                                                                                    

28

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SIGNATURES

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

| |  |             |                           |                                 | 
| |  | ----------- | ------------------------- | ------------------------------- | 
| |  | EMTEC, INC. |                          
| |  |             |                           |                                
| |  | By:         | /s/ DINESH
  R. DESAI    
| |  |             |                           |                                
| |  |             |                           | Dinesh R.
  Desai              
| |  |             |                           | Chairman and
  Chief           
| |  |             |                           | Executive
  Officer            
| |  |             |                           | (Principal
  Executive Officer)
| |  |             |                           |                                
| |  |             |                           |                                
| |  | By:         | /s/ STEPHEN
  C. DONNELLY |                                
| |  |             |                           |                                
| |  |             |                           | Stephen C.
  Donnelly           | 
| |  |             |                           | Chief
  Financial Officer       | 
| |  |             |                           | (Principal
  Financial Officer) | 

Date: April 14, 2006

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