UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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 May 31, 2006                                              

Commission file
number: 0-32789

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

|                                                                                                                       |                                                  
|---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------
|Delaware
  (State of incorporation or organization)                                                                    | 87-0273300
  (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. YesxNoo

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

---



EMTEC,
INC.
FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2006

Table of Contents

|                                                                                                       |    | 
|------------------------------------------------------------------------------------------------------ | -- | 
|PART I  FINANCIAL
  INFORMATION                                                                       |    | 
|                                                                                                       |    | 
|Item 1 - Financial
  Statements                                                                        |    | 
|                                                                                                       |    | 
|Consolidated
  Balance Sheets May 31, 2006 (Unaudited) and August 31, 2005                             | 1  | 
|                                                                                                       |    | 
|Consolidated
  Statements of Operations Three and Six months ended May 31, 2006 and 2005
  (Unaudited) | 2  | 
|                                                                                                       |    | 
|Consolidated
  Statements of Cash Flows Six months ended May 31, 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 1A  Risk Factors                                                                                 | 28 | 
|                                                                                                       |    | 
|Item 4  Submission of Matters to a
  Vote by Security Holders                                         | 29 | 
|                                                                                                       |    | 
|Item 6  Exhibits                                                                                      | 30 | 
|                                                                                                       |    | 
|SIGNATURES                                                                                             | 31 | 

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PART I 
FINANCIAL INFORMATION

Item 1. Financial
Statements

EMTEC, INC.
CONSOLIDATED BALANCE SHEET

|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ----------------- | - | ---------- | 
|                                                                                                                                                                                                    |  | May 31,
  2006 |            |                   |   |           
|                                                                                                                                                                                                    |  | (Unaudited)    |            | August 31,
  2005 |  
|                                                                                                                                                                                                    |  |                |            |                   |  
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Assets                                                                                                                                                                                              |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Current Assets                                                                                                                                                                                      |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Cash and cash equivalents                                                                                                                                                                           |  | $              | 1,547,889  |                   | $ | 1,021,237  | 
|Receivables:                                                                                                                                                                                        |  |                |            |                   |   |            | 
|Trade, less allowance for doubtful
accounts                                                                                                                                                         |  |                | 25,828,142 |                   |   | 34,541,373 | 
|Others                                                                                                                                                                                              |  |                | 1,302,090  |                   |   | 3,385,891  | 
|Inventories, net                                                                                                                                                                                    |  |                | 2,599,277  |                   |   | 5,770,590  | 
|Prepaid expenses                                                                                                                                                                                    |  |                | 481,237    |                   |   | 433,238    | 
|Deferred tax asset - current                                                                                                                                                                        |  |                | 515,878    |                   |   | 603,533    | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Total current assets                                                                                                                                                                                |  |                | 32,274,513 |                   |   | 45,755,862 | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Property and equipment, net                                                                                                                                                                         |  |                | 1,238,636  |                   |   | 917,159    | 
|Customer relationships, net                                                                                                                                                                         |  |                | 8,158,215  |                   |   | 8,592,844  | 
|Goodwill                                                                                                                                                                                            |  |                | 9,014,055  |                   |   | 8,974,610  | 
|Restricted cash                                                                                                                                                                                     |  |                | 150,000    |                   |   | 5,650,000  | 
|Other assets                                                                                                                                                                                        |  |                | 99,162     |                   |   | 119,443    | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                   
|Total assets                                                                                                                                                                                        |  | $              | 50,934,581 |                   | $ | 70,009,918 | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Liabilities
  and Stockholders Equity                                                                                                                                                              |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Current Liabilities                                                                                                                                                                                 |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Line of credit                                                                                                                                                                                      |  | $              | 3,563,267  |                   | $ | 4,412,526  | 
|Accounts payable - trade                                                                                                                                                                            |  |                | 20,207,024 |                   |   | 29,738,061 | 
|Accounts payable - related party                                                                                                                                                                    |  |                | 229,166    |                   |   | 133,333    | 
|Current portion of long term debt                                                                                                                                                                   |  |                | 719,356    |                   |   | 524,874    | 
|Income taxes payable                                                                                                                                                                                |  |                | 9,921      |                   |   | 828,659    | 
|Accrued liabilities                                                                                                                                                                                 |  |                | 3,826,488  |                   |   | 4,190,728  | 
|Due to former stockholders                                                                                                                                                                          |  |                | 631,415    |                   |   | 631,415    | 
|Customer deposits                                                                                                                                                                                   |  |                | 47,131     |                   |   | 1,268,672  | 
|Deferred revenue                                                                                                                                                                                    |  |                | 982,996    |                   |   | 1,125,205  | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Total current liabilities                                                                                                                                                                           |  |                | 30,216,764 |                   |   | 42,853,473 | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Accrued severance                                                                                                                                                                                   |  |                | 332,755    |                   |   | 380,356    | 
|Deferred tax liability                                                                                                                                                                              |  |                | 2,757,312  |                   |   | 2,838,298  | 
|Long term debt                                                                                                                                                                                      |  |                | 2,320,130  |                   |   | 3,010,219  | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Total liabilities                                                                                                                                                                                   |  |                | 35,626,961 |                   |   | 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 May
  31, 2006 and August 31, 2005, respectively |  |                | 172,459    |                   |   | 172,321    | 
|Additional paid-in capital                                                                                                                                                                          |  |                | 19,920,577 |                   |   | 19,908,779 | 
|Retained earnings                                                                                                                                                                                   |  |                | 810,631    |                   |   | 846,472    | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                | 20,903,667 |                   |   | 20,927,572 | 
|Less: treasury stock, at cost, 2,864,584
shares                                                                                                                                                     |  |                | (5,596,047 | )                 |   |           | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Total stockholders equity                                                                                                                                                                          |  |                | 15,307,620 |                   |   | 20,927,572 | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|                                                                                                                                                                                                    |  |                |            |                   |   |            | 
|Total liabilities and stockholders
equity                                                                                                                                                          |  | $              | 50,934,581 |                   | $ | 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 |            | Nine
  months ended |  
|                                                     |  | May 31,              |            | May 31,             |  
|                                                     |  |                      |            |                     |  
|                                                     |  | 2006                 |            | 2005                |   | 2006       |   | 2005 |            
|                                                     |  |                      |            |                     |   |            |   |      |            
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Revenues                                             |  | $                    | 49,962,609 |                     | $ | 29,886,005 |   | $    | 176,162,709 |   | $ | 120,236,091 |  
|Cost of revenues                                     |  |                      | 44,264,956 |                     |   | 26,816,502 |   |      | 157,121,024 |   |   | 110,036,651 |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Gross profit                                         |  |                      | 5,697,653  |                     |   | 3,069,503  |   |      | 19,041,685  |   |   | 10,199,440  |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Operating expenses:                                  |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Selling, general, and administrative
  expenses      |  |                      | 5,087,263  |                     |   | 2,527,656  |   |      | 16,889,646  |   |   | 7,952,732   |  
|Management fee  related party                       |  |                      | 87,500     |                     |   | 87,500     |   |      | 262,500     |   |   | 262,500     |  
|Rent expense  related party                         |  |                      | 89,322     |                     |   | 45,000     |   |      | 266,409     |   |   | 135,000     |  
|Depreciation and amortization                        |  |                      | 238,105    |                     |   | 30,047     |   |      | 676,576     |   |   | 83,915      |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Total operating expenses                             |  |                      | 5,502,190  |                     |   | 2,690,203  |   |      | 18,095,131  |   |   | 8,434,147   |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Operating income                                     |  |                      | 195,463    |                     |   | 379,300    |   |      | 946,554     |   |   | 1,765,293   |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Other expense (income):                              |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Interest income  other                              |  |                      | (7,883     | )                   |   | (32,164    | ) |      | (31,950     | ) |   | (67,016     | )
|Interest expense                                     |  |                      | 315,095    |                     |   | 274,476    |   |      | 908,860     |   |   | 469,340     |  
|Other expense (income)                               |  |                      | (291       | )                   |   | (13,090    | ) |      | (28,607     | ) |   | (14,044     | )
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|(Loss) Income before income taxes                    |  |                      | (111,458   | )                   |   | 150,078    |   |      | 98,251      |   |   | 1,377,013   |  
|Provision (benefits) for income taxes                |  |                      | (48,113    | )                   |   | 87,352     |   |      | 134,092     |   |   | 616,352     |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Net (loss) income                                    |  | $                    | (63,345    | )                   | $ | 62,726     |   | $    | (35,841     | ) | $ | 760,661     |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Preferred stock dividends                            |  |                      |           |                     |   | (20,164    | ) |      |            |   |   | (59,835     | )
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Net (loss) income available to common
  stockholders |  | $                    | (63,345    | )                   | $ | 42,562     |   | $    | (35,841     | ) | $ | 700,826     |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Net (loss) income per common share                   |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Basic and diluted                                    |  |                      | 0.00       |                     |   | 0.00       |   |      | 0.00        |   |   | 0.07        |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Weighted average shares outstanding                  |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Basic                                                |  |                      | 14,381,286 |                     |   | 9,528,110  |   |      | 15,039,273  |   |   | 9,528,110   |  
|                                                     |  |                      |            |                     |   |            |   |      |             |   |   |             |  
|Diluted                                              |  |                      | 14,386,171 |                     |   | 9,528,110  |   |      | 15,044,332  |   |   | 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)

|                                                                                   |  |                     |            |      |   |            |  
|---------------------------------------------------------------------------------- |  | ------------------- | ---------- | ---- | - | ---------- | -
|                                                                                   |  | Nine
  months ended |           
|                                                                                   |  | May 31,             |           
|                                                                                   |  |                     |           
|                                                                                   |  | 2006                |            | 2005 |  
|                                                                                   |  |                     |            |      |  
|                                                                                   |  |                     |            |      |   |            |  
|Cash Flows from Operating
Activities                                               |  |                     |            |      |   |            |  
|Net income (loss)                                                                  |  | $                   | (35,841    | )    | $ | 760,661    |  
|Adjustments to Reconcile Net Income to Net Cash
  Provided By Operating Activities |  |                     |            |      |   |            |  
|Depreciation and amortization                                                      |  |                     | 676,573    |      |   | 83,914     |  
|Deferred income tax (benefit) expense                                              |  |                     | 6,669      |      |   | (73,779    | )
|Put option valuation                                                               |  |                     | (11,500    | )    |   |           |  
|Changes in Operating Assets and
Liabilities                                        |  |                     |            |      |   |            |  
|Receivables                                                                        |  |                     | 10,797,032 |      |   | 2,184,125  |  
|Inventories                                                                        |  |                     | 3,171,313  |      |   | (2,173,038 | )
|Prepaid expenses and other assets                                                  |  |                     | (27,717    | )    |   | (112,334   | )
|Accounts payable                                                                   |  |                     | (9,435,204 | )    |   | 1,831,144  |  
|Customer deposits                                                                  |  |                     | (1,221,541 | )    |   |           |  
|Income Taxes Payable                                                               |  |                     | (818,738   | )    |   | 480,023    |  
|Accrued liabilities                                                                |  |                     | (352,741   | )    |   | 1,141,273  |  
|Deferred compensation                                                              |  |                     | (47,601    | )    |   | (59,583    | )
|Deferred revenue                                                                   |  |                     | (142,209   | )    |   | (6,425     | )
|                                                                                   |  |                     |            |      |   |            |  
|Net Cash Provided By Operating
Activities                                          |  |                     | 2,558,495  |      |   | 4,055,981  |  
|                                                                                   |  |                     |            |      |   |            |  
|                                                                                   |  |                     |            |      |   |            |  
|Cash Flows from Investing
Activities                                               |  |                     |            |      |   |            |  
|Purchases of property and equipment                                                |  |                     | (563,421   | )    |   | (221,708   | )
|Decrease in restricted cash                                                        |  |                     | 5,500,000  |      |   |           |  
|Business acquistion costs                                                          |  |                     | (39,445    | )    |   | (157,739   | )
|                                                                                   |  |                     |            |      |   |            |  
|Net Cash Provided By (Used In) Investing
Activities                                |  |                     | 4,897,134  |      |   | (379,447   | )
|                                                                                   |  |                     |            |      |   |            |  
|                                                                                   |  |                     |            |      |   |            |  
|Cash Flows from Financing
Activities                                               |  |                     |            |      |   |            |  
|Net decrease in line of credit                                                     |  |                     | (849,259   | )    |   | (299,250   | )
|Proceeds from issuance of common stock                                             |  |                     | 11,936     |      |   |           |  
|Purchase of treasury stock                                                         |  |                     | (5,596,047 | )    |   |           |  
|Repayment of debt                                                                  |  |                     | (495,607   | )    |   | (322,694   | )
|                                                                                   |  |                     |            |      |   |            |  
|Net Cash Used In Financing Activities                                              |  |                     | (6,928,977 | )    |   | (621,944   | )
|                                                                                   |  |                     |            |      |   |            |  
|                                                                                   |  |                     |            |      |   |            |  
|Net Increase in Cash and Cash
Equivalents                                          |  |                     | 526,652    |      |   | 3,054,590  |  
|                                                                                   |  |                     |            |      |   |            |  
|Beginning Cash and Cash
Equivalents                                                |  |                     | 1,021,237  |      |   | 1,215,917  |  
|                                                                                   |  |                     |            |      |   |            |  
|                                                                                   |  |                     |            |      |   |            |  
|Ending Cash and Cash Equivalents                                                   |  | $                   | 1,547,889  |      | $ | 4,270,507  |  
|                                                                                   |  |                     |            |      |   |            |  
|                                                                                   |  |                     |            |      |   |            |  
|Supplemental Disclosure of Cash Flow
Information                                   |  |                     |            |      |   |            |  
|Cash paid during the six months for:                                               |  |                     |            |      |   |            |  
|Income taxes                                                                       |  | $                   | 1,152,419  |      | $ | 307,394    |  
|                                                                                   |  |                     |            |      |   |            |  
|Interest                                                                           |  |                     | 477,776    |      |   | 210,259    |  
|                                                                                   |  |                     |            |      |   |            |  

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 nine months ended May 31, 2006 and only of
Darr for the three and nine months ended May 31, 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 nine months ended May 31, 2006 are as
follows:

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

3. 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 4,885 and 5,059 additional shares for the three months and
nine months ended May 31, 2006, respectively. Outstanding stock warrants to
purchase 1,597,921 common shares, as of May 31, 2006, were not included in the
computation of diluted earnings per share for the three months and nine months
ended May 31, 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 nine months ended May 31, 2005 and
therefore no adjustment was made to dilutive earnings per shares during the
period.

4. Stock Options and Warrants

The Companys 2006 Stock-Based Incentive Compensation Plan
  (the 2006 Plan) was approved by the stockholder on May 8, 2006.
  The 2006 Plan authorizes the granting of stock options to directors and eligible
  employees. The Company has reserved 1,400,000 shares of its common stock for
  issuance under the 2006 Plan

5

---



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 2006 Plan typically
  terminate after 10 years and vest over a four year period. No options were granted
  or exercised during the three months ended May 31, 2006.

The Companys 1996 Stock Option Plan (amended in 1999) (the
  1996 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 1996 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 1996 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 May 31, 2006. Options outstanding and exercisable
  at May 31, 2006 totaled 6,000 and their weighted average exercise price is $0.29.

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 nine months ended
May 31, 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 May 31, 2006. The
outstanding stock warrants were anti-dilutive for the three and nine months
ended May 31, 2006.

5. 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.

6

---



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 $5.0 million and the Company paid a waiver fee of $50,000 for its
non-compliance with certain financial covenants as of November 30, 2005.

On April 10,
2006, the Company entered into an addendum to its credit facility with the
Lender. This addendum amended the Credit Facility by decreasing the 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 the financial covenants from the
quarter ending February 28, 2006 through May 31, 2007. All other terms remain
unchanged.

At May 31,
2006, the Company had a $3.56 million outstanding balance under the accounts
receivable credit facility, and a $1.37 million (included in the Companys
accounts payable) outstanding balance plus $180,868 in open approvals under the
floor plan credit facility with Lender. Net availability of $10.64 million was
available under the accounts receivable credit facility, and $19.25 million was
available under the floor plan credit facility as of May 31, 2006.

At May 31,
2006, the Company determined that it was in compliance with its financial
covenants with the Lender.

6. 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 May 31, |           
|                                            |  | 2006                               |            | 2005 | 
|                                            |  |                                    |            |      | 
|Departments of the United States Government |  | $                                  | 24,493,972 |      |  | 49.0  | % | $ | 21,598,052 |  |  | 72.3  | %
|State and Local Governments                 |  | $                                  | 6,121,033  |      |  | 12.3  | % | $ | 4,793,953  |  |  | 16.0  | %
|Commercial Companies                        |  | $                                  | 12,616,189 |      |  | 25.3  | % | $ | 1,830,378  |  |  | 6.1   | %
|Education and other                         |  | $                                  | 6,731,415  |      |  | 13.4  | % | $ | 1,663,622  |  |  | 5.6   | %
|                                            |  |                                    |            |      |  |       |   |   |            |  |  |       |  
|Total Revenues                              |  | $                                  | 49,962,609 |      |  | 100.0 | % | $ | 29,886,005 |  |  | 100.0 | %
|                                            |  |                                    |            |      |  |       |   |   |            |  |  |       |  

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

|                                              |  |                                   |             |      |  |       |   |   |             |  |  |       |  
|--------------------------------------------- |  | --------------------------------- | ----------- | ---- |  | ----- | - | - | ----------- |  |  | ----- | -
|                                              |  | For the nine months ended May 31, |            
|                                              |  | 2006                              |             | 2005 | 
|                                              |  |                                   |             |      | 
|Departments of the United
  States Government |  | $                                 | 95,548,084  |      |  | 54.2  | % | $ | 99,536,066  |  |  | 82.8  | %
|State and Local
  Governments                 |  | $                                 | 22,091,909  |      |  | 12.5  | % | $ | 10,737,404  |  |  | 8.9   | %
|Commercial Companies                          |  | $                                 | 39,177,781  |      |  | 22.2  | % | $ | 7,097,798   |  |  | 5.9   | %
|Education and other                           |  | $                                 | 19,344,935  |      |  | 11.1  | % | $ | 2,864,823   |  |  | 2.4   | %
|                                              |  |                                   |             |      |  |       |   |   |             |  |  |       |  
|Total Revenues                                |  | $                                 | 176,162,708 |      |  | 100.0 | % | $ | 120,236,091 |  |  | 100.0 | %
|                                              |  |                                   |             |      |  |       |   |   |             |  |  |       |  

7

---



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. Trade 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.

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:

|                                |  |         |            |            |   |            |  
|------------------------------- |  | ------- | ---------- | ---------- | - | ---------- | -
|                                |  | May 31, |            | August 31, |  
|                                |  |         |            |            |  
|                                |  | 2006    |            | 2006       |  
|                                |  |         |            |            |  
|Trade receivables               |  | $       | 26,054,071 |            | $ | 34,766,373 |  
|Allowance for dountful accounts |  |         | (225,929   | )          |   | (225,000   | )
|                                |  |         |            |            |   |            |  
|Trade receivables, net          |  |         | 25,828,142 |            |   | 34,541,373 |  
|                                |  |         |            |            |   |            |  

7. 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.

The components
of inventory are as follows:

|                                          |  |         |           |            |   |           |  
|----------------------------------------- |  | ------- | --------- | ---------- | - | --------- | -
|                                          |  | May 31, |           | August 31, |  
|                                          |  |         |           |            |  
|                                          |  | 2006    |           | 2005       |  
|                                          |  |         |           |            |  
|Hardware, software, accessories and parts |  | $       | 2,741,713 |            | $ | 6,070,728 |  
|Less: inventory reserve                   |  |         | (142,436  | )          |   | (300,138  | )
|                                          |  |         |           |            |   |           |  
|Net inventories                           |  | $       | 2,599,277 |            | $ | 5,770,590 |  
|                                          |  |         |           |            |   |           |  

8. 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 $503,497 and
$68,868, as of May 31, 2006 and August 31, 2005, respectively.

8

---



9. Accrued Liabilities

Accrued
liabilities consisted of the following:

|                                 |  |              |           |                 |   |           | 
|-------------------------------- |  | ------------ | --------- | --------------- | - | --------- | 
|                                 |  | May 31, 2006 |           | August 31, 2005 |  
|                                 |  |              |           |                 |  
|                                 |  |              |           |                 |  
|Accrued payroll                  |  | $            | 891,415   |                 | $ | 1,042,864 | 
|Accrued commissions              |  | $            | 687,692   |                 | $ | 511,858   | 
|Accrued state sales taxes        |  | $            | 154,078   |                 | $ | 366,432   | 
|Accrued third party service fees |  | $            | 455,524   |                 | $ | 627,526   | 
|Other accrued expenses           |  | $            | 1,637,779 |                 | $ | 1,642,048 | 
|                                 |  |              |           |                 |   |           | 
|                                 |  | $            | 3,826,488 |                 | $ | 4,190,728 | 
|                                 |  |              |           |                 |   |           | 

10. Related Party Transactions

The Company
accrues a monthly management fee of approximately $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 May 31, 2006 and 2005, respectively, the Company
recorded $87,500 for this management fee in the accompanying consolidated
statements of operations. For each of the nine months ended May 31, 2006 and
2005, respectively, the Company recorded $262,500 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
$135,000 for each of the nine months ended May 31, 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 and nine months ended May 31, 2006, the
Company recorded expense under this lease totaling $44,322 and $131,409, respectively.
The lease commenced on November 30, 2004 with Old Emtec, and thus there was no
related party expense during the nine months ended May 31, 2005.

11. 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
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:

9

---



|                                                 |  |   |           | 
|------------------------------------------------ |  | - | --------- | 
|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

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 Emtec, Inc., a
Delaware corporation (Old Emtec), Emtec Viasub LLC, a Delaware limited
liability company and a wholly-owned subsidiary of Old Emtec (MergerCo), and
Darr Westwood Technology Corporation, a Delaware corporation (Darr). Pursuant
to the terms of the Merger Agreement, Darr merged with and into MergerCo (the
Merger) and became a part of the consolidated entity that has retained the
name Emtec, Inc, ( the Company).

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 our
historical financial statements. 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
post-Merger combined company for the three and nine months ended May 31, 2006 and
only of Darr for the three and nine months ended May 31, 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 May 31, 2006 and 2005.

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended May 31,

|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|--------------------------------------------- |  | ---- | ---------- | -------------- |  | ---- | ---- |  | -------------- | ---------- | ------ |  | ---- | ---------- | - | ---------- | - |  |  | ------ | --
|                                              |  | 2006 |            | % of
  Revenue |  |      | 2005 |  | % of
  Revenue |            | Change |  |      | %
  Change |  
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |  
|Revenues                                      |  | $    | 49,962,609 |                |  | 100  | %    |  | $              | 29,886,005 |        |  | 100  | %          | $ | 20,076,604 |   |  |  | 67.2   | % 
|Cost of revenues                              |  |      | 44,264,956 |                |  | 88.6 |      |  |                | 26,816,502 |        |  | 89.7 |            |   | 17,448,454 |   |  |  | 65.1   | % 
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Gross profit                                  |  |      | 5,697,653  |                |  | 11.4 | %    |  |                | 3,069,503  |        |  | 10.3 | %          |   | 2,628,150  |   |  |  | 85.6   | % 
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Operating expenses:                           |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Selling, general, and administrative
expenses |  |      | 5,087,263  |                |  | 10.2 |      |  |                | 2,527,656  |        |  | 8.5  |            |   | 2,559,607  |   |  |  | 101.3  | % 
|Management fee  related party                |  |      | 87,500     |                |  | 0.2  |      |  |                | 87,500     |        |  | 0.3  |            |   |           |   |  |  | 0.0    | % 
|Rent expense  related party                  |  |      | 89,322     |                |  | 0.2  |      |  |                | 45,000     |        |  | 0.2  |            |   | 44,322     |   |  |  | 98.5   | % 
|Depreciation and amortization                 |  |      | 238,105    |                |  | 0.5  |      |  |                | 30,047     |        |  | 0.1  |            |   | 208,058    |   |  |  | 692.4  | % 
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Total operating expenses                      |  |      | 5,502,190  |                |  | 11.0 | %    |  |                | 2,690,203  |        |  | 9.0  | %          |   | 2,811,987  |   |  |  | 104.5  | % 
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Operating income                              |  |      | 195,463    |                |  | 0.4  |      |  |                | 379,300    |        |  | 1.3  |            |   | (183,837   | ) |  |  | (48.5  | )%
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Other expense (income):                       |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Interest income  other                       |  |      | (7,883     | )              |  | (0.0 | )    |  |                | (32,164    | )      |  | (0.1 | )          |   | 24,281     |   |  |  | (75.5  | )%
|Interest expense                              |  |      | 315,095    |                |  | 0.6  |      |  |                | 274,476    |        |  | 0.9  |            |   | 40,619     |   |  |  | 14.8   | % 
|Other expense (income)                        |  |      | (291       | )              |  | (0.0 | )    |  |                | (13,090    | )      |  | (0.0 | )          |   | 12,799     |   |  |  | (97.8  | )%
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Income (loss) before income taxes             |  |      | (111,458   | )              |  | (0.2 | )    |  |                | 150,078    |        |  | 0.5  |            |   | (261,536   | ) |  |  | (174.3 | )%
|Provision (benefits) for income taxes         |  |      | (48,113    | )              |  | (0.1 | )    |  |                | 87,352     |        |  | 0.3  |            |   | (135,465   | ) |  |  | (155.1 | )%
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   
|Net income (loss)                             |  | $    | (63,345    | )              |  | (0.1 | )%   |  | $              | 62,726     |        |  | 0.2  | %          | $ | (126,071   | ) |  |  | (201.0 | )%
|                                              |  |      |            |                |  |      |      |  |                |            |        |  |      |            |   |            |   |  |  |        |   

Comparison of Three Months Ended May 31, 2006
and 2005

Total
Revenues

Total
revenues increased by 67.2% or $20.07 million to $49.96 million for the three
months ended May 31, 2006, compared to $29.89 million for the three months
ended May 31, 2005. Total revenue of $49.96 million for the three months ended
May 31, 2006 includes $16.83 million of revenues attributed to Old Emtec as a
result of the Merger in August 2005. Without this incremental revenue that
resulted from the Merger, our total revenue would have increased by 10.9% or
$3.25 million to $33.13 million for the three months ended May 31, 2006,
compared to $29.89 million for the three months ended May 31, 2005. This
increase is primarily attributable to an overall increase in the

13

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federal
government and commercial business during this quarter which is partially
offset by decrease in state and local government business.

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 May 31, 2006 and 2005, U.S.
governmental department and agency related revenues represented approximately
49.0% and 72.3% 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, by client types, are comprised of the
following for the three months ended:

|                                              |  |                                    |            |      |  |       |   |   |            |  |  |       |  
|--------------------------------------------- |  | ---------------------------------- | ---------- | ---- |  | ----- | - | - | ---------- |  |  | ----- | -
|                                              |  | For the three months ended May 31, |           
|                                              |  | 2006                               |            | 2005
|                                              |  |                                    |            |      | 
|Departments
  of the United States Government |  | $                                  | 24,493,972 |      |  | 49.0  | % | $ | 21,598,052 |  |  | 72.3  | %
|State and
  Local Governments                 |  | $                                  | 6,121,033  |      |  | 12.3  | % | $ | 4,793,953  |  |  | 16.0  | %
|Commercial
  Companies                        |  | $                                  | 12,616,189 |      |  | 25.3  | % | $ | 1,830,378  |  |  | 6.1   | %
|Education
  and other                         |  | $                                  | 6,731,415  |      |  | 13.4  | % | $ | 1,663,622  |  |  | 5.6   | %
|                                              |  |                                    |            |      |  |       |   |   |            |  |  |       |  
|Total Revenues                                |  | $                                  | 49,962,609 |      |  | 100.0 | % | $ | 29,886,005 |  |  | 100.0 | %
|                                              |  |                                    |            |      |  |       |   |   |            |  |  |       |  

Gross
Profit

Aggregate
gross profit increased by 85.6% or $2.63 million to $5.70 million for the three
months ended May 31, 2006 as compared to $3.07 million for the three months
ended May 31, 2005. This increase is primarily attributable to the Merger.
Gross profit associated with the Merger equaled $2.38 million for the three
months ended May 31, 2006, which represented approximately 90.5% of our total
increase in gross profit. Without this acquisition, our gross profit would have
increased by 8.0% or $246,484 for the three months ended May 31, 2006. This
increase is primarily attributable to an increase in revenue as discussed in
the revenue section.

Measured
as a percentage of revenues, our gross profit margin increased to 11.4% of
total revenues for the three months ended May 31, 2006 from 10.3% for the three
months ended May 31, 2005. This increase is also mainly attributable to the
Merger. Gross profit margin of the Old Emtec business was 14.1% of Old Emtec
total revenues for the three months ended May 31, 2006. Excluding Old Emtecs
results, our gross profit margin would have decreased to 10.0% of total
revenues for the three months ended May 31, 2006 from 10.3% for the three
months ended May 31, 2005. This decrease is mainly due to competitive pressure
and aggressive pricing strategies which lowered our margin percentages.

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.

14

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Selling,
General and Administrative Expenses

Selling,
general and administrative expenses increased by 101.3% or $2.56 million to
$5.09 million for the three months ended May 31, 2006, compared to $2.53
million for the three months ended May 31, 2005. This increase is mainly due to
the Merger. Selling, general and administrative expenses associated with Old
Emtec approximated $2.26 million for the three months ended May 31, 2006.
Without this acquisition, our selling, general and administrative expenses
would have increased by 11.7%, or $294,714. This increase in selling, general
and administrative expenses is mainly due to professional fees of approximately
$90,000 related to compliance costs associated with the Securities and Exchange
Commission, higher commission and bonus payments and compensation 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 May 31, 2006 compared to the three months ended May 31, 2005. DARR Global
Holdings, Inc. (DARR Global) is management services firm 100% owned by our
Chief Executive Officer. DARR Global charges the Company a management fee of
$350,000 annually.

Rent
Expense-Related Party

Rent
Expense-related party increased by 98.5% or $44,322 to $89,322 for the three
months ended May 31, 2006, compared to $45,000 for the three months ended May
31, 2005. The increase in rent expense-related party is due to the Merger and
the assumption of the lease from GS&T Properties, LLC, a company in which
officers of our company are passive investors, owning approximately 20% equity
interest. Under the term of the lease, we occupy approximately 21,000 square
feet of office and warehouse space in a 70,000 square foot building in
Suwannee, GA. The lease term is for 5 years with monthly base rent of $12,500.
During the period ended May 31, 2006, we recorded $44,322 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
May 31, 2006, we recorded $45,000 in expense under this lease.

Depreciation
and Amortization

Depreciation
and Amortization expense increased by 692.4% or $208,058 to $238,105 for the
three months ended May 31, 2006, compared to $30,047 for the three months ended
May 31, 2005. This increase is primarily attributable to the Merger. Old
Emtecs post-Merger depreciation and amortization accounted approximately for
$181,909 of increase. Additionally, we made fixed asset acquisitions of
$563,421 during the nine months ended May 31, 2006, which increased our

15

---



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 May 31, 2006 and August 31, 2005 consisted of the value ascribed to
customer relationships of $8,661,712 less accumulated amortization of $503,497
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 May 31, 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 14.8% or $40,619 to $315,095 for the three months ended
May 31, 2006, compared to $274,476 for the three months ended May 31, 2005. This
is mainly due to the addition of Emtec, an average higher balance on our line
of credit and a higher interest rate due to an increasing prime rate.

Income
Taxes

We
recorded an income tax benefit of $48,113 for the three months ended May 31,
2006 compared to an income tax expense of $87,352 for the three months ended
May 31, 2005. This is primarily due to the loss before income taxes for the
current three month period compared to the income before income taxes for the
three months ended May 31, 2005.

16

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Comparison of Nine Months Ended May 31, 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 nine months ended May 31, 2006 and 2005.

EMTEC, INC.CONSOLIDATED STATEMENTS OF OPERATIONSNine months ended May 31,

|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|--------------------------------------------- |  | ---- | ----------- | -------------- |  | ----- | ---- |  | -------------- | ----------- | ------ |  | ---- | ---------- | - | ---------- | - |  |  | ------ | --
|                                              |  | 2006 |             | % of
  Revenue |  |       | 2005 |  | % of
  Revenue |             | Change |  |      | %
  Change |  
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |  
|Revenues                                      |  | $    | 176,162,709 |                |  | 100.0 | %    |  | $              | 120,236,091 |        |  | 100  | %          | $ | 55,926,618 |   |  |  | 46.5   | % 
|Cost of revenues                              |  |      | 157,121,024 |                |  | 89.2  |      |  |                | 110,036,651 |        |  | 91.5 |            |   | 47,084,373 |   |  |  | 42.8   | % 
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Gross profit                                  |  |      | 19,041,685  |                |  | 10.8  | %    |  |                | 10,199,440  |        |  | 8.5  | %          |   | 8,842,245  |   |  |  | 86.7   | % 
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Operating expenses:                           |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Selling, general, and
administrative expenses |  |      | 16,889,646  |                |  | 9.6   |      |  |                | 7,952,732   |        |  | 6.6  |            |   | 8,936,914  |   |  |  | 112.4  | % 
|Management fee  related
party                |  |      | 262,500     |                |  | 0.1   |      |  |                | 262,500     |        |  | 0.2  |            |   |           |   |  |  | 0.0    | % 
|Rent expense  related
party                  |  |      | 266,409     |                |  | 0.2   |      |  |                | 135,000     |        |  | 0.1  |            |   | 131,409    |   |  |  | 97.3   | % 
|Depreciation and
amortization                 |  |      | 676,576     |                |  | 0.4   |      |  |                | 83,915      |        |  | 0.1  |            |   | 592,661    |   |  |  | 706.3  | % 
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Total operating
expenses                      |  |      | 18,095,131  |                |  | 10.3  | %    |  |                | 8,434,147   |        |  | 7.0  | %          |   | 9,660,984  |   |  |  | 114.5  | % 
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Operating income                              |  |      | 946,554     |                |  | 0.5   |      |  |                | 1,765,293   |        |  | 1.5  |            |   | (818,739   | ) |  |  | (46.4  | )%
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Other expense
(income):                       |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Interest income 
other                       |  |      | (31,950     | )              |  | (0.0  | )    |  |                | (67,016     | )      |  | (0.1 | )          |   | 35,066     |   |  |  | (52.3  | )%
|Interest expense                              |  |      | 908,860     |                |  | 0.5   |      |  |                | 469,340     |        |  | 0.4  |            |   | 439,520    |   |  |  | 93.6   | % 
|Other expense
(income)                        |  |      | (28,607     | )              |  | (0.0  | )    |  |                | (14,044     | )      |  | (0.0 | )          |   | (14,563    | ) |  |  | 103.7  | % 
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Income before income taxes                    |  |      | 98,251      |                |  | 0.1   |      |  |                | 1,377,013   |        |  | 1.1  |            |   | (1,278,762 | ) |  |  | (92.9  | )%
|Provision for income taxes                    |  |      | 134,092     |                |  | 0.1   |      |  |                | 616,352     |        |  | 0.5  |            |   | (482,260   | ) |  |  | (78.2  | )%
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   
|Net (loss) income                             |  | $    | (35,841     | )              |  | (0.0  | )%   |  | $              | 760,661     |        |  | 0.6  | %          | $ | (796,502   | ) |  |  | (104.7 | )%
|                                              |  |      |             |                |  |       |      |  |                |             |        |  |      |            |   |            |   |  |  |        |   

Total
Revenues

Total
  revenues increased by 46.5% or $55.93 million to $176.16 million for the nine
  months ended May 31, 2006, compared to $120.24 million for the nine months ended
  May 31, 2005. This increase is primarily attributable to the Merger. Total additional
  revenue attributed to this acquisition approximated $57.79 million for the nine
  months ended May 31, 2006. Without this incremental revenue that resulted from
  the acquisition, our total revenue would have decreased by 1.5% or $1.86 million
  for the nine months ended May 31, 2006. This decrease is mainly due to our sale
  to the United States Department of Agriculture (USDA) of approximately
  $21.79 million during the three months ended May 31, 2005. Without this USDA
  sale, our total revenue for the nine months ended May 31, 2006 would have increased
  by $19.9 million. This increase is primarily attributable to an overall increase
  in the federal government business.

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 the nine months ended May 31, 2006 and 2005, U.S.
governmental department and agency related revenues represented approximately
54.2% and 82.8% 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, by client types, are comprised of the
following for the nine months ended:

|                                              |  |                                   |             |      |  |       |   |   |             |  |  |       |  
|--------------------------------------------- |  | --------------------------------- | ----------- | ---- |  | ----- | - | - | ----------- |  |  | ----- | -
|                                              |  | For the nine months ended May 31, |            
|                                              |  | 2006                              |             | 2005
|                                              |  |                                   |             |      |  |       |   |   |             |  | 
|Departments
  of the United States Government |  | $                                 | 95,548,084  |      |  | 54.2  | % | $ | 99,536,066  |  |  | 82.8  | %
|State and
  Local Governments                 |  | $                                 | 22,091,909  |      |  | 12.5  | % | $ | 10,737,404  |  |  | 8.9   | %
|Commercial
  Companies                        |  | $                                 | 39,177,781  |      |  | 22.2  | % | $ | 7,097,798   |  |  | 5.9   | %
|Education
  and other                         |  | $                                 | 19,344,935  |      |  | 11.1  | % | $ | 2,864,823   |  |  | 2.4   | %
|                                              |  |                                   |             |      |  |       |   |   |             |  |  |       |  
|Total Revenues                                |  | $                                 | 176,162,708 |      |  | 100.0 | % | $ | 120,236,091 |  |  | 100.0 | %
|                                              |  |                                   |             |      |  |       |   |   |             |  |  |       |  

Gross
Profit

Aggregate
gross profit increased by 86.7% or $8.84 million to $19.04 million for the nine
months ended May 31, 2006 as compared to $10.20 million for the nine months
ended May 31, 2005. This increase is primarily attributable to Old Emtecs
post-Merger gross profit of $8.12 million for the nine months ended May 31,
2006, which represented approximately 91.9% of our total increase in gross
profit. The remainder of the $736,145 increase in our gross profit is
attributable to favorable price drops and incentives offered by manufacturers.
Overall gross profit for the nine months ended May 31, 2006 includes a
reduction in gross profit of approximately $338,000 due to inventory damage
that occurred to a large shipment during the quarter ended February 28, 2006.

Measured
  as a percentage of revenues, our gross profit margin increased to 10.8% of total
  revenues for the nine months ended May 31, 2006 from 8.5% for the nine months
  ended May 31, 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 nine months ended May 31, 2006. Without this acquisition,
  our gross profit margin would have increased to 9.2% of total revenues for the
  nine months ended May 31, 2006 from 8.5% for the nine months ended May 31, 2005.
  This percentage increase is primarily attributable to greater selling efforts,
  favorable price drops and incentives offered by manufacturers. We cannot expect
  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 112.4% or $8.94 million to
$16.89 million for the nine months ended May 31, 2006, compared to $7.95
million for the nine months ended

18

---



May 31, 2005.
This increase is mainly due to the Merger. Selling, general and administrative
expenses associated with Old Emtec approximated $7.15 million for the nine
months ended May 31, 2006. Without this acquisition, our selling, general and
administrative expenses would have increased by 22.5%, or $1.78 million to
$9.74 million for the nine months ended May 31, 2006. This increase in selling,
general and administrative expenses is mainly due to the following:

| |   |                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Professional
  fees increased approximately $675,000 due to compliance costs associated with
  the Securities and Exchange Commission and in connection with the Merger; and                                                                                             
| |   |                                                                                                                                                                                                                                                                          
| |  | Compensation and benefits expense increased approximately $900,000
        due to a company wide increase in head count associated with our long-term
        investment in new employees as well as higher commission costs associated
        with higher gross profit.

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. 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 nine months ended
May 31, 2006 compared to the nine months ended May 31, 2005.

Rent
Expense-Related Party

Rent
Expense-related party increased by 97.3% or $131,409 to $266,409 for the nine
months ended May 31, 2006, compared to $135,000 for the nine months ended May
31, 2005. The increase in rent expense-related party is due to the Merger and
the assumption of the lease from GS&T Properties, LLC, a company in which
officers of our company are passive investors, owning approximately 20% equity
interest. Under the term of the lease, 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. The lease term is for 5 years with monthly base
rent of $12,500. During the nine months ended May 31, 2006, we recorded
$131,409 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 nine months
ended May 31, 2006, we recorded $135,000 in expense under this lease.

Depreciation
and Amortization

Depreciation
and Amortization expense increased by 706.3% or $592,661 to $676,576 for the
nine months ended May 31, 2006, compared to $83,915 for the nine months ended
May 31, 2005. This increase is primarily attributable to the Merger. Old
Emtecs post-merger depreciation and amortization accounted approximately for
$521,009 of increase. Additionally, we made fixed asset acquisitions of
$563,421 during the nine months ended May 31, 2006, which increased our

19

---



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 May 31, 2006 and August 31, 2005 consisted of the value ascribed to
customer relationships of $8,661,712 less accumulated amortization of $503,497
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 $434,630 and $16,359 for each of the nine months ended May 31, 2006
and 2005, respectively.

Interest
expense

Interest
expense increased by 93.6% or $439,520 to $908,860 for the nine months ended
May 31, 2006, compared to $469,340 for the nine months ended May 31, 2005. This
is mainly due to a higher balance on our line of credit and a higher interest
rate due to an increasing prime rate, and higher days sales outstanding during
the period.

Income
Taxes

Income
taxes decreased by 78.2% or $482,260 to $134,092 for the nine months ended May
31, 2006, compared to $616,352 for the nine months ended May 31, 2005. Income
tax expense of $134,092 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 $61,092. This decrease is primarily attributable to the 92.9%
decrease in income before income taxes in the current nine month period
compared to the same nine month period in the prior year.

Liquidity and Capital Resources

Cash
and cash equivalents at May 31, 2006 of $1.55 million represented an increase
of $526,652 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 May 31, 2006 represented a decrease of $849,259 from $4.41
million at August 31, 2005. This increase in cash position and decrease in line
of credit balance is primarily attributable to improved days sales outstanding
(DSO) and open terms offered to us by our suppliers. At May 31, 2006, our
working capital was approximately $844,640 less than it was 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.

20

---



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%).

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 May 31, 2006, we had a $3.56 million outstanding balance under the Credit
Facility, a $1.37 million outstanding balance, which is included in our
accounts payable, plus $180,868 in open approvals under the Wholesale Agreement
with the Lender. Net availability of $10.64 million was available under the
Credit Facility, and $19.25 million was available under the Wholesale
Agreement.

As
of May 31, 2006, we determined that we were in compliance with our financial
covenants with the Lender.

As
of May 31, 2006, we had outstanding balances under our open term credit
facilities with our primary trade vendors, including aggregators and
manufacturers, of $27.50 million with outstanding principal of approximately
$16.15 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

21

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without notice
and this action could have material adverse affect our business, result of
operations, and financial condition.

Capital
expenditures of $563,421 during the nine months ended May 31, 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

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

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.
  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. Currently, we
  are in the process of finalizing our annual impairment test in accordance with
  SFAS 142 and will report its results on our 2006 annual report on Form 10K.
  Intangible assets that have finite useful lives are amortized over their useful
  lives.

Intangible
assets at May 31, 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 May 31, 2006 was approximately $3.56 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 $35,600 annually.

26

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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 May 31,
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 May 31, 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 1A.
Risk Factors

There have
been no material changes in our risk factors from those disclosed in our 2005
Annual Report on Form 10-K and updated in our Quarterly Report on Form 10-Q for
the period ending November 30, 2005.

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Item 4.
Submission of Matters to a vote by Securities Holders

The
Annual Meeting of Shareholders of the Company (the Meeting) was held on May
8, 2006. There were present at the Meeting in person or by proxy shareholders
holding an aggregate of 13,906,427 shares of Common Stock of a total number of
14,381,286 shares of Common Stock outstanding and entitled to vote at the
Meeting.

| |    |                          
| | -- | -------------------------
| | 1. | Election
  of  Directors.

The
  following directors were elected as Class A directors.

|                    |  |            |  |         |  |             | 
|------------------- |  | ---------- |  | ------- |  | ----------- | 
|NOMINEE             |  | FOR        |  | AGAINST |  | ABSTENSIONS | 
|                    |  |            |  |         |  |             | 
|Dinesh R. Desai     |  | 13,862,200 |  |        |  | 44,227      | 
|Brina McAdams       |  | 13,862,200 |  |        |  | 44,227      | 
|Gregory P. Chandler |  | 13,862,200 |  |        |  | 44,227      | 

The
  following director was elected as a Class B director.

|             |  |            |  |         |  |             | 
|------------ |  | ---------- |  | ------- |  | ----------- | 
|NOMINEE      |  | FOR        |  | AGAINST |  | ABSTENSIONS | 
|             |  |            |  |         |  |             | 
|Keith Grabel |  | 13,881,200 |  | 24,800  |  | 427         | 

| |    |                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | The
  stockholders ratified the appointment of McGladrey & Pullen, LLP as the
  Companys independent registered public accounting firm for the fiscal year
  ending August 31, 2006 by the vote set forth below:

|           |  |         |  |             | 
|---------- |  | ------- |  | ----------- | 
|FOR        |  | AGAINST |  | ABSTENSIONS | 
|           |  |         |  |             | 
|13,900,633 |  | 4,267   |  | 1,527       | 

| |    |                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------
| | 3. | The
  stockholders approved the 2006 Stock-Based Incentive Compensation Plan by the
  vote set forth below:

|           |  |         |  |             | 
|---------- |  | ------- |  | ----------- | 
|FOR        |  | AGAINST |  | ABSTENSIONS | 
|           |  |         |  |             | 
|13,900,633 |  | 4,267   |  | 1,527       | 

29

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Item 6.
Exhibits

| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit 31.1
  - Rule 13a-14(a)/15 d-14(a) Certification of Dinesh R. Desai, Principal
  Executive Officer, of Emtec, Inc. dated July 17, 2006.    
| |                                                                                                                                                    
| | Exhibit 31.2
  - Rule 13a-14(a)/15 d-14(a) Certification of Stephen C. Donnelly, Principal
  Financial Officer, of Emtec, Inc. dated July 17, 2006.
| |                                                                                                                                                    
| | Exhibit 32.1
  - Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer,
  of Emtec, Inc. dated July 17, 2006.                   
| |                                                                                                                                                    
| | Exhibit 32.2
  - Section 1350 Certificate of Stephen C. Donnelly, Principal Financial
  Officer, of Emtec, Inc. dated July 17, 2006.               

30

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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: July
  17, 2006 |             |     |                                

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