UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549










FORM
10-Q





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





For the
quarterly period ended November 30, 2009





Commission
file number: 0-32789




EMTEC,
INC.


(Exact
name of registrant as specified in its charter)




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





525
Lincoln Drive


5
Greentree Center, Suite 117


Marlton,
New Jersey 08053


(Address
of principal executive offices, including zip code)





(856)
552-4204


(Registrant’s
telephone number, including area code)




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes   o   No  o




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




Large
accelerated filer o  Accelerated
filer  o  Non-accelerated
filer  o  Smaller
reporting company  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 January
4, 2010, there were outstanding 15,742,431 shares of the registrant’s common
stock.








EMTEC,
INC.


FORM
10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2009




Table of
Contents




PART
      I – FINANCIAL INFORMATIONItem
      1 - Financial StatementsCondensed
      Consolidated Balance Sheets
                      1Condensed
      Consolidated Statements of Income
                      2Condensed
      Consolidated Statements of Cash Flows
                      3Notes
      to Condensed Consolidated Financial Statements
                      4Item
      2  -
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      18Item
      3  -
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      34Item
      4T - Controls
      and Procedures
                      35PART
      II – OTHER INFORMATIONItem
      1 – Legal Proceedings
                      36Item
      6 – Exhibits
                      37SIGNATURES
                      38







PART
I – FINANCIAL INFORMATION


Item
1.          Financial
Statements





EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
Thousands, Except per Share and Share Data)





November 30,2009(Unaudited)
                      
                      
                      August 31, 2009AssetsCurrent
      AssetsCash
                      
                      $
                      4,186
                      
                      
                      $
                      1,713Receivables:Trade,
      less allowance for doubtful accounts
                      
                      
                      41,407
                      
                      
                      
                      29,463Others
                      
                      
                      1,996
                      
                      
                      
                      2,184Inventories,
      net
                      
                      
                      5,983
                      
                      
                      
                      4,410Prepaid
      expenses and other
                      
                      
                      1,698
                      
                      
                      
                      2,184Deferred
      tax asset - current
                      
                      
                      933
                      
                      
                      
                      680Total
      current assets
                      
                      
                      56,203
                      
                      
                      
                      40,634Property
      and equipment, net
                      
                      
                      1,331
                      
                      
                      
                      1,390Intangible
      assets, net
                      
                      
                      10,864
                      
                      
                      
                      11,235Goodwill
                      
                      
                      11,441
                      
                      
                      
                      11,424Deferred
      tax asset- long term
                      
                      
                      388
                      
                      
                      
                      459Other
      assets
                      
                      
                      113
                      
                      
                      
                      131Total
      assets
                      
                      $
                      80,340
                      
                      
                      $
                      65,273Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesLine
      of credit
                      
                      $
                      14,909
                      
                      
                      $
                      9,035Accounts
      payable
                      
                      
                      33,599
                      
                      
                      
                      25,390Current
      portion of long term debt - related party
                      
                      
                      728
                      
                      
                      
                      1,213Income
      taxes payable
                      
                      
                      1,012
                      
                      
                      
                      590Accrued
      liabilities
                      
                      
                      6,579
                      
                      
                      
                      6,723Deferred
      revenue
                      
                      
                      1,895
                      
                      
                      
                      2,103Total
      current liabilities
                      
                      
                      58,722
                      
                      
                      
                      45,054Deferred
      tax liability- long term
                      
                      
                      2,673
                      
                      
                      
                      2,816Accrued
      liabilities
                      
                      
                      184
                      
                      
                      
                      180Total
      liabilities
                      
                      
                      61,579
                      
                      
                      
                      48,050Commitments
      and contingenciesStockholders'
      EquityCommon
      stock $0.01 par value; 25,000,000 shares authorized; 18,169,679 and
      18,059,679 shares issued and 15,305,090 and 15,195,090, outstanding
      at  November 30, 2009 and August 31, 2009,
      respectively
                      
                      
                      181
                      
                      
                      
                      181Additional
      paid-in capital
                      
                      
                      20,880
                      
                      
                      
                      20,794Retained
      earnings
                      
                      
                      3,078
                      
                      
                      
                      1,671Accumulated other
      comprehensive income
                      
                      
                      218
                      
                      
                      
                      17324,357
                      
                      
                      
                      22,819Less:
      treasury stock, at cost, 2,864,589 shares
                      
                      
                      (5,596
                      )
                      
                      
                      (5,596
                      )Total
      stockholders' equity
                      
                      
                      18,761
                      
                      
                      
                      17,223Total
      liabilities and stockholders' equity
                      
                      $
                      80,340
                      
                      
                      $
                      65,273





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


1


EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


(In
Thousands, Except per Share and Share Data)





For the Three Months Ended November 30,2009
                
                
                2008RevenuesProcurement
      services
                
                $
                59,382
                
                
                $
                56,359Service
      and consulting
                
                
                14,195
                
                
                
                13,660Total
      Revenues
                
                
                73,577
                
                
                
                70,019Cost
      of SalesCost
      of procurement services
                
                
                53,173
                
                
                
                50,392Service
      and consulting
                
                
                9,860
                
                
                
                10,833Total
      Cost of Sales
                
                
                63,033
                
                
                
                61,225Gross
      ProfitProcurement
      services
                
                
                6,209
                
                
                
                5,967Service
      and consulting
                
                
                4,335
                
                
                
                2,827Total
      Gross Profit
                
                
                10,544
                
                
                
                8,794Operating
      expenses:Selling,
      general, and administrative expenses
                
                
                7,278
                
                
                
                6,178Rent
      expense – related parties
                
                
                154
                
                
                
                152Depreciation
      and amortization
                
                
                596
                
                
                
                534Total
      operating expenses
                
                
                8,028
                
                
                
                6,864Operating
      income
                
                
                2,516
                
                
                
                1,930Other
      expense (income):Interest
      income – other
                
                
                (11
                )
                
                
                (5
                )Interest
      expense
                
                
                145
                
                
                
                254Other
      expense
                
                
                (8
                )
                
                
                4Income
      before income taxes
                
                
                2,390
                
                
                
                1,676Provision
      for income taxes
                
                
                983
                
                
                
                670Net
      income
                
                $
                1,407
                
                
                $
                1,006Net
      income per common shareBasic
      and Diluted
                
                $
                0.09
                
                
                $
                0.07Weighted
      Average Shares OutstandingBasic
                
                
                14,914,912
                
                
                
                14,578,827Diluted
                
                
                15,112,667
                
                
                
                14,632,335





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


2





EMTEC, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
Thousands)





For the Three Months Ended November 30,2009
                    
                    
                    2008Cash
      Flows From Operating ActivitiesNet
      income
                    
                    $
                    1,407
                    
                    
                    $
                    1,006Adjustments
      to Reconcile Net Income to NetCash
      Used In Operating ActivitiesDepreciation
      and amortization
                    
                    
                    188
                    
                    
                    
                    189Amortization
      related to intangible assets
                    
                    
                    408
                    
                    
                    
                    345Deferred
      income taxes (benefit)
                    
                    
                    (338
                    )
                    
                    
                    (216
                    )Stock-based
      compensation
                    
                    
                    86
                    
                    
                    
                    42Indemnification
      of professional fees
                    
                    
                    -
                    
                    
                    
                    (270
                    )Changes
      In Operating Assets and LiabilitiesReceivables
                    
                    
                    (11,735
                    )
                    
                    
                    (2,670
                    )Inventories
                    
                    
                    (1,573
                    )
                    
                    
                    (1,814
                    )Prepaid
      expenses and other assets
                    
                    
                    528
                    
                    
                    
                    189Accounts
      payable
                    
                    
                    8,210
                    
                    
                    
                    2,519Income
      taxes payable
                    
                    
                    422
                    
                    
                    
                    477Accrued
      liabilities
                    
                    
                    (195
                    )
                    
                    
                    (412
                    )Deferred
      revenue
                    
                    
                    (235
                    )
                    
                    
                    (144
                    )Net
      Cash Used In Operating Activities
                    
                    
                    (2,827
                    )
                    
                    
                    (759
                    )Cash
      Flows From Investing ActivitiesPurchases
      of property and equipment
                    
                    
                    (129
                    )
                    
                    
                    (78
                    )Acquisition
      of businesses, net of cash acquired
                    
                    
                    -
                    
                    
                    
                    (165
                    )Net
      Cash Used In Investing Activities
                    
                    
                    (129
                    )
                    
                    
                    (243
                    )Cash
      Flows From Financing ActivitiesNet
      increase  in line of credit
                    
                    
                    5,874
                    
                    
                    
                    1,474Repayment
      of debt
                    
                    
                    (497
                    )
                    
                    
                    (237
                    )Net
      Cash Provided By Financing Activities
                    
                    
                    5,377
                    
                    
                    
                    1,237Effect
      of rate changes on cash
                    
                    
                    53
                    
                    
                    
                    -Net
      Increase in Cash
                    
                    
                    2,473
                    
                    
                    
                    235Beginning
      Cash
                    
                    
                    1,713
                    
                    
                    
                    2,025Ending
      Cash
                    
                    $
                    4,186
                    
                    
                    $
                    2,260Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
                    
                    $
                    857
                    
                    
                    $
                    209Interest
                    
                    $
                    132
                    
                    
                    $
                    146Supplemental
      Schedule of Non Cash Investing and Financing ActivitiesIndemnification
      receivable due from former shareholders settled by the
      amounts  due to former shareholders
                    
                    $
                    -
                    
                    
                    $
                    631





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


3


EMTEC,
INC


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.  Basis
of Presentation





The
accompanying unaudited condensed 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 accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included in the
accompanying unaudited 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 fiscal year ended
August 31, 2009.





2.  General





Description of
Business





Emtec,
Inc., a Delaware corporation, (the “Company”) is an information technology
(“IT”) systems integrator, providing consulting, services and infrastructure
solutions to commercial, federal, education, state and local government clients.
The Company’s areas of specific practices include IT consulting, communications,
data management, enterprise computing, managed services, business service
management solutions, training, storage and data center planning and
development.  The Company’s client base is comprised of departments of
federal, state and local governments in the United States and Canada, schools
and commercial businesses throughout the United States and Canada.




Principles of
Consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Emtec, Inc., a New Jersey Corporation (“Emtec NJ”),
Emtec Viasub LLC (“Emtec LLC”), Emtec LLC’s wholly-owned subsidiary Emtec
Federal, Inc. (“Emtec Federal”), Emtec Global Services LLC (“EGS”), EGS’
wholly-owned subsidiaries Luceo, Inc. (“Luceo”), eBusiness Application
Solutions, Inc. (“eBAS”), Aveeva, Inc. (“Aveeva”) and Aveeva’s subsidiary
Aviance Software India Private Limited (“Aviance”), Emtec Infrastructure
Services Corporation (“EIS-US”), and EIS-US’s wholly-owned subsidiaries Emtec
Infrastructure Services Canada Corporation (“EIS-Canada”), which is referred to
in this report as KOAN-IT, and KOAN-IT (US) Corp. (“KOAN-IT (US)”). Significant
intercompany account balances and transactions have been eliminated in
consolidation.




Segment
Reporting





The
Company divides its operating activity into two operating segments for reporting
purposes: Emtec Infrastructure Services Division (“EIS”) and Emtec Global
Services Division (“EGS”). EIS consists of the Company’s historical business
(“Systems Division”) which includes Emtec NJ, Emtec LLC, Emtec Federal and the
business service management solutions offered by the Information Technology
Service Management (“ITSM”) practice. EGS is the Company’s enterprise
applications services solutions and training business including its Enterprise
Resource Planning (“ERP”) and Application Development practice and its Business
Analysis and Quality Assurance Practice.


4


Accounting
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 other long-lived assets 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 materially from those
estimates.





Goodwill





Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired companies.  In accordance with ASC 350 “Intangibles-
Goodwill and Other,” 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 has set an annual impairment
testing date of June 1.  The impairment determination is made at the
reporting unit level and consists of two steps. First, the Company determines
the fair value of the reporting unit and compares it to its carrying amount.
Second, if the carrying amount of the reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation, in accordance
with ASC 805 “Business Combinations.”  The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. The
Company’s policy is to perform its annual impairment testing for all reporting
units as 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.





The
changes in the carrying amount of goodwill for the three months ended November
30, 2009 are as follows (in thousands):





Balance
      at August 31, 2009
                      
                      $
                      11,424Foreign
      currency translation effect of Canadian goodwill
                      
                      
                      17Balance
      at November 30, 2009
                      
                      $
                      11,441





Based on
the income (discounted cash flows) and market-based (guideline company method)
valuation approaches, there was no goodwill impairment for the Company’s
reporting units consisting of: Systems Division, KOAN-IT, Luceo and eBAS/Aveeva,
at June 1, 2009. At November 30, 2009, Emtec's market capitalization was less
than its total stockholders' equity, which is one factor the Company considered
when determining whether goodwill should be tested for impairment between annual
tests.  The Company’s stock does not trade frequently and thus
management believes the inherent value of the Company has not been reflective of
the current or historical stock market valuation of the Company.  While we
are taking steps to improve our operating performance and grow the Company, we
cannot guarantee that the market price will reflect the true value of the
stock.  The Company’s stock could also be subject to significant
volatility. The Company does not currently believe that the reduced market
capitalization represents a goodwill impairment indicator as of November 30,
2009. However, if current market conditions persist and the Company’s estimated
value under the income and market-based approaches is affected, then it is
possible that the Company may have to take a goodwill impairment charge against
earnings in a future period.


5


Identifiable Intangible
Assets





At
November 30, 2009 and August 31, 2009, the components of identifiable intangible
assets are as follows (in thousands):




November 30, 2009
                    
                    
                    August 31, 2009Customer
      relationships
                    
                    $
                    14,098
                    
                    
                    $
                    14,098Noncompete
      agreements
                    
                    
                    398
                    
                    
                    
                    398Trademarks
                    
                    
                    169
                    
                    
                    
                    169Foreign
      currency translation adjustment
                    
                    
                    41
                    
                    
                    
                    -14,706
                    
                    
                    
                    14,665Accumulated
      amortization
                    
                    
                    (3,838
                    )
                    
                    
                    (3,430
                    )Foreign
      currency translation adjustment
                    
                    
                    (4
                    )
                    
                    
                    -Balance,
      ending
                    
                    $
                    10,864
                    
                    
                    $
                    11,235




Customer
relationships represent the value ascribed to customer relationships purchased
in 2005, the acquisitions of Luceo and eBAS/Aveeva in fiscal 2008 and the
acquisition of KOAN-IT in February 2009.  The amounts ascribed to
customer relationships are being amortized on a straight-line basis over 5-15
years.





Noncompete
agreements represent the value ascribed to covenants not to compete in
employment and acquisition agreements with certain members of Luceo, eBAS/Aveeva
and KOAN-IT’s management entered into at the time of the respective
acquisitions.  The amounts ascribed to noncompete agreements are being
amortized on a straight-line basis over 5 years.





Trademarks
represent the value ascribed to trade name and trademarks owned by
KOAN-IT.  The amounts ascribed to trademarks are being amortized on a
straight-line basis over 5 years.





Amortization
expense related to intangible assets was $408,000 and $345,000 for the three
months ended November 30, 2009 and 2008, respectively.  We currently
expect future amortization for the next four years ending August 31, 2010
through 2013 will be approximately $1.6 million per year and for the fiscal year
ending 2014 will be approximately $937,000.





Long-lived
assets, including customer relationships and property and equipment, are tested
for recoverability whenever events or changes in circumstances indicate that
their carrying amount may not be recoverable in accordance with ASC 350
“Intangibles- Goodwill and Other” and ASC 360 “Property, Plant and
Equipment”.  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.  No impairment of long-lived assets occurred
during the fiscal years ended 2009 and 2008.


6


Foreign Currency Translation
and Other Comprehensive Income





The
financial statements of the Company’s foreign subsidiaries are remeasured into
U.S. dollars for consolidation and reporting purposes.  The functional
currency for the Company’s foreign operations is the local
currency.  Current rates of exchange are used to remeasure assets and
liabilities.  Adjustments to translate those statements into U.S.
dollars are recorded in accumulated other comprehensive income.





The
Company’s comprehensive income is presented in the following table:




For the Three Months Ended November 30,2009
                    
                    
                    2008Net
      Income
                    
                    $
                    1,407
                    
                    
                    $
                    1,006Cumulative
      translation adjustment, net of taxes
                    
                    
                    45
                    
                    
                    
                    -Total
      comprehensive income
                    
                    $
                    1,452
                    
                    
                    $
                    1,006





Earnings Per
Share





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





The
computation of diluted earnings per share is 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, restricted stock awards and warrants had been exercised as of the end
of the period. Potentially dilutive shares consist of stock options, restricted
stock awards and warrants totaling 197,755 and 53,508 for the three months ended
November 30, 2009 and 2008, respectively. Outstanding warrants to purchase
1,700,566 and 1,682,444 common shares as of and for the periods ended November
30, 2009 and 2008, respectively, were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the Company’s common shares over those periods.





Income Taxes and Due to
Former Stockholders





The
Company accounts for income taxes in accordance with ASC 740 "Income
Taxes".  The Company files a federal consolidated tax return that
includes all U.S. entities.  The Company also files several
combined/consolidated state tax returns and several separate state tax
returns.  Deferred taxes are provided based upon a review of the tax
bases of assets and liabilities, whereby deferred tax assets and liabilities are
recognized for temporary differences.  Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are recognized for tax loss
carryforwards.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment.  Deferred taxes result from timing differences primarily
relating to bad debts, inventory reserves, deferred revenue, fixed asset
depreciation, compensation expenses and intangible
amortization.


7


In
October 2008, the Company settled the August 2003 and April 2004 tax audits of
Emtec Federal, formerly known as Westwood Computer Corporation (“Westwood”),
with the Appeals Office of the IRS.  The settlement agreement resulted in
an additional federal income tax payment of $145,000, which included interest of
$41,000.  The Company has filed 2003 and 2004 amended New Jersey income tax
returns to pay additional New Jersey taxes that resulted from the IRS
settlement.  The accounting to record the settlements of these pre-merger
tax liabilities under ASC 740 resulted in adjustments to goodwill and to
deferred tax assets.  Since the Westwood merger agreement included
indemnification coverage by Westwood’s former stockholders, the Company recorded
a receivable “due from the Westwood former stockholders” of $631,000.  The
$631,000 included pre-merger tax liabilities totaling $361,000 plus associated
professional fees to defend the Company’s tax positions totaling $270,000. 
The $361,000 portion of the Company’s indemnity claim was recorded as a
reduction to goodwill acquired in the April 2004 Westwood merger.  The
remaining $270,000 portion was recorded as a reduction to selling, general and
administrative expenses during the three months ended November 30,
2008.





The “due
from Westwood former stockholders” receivable was satisfied during October 2008,
based on offsetting amounts “due to Westwood former stockholders” totaling
$631,000.  The amounts “due to Westwood former stockholders” represented
funds we held as unclaimed merger consideration.





We
conduct business nationally and, as a result, file income tax returns in the U.S
federal jurisdiction and various state and local jurisdictions. With a few
exceptions, we are no longer subject to federal, state or local income tax
examinations for tax returns filed for fiscal years 2005 and prior.





Reconciliation
of Liabilities for Unrecognized Tax Benefits for the three months ended November
30, 2009 and 2008 (in thousands) are as follows:




2009
                    
                    
                    2008Balance
      at September 1
                    
                    $
                    202
                    
                    
                    $
                    693Unrecognized
      tax positions of prior periods:Increase
                    
                    
                    -
                    
                    
                    
                    -Decrease
                    
                    
                    -
                    
                    
                    
                    -Unrecognized
      tax positions of current year:Increase
                    
                    
                    6
                    
                    
                    
                    3Decrease
                    
                    
                    -
                    
                    
                    
                    -Decrease
      in Unrecognized tax benefits due to settlements
                    
                    
                    -
                    
                    
                    
                    (547
                    )Decrease
      in Unrecognized tax benefits due to lapse of statute of
      limitations
                    
                    
                    -
                    
                    
                    
                    -Balance
      at November 30
                    
                    $
                    208
                    
                    
                    $
                    149


8


For the Three Months Ended,November 30,2009
                        
                        
                        November 30,2008Total
      amount of unrecognized tax benefits that, if recognized, would
      affect the effective tax rate
                        
                        $
                        94
                        
                        
                        $
                        51Accrued
      interest and penalties for unrecognized tax benefits
                        
                        $
                        83
                        
                        
                        $
                        63Interest
      and penalties classified as income tax expense (benefit)
                        
                        $
                        5
                        
                        
                        $
                        (24
                        )





Subsequent
Events





ASC 855
“Subsequent Events” establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued.  The pronouncement provides: (a) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; (b) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements; and (c) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. Management has evaluated subsequent events through January
14, 2010, the date on which financial statements were issued and has determined
that no recognized and non-recognized subsequent events warranted inclusion or
disclosure in the interim financial statements as of November 30,
2009.





3.
Acquisitions





Enterprise
Management Solutions, Inc.





On May
12, 2009, KOAN-IT (US) acquired certain assets of EMS, a company under Chapter
11 bankruptcy protection in the Middle District of Florida.  The
purchase price consisted of $150,000 cash at closing. Additionally, the Company
capitalized professional fees of $108,000 that were associated with the
acquisition of the assets of EMS.  The acquisition was funded through
borrowings under the Credit Facility with the Lender (as such terms are later
defined in footnote #5).





The
Company accounted for the acquisition under the purchase method whereby amounts
were assigned to assets acquired based on their fair values on the date of the
acquisition. Management determined the fair value of EMS’ assets on May 12, 2009
was $6,000 (property and equipment), which resulted in an excess purchase price
over fair value of assets acquired of $252,000 that was recognized as goodwill.





Unaudited
pro forma condensed results of operations are not included in this report
because the effect of the acquisition is not material.





KOAN-IT
Corp.





On
February 12, 2009, EIS-Canada, EIS-US, KOAN-IT and the shareholders of KOAN-IT
(the “Shareholders”) entered into a Share Purchase Agreement pursuant to which
(i) EIS-Canada acquired all of the outstanding stock of KOAN-IT from the
Shareholders and (ii) EIS-US acquired all of the outstanding stock of KOAN-IT
(US) from KOAN-IT for an aggregate consideration of up to approximately $3.3
million.  The purchase price consisted of (i) cash at closing in an
aggregate amount equal to $1.2 million (consisting of approximately $1.2 million
for the outstanding stock of KOAN-IT and $20,000 for the outstanding stock of
KOAN-IT (US)), (ii) unsecured subordinated 6% promissory notes issued to each of
the Shareholders in an aggregate principal amount of $408,000 payable in full on
the 12 month anniversary of the closing and (iii) the potential right to receive
additional cash consideration each year for the next three years on the
anniversary of the closing, in the aggregate totaling $1.6 million if certain
performance goals are met. The acquisition was funded through borrowings under
the Credit Facility with the Lender (as such terms are later defined in footnote
#5 – Line of Credit below).


9


The
Company accounted for the acquisition under the purchase method, whereby,
amounts were assigned to assets acquired and liabilities assumed based on their
fair values, on the date of the acquisition. Management determined the fair
value of KOAN-IT and KOAN-IT (US)’s net assets on February 12, 2009 was $1.1
million, which resulted in an excess purchase price over fair value of net
assets acquired of $548,000, which was recognized as goodwill.





The
allocation of purchase price by significant component is as follows (in
thousands):




Cash
                    
                    $
                    572Trade
      receivable, net
                    
                    
                    985Prepaid
      expenses and other current assets
                    
                    
                    583Plant
      and equipment
                    
                    
                    70Customer
      relationships
                    
                    
                    1,100Trademarks
                    
                    
                    150Noncompete
      asset
                    
                    
                    25Accounts
      payable
                    
                    
                    (463
                    )Income
      taxes payable
                    
                    
                    27Deferred
      tax liabilities
                    
                    
                    (415
                    )Deferred
      revenue
                    
                    
                    (848
                    )Accrued
      expenses
                    
                    
                    (703
                    )Fair
      value of net assets acquired
                    
                    
                    1,083Purchase
      price
                    
                    
                    1,631Excess
      purchase price
                    
                    $
                    548





The
allocation is preliminary and such amounts are subject to adjustments as
additional analysis is performed or obtained from third party sources. The
Company allocated $1.1 million to client relationships at the acquisition date
that is being amortized over a period of six years.  The Company also
allocated $150,000 and $25,000 to trademarks and a noncompete asset,
respectively, that are being amortized over a period of five years. The
allocation of purchase price at closing did not include
amounts contingently payable in the future as described
above.




The
Company capitalized professional fees of $246,000 that were associated with the
acquisition of KOAN-IT and KOAN-IT (US).





Unaudited
pro forma condensed results of operations are not included in this report
because the effect of the acquisition is not material.


10


4.  Stock-Based
Compensation and Warrants




Stock
Options




An
amendment to the Company’s 2006 Stock-Based Incentive Compensation Plan (the
“2006 Plan”) was approved by the Company’s stockholders on February 2, 2009. The
2006 Plan authorizes the granting of stock options to directors and eligible
employees. The amendment increased the aggregate number of shares of Common
Stock available under the 2006 Plan from 1,400,000 shares to 2,543,207 shares
eligible for issuance 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 stockholders
owning more than 10% of the Company’s common stock). Options under the 2006 Plan
have terms from 7 to 10 years and certain options vest immediately and others
through a term up to 4 years.




The
Company measures the fair value of options on the grant date using the
Black-Scholes option valuation model.  The Company estimated the
expected volatility using the Company’s historical stock price data over the
expected term of the stock options.  The Company also used historical
exercise patterns and forfeiture behaviors to estimate the options, expected
term and our forfeiture rate.  The risk-free interest rate is based on
the U.S. Treasury zero-coupon yield curve in effect on the grant
date.  Both expected volatility and the risk-free interest rate are
based on a period that approximates the expected term.




A summary
of stock options for the three months ended November 30, 2009 is as
follows:




For the Three Months EndedNovember 30, 2009
                                        
                                        Shares
                                        
                                        
                                        Weighted
                                          AverageExercise
                                          Price
                                        
                                        Weighted Average
                                          Remaining Term
                                        
                                        Aggregate Intrinsic
                                          Value *Options
      Outstanding -September 1, 2009
                                        
                                        
                                        359,500
                                        
                                        
                                        $
                                        1.15Options
      Granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Options
      Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Options
      Forfeited or Expired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Options
      Outstanding - November 30, 2009
                                        
                                        
                                        359,500
                                        
                                        
                                        $
                                        1.15
                                        
                                        5.49
      years
                                        
                                        $
                                        25,700Options
      Exercisable - November 30, 2009
                                        
                                        
                                        301,425
                                        
                                        
                                        $
                                        1.12
                                        
                                        5.49 years
                                        
                                        $
                                        25,700





*
Represents the total pre-tax intrinsic value based on the Company’s average
closing stock prices for the three months ended November 30, 2009.




There
were no stock options issued during the three months ended November 30,
2009.




Nonvested Stock (Restricted
Stock)




The
following table summarizes the Company’s restricted stock activity during the
three months ended November 30, 2009:


11




For the Three Months Ended November 30, 2009
                            
                            Shares
                            
                            
                            Weighted
                              Average Grant
                              Date FairValue
                            
                            
                            Fair ValueNonvested
      - September 1, 2009
                            
                            
                            565,859
                            
                            
                            $
                            0.72Granted
                            
                            
                            110,000
                            
                            
                            $
                            0.99Vested
                            
                            
                            (285,681
                            )
                            
                            $
                            0.60
                            
                            
                            $
                            278,856
                            (a)Forfeited
                            
                            
                            -
                            
                            
                            
                            -Nonvested
      - November 30, 2009
                            
                            
                            390,178
                            
                            
                            $
                            0.89
                            
                            
                            $
                            378,473
                            (b)




(a)
            The
      fair value of vested restricted stock shares represents the total pre-tax
      fair value, based on the closing stock price on the day of vesting, which
      would have been received by holders of restricted stock shares had all
      such holders sold their underlying shares on that
  date.




(b)
            The
      aggregate fair value of the nonvested restricted stock shares expected to
      vest represents the total pre-tax fair value, based on the Company’s
      closing stock price as of November 30,  2009 which would have
      been received by holders of restricted stock shares had all such holders
      sold their underlying shares on that
date.




The fair
value of these shares was determined based upon the quoted closing price of the
Company’s stock on the Over-the-Counter Bulletin Board on the grant
date.  The Company recognizes compensation expense associated with the
issuance of such shares using the closing price of the Company’s common stock on
the date of grant over the vesting period on a straight-line basis.




Stock Options and Nonvested
Stock




Stock-based
compensation costs related to the 2006 Plan totaled $86,000 and $42,000 during
the three months ended November 30, 2009 and 2008, respectively.  As
of November 30, 2009, the Company had recognized a total of $962,000 in
compensation costs and had $213,000 of unrecognized compensation cost related to
the 2006 Plan.  The cost is expected to be recognized over a remaining
period of 3 years.




Warrants




On August
5, 2005, the Company issued certain stockholders stock warrants that evidence
the obligation of the Company to issue a variable number of shares, in the
aggregate, equal to 10% of then 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 $3.7 million.  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
1,700,566 and 1,682,444 shares, with an exercise price of $2.17 and $2.20 per
share, as of November 30, 2009 and 2008, respectively. The outstanding
warrants were anti-dilutive for the three months ended November 30, 2009 and
2008 because the exercise price was greater than the average market price of the
Company’s common shares.





5.  Line
of Credit




The
Company, Emtec NJ, Emtec LLC, Emtec Federal, Emtec Global, Luceo, eBAS, and
Aveeva (collectively, the “Borrower”), have a Loan and Security Agreement with
De Lage Landen Financial Services, Inc. (the “Lender”) pursuant to which the
Lender provides the Borrower with a revolving credit loan and floor plan loan
(the “Credit Facility”). The Credit Facility provides for aggregate borrowings
of the lesser of $32.0 million or 85% of Borrower’s eligible accounts
receivable, plus 100% of unsold inventory financed by the Lender. The floor plan
loan portion of the Credit Facility is for the purchase of inventory from
approved vendors and for other business purposes. The Credit Facility subjects
the Borrower to mandatory repayments upon the occurrence of certain events as
set forth in the Credit Facility.


12




On
December 5, 2008, the Borrower entered into a First Amendment and Joinder to
Loan and Security Agreement and Schedule to Loan and Security Agreement (the
“First Amendment”) with the Lender, pursuant to which the Lender extended the
term of the loans issued to the Borrower under the Loan and Security Agreement
from December 7, 2008 until December 7, 2010 and made certain other amendments
to the Loan and Security Agreement, including the following:





§
            The
      First Amendment changed the base rate of interest to the three month (90
      day) LIBOR rate from the previous base rate of the “Prime
      Rate.”





§
            The
      First Amendment changed the interest rate for revolving credit loans to
      the base rate plus 3.25% from the previous interest rate for revolving
      credit loans which was the base rate minus 0.5%, and changed the interest
      rate for floorplan loans, if applicable, to 6.25% in excess of the base
      rate from the previous interest rate for floorplan loans of 2.5% in excess
      of the base rate.





§
            The
      First Amendment amended the Schedule to provide that the Borrower must pay
      the Lender a floorplan annual volume commitment fee if the aggregate
      amount of all floorplan loans does not equal or exceed $60.0 million in a
      12 month period from December 1st through November 30th.  The
      floorplan commitment fee is equal to the amount that the floorplan usage
      during such 12 month period is less than $60.0 million multiplied by
      1%.  If the Borrower terminates the Credit Facility during a 12
      month period, the Borrower shall be required to pay the Lender a prorated
      portion of the annual volume commitment fee.  For the period
      from December 1, 2008 through November 30, 2009, the Company’s floorplan
      volume was approximately $30.0 million. The Company has total accrual of
      $300,000 in commitment fees as interest payable on the consolidated
      financial statements of which, approximately $280,000 was expensed during
      the year ended August 31, 2009 and approximately $20,000 was expensed in
      three months ended November 30,
2009.




In
addition, by executing the First Amendment, Emtec Global, Luceo, eBAS and Aveeva
each joined the Credit Facility as a Borrower and granted the Lender a security
interest in all of their respective interests in certain of their respective
assets, including inventory, equipment, fixtures, accounts, chattel paper,
instruments, deposit accounts, documents, general intangibles, letter of credits
rights, and proceeds from all judgments, claims and insurance
policies.  Emtec Global pledged 100% of the outstanding shares of its
domestic subsidiaries, eBAS and Luceo, and Emtec Global and Aveeva pledged 65%
in the aggregate of the outstanding shares of Aviance Software (India) Pvt.
Ltd., an Indian company.




The
Company had balances of $14.9 million and $9.0 million outstanding under the
revolving portion of the Credit Facility, and balances of $9.5 million and $5.4
million (included in the Company’s accounts payable) outstanding plus $430,000
and $321,000 in open approvals under the floor plan portion of the Credit
Facility at November 30, 2009 and August 31, 2009, respectively. Net
availability was $9.8 million and $11.9 million under the revolving portion of
the Credit Facility, and additionally $2.0 million and $5.4 million was
available under the floor plan portion of the Credit Facility as of November 30,
2009 and August 31, 2009, respectively.




As of
November 30, 2009, the Company determined that it was in compliance with its
financial covenants under the Credit Facility.


13




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, consist of the following (in
thousands):




For the Three Months EndedNovember 30, 2009
                    
                    
                    November 30, 2008Departments
      of the U.S. Government
                    
                    $
                    41,400
                    
                    
                    
                    56.3
                    %
                    
                    $
                    40,195
                    
                    
                    
                    57.4
                    %Canada
      Government Agencies
                    
                    
                    349
                    
                    
                    
                    0.5
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %State
      and Local Governments
                    
                    
                    1,057
                    
                    
                    
                    1.4
                    %
                    
                    
                    2,996
                    
                    
                    
                    4.3
                    %Commercial
      Companies
                    
                    
                    13,599
                    
                    
                    
                    18.5
                    %
                    
                    
                    16,759
                    
                    
                    
                    23.9
                    %Education
      and other
                    
                    
                    17,172
                    
                    
                    
                    23.3
                    %
                    
                    
                    10,069
                    
                    
                    
                    14.4
                    %Total
      Revenues
                    
                    $
                    73,577
                    
                    
                    
                    100.0
                    %
                    
                    $
                    70,019
                    
                    
                    
                    100.0
                    %





The
Company reviews a client's credit history before extending
credit.  The Company does not require collateral or other security to
support credit sales. The Company provides an allowance for doubtful accounts
based on the credit risk of specific clients, historical experience and other
identified risks. Trade receivables are carried at original invoice less an
estimate made for doubtful receivables, based on review by management of all
outstanding amounts on a periodic basis.  Trade receivables 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 ceases its collection
efforts.





The trade
account receivables consist of the following (in thousands):




November 30,
                    
                    
                    August 31,2009
                    
                    
                    2008Trade
      receivables
                    
                    $
                    41,742
                    
                    
                    $
                    29,767Allowance
      for doubtful accounts
                    
                    
                    (335
                    )
                    
                    
                    (304
                    )Trade
      receivables, net
                    
                    $
                    41,407
                    
                    
                    $
                    29,463





Trade
receivables include $1.9 million and $1.5 million of unbilled revenue as of
November 30, 2009 and August 31, 2009, respectively.





Sales to
one of the school districts in Georgia and to a department of the United States
Government accounted for approximately $10.1 million or 13.7% and $8.4 million
or 11.5% of the Company’s total revenues for the three months ended November 30,
2009, respectively. The same customers accounted for approximately $8.9 million
or 12.8%, and $77,000 or 0.1% of the Company’s total revenues for the three
months ended November 30, 2008, respectively.





Trade
receivables due from school districts in Georgia and one of the departments of
the U.S. Government accounted for approximately 4.9% and 22.6%, respectively, of
the Company’s trade receivables as of November 30, 2009. The same clients
accounted for approximately 14.4% and 21.4%, respectively of the Company’s trade
receivable as of August 31, 2009.


14




7.  Inventories




Inventories
are stated at the lower of average cost or market. Inventories consist of
finished goods purchased for resale, including computer hardware, computer
software, computer peripherals and related supplies. At November 30, 2009 and
August 31, 2009, inventories consisted of the following (in
thousands):


November 30,
                    
                    
                    August 31,2009
                    
                    
                    2009Hardware,
      software, accessories and parts
                    
                    $
                    6,211
                    
                    
                    $
                    4,638Inventory
      reserve
                    
                    
                    (228
                    )
                    
                    
                    (228
                    )Net
      inventories
                    
                    $
                    5,983
                    
                    
                    $
                    4,410




8.  Accrued
Liabilities




At
November 30, 2009 and August 31, 2009, accrued liabilities consisted of the
following (in thousands):




November 30,
                    
                    
                    August 31,2009
                    
                    
                    2009Accrued
      payroll
                    
                    $
                    2,706
                    
                    
                    $
                    2,559Accrued
      commissions
                    
                    
                    679
                    
                    
                    
                    586Accrued
      state sales taxes
                    
                    
                    38
                    
                    
                    
                    74Accrued
      third-party service fees
                    
                    
                    83
                    
                    
                    
                    72Other
      accrued expenses
                    
                    
                    3,073
                    
                    
                    
                    3,432$
                    6,579
                    
                    
                    $
                    6,723




9.  Long-Term
Debt




At
November 30, 2009 and August 31, 2009, the Company’s long-term debt consisted of
the following (in thousands):




November 30,
                              
                              
                              August 31,2009
                              
                              
                              20095%
      subordinated note payable to DARR Global Holdings, Inc.
                              
                              $
                              257
                              
                              
                              $
                              3458%
      subordinated note payable to Mr. Siva Natarajan
                              
                              
                              -
                              
                              
                              
                              4106%
      subordinated note payable to Former Shareholders of
KOAN-IT
                              
                              
                              471
                              
                              
                              
                              458Total
      debt
                              
                              
                              728
                              
                              
                              
                              1,213Less
      current portion
                              
                              
                              (728
                              )
                              
                              
                              (1,213
                              )Long-term
      debt, net of current portion
                              
                              $
                              -
                              
                              
                              $
                              -




10.  Related
Party Transactions





One of
the Company’s facilities is leased under a non-cancelable operating lease
agreement with an entity that is owned by a director and an officer of the
Company and their related family members. During the three months ended November
30, 2009 and 2008, the Company recorded expense under this lease totaling
$52,000 and $45,000, respectively. The facilities consist of office and
warehouse space totaling 42,480 square feet located in Springfield, New
Jersey.


15


The
Company is occupying approximately 26,000 square feet of office and warehouse
space in a 70,000 square-foot building in Suwannee, GA. This space is leased
from GS&T Properties, LLC, in which a certain officer of the Company is a
passive investor with an approximately 10% equity interest. The lease term was
through November 2009 with monthly rent of $17,000. Currently, the Company is in
a process of negotiating the renewal of the lease and is occupying the premise
on a month-to-month basis. During the three months ended November 30, 2009 and
2008, the Company recorded expense under this lease totaling $50,000 and
$47,000, respectively.





In
conjunction with the acquisition of eBAS/Aveeva, the Company entered into a
lease for approximately 20,000 square feet of office space in Fremont,
California.  This space is leased from the spouse of an officer of
eBAS/Aveeva.  The lease term is through August 31, 2011 with a monthly
rent of $20,000. In March 2009, the Company subleased portion of the building
for a monthly rent of $3,000 on a month-to-month basis. During the three months
ended November 30, 2009 and 2008, the Company recorded expense under this lease
totaling $52,000 and $60,000, respectively.





Management
believes the lease payments are at or below market lease rates for similar
facilities for the leases noted above.





11.  Legal
Proceedings





During
December 2007, the Company received a subpoena issued by the GSA Office of
Inspector General (“OIG”), apparently as part of an ongoing, industry-wide
investigation.  The Company produced documents and data in response to the
subpoena to the OIG during 2008.  In September 2009, the Company became
aware that it had been named along with several other prominent IT companies in
a qui tam lawsuit entitled Christopher Crennen, et al., v. Dell
Marketing, et al., filed in the United States District Court for the
District of Massachusetts alleging violations of the False Claims Act relating
to the Company's obligations under the Buy American Act and the Trade Agreements
Act.  Qui tam lawsuits typically remain under seal (hence, usually unknown
to the defendant) for some time while the government decides whether or not to
intervene on behalf of a private qui tam plaintiff (known as a relator) and take
the lead in the litigation.  These lawsuits can involve significant
monetary damages and penalties and award bounties to private plaintiffs who
successfully bring the suits.  The lawsuit, which was previously under
seal, appears to have been the cause of the OIG subpoena.  Despite its
investigation, to date the government has declined to intervene in the lawsuit,
however the Company can provide no assurance that the government will not
intervene in this case or in any other qui tam suit against the Company in
the future.   The Company does not know whether the relators will
pursue the qui tam lawsuit independently.  The Company has filed a motion
to dismiss the lawsuit.  At this time, the Company is unable to
predict the timing and outcome of this matter.





12. Segment
Information





The
Company provides segment financial information in accordance with ASC 280,
“Segment Reporting”.  The Company’s business activities are divided into
two business segments, EIS and EGS. EIS consists of the Systems Division,
which includes Emtec NJ, Emtec LLC, Emtec Federal and the business service
management solutions offered by the ITSM practice. EGS is the Company’s
enterprise applications services solutions and training business including its
ERP and Application Development practice and its Business Analysis and Quality
Assurance Practice.  The accounting policies of our segments are the
same as those described in Note 2 and there are no material intersegment
transactions.Summarized financial information relating to the Company’s
operating segments is as follows (in thousands):


16




(Unaudited)November 30,
                      
                      
                      August 31,2009
                      
                      
                      2009Identifiable Assets:EIS
                      
                      $
                      66,455
                      
                      
                      $
                      51,586EGS
                      
                      
                      13,885
                      
                      
                      
                      13,687Total
      Assets
                      
                      $
                      80,340
                      
                      
                      $
                      65,273




For the Three Months EndedNovember 30,(Unaudited)2009
                                                      
                                                      
                                                      2008RevenuesEIS
                                                      
                                                      $
                                                      65,829
                                                      
                                                      
                                                      $
                                                      59,306EGS
                                                      
                                                      
                                                      7,748
                                                      
                                                      
                                                      
                                                      10,713Total
      Revenue
                                                      
                                                      $
                                                      73,577
                                                      
                                                      
                                                      $
                                                      70,019Gross ProfitEIS
                                                      
                                                      $
                                                      9,173
                                                      
                                                      
                                                      $
                                                      6,687EGS
                                                      
                                                      
                                                      1,371
                                                      
                                                      
                                                      
                                                      2,107Gross
      Profit
                                                      
                                                      $
                                                      10,544
                                                      
                                                      
                                                      $
                                                      8,794Depreciation and
    amortizationEIS
                                                      
                                                      $
                                                      369
                                                      
                                                      
                                                      $
                                                      324EGS
                                                      
                                                      
                                                      227
                                                      
                                                      
                                                      
                                                      210Depreciation
      and amortization
                                                      
                                                      $
                                                      596
                                                      
                                                      
                                                      $
                                                      534Operating IncomeEIS
                                                      
                                                      $
                                                      2,407
                                                      
                                                      
                                                      $
                                                      1,200EGS
                                                      
                                                      
                                                      109
                                                      
                                                      
                                                      
                                                      730Operating
      Income
                                                      
                                                      $
                                                      2,516
                                                      
                                                      
                                                      $
                                                      1,930Interest and Other Expense
      (Income)EIS
                                                      
                                                      $
                                                      70
                                                      
                                                      
                                                      $
                                                      134EGS
                                                      
                                                      
                                                      56
                                                      
                                                      
                                                      
                                                      119Interest
      and Other Expense (Income)
                                                      
                                                      $
                                                      126
                                                      
                                                      
                                                      $
                                                      253Provision for Income TaxesEIS
                                                      
                                                      $
                                                      957
                                                      
                                                      
                                                      $
                                                      416EGS
                                                      
                                                      
                                                      26
                                                      
                                                      
                                                      
                                                      254Provision
      for Income Taxes
                                                      
                                                      $
                                                      983
                                                      
                                                      
                                                      $
                                                      670Net IncomeEIS
                                                      
                                                      $
                                                      1,380
                                                      
                                                      
                                                      $
                                                      649EGS
                                                      
                                                      
                                                      27
                                                      
                                                      
                                                      
                                                      357Net
      Income
                                                      
                                                      $
                                                      1,407
                                                      
                                                      
                                                      $
                                                      1,006Capital expendituresEIS
                                                      
                                                      $
                                                      89
                                                      
                                                      
                                                      $
                                                      74EGS
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      4Capital
      expenditures
                                                      
                                                      $
                                                      129
                                                      
                                                      
                                                      $
                                                      78


17




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
regarding future events and 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, 2009 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
IT systems integrator, providing consulting, services and infrastructure
solutions to commercial, federal, education, state and local government clients.
The Company’s areas of specific practices include IT consulting, communications,
data management, enterprise computing, managed services, business service
management solutions, training, storage and data center planning and development
and staff augmentation solutions.  The Company’s client base is comprised
of departments of federal, state and local governments in the United States and
Canada, schools and commercial businesses throughout the United States and
Canada.





We have
divided our operating activity into two operating segments for reporting
purposes: EIS and EGS. EIS consists of the Company’s historical business, which
we refer to as the Systems Division, and the business service management
solutions offered by the ITSM practice. EGS is the Company’s enterprise
applications services solutions and training business including its ERP and
Application Development practice and its Business Analysis and Quality Assurance
Practice.


18


Consolidated
Statements of Income for the Three Months Ended November 30, 2009 compared with
the Three Months Ended November 30, 2008.





EMTEC,
INC.


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands)


Three
      Months Ended November 30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  Change
                                  
                                  
                                  %RevenuesProcurement
      services
                                  
                                  $
                                  59,382
                                  
                                  
                                  $
                                  56,359
                                  
                                  
                                  $
                                  3,023
                                  
                                  
                                  
                                  5.4
                                  %Service
      and consulting
                                  
                                  
                                  14,195
                                  
                                  
                                  
                                  13,660
                                  
                                  
                                  
                                  535
                                  
                                  
                                  
                                  3.9
                                  %Total Revenues
                                  
                                  
                                  73,577
                                  
                                  
                                  
                                  70,019
                                  
                                  
                                  
                                  3,558
                                  
                                  
                                  
                                  5.1
                                  %Cost of SalesCost
      of procurement services
                                  
                                  
                                  53,173
                                  
                                  
                                  
                                  50,392
                                  
                                  
                                  
                                  2,781
                                  
                                  
                                  
                                  5.5
                                  %Service
      and consulting
                                  
                                  
                                  9,860
                                  
                                  
                                  
                                  10,833
                                  
                                  
                                  
                                  (973
                                  )
                                  
                                  
                                  (9.0
                                  )%Total Cost of Sales
                                  
                                  
                                  63,033
                                  
                                  
                                  
                                  61,225
                                  
                                  
                                  
                                  1,808
                                  
                                  
                                  
                                  3.0
                                  %Gross ProfitProcurement
      services
                                  
                                  
                                  6,209
                                  
                                  
                                  
                                  5,967
                                  
                                  
                                  
                                  242
                                  
                                  
                                  
                                  4.1
                                  %Procurement
      services %
                                  
                                  
                                  10.5
                                  %
                                  
                                  
                                  10.6
                                  %Service
      and consulting
                                  
                                  
                                  4,335
                                  
                                  
                                  
                                  2,827
                                  
                                  
                                  
                                  1,508
                                  
                                  
                                  
                                  53.4
                                  %Service
      and consulting %
                                  
                                  
                                  30.5
                                  %
                                  
                                  
                                  20.7
                                  %Total Gross Profit
                                  
                                  
                                  10,544
                                  
                                  
                                  
                                  8,794
                                  
                                  
                                  
                                  1,750
                                  
                                  
                                  
                                  19.9
                                  %Total Gross Profit %
                                  
                                  
                                  14.3
                                  %
                                  
                                  
                                  12.6
                                  %Operating
      expenses:Selling,
      general, and administrative expenses
                                  
                                  
                                  7,278
                                  
                                  
                                  
                                  6,178
                                  
                                  
                                  
                                  1,100
                                  
                                  
                                  
                                  17.8
                                  %Rent
      expense – related party
                                  
                                  
                                  154
                                  
                                  
                                  
                                  152
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  1.0
                                  %Depreciation
      and amortization
                                  
                                  
                                  596
                                  
                                  
                                  
                                  534
                                  
                                  
                                  
                                  62
                                  
                                  
                                  
                                  11.6
                                  %Total
      operating expenses
                                  
                                  
                                  8,028
                                  
                                  
                                  
                                  6,864
                                  
                                  
                                  
                                  1,164
                                  
                                  
                                  
                                  17.0
                                  %Percent
      of revenues
                                  
                                  
                                  10.9
                                  %
                                  
                                  
                                  9.8
                                  %Operating
      income
                                  
                                  
                                  2,516
                                  
                                  
                                  
                                  1,930
                                  
                                  
                                  
                                  586
                                  
                                  
                                  
                                  30.4
                                  %Percent
      of revenues
                                  
                                  
                                  3.4
                                  %
                                  
                                  
                                  2.8
                                  %Other
      expense (income):Interest
      income – other
                                  
                                  
                                  (11
                                  )
                                  
                                  
                                  (5
                                  )
                                  
                                  
                                  (6
                                  )
                                  
                                  
                                  124.4
                                  %Interest
      expense
                                  
                                  
                                  145
                                  
                                  
                                  
                                  254
                                  
                                  
                                  
                                  (109
                                  )
                                  
                                  
                                  (42.9
                                  )%Other
                                  
                                  
                                  (8
                                  )
                                  
                                  
                                  4
                                  
                                  
                                  
                                  (12
                                  )
                                  
                                  
                                  (292.1
                                  )%Income
      before income taxes
                                  
                                  
                                  2,390
                                  
                                  
                                  
                                  1,676
                                  
                                  
                                  
                                  714
                                  
                                  
                                  
                                  42.6
                                  %Provision
      for income taxes
                                  
                                  
                                  983
                                  
                                  
                                  
                                  670
                                  
                                  
                                  
                                  313
                                  
                                  
                                  
                                  46.6
                                  %Net
      income
                                  
                                  $
                                  1,407
                                  
                                  
                                  $
                                  1,006
                                  
                                  
                                  $
                                  401
                                  
                                  
                                  
                                  39.9
                                  %Percent
      of revenues
                                  
                                  
                                  1.9
                                  %
                                  
                                  
                                  1.4
                                  %




Consolidated
Results of Operations Overview




For the
three months ended November 30, 2009 compared with the three months ended
November 30, 2008, total gross profit increased 19.9% from $8.8 million to $10.5
million; overall gross margin percentage rose to 14.3% from 12.6%; services and
consulting gross profit increased 53.3% from $2.8 million to $4.3 million;
services and consulting gross margin percentage rose to 30.5% from 20.7%;
operating income increased to $2.5 million from $1.9 million, a growth of 30.4%,
and earnings per share increased to $0.09 from $0.07, a growth of
28.6%.


19





Management
examines numerous measures when analyzing the results of our
operations.  Our objective is to grow the overall revenues of the
Company while improving our gross margins and operating margins.  We
consistently analyze our adjusted earnings before interest, taxes, depreciation
and amortization (“Adjusted EBITDA”) and our earnings per share as we feel these
measures appropriately reflect the performance of the Company.  We
look at our segment performance for improvement in these measures as well as
other operating metrics, improvements in our balance sheet and return on
invested capital.  Adjusted EBITDA is a non-GAAP financial measure
which may not be comparable to similarly titled measures reported by other
companies and may be considered in addition to, but not as a substitute for or
preferable to, other information prepared in accordance with GAAP.  We
may provide additional information on the Company’s Adjusted EBITDA in press
releases which will be furnished to the Securities Exchange Commission on Form
8-K.





We
currently categorize our revenues and costs of sales into “Procurement Services”
and “Services and Consulting.”  We have made the categorizations in
order to analyze our growth in consulting and other services as a percentage of
overall revenues.  We have divided our business into two
segments.  EIS provides a broad range of IT infrastructure services
for our clients.  These services are focused on improving the value IT
assets provide to an organization, and to reduce the costs of these
assets.  EGS was formed to provide IT application consulting and other
services.  These services typically include business process
improvement through the use of technology.  Our consultants are
skilled in a wide array of technologies in this segment.





We
discuss the results of each segment below.


20




Results
of Operations -EIS




The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
the three months ended November 30, 2009 and 2008.




EIS


STATEMENTS
OF INCOME


(In
thousands)


Three
      Months Ended November 30,2009
                                
                                
                                2008
                                
                                
                                Change
                                
                                
                                %RevenuesProcurement
      services
                                
                                $
                                59,382
                                
                                
                                $
                                56,359
                                
                                
                                $
                                3,023
                                
                                
                                
                                5.4
                                %Service
      and consulting
                                
                                
                                6,447
                                
                                
                                
                                2,947
                                
                                
                                
                                3,500
                                
                                
                                
                                118.8
                                %Total Revenues
                                
                                
                                65,829
                                
                                
                                
                                59,306
                                
                                
                                
                                6,523
                                
                                
                                
                                11.0
                                %Cost of SalesCost
      of procurement services
                                
                                
                                53,173
                                
                                
                                
                                50,392
                                
                                
                                
                                2,781
                                
                                
                                
                                5.5
                                %Service
      and consulting
                                
                                
                                3,484
                                
                                
                                
                                2,227
                                
                                
                                
                                1,257
                                
                                
                                
                                56.4
                                %Total Cost of Sales
                                
                                
                                56,657
                                
                                
                                
                                52,619
                                
                                
                                
                                4,038
                                
                                
                                
                                7.7
                                %Gross ProfitProcurement
      services
                                
                                
                                6,209
                                
                                
                                
                                5,967
                                
                                
                                
                                242
                                
                                
                                
                                4.1
                                %Procurement
      services %
                                
                                
                                10.5
                                %
                                
                                
                                10.6
                                %Service
      and consulting
                                
                                
                                2,963
                                
                                
                                
                                720
                                
                                
                                
                                2,243
                                
                                
                                
                                311.5
                                %Service
      and consulting %
                                
                                
                                46.0
                                %
                                
                                
                                24.4
                                %Total Gross Profit
                                
                                
                                9,172
                                
                                
                                
                                6,687
                                
                                
                                
                                2,485
                                
                                
                                
                                37.2
                                %Total Gross Profit %
                                
                                
                                13.9
                                %
                                
                                
                                11.3
                                %Operating
      expenses:Selling,
      general, and administrative expenses
                                
                                
                                6,295
                                
                                
                                
                                5,070
                                
                                
                                
                                1,225
                                
                                
                                
                                24.2
                                %Rent
      expense – related party
                                
                                
                                101
                                
                                
                                
                                92
                                
                                
                                
                                9
                                
                                
                                
                                9.8
                                %Depreciation
      and amortization
                                
                                
                                369
                                
                                
                                
                                324
                                
                                
                                
                                45
                                
                                
                                
                                13.9
                                %Total
      operating expenses
                                
                                
                                6,765
                                
                                
                                
                                5,486
                                
                                
                                
                                1,279
                                
                                
                                
                                23.3
                                %Percent
      of revenues
                                
                                
                                10.3
                                %
                                
                                
                                9.3
                                %Operating
      income
                                
                                
                                2,407
                                
                                
                                
                                1,201
                                
                                
                                
                                1,206
                                
                                
                                
                                100.4
                                %Percent
      of revenues
                                
                                
                                3.7
                                %
                                
                                
                                2.0
                                %Other
      expense (income):Interest
      income – other
                                
                                
                                (11
                                )
                                
                                
                                (3
                                )
                                
                                
                                (8
                                )
                                
                                
                                266.7
                                %Interest
      expense
                                
                                
                                87
                                
                                
                                
                                138
                                
                                
                                
                                (51
                                )
                                
                                
                                -37.0
                                %Other
                                
                                
                                (6
                                )
                                
                                
                                -
                                
                                
                                
                                (6
                                )
                                
                                
                                N/AIncome
      before income taxes
                                
                                
                                2,337
                                
                                
                                
                                1,066
                                
                                
                                
                                1,271
                                
                                
                                
                                119.2
                                %Provision
      (benefit) for income taxes
                                
                                
                                957
                                
                                
                                
                                416
                                
                                
                                
                                541
                                
                                
                                
                                130.1
                                %Net
      income
                                
                                $
                                1,380
                                
                                
                                $
                                650
                                
                                
                                $
                                730
                                
                                
                                
                                112.3
                                %Percent
      of revenues
                                
                                
                                2.1
                                %
                                
                                
                                1.1
                                %


21




Comparison
of the Three Months Ended November 30, 2009 and 2008 - EIS




Revenues -
EIS




EIS
division’s total revenues increased $6.5 million, or 11.0%, to $65.8 million for
the three months ended November 30, 2009, compared to $59.3 million for the
three months ended November 30, 2008.  EIS division’s total revenue
includes revenues from the Company’s historical business, which we refer to as
the Systems Division, and KOAN-IT, which was acquired on February 12, 2009, and
includes the assets of EMS which were acquired on May 12,
2009.  KOAN-IT’s total revenues (including revenues derived from the
assets acquired from EMS) for the three months ended November 30, 2009 were $1.7
million. Without these acquisitions Systems Division’s revenue increased $4.8
million, or 8.1%, to $64.1 million for the three months ended November 30, 2009,
compared to $59.3 million for the three months ended November 30,
2008.




Procurement
services revenue increased $3.0 million, or 5.4%, to $59.4 million for the three
months ended November 30, 2009, compared to $56.4 million for the three months
ended November 30, 2008. This increase is primarily attributable to an increases
in our education business attributable to various IT projects for school
districts in Florida and Georgia and increase in various departments of the U.S.
government, which was partially offset by a decrease in our clients’ IT
spending, particularly in commercial business and various governmental agencies
in the State of New Jersey.  We believe that this decrease in
commercial business can be attributed to the current economic
downturn.




Services
and consulting revenue for the Systems Division increased $3.5 million, or
118.8%, to $6.4 million for the three months ended November 30, 2009, compared
to $2.9 million for the three months ended November 30, 2008. This increase is
mainly attributable to various IT projects for school districts in Florida and
Georgia and various departments of the U.S. government during the three months
ended November 30, 2009.




Our EIS
division’s revenues, by client type, are comprised of the following (in
thousands):





For
      the Three Months EndedNovember 30, 2009
                    
                    
                    November 30, 2008Departments
      of the U.S. Government
                    
                    $
                    41,400
                    
                    
                    
                    62.9
                    %
                    
                    $
                    40,195
                    
                    
                    
                    67.8
                    %Canada
      Government Agencies
                    
                    
                    349
                    
                    
                    
                    0.5
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %State
      and Local Governments
                    
                    
                    1,057
                    
                    
                    
                    1.6
                    %
                    
                    
                    2,996
                    
                    
                    
                    5.1
                    %Commercial
      Companies
                    
                    
                    5,851
                    
                    
                    
                    8.9
                    %
                    
                    
                    6,046
                    
                    
                    
                    10.2
                    %Education
      and other
                    
                    
                    17,172
                    
                    
                    
                    26.1
                    %
                    
                    
                    10,069
                    
                    
                    
                    17.0
                    %Total
      Revenues
                    
                    $
                    65,829
                    
                    
                    
                    100.0
                    %
                    
                    $
                    59,306
                    
                    
                    
                    100.0
                    %





During
the three months ended November 30, 2009 and 2008, U.S. governmental
department and agency related revenues represented approximately 62.9% and 67.8%
of total EIS division’s revenues, respectively. These clients include the
Department of Defense, Department of Justice, Department of Homeland Security,
Department of Health and Human Services, Department of Agriculture and
Department of Commerce. Revenues from various civilian and military U.S.
governmental departments and agencies increased by approximately $1.2 million
during the three months ended November 30, 2009 compared with the three months
ended November 30, 2008. This increase is primarily attributable to retooling of
our federal sales force during fiscal 2009 to focus more on
services.




The state
and local government business remains uncertain due to the tight budgetary
pressures within governmental agencies in the State of New Jersey. We expect
that until tax revenues increase in state and local governments we will not see
a large amount of growth from these clients.




Revenues
from commercial clients decreased by approximately $195,000 during the three
months ended November 30, 2009 compared with the three months ended November 30,
2008. This decrease is mainly due to the current economic downturn that caused
reductions in technology and discretionary spending by our commercial
clients.




22




During
the three months ended November 30, 2009, revenues from our education business
increased by approximately $7.1 million compared with the three months ended
November 30, 2008.  This increase is attributable to the increase in
various IT projects for school districts in Florida and Georgia during the three
months ended November 30, 2009.  During our fiscal years 2008 and
2009, we took steps to increase our business with our existing customers by
outsourcing more of their infrastructure managed services needs and to increase
our penetration with additional clients in this market.  These steps
increased the amount of long-term recurring revenue we have with these
clients.





Gross Profit -
EIS




Aggregate
gross profit for our EIS division increased $2.5 million, or 37.2%, to $9.2
million for the three months ended November 30, 2009 as compared to $6.7 million
for the three months ended November 30, 2008. This increase was mainly
attributable to an increase in the gross profit derived from our services and
consulting revenues of $2.2 million. This services gross profit increase
includes an increase of $509,000 from KOAN-IT, which was acquired on
February 12, 2009, and the assets of EMS, which were acquired on May 12,
2009.




Measured
as a percentage of revenues, our gross profit margin for our EIS division
increased to 13.9% of our EIS division’s revenues for the three months ended
November 30, 2009 from 11.3% for the three months ended November 30, 2008. This
increase is primarily a result of an increase in our service and consulting
gross profit margin attributable to higher utilization of our engineering
resources and increase in our services and consulting revenue associated with IT
projects for school districts in Florida, Georgia and various departments of the
U.S. government during the three months ended November 30, 2009.





Selling, General and
Administrative Expenses -EIS




Selling,
general and administrative expenses for our EIS division increased by $1.2
million, or 24.2% to $6.3 million for the three months ended November 30, 2009,
compared to $5.1 million for the three months ended November 30,
2008.





EIS
division’s selling, general and administrative expenses includes selling,
general and administrative expenses from Systems Division and KOAN-IT which was
acquired on February 12, 2009 and the assets of EMS, which were acquired on May
12, 2009.  KOAN-IT’s selling, general and administrative expenses
(including selling, general and administrative expenses related to the assets
acquired from EMS) for the three months ended November 30, 2009 were $423,000.
Without these acquisitions, Systems Division’s selling, general and
administrative expenses increased by $802,000, or 15.3% to $5.9 million for the
three months ended November 30, 2009, compared to $5.1 million for the three
months ended November 30, 2008. Additionally, during the quarter ended November
30, 2008, the Company recovered $270,000 of previously expensed professional
fees associated with defending the Company’s tax positions during the IRS’ 2003
and 2004 tax audits and appeals process, based on an indemnification right
associated with the April 2004 Westwood merger. Without this one-time recovery
of $270,000 recorded as a reduction of selling, general and administrative
expenses in three months ended November 30, 2008, Systems Division’s selling,
general and administrative expenses would have increased by $532,000, or 10.5%.
This increase is mainly due to increase of $351,000 in bonus expense related to
positive performance of the EIS division. The remaining increase of
approximately $181,000 is mainly due to expense categories such as new hires,
recruiting, marketing, professional fees and merger and acquisition related
costs.




23




Rent Expense-Related Party -
EIS





We occupy
approximately 42,000 square feet of office and warehouse space in Springfield,
New Jersey. This space is leased from a limited liability company owned by a
certain director of the Company and his related family members. The original
lease term was through April 2009 with monthly base rent of $15,000. We
exercised the option to extend the lease for an additional five year term
through April 2014, with monthly base rent of $18,000. During the three months
ended November 30, 2009 and 2008, we recorded $52,000 and $45,000 in expense
under this lease, respectively.





We occupy
approximately 26,000 square feet of office and warehouse space in a 70,000
square foot building in Suwannee, GA.  This space is leased from a
limited liability company in which a certain officer of our company is a passive
investor with an approximately 10% equity interest. The lease term is for 5
years with monthly base rent of $16,000.  During the three months
ended November 30, 2009 and 2008, we recorded expense under this lease totaling
$50,000 and $47,000, respectively.





Management
believes the facilities noted above are being leased at rates consistent
with the market rates.





Depreciation and
Amortization - EIS





Depreciation
and amortization expense for our EIS division increased by 13.9%, or $45,000, to
$369,000 for the three months ended November 30, 2009, compared to $324,000 for
the three months ended November 30, 2008.  EIS division’s depreciation
and amortization expense includes depreciation and amortization expense from
Systems Division and KOAN-IT, which was acquired on February 12, 2009, and the
assets of EMS which were acquired on May 12, 2009.  KOAN-IT’s
depreciation and amortization expense (including depreciation and amortization
expense related to the assets acquired from EMS) for the three months ended
November 30, 2009 was $69,000.  Without these acquisitions, Systems
Division’s depreciation and amortization expense decreased by
$24,000.





As of
November 30, 2009, intangible assets of the EIS division consisted of: the
estimated value ascribed to customer relationships of $9.9 million less
accumulated amortization of $2.7 million; the estimated value ascribed to
non-competes of $29,000 less accumulated amortization of $5,000; and the
estimated value ascribed to trademarks of $173,000 less accumulated amortization
of $28,000.  As of August 31, 2009 intangible assets of the EIS division
consisted of: the estimated value ascribed to customer relationships of $9.9
million less accumulated amortization of $2.5 million; the estimated value
ascribed to non-competes of $28,000 less accumulated amortization of $3,000; and
the estimated value ascribed to trademarks of $169,000 less accumulated
amortization of $19,000. The assets ascribed to customer relationships are being
amortized on a straight-line basis over 6 to 15 years and non-compete covenants
and trademarks are being amortized on a straight-line basis over 5 years. 
Amortization expense for the EIS division was $208,000, and $145,000 for the
three months ended November 30, 2009 and 2008, respectively.


24


Operating Income -
EIS





Operating
income for our EIS division for the three months ended November 30, 2009
increased by 100.4%, or $1.2 million, to $2.4 million, compared to operating
income of $1.2 million for the three months ended November 30, 2008. EIS
division’s operating income includes operating income from Systems Division and
KOAN-IT, which was acquired on February 12, 2009, and the assets of EMS, which
were acquired on May 12, 2009.  KOAN-IT’s operating income (including
operating income attributable to the assets acquired from EMS) for the three
months ended November 30, 2009 was $40,000.  Without these
acquisitions Systems Division’s operating income would have increased $1.2
million, or 97.1%, to $2.4 million for the three months ended November 30, 2009,
compared to $1.2 million for the three months ended November 30, 2008. This
increase in operating income is mainly attributable to increased services and
consulting revenue as discussed in the Total Revenue and Gross Profit sections
above.





Interest expense -
EIS





Interest
expense for the EIS division decreased by 37.0%, or $51,000, to $87,000 for the
three months ended November 30, 2009, compared to $138,000 for the three months
ended November 30, 2008.  We recorded approximately $20,000 in unused
floor plan fees as interest expense during the three months ended November 30,
2009. Without this unused floor plan fee accrual under the credit facility with
the Lender, our interest expense would have been decreased by
$71,000.  This is primarily attributable to lower balances on various
notes payable and a lower average interest rate charged on the line of credit,
which was attributable to a decrease in the prime rate during this period. The
average interest rate charged on the line of credit by the Lender was
approximately 3.6% and 4.0% for three months ended November 30, 2009 and 2008,
respectively.





Provision for income taxes
-EIS





We
recorded income tax expense of $957,000 for the three months ended November 30,
2009 as compared to $416,000 for the three months ended November 30, 2008. The
effective tax rate was 41.0% for the three months ended November 30, 2009 as
compared to 39.1% for the three months ended November 30, 2008. The lower
effective tax rate in the three months ended November 30, 2008 was
primarily the result of over accruals of interest expense in prior periods
that resulted in recognition of offsets to income tax expense for the three
months ended November 30, 2008 due to net tax settlements during the
period.


25




Results
of Operations –EGS




Most of
the clients EGS serves are commercial clients.  While our consultants
are typically working on long- term projects, we believe that the general
economic slowdown has impacted our ability to sell services the way these
businesses had typically operated before the acquisitions.  In
addition, it has been our intention to convert these businesses to a new sales
model and cross-sell their services across our organization.  During
2009, we took steps to add additional sales resources in the U.S., to change our
training methodologies of our consultants and to shift recruiting resources to
an onshore/offshore model.  We have also defined four practices within
EGS that we are starting to sell as full service practice offerings using
projects as opposed to typical staff augmentation.





The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
the three months ended November 30, 2009 and 2008.


EGS
 STATEMENTS
OF INCOME
 (In
thousands)
 Three
      Months Ended November 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    Change
                                    
                                    
                                    %RevenuesService
      and consulting
                                    
                                    $
                                    7,748
                                    
                                    
                                    $
                                    10,713
                                    
                                    
                                    $
                                    (2,965
                                    )
                                    
                                    
                                    -27.7
                                    %Total Revenues
                                    
                                    
                                    7,748
                                    
                                    
                                    
                                    10,713
                                    
                                    
                                    
                                    (2,965
                                    )
                                    
                                    
                                    -27.7
                                    %Cost of SalesService
      and consulting
                                    
                                    
                                    6,376
                                    
                                    
                                    
                                    8,606
                                    
                                    
                                    
                                    (2,230
                                    )
                                    
                                    
                                    -25.9
                                    %Total Cost of Sales
                                    
                                    
                                    6,376
                                    
                                    
                                    
                                    8,606
                                    
                                    
                                    
                                    (2,230
                                    )
                                    
                                    
                                    -25.9
                                    %Gross ProfitService
      and consulting
                                    
                                    
                                    1,372
                                    
                                    
                                    
                                    2,107
                                    
                                    
                                    
                                    (735
                                    )
                                    
                                    
                                    -34.9
                                    %Service
      and consulting %
                                    
                                    
                                    17.7
                                    %
                                    
                                    
                                    19.7
                                    %Total Gross Profit
                                    
                                    
                                    1,372
                                    
                                    
                                    
                                    2,107
                                    
                                    
                                    
                                    (735
                                    )
                                    
                                    
                                    -34.9
                                    %Total Gross Profit %
                                    
                                    
                                    17.7
                                    %
                                    
                                    
                                    19.7
                                    %Operating
      expenses:Selling,
      general, and administrative expenses
                                    
                                    
                                    983
                                    
                                    
                                    
                                    1,108
                                    
                                    
                                    
                                    (125
                                    )
                                    
                                    
                                    -11.3
                                    %Rent
      expense – related party
                                    
                                    
                                    53
                                    
                                    
                                    
                                    60
                                    
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    -11.7
                                    %Depreciation
      and amortization
                                    
                                    
                                    227
                                    
                                    
                                    
                                    210
                                    
                                    
                                    
                                    17
                                    
                                    
                                    
                                    8.1
                                    %Total
      operating expenses
                                    
                                    
                                    1,263
                                    
                                    
                                    
                                    1,378
                                    
                                    
                                    
                                    (115
                                    )
                                    
                                    
                                    -8.3
                                    %Percent
      of revenues
                                    
                                    
                                    16.3
                                    %
                                    
                                    
                                    12.9
                                    %Operating
      income
                                    
                                    
                                    109
                                    
                                    
                                    
                                    729
                                    
                                    
                                    
                                    (620
                                    )
                                    
                                    
                                    -85.0
                                    %Percent
      of revenues
                                    
                                    
                                    1.4
                                    %
                                    
                                    
                                    6.8
                                    %Other
      expense (income):Interest
      income – other
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2
                                    )
                                    
                                    
                                    2
                                    
                                    
                                    
                                    -100.0
                                    %Interest
      expense
                                    
                                    
                                    58
                                    
                                    
                                    
                                    116
                                    
                                    
                                    
                                    (58
                                    )
                                    
                                    
                                    -50.0
                                    %Other
                                    
                                    
                                    (2
                                    )
                                    
                                    
                                    4
                                    
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    -146.2
                                    %Income
      before income taxes
                                    
                                    
                                    53
                                    
                                    
                                    
                                    611
                                    
                                    
                                    
                                    (558
                                    )
                                    
                                    
                                    -91.3
                                    %Provision
      (benefit) for income taxes
                                    
                                    
                                    26
                                    
                                    
                                    
                                    254
                                    
                                    
                                    
                                    (228
                                    )
                                    
                                    
                                    -89.8
                                    %Net
      income
                                    
                                    $
                                    27
                                    
                                    
                                    $
                                    357
                                    
                                    
                                    $
                                    (330
                                    )
                                    
                                    
                                    -92.4
                                    %Percent
      of revenues
                                    
                                    
                                    0.3
                                    %
                                    
                                    
                                    3.3
                                    %


26


Comparison
of the Three Months Ended November 30, 2009 and 2008 - EGS




Revenues -
EGS




EGS
revenue consists of its ERP and Application Development practice and its
Business Analysis and Quality Assurance practice.  EGS division’s
total revenues decreased $3.0 million, or 27.7%, to $7.7 million for the three
months ended November 30, 2009, compared to $10.7 million for the three months
ended November 30, 2008. This decline was caused by a 22.1% decrease in hours
billed and a 7.2% decrease in the average hourly billing rate during the three
months ended November 30, 2009 compared with the corresponding period in 2008.
The decrease in billable hours is mainly due to decreases in our Business
Analysis and Quality Assurance practices. Most of the clients EGS serves are
commercial clients and we believe that this decrease in commercial business is
primarily attributed to the current economic downturn.




Gross
Profit - EGS




EGS
division’s gross profit decreased $736,000, or 34.9%, to $1.4 million for the
three months ended November 30, 2009, compared to $2.1 million for the three
months ended November 30, 2008. We believe this decrease is mainly due to the
economic downturn as discussed in the Revenue section above.





Measured
as percentages of revenues, our gross profit margin for the EGS division
decreased to 17.7% of our EGS division’s revenues for the three months ended
November 30, 2009 from 19.7% for the three months ended November 30, 2008. We
believe this decrease is mainly due to the decreased billing rate per hour, as a
result of pricing pressure from our commercial clients.





Selling, General and
Administrative Expenses - EGS





EGS
division’s selling, general and administrative expenses decreased $125,000, or
11.3%, to $983,000 for the three months ended November 30, 2009, compared to
$1.1 million for the three months ended November 30, 2008. This decrease in
selling, general and administrative expenses is primarily attributable to the
reduction of various expense categories including commissions due to lower gross
profits, travel, lodging, recruiting, business insurance, rent for guesthouses,
professional and consulting fees and training and others. Selling, general and
administrative expenses for the three months ended November 30, 2009 includes
$90,000 in retention bonuses paid to business development
personnel.





Rent Expense-Related Party -
EGS




We occupy
approximately 20,000 square feet of office space in Fremont, CA.  This
space is leased from the spouse of the President of eBAS/Aveeva.  The
lease term is for 3 years with monthly base rent of $20,000.  In March
2009, we subleased a portion of the building for a monthly rent of $3,000 on
month-to-month basis to reduce costs. During the three months ended November 30,
2009 and 2008, we recorded $53,000 and $60,000 in expense under this
lease.




Management
believes the lease noted above is being leased at a rate consistent with the
market rate.




27




Depreciation and
Amortization - EGS





EGS
division’s depreciation and amortization expense increased $17,000, or 8.1%, to
$227,000 for the three months ended November 30, 2009, compared to $210,000 for
the three months ended November 30, 2008. The increase is due to depreciation
expense associated with computer equipment we purchased for our training
facility during three months ended August 31, 2009.





As of
November 30, 2009, intangible assets of the EGS division consisted of the
estimated value ascribed to customer relationships of $4.2 million less
accumulated amortization of $1.0 million, and the estimated value ascribed to
non-competes of $370,000 less accumulated amortization of $104,000. As of
August 31, 2009, intangible assets of the EGS division consisted of the
estimated value ascribed to customer relationships of $4.2 million less
accumulated amortization of $820,000, and the estimated value ascribed to
non-competes of $370,000 less accumulated amortization of $86,000. The assets
ascribed to customer relationships are being amortized on a straight-line basis
over 5 to 9 years and noncompete covenants and trademarks are being amortized on
a straight-line basis over 5 years. Amortization expense for the EGS division
was $200,000, and $200,000 for the three months ended November 30, 2009 and
2008, respectively.




Operating income
-EGS





Operating
income for our EGS division for the three months ended November 30, 2009
decreased by 85.2%, or $621,000, to $108,000, compared to operating income of
$729,000 for the three months ended November 30, 2008. This decrease in
operating income is mainly due to a decrease in services and consulting revenue
as discussed in the Revenue and Gross Profit sections above. Additionally,
during the three months ended November 30, 2009, we paid $90,000 in retention
bonuses to business development personnel, which decreased our operating
income.




Interest expense
-EGS





Interest
expense for our EGS division for the three months ended November 30, 2009
decreased by 50.0%, or $58,000, to $58,000, compared to interest expense of
$116,000 for the three months ended November 30, 2008. This is primarily
attributable to lower total interest on an 8% subordinated note payable, which
was paid in full in September 2009 and a lower average interest rate charged on
the line of credit attributable to a decrease in the prime rate during this
period. The average interest rate charged on the line of credit by the Lender
was approximately 3.6% and 4.0% for three months ended November 30, 2009 and
2008, respectively.





Provision for income taxes
-EGS




We
recorded an income tax expense of $25,000 for the three months ended November
30, 2009 as compared to $254,000 for the three months ended November 30, 2008.
The effective tax rate was 48.1% for the three months ended November 30, 2009 as
compared to 41.6% for the three months ended November 30, 2008. The higher
effective tax rate in the three months ended November 30, 2009 was
primarily the result of  the effect of permanently non-deductible expenses
on a smaller pre-tax income base.




28




Recently
Issued Accounting Standards




Noncontrolling
Interests in Consolidated Financial Statements





We
adopted the new accounting and presentation standards for noncontrolling
interests in accordance with ASC 810 “Consolidation” effective September 1,
2009.  This statement establishes accounting and reporting standards
for the noncontrolling interests (minority interests) in a subsidiary and for
the deconsolidation of a subsidiary. Effective September 1, 2009, noncontrolling
interests will be classified as equity in the Company’s financial statements and
income and comprehensive income attributed to the noncontrolling interests will
be included in the Company’s income and comprehensive income. The provisions of
this standard must be applied retrospectively upon adoption. The adoption of the
new accounting and presentation standards did not have any effect on our
financial statements since all of our existing subsidiaries are
wholly-owned.





Business
Combinations





We
adopted the new accounting standard for business combinations in accordance with
ASC 805 “Business Combinations.”  The new standard establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures the assets acquired, liabilities assumed and any
noncontrolling interest in the acquiree. The new provisions of ASC 805 are
effective for our business combinations occurring on or after September 1, 2009.
There was
no financial statement impact upon adoption of the provisions of ASC 805, but it
may materially affect our accounting for future
acquisitions.





Liquidity
and Capital Resources




Cash at
November 30, 2009 of $4.2 million represented an increase of $2.5 million from
cash of $1.7 million at August 31, 2009. We are a net borrower; consequently, we
believe our cash balance must be viewed along with the available balance on our
line of credit.  Borrowings under our line of credit at November 30,
2009 increased to $14.9 million from $9.0 million at August 31, 2009. As of
November 30, 2009, our net working capital (defined as the excess of our current
assets over our current liabilities) was $1.9 million higher than it was at
August 31 2009. The increase in working capital is primarily attributable to net
income of $1.4 million for the three months ended November 30,
2009.





The
Company, Emtec NJ, Emtec LLC, Emtec Federal, Emtec Global, Luceo, eBAS and
Aveeva (collectively, the “Borrower”), are parties to a Loan and Security
Agreement with De Lage Landen Financial Services, Inc. (the “Lender”) pursuant
to which the Lender provides the Borrower with a revolving credit loan and floor
plan loan (the “Credit Facility”) until December 7, 2010. The Credit Facility
provides for aggregate borrowings of the lesser of $32.0 million or 85% of
Borrower’s eligible accounts receivable, plus 100% of unsold inventory financed
by the Lender. The floor plan loan portion of the Credit Facility is for the
purchase of inventory from approved vendors and for other business purposes. The
Credit Facility subjects the Borrower to mandatory repayments upon the
occurrence of certain events as set forth in the Credit Facility. For detailed
information on terms of the Credit Facility, refer to footnote#5 – Line of
Credit of the Condensed Consolidated Financial Statements in this Quarterly
Report on the Form 10-Q for the three months ended November 30, 2009, or the
annual financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2009.





29




The
Company had balances of $14.9 million and $9.0 million outstanding under the
revolving portion of the Credit Facility, and balances of $9.5 million and $5.4
million (included in the Company’s accounts payable) outstanding plus $430,000
and $321,000 in open approvals under the floor plan portion of the Credit
Facility at November 30, 2009 and August 31, 2009, respectively. Net
availability was $9.8 million and $11.9 million under the revolving portion of
the Credit Facility, and additionally $2.0 million and $5.4 million was
available under the floor plan portion of the Credit Facility as of November 30,
2009 and August 31, 2009, respectively.





As of
November 30, 2009, the Company determined that it was in compliance with its
financial covenants under the Credit Facility.





As of
November 30, 2009, we had open term credit facilities with our primary trade
vendors, including aggregators and manufacturers, of approximately $41.0 million
with outstanding principal of approximately $19.3 million. Under these lines, we
are typically obligated to pay each invoice within 30-45 days from the date of
such invoice. These credit lines could be reduced or eliminated without notice
and this action could have a material adverse affect on our business, result of
operations and financial condition.




Capital
expenditures of approximately $129,000 during the three months ended November
30, 2009 related primarily to the purchase of computer equipment for internal
use, purchase of automobile for our service technicians and software costs to
upgrade various modules of our accounting systems.





We
anticipate that our primary sources of liquidity in fiscal year 2010 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.




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 SEC
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.




30




Revenue
Recognition




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




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 Staff Accounting
Bulletin 104 (“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 clients. The client is invoiced at the date of
      revenue recognition when all of the criteria have been met. As of November
      30, 2009 and 2008, we did not have any bill & hold
      transactions.




We have
experienced minimal client returns.  Since some 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.




Revenue
from the sale of warranties and support service contracts is recognized on a
straight-line basis over the term of the contract.




We
recognize revenue from sale arrangements that contain both procurement revenue
and services and consulting revenue 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.




Revenues
from the sale of third party manufacturer warranties and 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 we do not expect
cancellations of any significance in the future.  As the Company is
not obligated to perform these services, we determined it is more appropriate to
recognize the net amount of the revenue and related payments as net revenue at
the time of sale.




31




Service
and consulting revenue includes time billings based upon billable hours charged
to clients, fixed price short-term projects, and hardware maintenance
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.





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 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




Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired companies.  In accordance with ASC 350
“Intangibles-Goodwill and Others”, 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 has set an
annual impairment testing date of June 1.  The impairment
determination is made at the reporting unit level and consists of two steps.
First, the Company determines the fair value of the reporting unit and compares
it to its carrying amount. Second, if the carrying amount of the reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with ASC 805 “Business Combinations.” The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill. The Company’s policy is to perform its annual impairment testing for
all reporting units as 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.




32




Intangible
assets at November 30, 2009 and August 31, 2009 consisted of the value ascribed
to customer relationships and noncompete covenants.  The assets
ascribed to customer relationships are being amortized on a straight-line basis
over 5 to 15 years and five years for noncompete
covenants.  Intangible assets are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may not
be recoverable in accordance with ASC 350 “Intangibles-Goodwill and
Others.”  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.





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 of the deferred tax assets will
not be realized.


33


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 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 November 30, 2009 was approximately $15.0
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 $150,000 annually.


34


Item
4T.       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 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of November
30, 2009.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
including the accumulation and communication of disclosures to the Company’s
Chief Executive Officer and Chief Financial Officer as appropriate to allow
timely decision regarding required disclosure, were effective to provide
reasonable assurance 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 SEC. 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 November 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


35


PART
II – OTHER INFORMATION




Item
1.   Legal Proceedings




During
December 2007, we received a subpoena issued by the GSA Office of Inspector
General,  apparently as part of an ongoing, industry-wide
investigation.  We produced documents and data in response to the subpoena
to the OIG during 2008.  In September 2009, we became aware that the
Company had been named along with several other prominent IT companies in a qui
tam lawsuit entitled Christopher Crennen, et al., v. Dell
Marketing, et al., filed in the United States District Court for the
District of Massachusetts alleging violations of the False Claims Act related to
the Company's obligations under the Buy American Act and the Trade Agreements
Act.  Qui tam lawsuits typically remain under seal (hence, usually unknown
to the defendant) for some time while the government decides whether or not to
intervene on behalf of a private qui tam plaintiff (known as a relator) and take
the lead in the litigation.  These lawsuits can involve significant
monetary damages and penalties and award bounties to private plaintiffs who
successfully bring the suits.  The lawsuit, which was previously under
seal, appears to have been the cause of the OIG subpoena.  Despite its
investigation, to date the government has declined to intervene in the lawsuit,
however we can provide no assurance that the government will not intervene in
this case or in any other qui tam suit against the Company in the
future.   The Company does not know whether the relators will pursue
the qui tam lawsuit independently.  We have filed a motion to dismiss the
lawsuit.  At this time, we are unable to predict the timing and
outcome of this matter.




The
Company is occasionally involved in various lawsuits, claims, and administrative
proceedings arising in the normal course of business.  Except as set
forth above, the Company believes that any liability or loss associated with
such matters, individually or in the aggregate, will not have a material adverse
effect on the Company’s financial condition or results of
operations.


36


Item
6.    Exhibits




Exhibit 10.1 –
Employment Agreement between the Company and Stephen C. Donnelly dated September
21, 2009.(1)




Exhibit 10.2 –
Employment Agreement between the Company and Sunil Misra dated November 6,
2009.(1)




Exhibit 10.3 –
Employment Agreement between the Company and Samir Bhatt dated December 1,
2009.




Exhibit 10.4 – Second
Amendment to Lease Agreement, dated as of May 1, 2009, between Westwood
Properties Holdings LLC and Emtec Federal, Inc., for Springfield New Jersey
facility.




Exhibit 31.1 - Rule
13a-14(a)/15d-14(a) Certification of Dinesh R. Desai, Principal Executive
Officer, of Emtec, Inc. datedJanuary 14, 2010.




Exhibit 31.2 - Rule
13a-14(a)/15d-14(a) Certification of Gregory P. Chandler, Principal Financial
Officer, of Emtec, Inc. dated January 14, 2010.




Exhibit 32.1 -
Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
Emtec, Inc. dated January 14, 2010.




Exhibit 32.2 -
Section 1350 Certificate of Gregory P. Chandler, Principal Financial Officer, of
Emtec, Inc. dated January 14, 2010.




(1)Previously filed as an
exhibit to Registrant’s Form 10-K dated August 31, 2009, filed on November 25,
2009 and incorporated herein by reference.







37


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.
      DESAIDinesh
      R. DesaiChairman
      and ChiefExecutive
      Officer(Principal
      Executive Officer)By:
                      /s/    GREGORY P.
      CHANDLERGregory
      P. ChandlerChief
      Financial Officer(Principal
      Financial
Officer)





Date:
January 14, 2010


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