UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549








FORM
10-Q





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





For the
quarterly period ended February 28, 2009





Commission
file number: 0-32789




EMTEC,
INC.


(Exact
name of registrant as specified in its charter)




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




As of April
13, 2009, there were outstanding 15,084,617 shares of the registrant’s common
stock.












EMTEC,
INC.




FORM
10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2009




Table of
Contents




PART
      I – FINANCIAL INFORMATIONItem
      1 - Financial StatementsCondensed
      Consolidated Balance Sheets
              
              
              1Condensed
      Consolidated Statements of Operations
              
              
              2Condensed
      Consolidated Statements of Cash Flows
              
              
              3Notes
      to Condensed Consolidated Financial Statements
              
              
              4Item
      2  - Management’s Discussion and Analysis of FinancialCondition and Results of Operations
              
              
              19Item
      3  - Quantitative and Qualitative Disclosures About Market
      Risk
              
              
              40Item
      4T - Controls and Procedures
              
              
              41PART
      II – OTHER INFORMATIONItem
      1 –   Legal Proceedings
              
              
              42Item
      1A – Risk Factors
              
              
              43Item
      4 – Submission of Matters to a Vote by Securities Holders
              
              
              44Item
      6 – Exhibits
              
              
              45SIGNATURES
              
              
              46









PART
I – FINANCIAL INFORMATION


Item
1.                                Financial
Statements




EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




February
      28,2009
              
              
              August 31,(Unaudited)
              
              
              2008AssetsCurrent
      AssetsCash
              
              $
              3,100,687
              
              
              $
              2,025,098Receivables:Trade,
      less allowance for doubtful accounts
              
              
              25,569,671
              
              
              
              32,178,967Others
              
              
              2,791,970
              
              
              
              2,285,542Inventories,
      net
              
              
              1,616,224
              
              
              
              659,994Prepaid
      expenses and other
              
              
              1,362,164
              
              
              
              1,006,686Deferred
      tax asset - current
              
              
              707,028
              
              
              
              900,028Total
      current assets
              
              
              35,147,744
              
              
              
              39,056,315Property
      and equipment, net
              
              
              1,089,508
              
              
              
              1,108,327Intangible
      assets, net
              
              
              11,856,976
              
              
              
              11,315,422Goodwill
              
              
              11,070,412
              
              
              
              10,697,516Deferred
      tax asset- long term
              
              
              104,083
              
              
              
              171,985Other
      assets
              
              
              150,413
              
              
              
              124,475Total
      assets
              
              $
              59,419,136
              
              
              $
              62,474,040Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesLine
      of credit
              
              $
              11,985,200
              
              
              $
              8,583,552Accounts
      payable
              
              
              17,537,911
              
              
              
              24,824,365Current
      portion of long term debt - related party
              
              
              3,319,018
              
              
              
              2,810,937Income
      taxes payable
              
              
              302,666
              
              
              
              315,111Accrued
      liabilities
              
              
              5,720,347
              
              
              
              5,418,625Due
      to former stockholders
              
              
              -
              
              
              
              631,415Customer
      deposits
              
              
              -
              
              
              
              500Deferred
      revenue
              
              
              1,837,076
              
              
              
              1,323,177Total
      current liabilities
              
              
              40,702,218
              
              
              
              43,907,682Deferred
      tax liability
              
              
              2,569,332
              
              
              
              2,298,650Accrued
      liabilities
              
              
              140,344
              
              
              
              342,708Long
      term debt - related party
              
              
              169,582
              
              
              
              754,578Total
      liabilities
              
              
              43,581,476
              
              
              
              47,303,618Commitments
      and contingent liabilitiesStockholders'
      EquityCommon
      stock $0.01 par value; 25,000,000 shares authorized;17,949,206
      and 17,714,180 shares issued and 15,084,617 and14,849,591,
      outstanding at February 28, 2009 and August 31, 2008,
      respectively
              
              
              179,492
              
              
              
              177,142Additional
      paid-in capital
              
              
              20,717,394
              
              
              
              20,635,972Retained
      earnings (accumulated deficit)
              
              
              574,280
              
              
              
              (46,645
              )Cumulative
      translation adjustment
              
              
              (37,459
              )
              
              
              -21,433,707
              
              
              
              20,766,469Less:
      treasury stock, at cost, 2,864,589 shares
              
              
              (5,596,047
              )
              
              
              (5,596,047
              )Total
      stockholders' equity
              
              
              15,837,660
              
              
              
              15,170,422Total
      liabilities and stockholders' equity
              
              $
              59,419,136
              
              
              $
              62,474,040


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






1




EMTEC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)


Three
      months ended
              
              
              Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              February
      28, 2009
              
              
              February
      29, 2008RevenuesProcurement
      services
              
              $
              29,414,055
              
              
              $
              40,928,623
              
              
              $
              85,772,778
              
              
              $
              111,691,000Service
      and consulting
              
              
              12,547,235
              
              
              
              3,139,879
              
              
              
              26,207,622
              
              
              
              7,017,688Total
      Revenues
              
              
              41,961,290
              
              
              
              44,068,502
              
              
              
              111,980,400
              
              
              
              118,708,688Cost
      of SalesCost
      of procurement services
              
              
              26,370,454
              
              
              
              36,625,710
              
              
              
              76,762,952
              
              
              
              99,655,022Service
      and consulting
              
              
              9,464,436
              
              
              
              2,471,549
              
              
              
              20,297,062
              
              
              
              5,437,446Total
      Cost of Sales
              
              
              35,834,890
              
              
              
              39,097,259
              
              
              
              97,060,014
              
              
              
              105,092,468Gross
      ProfitProcurement
      services
              
              
              3,043,601
              
              
              
              4,302,913
              
              
              
              9,009,826
              
              
              
              12,035,978Service
      and consulting
              
              
              3,082,799
              
              
              
              668,330
              
              
              
              5,910,560
              
              
              
              1,580,242Total
      Gross Profit
              
              
              6,126,400
              
              
              
              4,971,243
              
              
              
              14,920,386
              
              
              
              13,616,220Operating
      expenses:Selling,
      general, and administrative expenses
              
              
              5,758,088
              
              
              
              4,920,946
              
              
              
              11,935,963
              
              
              
              10,676,389Rent
      expense – related parties
              
              
              152,496
              
              
              
              89,325
              
              
              
              304,992
              
              
              
              178,650Depreciation
      and amortization
              
              
              567,746
              
              
              
              307,511
              
              
              
              1,101,645
              
              
              
              608,014Total
      operating expenses
              
              
              6,478,330
              
              
              
              5,317,782
              
              
              
              13,342,600
              
              
              
              11,463,053Operating
      income (loss)
              
              
              (351,930
              )
              
              
              (346,539
              )
              
              
              1,577,786
              
              
              
              2,153,167Other
      expense (income):Interest
      income – other
              
              
              (6,290
              )
              
              
              (48,888
              )
              
              
              (11,188
              )
              
              
              (66,663
              )Interest
      expense
              
              
              269,930
              
              
              
              315,720
              
              
              
              523,993
              
              
              
              652,743Other
      expense (income)
              
              
              248
              
              
              
              -
              
              
              
              4,411
              
              
              
              (18
              )Income
      (loss) before income taxes
              
              
              (615,818
              )
              
              
              (613,371
              )
              
              
              1,060,570
              
              
              
              1,567,105Provision
      (benefit) for income taxes
              
              
              (230,801
              )
              
              
              (221,993
              )
              
              
              439,645
              
              
              
              712,281Net
      income (loss)
              
              $
              (385,017
              )
              
              $
              (391,378
              )
              
              $
              620,925
              
              
              $
              854,824Net
      income (loss) per common shareBasic
      and Diluted
              
              $
              (0.03
              )
              
              $
              (0.03
              )
              
              $
              0.04
              
              
              $
              0.06Weighted
      Average Shares OutstandingBasic
              
              
              14,629,231
              
              
              
              14,519,049
              
              
              
              14,629,231
              
              
              
              14,519,049Diluted
              
              
              14,629,231
              
              
              
              14,519,049
              
              
              
              14,788,619
              
              
              
              14,594,685




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






2




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


Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              620,925
              
              
              $
              854,824Adjustments
      to Reconcile Net Income to NetCash
      (Used In) Provided By Operating ActivitiesDepreciation
      and amortization
              
              
              401,672
              
              
              
              317,839Amortization
      related to intangible assets
              
              
              699,974
              
              
              
              290,175Deferred
      income taxes
              
              
              (162,264
              )
              
              
              499,606Stock-based
      compensation
              
              
              83,772
              
              
              
              146,075Indemnification
      of professional fees
              
              
              (269,882
              )
              
              
              -Changes
      In Operating Assets and LiabilitiesReceivables
              
              
              6,721,009
              
              
              
              1,149,222Inventories
              
              
              (956,230
              )
              
              
              4,208,842Prepaid
      expenses and other assets
              
              
              185,368
              
              
              
              (146,748
              )Accounts
      payable
              
              
              (7,737,239
              )
              
              
              (2,050,944
              )Customer
      deposits
              
              
              (500
              )
              
              
              (136,089
              )Income
      taxes payable
              
              
              9,207
              
              
              
              (1,620
              )Accrued
      liabilities
              
              
              292,849
              
              
              
              (966,709
              )Deferred
      revenue
              
              
              (312,797
              )
              
              
              (170,015
              )Net
      Cash (Used In) Provided By Operating Activities
              
              
              (424,136
              )
              
              
              3,994,458Cash
      Flows From Investing ActivitiesPurchases
      of property and equipment
              
              
              (314,999
              )
              
              
              (57,373
              )Acquisition
      of businesses, net of cash acquired
              
              
              (896,960
              )
              
              
              -Goodwill/
      tax settlement
              
              
              (164,602
              )
              
              
              -Net
      Cash Used In Investing Activities
              
              
              (1,376,561
              )
              
              
              (57,373
              )Cash
      Flows From Financing ActivitiesNet
      increase (decrease) in line of credit
              
              
              3,401,648
              
              
              
              (4,846,207
              )Repayment
      of debt
              
              
              (473,865
              )
              
              
              (478,400
              )Net
      Cash Provided By (Used In) Financing Activities
              
              
              2,927,783
              
              
              
              (5,324,607
              )Effect
      of rate changes on cash
              
              
              (51,498
              )
              
              
              -Net
      increase (decrease) in Cash
              
              
              1,075,588
              
              
              
              (1,387,522
              )Beginning
      Cash
              
              
              2,025,099
              
              
              
              2,251,352Ending
      Cash
              
              $
              3,100,687
              
              
              $
              863,830Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
              
              $
              560,485
              
              
              $
              922,050Interest
              
              $
              353,180
              
              
              $
              511,552Supplemental
      Schedule of Non Cash Investing and Financing ActivitiesIndemnification
      receivable due from former shareholders settled by the
    amountsdue
      to former shareholders
              
              $
              631,415
              
              
              
              -Note
      payable issued, acquisition of Capital Stock of Koan-IT
              
              $
              396,950
              
              
              
              -




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 accruals) considered
necessary for a fair presentation have been included in the accompanying
condensed consolidated financial statements.  Quarterly results are
not necessarily indicative of results for the full year.For
further information, refer to the annual financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended August
31, 2008.





2.  General





Description of
Business





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





On March
20, 2008, the Company acquired, through its subsidiary Emtec Global Services LLC
(“EGS”), all of the outstanding stock of Luceo, Inc. (“Luceo”) headquartered in
Naperville, IL. Luceo offers a broad range of consulting/contracting services to
clients throughout the United States including IT project management services,
packaged software implementation, web technologies/client server application
development and support.





On August
13, 2008, the Company acquired, through its subsidiary EGS, all of the
outstanding stock of eBusiness Application Solutions, Inc. (“eBAS”), and Aveeva,
Inc. (“Aveeva”) headquartered in Fremont, CA and their Indian subsidiary Aviance
Software India Private Limited (“Aviance”), headquartered in Bangalore, India.
eBAS and Aveeva offers a broad range of software consulting services, including
business analysis, quality assurance, testing and training as well as SAP, CRM,
Oracle Apps, and Java based solutions throughout the United States.





On
February 12, 2009, the Company acquired through its subsidiary, Emtec
Infrastructure Services Corporation (“EIS-US”), all of the outstanding stock of
KOAN-IT Corp .headquartered in Ottawa, Canada (“KOAN-IT”)_ and KOAN-IT (US)
Corp. (“KOAN-IT (US)”).  KOAN-IT is a consulting firm specializing in
business service management methodologies to its clients in Canada and the
United States.   As of March 1, 2009 KOAN-IT Corp. and 7119747
Canada Inc., a subsidiary of EIS-US, were amalgamated to form Emtec
Infrastructure Services Canada Corporation (“EIS-Canada”), which does business
as KOAN-IT.




4





With the acquisitions of Luceo, eBAS,
Aveeva and KOAN-IT, the Company divides its operating activity into two
operating segments for reporting purposes: Emtec Systems Division (“Systems
Division”) and Emtec Global Services Division (“Global Services Division”).
Systems Divisions is the Company’s historical business and Global Services
Division is the Company’s IT Staffing Augmentation Solutions, Business Service
Management solutions and Training business including Luceo, eBAS, Aveeva and
KOAN-IT.




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”), EGS, EGS’s wholly owned subsidiaries Luceo,
eBAS, Aveeva and Aveeva’s subsidiary Aviance, EIS-US and EIS-US’s wholly owned
subsidiaries KOAN-IT and KOAN-IT (US). Significant intercompany account balances
and transactions have been eliminated in consolidation.





Reclassifications




Certain reclassifications have been
made to prior year balances in order to conform to current
presentations.





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 from those
estimates.




Goodwill




Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired companies.  In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 142, “Goodwill and Other Intangible Assets,”
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.  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 six months ended February 28,
2009 are as follows:




5




Balance
      at August 31, 2008
              
              $
              10,697,516Increase
      in goodwill arising from acquistion of KOAN-IT
              
              
              548,435Foreign
      currency translation effect of Canadian goodwill
              
              
              (13,876
              )Reduction
      in goodwill arising from settlement of taxuncertainties
      acquired in April 16, 2004 merger
              
              
              (161,663
              )Balance
      at February 28, 2009
              
              $
              11,070,412





The
Company determined that it has two reporting segments, Systems Division and
Global Services Division. Systems Division primarily consists of the Company’s
historical business prior the acquisition of Luceo on March 20, 2008 and Global
Services Division consists of Luceo, eBAS, Aveeva and
KOAN-IT.  Further, the Company determined that it has four reporting
units under SFAS 142: Systems Divisions, Luceo, eBAS/Aveeva and
KOAN-IT.





Based on
the income (discounted cash flows) and market-based (guideline company method)
approaches there was no goodwill impairment for the Systems Division at June 1,
2008. Based on the income (discounted cash flows) approach there was no goodwill
impairment for the Luceo reporting unit at June 1, 2008. At February 28, 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
does not currently believe that the reduced market capitalization represents a
goodwill impairment indicator as of February 28, 2009, however, if current
market conditions persist and the Company’s estimated value under the income and
market-based approaches is effected, then it is possible that the Company may
have to take a goodwill impairment charge against earnings in a future
period.





Identifiable Intangible
Assets





At
February 28, 2009 and August 31, 2008, the components of identifiable intangible
assets are as follows:




February
      28, 2009
              
              
              August
      31, 2008Customer
      relationships
              
              
              13,932,753
              
              
              
              12,861,712Noncompete
      agreements
              
              
              394,342
              
              
              
              370,000Trademarks
              
              
              146,051
              
              
              
              -14,473,146
              
              
              
              13,231,712Accumulated
      amortization
              
              
              (2,616,170
              )
              
              
              (1,916,290
              )11,856,976
              
              
              
              11,315,422




Customer
relationships represent the value ascribed to customer relationships purchased
in 2005 and 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 date of the respective
acquisitions.  The amounts ascribed to noncompete agreements are being
amortized on a straight-line basis over five years.





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




6





Amortization
expense was $699,974 and $290,175 for the six months ended February 28, 2009 and
February 29, 2008, respectively.  We currently expect future
amortization for the next 5 years ending August 31, 2009 through 2013 will be
approximately $1,590,000 per year.





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 “SFAS” No. 144
“Accounting for the Impairment or Disposal of Long-Lived
Assets.”  Recoverability of long-lived assets is assessed by a
comparison of the carrying amount to the estimated undiscounted future net cash
flows expected to result from the use of the assets and their eventual
disposition.  If estimated undiscounted future net cash flows are less
than the carrying amount, the asset is considered impaired and a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the asset.  No impairment of long-lived assets occurred
during the six months ended February 28, 2009.





Foreign Currency Translation
and Other Comprehensive Income (Loss)





The
financial statements of the Company’s foreign
subsidiaries areremeasured 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 (loss).





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





Three
      months ended
              
              
              Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              February
      28, 2009
              
              
              February
      29, 2008Net
      Income (loss)
              
              $
              (385,017
              )
              
              $
              (391,378
              )
              
              $
              620,925
              
              
              $
              854,824Cumulative
      translation adjustment
              
              
              (37,459
              )
              
              
              -
              
              
              
              (37,459
              )
              
              
              -Total
      comprehensive income (loss)
              
              $
              (422,476
              )
              
              $
              (391,378
              )
              
              $
              583,466
              
              
              $
              854,824




Earnings (loss) Per
Share





Basic
earnings (loss) per share amounts are computed by dividing net income (loss)
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 (loss) 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 219,842 and 122,944, and 159,388
and 45,792 for the three and six months ended February 28, 2009 and February 29,
2008, respectively. Diluted shares for the three months ended February 28, 2009
and February 29, 2008 were not included in the calculation of diluted net loss
per share because the effect of the inclusion would be anti-dilutive. In
addition, outstanding warrants to purchase 1,682,444 and 1,649,955 common shares
as of and for the periods ended February 28, 2009 and February 29, 2008,
respectively, were also 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.




7





Income Taxes and Due to
Former Stockholders





On
September 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”).
FIN 48 prescribes a recognition threshold that a tax position is required to
meet before being recognized in the financial statements and provides guidance
on de-recognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition issues. Subsequent to
the initial adoption of FIN 48, our policy is to recognize interest and penalty
expense associated with uncertain tax positions as a component of income tax
expense in the consolidated statements of operations.





In
October 2008, the Company settled the August 2003 and April 2004 tax audits of
Emtec-Federal {formerly Westwood Computer Corporation (“Westwood”) with the
Appeals Office of the IRS.  The settlement agreement resulted in an
additional federal income tax payment of $145,070, which included interest of
$40,908.  The Company has filed 2003 and 2004 amended New Jersey
income tax returns to pay additional New Jersey tax liability that results from
the IRS settlement.  The accounting to record the settlements of these
pre-merger tax liabilities under FIN 48 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
$631,415.  The $631,415 included pre-merger tax liabilities totaling
$361,533 plus associated professional fees to defend the Company’s tax positions
totaling $269,882.  The $361,533 portion of the Company’s indemnity
claim was recorded as a reduction to goodwill acquired in the April 2004
Westwood merger.  The remaining $269,882 portion was recorded as a
reduction to selling, general & administrative expenses for 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
$631,415.  The amounts “due to Westwood former stockholders”
represented funds we held as unclaimed merger consideration.





8





Reconciliation
      of Unrecognized Tax Benefits for the six months ended February 28,
      2009:Balance
      at September 1, 2008
              
              $
              692,532Unrecognized
      tax postions of prior periods:Increase
              
              
              -Decrease
              
              
              -Unrecognized
      tax postions of current year:Increase
              
              $
              5,939Decrease
              
              
              -Decrease
      in Unrecognized tax benefits due to settlements
              
              $
              (547,119
              )Decrease
      in Unrecognized tax benefits due to lapse ofstatute
      of limitations
              
              
              -Balance
      at February 28, 2009
              
              $
              151,352Total
      amount of unrecognized tax benefits that, if recognized,would
      affect the effective tax rate
              
              $
              52,597Accrued
      interest and penalties for unrecognized tax benefitsas
      of February 28, 2009 balance sheet
              
              $
              67,412Interest
      and penalties classified as income tax expense (benefit)-for
      the six months ended February 28, 2009
              
              $
              (35,382
              )


3.
Acquisitions





KOAN-IT Corp.





On
February 12, 2009, 7119747 Canada Inc. (“Emtec Canada”), a wholly-owned
subsidiary of Emtec, EIS-US,, KOAN-IT Corp. and the shareholders of KOAN-IT (the
“Shareholders”) entered into a Share Purchase Agreement (the “Purchase
Agreement”), pursuant to which (i) Emtec Canada agreed to acquire 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) Corp. from KOAN-IT for an aggregate
consideration of up to approximately $3.30 million.  The purchase
price consisted of (i) cash at closing in an aggregate amount equal to
$1,223,049 (consisting of $1,202,665 for the outstanding stock of KOAN-IT and
$20,384 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 $407,683 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 of
$1,630,731 if certain performance goals are met. The purchase price may be
reduced pursuant to a post-closing working capital adjustment. The acquisition
was funded through borrowings under the Credit Facility with the Lender. All
dollar amounts in this footnote have been translated into U.S. dollars from
Canadian dollars at the exchange rate in effect as of the acquisition date of
February 12, 2009.  As of March 1, 2009 KOAN-IT Corp. and Emtec Canada
were amalgamated to form EIS-Canada, which does business as
KOAN-IT.





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 were
$1,082,297, which resulted in an excess purchase price over fair value of net
assets acquired of $548,435, which amount was recognized as
goodwill.  Additionally, the purchase price includes capitalized
professional fees of $245,524 that were associated with the acquisition of
KOAN-IT and KOAN-IT (US).




9





The
allocation of purchase price by significant component is as
follows:





Cash
              
              $
              571,613Trade
      receivable, net
              
              
              984,817Prepaid
      expenses & other current assets
              
              
              582,566Plant
      and equipment
              
              
              69,677Customer
      relationships
              
              
              1,100,000Trademarks
              
              
              150,000Noncompete
      asset
              
              
              25,000Accounts
      payable
              
              
              (463,033
              )Income
      taxes payable
              
              
              27,355Deferred
      tax liabilities
              
              
              (414,607
              )Deferred
      revenue
              
              
              (848,488
              )Accrued
      expenses
              
              
              (457,080
              )Fair
      value of net assets acquired
              
              
              1,327,820Purchase
      price
              
              
              1,876,255Excess
      purchase price
              
              $
              548,435




The
allocation is preliminary and such amounts are subject to adjustment as
additional analysis is performed or obtained from third party
sources.  The Company allocated $1.1 million to client relationships
at the acquisition date which amount 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.





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





Luceo, Inc.





On March
20, 2008, EGS, Luceo and Sivapatham Natarajan (“Mr. Natarajan”) entered into a
Stock Purchase Agreement, pursuant to which EGS acquired all of the outstanding
stock of Luceo from Mr. Natarajan for the purchase price that consisted of (i)
cash at closing in an aggregate amount equal to $1,795,000; (ii) a subordinated
promissory note in a principal amount of $820,000 which is payable in two equal
installments of $410,000 each on the 12 month and 18 month anniversaries of the
closing and (iii) contingent payments of additional cash consideration each year
for three years on the anniversary of the closing if certain performance goals
are met. During the year ended August 31, 2008, the purchase price was reduced
by $68,489 in connection with the post-closing working capital
adjustment.




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





eBusiness
Applications Solutions, Inc. and Aveeva, Inc.




10






On August
13, 2008, EGS eBAS, Aveeva and Ms. Chopra entered into a Purchase Agreement,
pursuant to which EGS acquired all of the outstanding stock of eBAS and Aveeva
from Ms. Chopra. The purchase price consisted of (i) cash at closing in an
aggregate amount equal to $7,313,500 and (ii) the potential right to pay
contingent consideration of $1.0 million each year for three years on the
anniversary of the closing if certain performance goals are met. The purchase
price may be increased or decreased pursuant to a post-closing working capital
adjustment.




Unaudited
pro forma results of operations as if the acquisition of eBAS/Aveeva had
occurred as of September 1, 2007 is presented below.




Three
      months ended
              
              
              Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              February
      28, 2009
              
              
              February
      29, 2008Revenue
              
              $
              41,961,290
              
              
              $
              52,535,389
              
              
              $
              111,980,400
              
              
              $
              135,979,828Income
      (loss) from continuing operations
              
              
              (385,017
              )
              
              
              (150,107
              )
              
              
              620,925
              
              
              
              1,209,824Net
      income (loss)
              
              
              (385,017
              )
              
              
              (150,107
              )
              
              
              620,925
              
              
              
              1,209,824Basic
      and diluted earning (loss) per share from
      continuing operations
              
              $
              (0.03
              )
              
              $
              (0.01
              )
              
              $
              0.04
              
              
              $
              0.08Basic
      and diluted earning (loss) per share
              
              $
              (0.03
              )
              
              $
              (0.01
              )
              
              $
              0.04
              
              
              $
              0.08





The
unaudited pro forma results have been prepared for comparative purposes only and
include certain adjustments. All adjustments were tax effected. The unaudited
pro forma results do not purport to be indicative of the results of operations
that actually would have resulted had the business combination occurred on
September 1, 2007 or of future results of operations of the consolidated
entities.





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 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.




11




A summary
of stock options for the six months ended February 28, 2009 is as
follows:




Weighted
      Average
              
              
              Weighted
      Average
              
              AggregateFor
      the Six Months Ended February 28, 2009
              
              Shares
              
              
              Exercise
                Price
              
              
              Remaining
                Term
              
              Intrinsic
                Value
      *Options
      Outstanding -September 1, 2008
              
              
              386,500
              
              
              $
              1.22Options
      Granted
              
              
              20,000
              
              
              $
              0.33Options
      Exercised
              
              
              -Options
      Forfeited or Expired
              
              
              (56,000
              )
              
              $
              0.78Options
      Outstanding - February 28, 2009
              
              
              350,500
              
              
              $
              1.19
              
              
              5.89
      years
              
              $
              5,000Options
      Exercisable -February 28, 2009
              
              
              228,375
              
              
              $
              1.14
              
              
              6.45
      years
              
              $
              5,000


*
Represents the total pre-tax intrinsic value based on the Company’s average
closing stock prices for the six months ended February 28, 2009.




There
were no stock options issued during the three months ended February 28, 2009.
The following assumptions were used to value stock options issued during the six
months ended February 28, 2009:




2009Weighted-Average
      Fair Value
                
                $
                0.28AssumptionsExpected
      Volatility
                
                
                106.49
                %Expected
      Term
                
                5
      yearsExpected
      Forfeiture Rate
                
                
                0
                %Dividend
      Yield
                
                
                0
                %Risk-Free
      Interest Rate
                
                
                1.89
                %


Nonvested Stock (Restricted
Stock)




During
the fiscal year ended August 31, 2007, the Company granted 459,224 shares of
nonvested (restricted) stock to certain members of senior management and
employees.  These nonvested shares vest equally over 4
years.  During January 2008, the Company granted 10,331 shares of
stock to a member of senior management. During November 2008, the Company
granted 292,402 shares of nonvested (restricted) stock to certain members of
senior management in connection with annual bonus compensation. These nonvested
shares vest over a one-year period. 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.




12




The
following table summarizes the Company’s restricted stock activity during the
six months ended February 28, 2009:




For
      the Six Months Ended February 28, 2009
              
              Shares
              
              
              Weighted
      AverageGrant Date Fair
      Value
              
              
              Fair
      ValueNonvested
      - September 1, 2008
              
              
              330,542
              
              
              $
              1.24Granted
              
              
              292,402
              
              
              $
              0.36Vested
              
              
              (110,182
              )
              
              $
              1.24
              
              
              $
              46,218
              (a)Forfeited
              
              
              (57,376
              )
              
              
              -Nonvested
      -February 28, 2009
              
              
              455,386
              
              
              $
              0.79
              
              
              $
              387,078
              (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 February 28, 2009 which would have been received
      by holders of restricted stock shares had all such holders sold their
      underlying shares on that date.




Stock Options and Nonvested
Stock




Stock-based
compensation costs related to the 2006 Plan totaled $41,597 and $78,723 during
the three months ended February 28, 2009 and February 29, 2008, respectively.
Stock-based compensation costs related to the 2006 Plan totaled $83,772 and
$146,075 during the six months ended February 28, 2009 and February 29, 2008,
respectively.  As of February 28, 2009, the Company had $211,215 of
unrecognized compensation cost related to these instruments.  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 $3,695,752.  The exercise
price per warrant will vary based upon the number of shares issuable under the
warrants.  The number of shares issuable under the warrants totaled
1,682,444 and 1,649,955 shares, with an exercise price of $2.20 and $2.24 per
share, as of February 28, 2009 and February 29, 2008, respectively. The
outstanding warrants were anti-dilutive for the three and six months ended
February 28, 2009 and February 29, 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.




13





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 has agreed to
extend the term of the loans issued to the Borrower under the Loan and Security
Agreement from December 7, 2008 until December 7, 2010 and to make certain other
amendments to the Loan and Security Agreement, including the
following:


·
              The First Amendment changes 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 changes the
      interest rate for revolving credit loans to the base rate plus 3.25% from
      the previous interest rate for revolving credit loans of the base rate
      minus 0.5%, and changes 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 amends the
      Schedule to provide that the Borrowers must pay the Lender a floorplan
      annual volume commitment fee if the aggregate amount of all floorplan
      loans does not equal or exceed $60,000,000 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 $60,000,000 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 pro rated portion of the
      annual volume commitment
fee.


In
addition by executing the First Amendment, Emtec Global, Luceo, eBAS and Aveeva
each joined the Credit Facility as a Borrower and granted DLL 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 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 $11.99 million and $8.58 million outstanding under the
revolving portion of the Credit Facility, and balances of $893,435 and $2.05
million (included in the Company’s accounts payable) outstanding plus $503,600
and $444,700 in open approvals under the floor plan portion of the Credit
Facility at February 28, 2009 and August 31, 2008, respectively. Net
availability was $6.11 million and $14.44 million under the revolving portion of
the Credit Facility, and additionally $12.51 million and $6.49 million was
available under the floor plan portion of the Credit Facility as of February 28,
2009 and August 31, 2008, respectively.




As of
February 28, 2009, the Company determined that it was in compliance with its
financial covenants with the Lender.




6.  Concentration
of Credit Risk and Significant Clients




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




14




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




For
      the Three Months EndedFebruary
      28, 2009
              
              
              %
      of Total
              
              
              February
      29, 2008
              
              
              %
      of TotalDepartments
      of the U.S.Government
              
              $
              11,244,201
              
              
              
              26.9
              %
              
              $
              26,482,919
              
              
              
              60.1
              %State
      and Local Governments
              
              
              1,949,078
              
              
              
              4.6
              %
              
              $
              2,262,595
              
              
              
              5.1
              %Commercial
      Companies
              
              
              17,979,862
              
              
              
              42.8
              %
              
              $
              11,387,333
              
              
              
              25.8
              %Education
      and other
              
              
              10,788,149
              
              
              
              25.7
              %
              
              $
              3,935,654
              
              
              
              8.9
              %Total
      Revenues
              
              $
              41,961,290
              
              
              
              100.0
              %
              
              $
              44,068,502
              
              
              
              100.0
              %
 
 For
      the Six Months EndedFebruary
      28, 2009
              
              
              %
      of Total
              
              
              February
      29, 2008
              
              
              %
      of TotalDepartments
      of the U.S.Government
              
              $
              51,439,447
              
              
              
              46.0
              %
              
              $
              74,853,433
              
              
              
              63.1
              %State
      and Local Governments
              
              
              4,945,273
              
              
              
              4.4
              %
              
              
              5,980,610
              
              
              
              5.0
              %Commercial
      Companies
              
              
              34,738,777
              
              
              
              31.0
              %
              
              
              24,469,810
              
              
              
              20.6
              %Education
      and other
              
              
              20,856,903
              
              
              
              18.6
              %
              
              
              13,404,835
              
              
              
              11.3
              %Total
      Revenues
              
              $
              111,980,400
              
              
              
              100.0
              %
              
              $
              118,708,688
              
              
              
              100.0
              %


Major
Customers





Three and six months ended
February 28, 2009





Sales to
school districts in Georgia and Florida accounted for approximately $4.18
million or 10.0%, and $6.35 million or 15.1% of the Company’s total revenues for
three months ended February 28, 2009, respectively. The same customers accounted
for approximately $912,000 or 2.1%, and $2.55 million or 5.8% of the Company’s
total revenues for the three months ended February 29, 2008,
respectively.





Sales to
a school district in Georgia accounted for approximately $13.16 million or 11.7%
of the Company’s total revenues for six months ended February 28, 2009. The same
customer accounted for approximately $6.50 million or 5.5% the Company’s total
revenues for the six months ended February 29, 2008.





Three and six months ended
February 29, 2008





The
Department of the Air Force, one of the departments of the United States
Government accounted for approximately $14 million or 31.8%, and $15.07 million
or 12.7% of the Company’s total revenues for the three and six months ended
February 29, 2008.  The same customer accounted for approximately
$245,624 or 0.6% and $2.57 million or 2.3% of the Company’s total revenue for
the three and six months ended February 28, 2009.





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 for 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.




15





The trade
account receivables consist of the following:




February
              
              
              August28,
      2009
              
              
              31,
      2008Trade
      receivables
              
              $
              25,822,824
              
              
              $
              32,570,104Allowance
      for doubtful accounts
              
              
              (253,153
              )
              
              $
              (391,137
              )Trade
      receivables, net
              
              $
              25,569,671
              
              
              $
              32,178,967


7.  Accrued
Liabilities




Current
accrued liabilities consisted of the following:




February
      28, 2009
              
              
              August
      31, 2008Accrued
      payroll
              
              $
              2,044,285
              
              
              $
              2,384,922Accrued
      commissions
              
              
              523,608
              
              
              
              730,848Accrued
      state sales taxes
              
              
              86,878
              
              
              
              97,514Accrued
      third-party service fees
              
              
              29,665
              
              
              
              108,070Other
      accrued expenses
              
              
              3,035,911
              
              
              
              2,097,271$
              5,720,347
              
              
              $
              5,418,625


8.  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 certain directors and officers of the
Company and their related family members. Rent expense was $45,000 and $90,000
for each of the three and six months ended February 28, 2009 and February 29,
2008, respectively.  The facilities consist of office and warehouse
space totaling 42,480 square feet located in Springfield, New
Jersey





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 certain officers of the Company are
passive investors with an approximately 20% equity interest. The lease term is
for 5 years, with monthly base rent of $15,832. During the three months ended
February 28, 2009 and February 29, 2008, the Company recorded expense under this
lease totaling $47,496 and $44,325, respectively. During the six months ended
February 28, 2009 and February 29, 2008, the Company recorded expense under this
lease totaling $94,992 and $88,650, 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 the President of
eBAS/Aveeva.  The lease term is through August 31, 2011 with a monthly
rent of $20,000.  Rent expense was $60,000 and $120,000 for each of
the three and six months ended February 28, 2009, respectively.




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




16




9.      Segment
Information





The
Company has adopted Statement of Financial Accounting Standard No. 131,
“Disclosure about Segments of an Enterprise and Related Information.”  The
Company’s business activities are divided into two business segments, Systems
Division and Global Services Division.  Systems Division provides services
and products to commercial, federal, education, state and local government
clients.  System Division’s areas of specific practices include
communications, data management, enterprise computing, managed services, storage
and data center planning and development.  Systems Division’s client base
is comprised of departments of the United States Federal Government, state and
local governments, schools and commercial businesses throughout the United
States.  Global Services Division offers a broad range of
consulting/contracting services to clients throughout the United States and
Canada including IT project management services, packaged software
implementation, web technologies/client server application development, business
service management methodologies and extended service maintenance and upgrades.
 Global Services is comprised primarily of the business operations acquired
through the acquisitions of Luceo on March 20, 2008, eBAS/Aveeva on August 13,
2008 and KOAN-IT on February 12, 2009.





Summarized
financial information relating to the Company’s operating segments is as
follows:




February
      28, 2009
              
              
              August
      31, 2008(Unaudited)Identifiable
      Assets:Systems
      Division
              
              
              40,642,086
              
              
              
              46,212,267Global
      Services Division
              
              
              18,777,055
              
              
              
              16,261,773Total
      Assets
              
              
              59,419,141
              
              
              
              62,474,040


17




Three
      months ended
              
              
              Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              February
      28, 2009
              
              
              February
      29, 2008(Unaudited)
              
              
              (Unaudited)RevenuesSystems
      Division
              
              
              33,135,967
              
              
              
              44,068,502
              
              
              
              92,442,187
              
              
              
              118,708,688Global
      Services Division
              
              
              8,825,323
              
              
              
              -
              
              
              
              19,538,213
              
              
              
              -Total
      Revenue
              
              
              41,961,290
              
              
              
              44,068,502
              
              
              
              111,980,400
              
              
              
              118,708,688Gross
      ProfitSystems
      Division
              
              
              4,485,432
              
              
              
              4,971,243
              
              
              
              11,172,102
              
              
              
              13,616,220Global
      Services Division
              
              
              1,640,968
              
              
              
              -
              
              
              
              3,748,284
              
              
              
              -Gross
      Profit
              
              
              6,126,400
              
              
              
              4,971,243
              
              
              
              14,920,386
              
              
              
              13,616,220Operating
      IncomeSystems
      Division
              
              
              (594,482
              )
              
              
              (346,539
              )
              
              
              605,562
              
              
              
              2,153,167Global
      Services Division
              
              
              242,552
              
              
              
              -
              
              
              
              972,224
              
              
              
              -Operating
      Income
              
              
              (351,930
              )
              
              
              (346,539
              )
              
              
              1,577,786
              
              
              
              2,153,167Interest
      and Other Expense (Income)Systems
      Division
              
              
              154,956
              
              
              
              266,832
              
              
              
              289,520
              
              
              
              586,062Global
      Services Division
              
              
              108,931
              
              
              
              -
              
              
              
              227,696
              
              
              
              -Interest
      and Other Expense (Income)
              
              
              263,887
              
              
              
              266,832
              
              
              
              517,216
              
              
              
              586,062Provision
      for Income TaxesSystems
      Division
              
              
              (296,142
              )
              
              
              (221,993
              )
              
              
              119,955
              
              
              
              712,281Global
      Services Division
              
              
              65,341
              
              
              
              
              
              
              
              319,690
              
              
              
              -Provision
      for Income Taxes
              
              
              (230,801
              )
              
              
              (221,993
              )
              
              
              439,645
              
              
              
              712,281Net
      IncomeSystems
      Division
              
              
              (453,297
              )
              
              
              (391,378
              )
              
              
              196,088
              
              
              
              854,824Global
      Services Division
              
              
              68,280
              
              
              
              -
              
              
              
              424,837
              
              
              
              -Net
      Income
              
              
              (385,017
              )
              
              
              (391,378
              )
              
              
              620,925
              
              
              
              854,824


18




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, 2008 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 company providing consulting, services and products to commercial,
educational institution, U.S. federal, state and local government clients. Our
services and products address the technology needs of our clients including
communications, data management, enterprise computing, managed services, storage
and data center planning and development. Our solutions are crafted to enable
our clients to become more efficient and effective, thereby making them more
profitable and giving them a competitive advantage. To date, the most
significant portion of our revenues has been derived from our activities as a
reseller of IT products, such as workstations, servers, microcomputers,
application software and networking and communications equipment. However, we
are actively endeavoring to increase the portion of our revenues that are
derived from IT services.





We have
historically not been adversely affected by inflation; technological advances
and competition within the IT industry have generally caused the prices of the
products we sell to decline, and product life-cycles tend to be short. These
factors require that our growth in unit sales exceed any declines in prices in
order for us to increase our net sales.





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




19





Factors
that may in the future have a negative impact on our selling, general and
administrative expenses for both divisions include costs associated with
marketing and selling activities, potential merger and acquisition related
costs, technological improvement costs, compliance costs associated with SEC
rules and increases in our insurance costs.





For three
and six months ended February 28, 2009 and February 29, 2008, our Systems
Divisions revenues decreased to $33.14 million and $92.44 from $44.07 million
and $118.71 million. If we are unable to increase our revenues in future
periods, whether due to the effects of the economic downturn on our commercial
business or otherwise, then we may be forced to consolidate our operations to
further reduce operating expenses sufficiently to achieve profitable operations.
We have implemented several cost containment measures beginning in December 2008
that have and will reduce our selling, general and administrative expenses in
future quarters, but there can be no assurance that we will be able to generate
sufficient new business or that our cost containment measures currently in place
will provide us the ability to maintain profitability in the
future.





Our
financial results can be impacted by the level of business activity of our
clients, in particular our commercial clients.  The current economic
downturn may continue to cause reductions in technology and discretionary
spending by our clients.  Furthermore, business activity from our
government and education clients may also decrease as their spending will be
impacted by declining tax revenues associated with this economic
downturn.




On March
20, 2008, we acquired through our subsidiary EGS all of the outstanding stock of
Luceo, headquartered in Naperville, Illinois. Luceo offers a broad range of
consulting/contracting services to clients throughout the United States, which
specializes in providing IT project management services, packaged software
implementation, web technologies/client server application development and
support.





On August
13, 2008, we acquired through our subsidiary EGS all of the outstanding stock of
eBAS and Aveeva headquartered in Fremont, California and Aveeva’s Indian
subsidiary Aviance, headquartered in Bangalore, India.  eBAS and
Aveeva offer a broad range of software consulting services including business
analysis, quality assurance, testing, and training as well as SAP, CRM, Oracle
Apps, and Java based solutions.





On
February 12, 2009, the Company acquired through its subsidiary, EIS-US, all of
the outstanding stock of KOAN-IT, headquartered in Ottawa, Canada and KOAN-IT
(US) Corp..  KOAN-IT is a consulting firm specializing in business
service management methodologies to its clients throughout Canada and the United
States.  As of March 1, 2009 KOAN-IT Corp. and Emtec Canada were
amalgamated to form EIS-Canada, which does business as KOAN-IT.




Our
primary business objective is to become a leading single-source provider of high
quality and innovative IT consulting, services and products. Through our
strategic partners, we have an expanded array of products and technology
solutions to offer our clients.


20




Results
of Operations





Comparison
of Three Months Ended February 28, 2009 and February 29, 2008




The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
each of the three months ended February 28, 2009 and February 29,
2008.




EMTEC,
INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three
      Months EndedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              Change
              
              
              %RevenuesProcurement
      services
              
              $
              29,414,055
              
              
              $
              40,928,623
              
              
              $
              (11,514,568
              )
              
              
              (28.1
              )%Service
      and consulting
              
              
              12,547,235
              
              
              
              3,139,879
              
              
              
              9,407,356
              
              
              
              299.6
              %Total
      Revenues
              
              
              41,961,290
              
              
              
              44,068,502
              
              
              
              (2,107,212
              )
              
              
              (4.8
              )%Cost
      of SalesCost
      of procurement services
              
              
              26,370,454
              
              
              
              36,625,710
              
              
              
              (10,255,256
              )
              
              
              (28.0
              )%Service
      and consulting
              
              
              9,464,436
              
              
              
              2,471,549
              
              
              
              6,992,887
              
              
              
              282.9
              %Total
      Cost of Sales
              
              
              35,834,890
              
              
              
              39,097,259
              
              
              
              (3,262,369
              )
              
              
              (8.3
              )%Gross
      ProfitProcurement
      services
              
              
              3,043,601
              
              
              
              4,302,913
              
              
              
              (1,259,312
              )
              
              
              (29.3
              )%Procurement
      services %
              
              
              10.3
              %
              
              
              10.5
              %Service
      and consulting
              
              
              3,082,799
              
              
              
              668,330
              
              
              
              2,414,469
              
              
              
              361.3
              %Service
      and consulting %
              
              
              24.6
              %
              
              
              21.3
              %Total
      Gross Profit
              
              
              6,126,400
              
              
              
              4,971,243
              
              
              
              1,155,157
              
              
              
              23.2
              %Total
      Gross Profit %
              
              
              14.6
              %
              
              
              11.3
              %Operating
      expenses:Selling,
      general, and administrative expenses
              
              
              5,758,088
              
              
              
              4,920,946
              
              
              
              837,142
              
              
              
              17.0
              %Rent
      expense – related party
              
              
              152,496
              
              
              
              89,325
              
              
              
              63,171
              
              
              
              70.7
              %Depreciation
      and amortization
              
              
              567,746
              
              
              
              307,511
              
              
              
              260,235
              
              
              
              84.6
              %Total
      operating expenses
              
              
              6,478,330
              
              
              
              5,317,782
              
              
              
              1,160,548
              
              
              
              21.8
              %Pecent
      of revenues
              
              
              15.4
              %
              
              
              12.1
              %Operating
      loss
              
              
              (351,930
              )
              
              
              (346,539
              )
              
              
              (5,391
              )
              
              
              1.6
              %Percent
      of revenues
              
              
              -0.8
              %
              
              
              -0.8
              %Other
      expense (income):Interest
      income – other
              
              
              (6,290
              )
              
              
              (48,888
              )
              
              
              42,598
              
              
              
              (87.1
              )%Interest
      expense
              
              
              269,930
              
              
              
              315,720
              
              
              
              (45,790
              )
              
              
              (14.5
              )%Other
              
              
              248
              
              
              
              -
              
              
              
              248
              
              
              
              N/ALoss
      before income taxes
              
              
              (615,818
              )
              
              
              (613,371
              )
              
              
              (2,447
              )
              
              
              0.4
              %Provision
      for income taxes
              
              
              (230,801
              )
              
              
              (221,993
              )
              
              
              (8,808
              )
              
              
              4.0
              %Net
      loss
              
              $
              (385,017
              )
              
              $
              (391,378
              )
              
              $
              6,361
              
              
              
              (1.6
              )%Percent
      of revenues
              
              
              (0.9
              )%
              
              
              (0.9
              )%
 
 21
 Total
Revenues






Our total
revenues, by segments, are comprised of the following:




Three
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008(Unaudited)RevenuesSystems
      Division
              
              
              33,135,967
              
              
              
              44,068,502Global
      Services Division
              
              
              8,825,323
              
              
              
              -Total
      Revenue
              
              
              41,961,290
              
              
              
              44,068,502


Systems
Division




Our
Systems Division’s revenues, by client types and revenue type, are comprised of
the following:




For
      the Three Months EndedClient
      Type
              
              February
      28, 2009
              
              
              %
      of Total
              
              
              February
      29, 2008
              
              
              %
      of TotalDepartments
      of the U.S.Government
              
              $
              11,244,201
              
              
              
              33.9
              %
              
              $
              26,482,919
              
              
              
              60.1
              %State
      and Local Governments
              
              
              1,949,078
              
              
              
              5.9
              %
              
              
              2,262,595
              
              
              
              5.1
              %Commercial
      Companies
              
              
              9,154,539
              
              
              
              27.6
              %
              
              
              11,387,333
              
              
              
              25.8
              %Education
      and other
              
              
              10,788,149
              
              
              
              32.6
              %
              
              
              3,935,654
              
              
              
              8.9
              %Total
      Revenues
              
              $
              33,135,967
              
              
              
              100.0
              %
              
              $
              44,068,502
              
              
              
              100.0
              %


For
      Three Months EndedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              Change
              
              
              %RevenuesProcurement
      services
              
              $
              29,414,055
              
              
              $
              40,928,623
              
              
              $
              (11,514,568
              )
              
              
              (28.1
              )%Service
      and consulting
              
              
              3,721,912
              
              
              
              3,139,879
              
              
              
              582,033
              
              
              
              18.5
              %Total
      Revenues
              
              
              33,135,967
              
              
              
              44,068,502
              
              
              
              (10,932,535
              )
              
              
              (24.8
              )%


Systems
Division’s total revenues decreased $10.93 million, or 24.8%, to $33.13 million
for the three months ended February 28, 2009, compared to $44.07 million for the
three months ended February 29, 2008.  Procurement services revenue
decreased $11.51 million or 28.1%, to $29.41 million for the three months ended
February 28, 2009, compared to $40.93 million for the three months ended
February 29, 2008. This decrease in procurement services revenue is mainly due
to an overall decrease in our client’s IT spending, particularly in various
departments of the U.S. government, agency and commercial business and various
governmental agencies in the State of New Jersey. We believe that this decrease
in revenues can be attributed to the current economic downturn and the deferral
of some larger computer roll-out projects to future quarters. Services and
consulting revenue for the Systems Division increased $582,033, or 18.5%, to
$3.72 million for the three months ended February 28, 2009. This increase is
mainly attributable to various installation and configuration related services
associated with computer roll-out projects for school districts in Florida and
Georgia during the three months ended February 28, 2009.





During
the three months ended February 28, 2009 and February 29, 2008, U.S.
governmental department and agency related revenues represented approximately
33.9% and 60.1% of total Systems 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, Department of Commerce and the General Service Administration.
Revenues from various civilian and military U.S. governmental departments and
agencies decreased by approximately $15.24 million during the three months ended
February 28, 2009 compared with the three months ended February 29, 2008. This
is mainly due to a large computer hardware sale to the Department of the Air
Force of approximately $14.0 million in the three months ended February 29,
2008. The same client only accounted for approximately $245,000 in revenue
during the three months ended February 28, 2009.




22





We expect
that federal government business revenues will continue to represent a large
portion of our total revenues as we continue to strive to penetrate wider and
deeper into various civilian and military agencies. The federal government
business typically experiences increased activity during the months of August
through November.





The state
and local government business remains uncertain due to the tight budgetary
pressures within governmental agencies in the State of New Jersey as a result of
decreasing tax revenues associated with the slowing economy.




Revenues
from commercial clients decreased by approximately $2.23 million during the
three months ended February 28, 2009 compared with the three months ended
February 29, 2008. This decrease is mainly due to the current economic downturn
that caused reductions in technology and discretionary spending by our
commercial clients.





During
the three months ended February 28, 2009, revenues from our education business
increased by approximately $6.85 million compared with the three months ended
February 29, 2008. This increase is attributable to increase in various computer
roll-out projects for school districts in Florida and Georgia during the three
months ended February 28, 2009.





Global Services
Division





Our
Global Services Division’s revenues were $8.83 million for the three months
ended February 28, 2009. Global Services Division consists of revenues from our
recently acquired subsidiaries Luceo, eBAS, Aveeva and KOAN-IT.





Gross
Profit







Our total
gross profit, by segments, is comprised of the following:




Three
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008(Unaudited)Gross
      ProfitSystems
      Division
              
              
              4,485,432
              
              
              
              4,971,243Global
      Services Division
              
              
              1,640,968
              
              
              
              -Gross
      Profit
              
              
              6,126,400
              
              
              
              4,971,243




23




Systems
Division




Aggregate
gross profit for our Systems Division decreased $485,812, or 9.8%, to $4.49
million for the three months ended February 28, 2009 as compared to $4.97
million for the three months ended February 29, 2008. This decrease is mainly
due to a decrease in revenue as discussed in the total revenue
section.




Measured
as a percentage of revenues, our gross profit margin for Systems Division
increased to 13.5% of our Systems Division’s revenues for the three months ended
February 28, 2009 from 11.3% for the three months ended February 29, 2008. This
increase is primarily a result of 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 computer
roll-out projects for school districts in Florida and Georgia during the three
months ended February 28, 2009.





Global Services
Division





Our
Global Services Division’s gross profit was $1.64 million for the three months
ended February 28, 2009. Global Services Division consists of revenues from our
recently acquired subsidiaries Luceo, eBAS, Aveeva and KOAN-IT.





Selling, General and
Administrative Expenses





Systems
Division





Selling,
general and administrative expenses for our Systems Division decreased by
$271,876, or 5.5% to $4.65 million for the three months ended February 28, 2009,
compared to $4.92 million for the three months ended February 29, 2008. This
decrease in selling, general and administrative expenses for the three months
ended February 28, 2009 is primarily attributable to the reduction of various
expense categories including compensation, sales commissions, travel, lodging,
telephone, office expenses, credit card bank fees, recruiting, professional fees
and merger and acquisition related costs.  In January 2009, we
implemented wage reductions to all employees whose earnings are expected to be
greater than $75,000 annually, froze salary increases and implemented many other
cost containment measures. During the three months ended February 28, 2009, we
eliminated approximately 18 positions from various selling and administrative
departments in the Systems Division and incurred approximately $98,000 in
severance costs that are included in selling, general and administrative
expenses in the three months ended February 28, 2009.





Global Services
Division





Our
Global Services Division’s selling, general and administrative expenses for the
three months ended February 28, 2009 were $1.11 million.





Rent Expense-Related
Party





Systems
Division





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
certain directors and officers of the Company and their related family members.
The lease term is through April 2009 with monthly base rent of $15,000. We have
provided notice of renewal to extend the lease for an additional five year term.
During the three months ended February 28, 2009 and February 29, 2008, we
recorded $45,000 in expense under this lease.




24





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 certain officers of our company are passive
investors with an approximately 20% equity interest. The lease term is for 5
years with monthly base rent of $15,832. During the three months ended February
28, 2009 and February 29, 2008, the Company recorded expense under this lease
totaling to $47,496 and $44,325, respectively.





Global Services
Division







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. During the three
months ended February 28, 2009, we recorded $60,000 in expense under this
lease.




Management
believes the leases noted above are being leased at a rate consistent with the
market rate.





Depreciation and
Amortization





Systems
Division





Depreciation
and amortization expense for our Systems Division increased by 10.0%, or
$30,837, to $338,348 for the three months ended February 28, 2009, compared to
$307,511 for the three months ended February 29, 2008.  This increase
in depreciation expense is mainly due to depreciation expense associated with
our purchase of computer equipment, a document management system and other
modifications made to our accounting systems made during the quarter ended
February 28, 2009.





Intangible
assets of the Systems Division at February 28, 2009 and August 31, 2008
consisted of the value ascribed to customer relationships of $8,661,712 less
accumulated amortization of $2,099,463 and $1,809,288,
respectively.  The assets ascribed to customer relationships are being
amortized on a straight-line basis over 13 to 15 years.  Amortization
expense of the Systems Division was $145,088 for each of the three months ended
February 28, 2009 and February 29, 2008.







Global Services
Division





Our
Global Services Division’s depreciation and amortization expense for the three
months ended February 28, 2009 was $229,398.





As of
February 28, 2009, intangible assets of the Global Services Division consisted
of the estimated value ascribed to customer relationships of $5,271,041 less
accumulated amortization of $466,217, the estimated value ascribed to
non-compete of $394,342 less accumulated amortization of $49,051 and the
estimated value ascribed to trademarks of $146,051 less accumulated amortization
of $1,441. As of August 31, 2008 intangible assets of the Global Services
Division consisted of the estimated value ascribed to customer relationships of
$4,200,000 less accumulated amortization of $276,303 and the estimated value
ascribed to non-compete of $370,000 less accumulated amortization of $30,311.
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 Global Services Division was
$210,095 for the three months ended February 28, 2009.
 25





Operating income
(loss)





Systems
Division







Operating
loss for our Systems Division for the three months ended February 28, 2009
increased by 71.5%, or $247,944, to $594,482, compared to $346,539 for the three
months ended February 29, 2008. This increase in operating loss is mainly due to
decreased revenues and gross profit as discussed in the Total Revenue and Gross
Profit sections above.





Global Services
Division





Our
Global Services Division’s operating income for the three months ended February
28, 2009 was $242,552.





Interest
expense





Systems
Division





Interest
expense for the Systems Division decreased by 49.0%, or $154,651, to $161,069
for the three months ended February 28, 2009, compared to $315,720 for the three
months ended February 29, 2008.  This is primarily attributable to
lower balances on various notes payable compared with prior period.





Global Services
Division





Our
Global Services Division’s interest expense for the three months ended February
28, 2009 was $108,861. This interest expense is related to acquisition debt from
the line of credit, 8% subordinated note payable to Mr. Natarajan as part of the
acquisition of Luceo and 6% subordinated notes payable to former shareholders of
KOAN-IT as part of the acquisition of KOAN-IT.





Provision (benefit) for
income taxes





Systems
Division





We
recorded an income tax benefit of $296,142 for the three months ended February
28, 2009 as compared to an income tax benefit of $221,993 for the three months
ended February 29, 2008. The effective tax benefit rate was 39.5% for the three
months ended February 28, 2009 versus 36.2% for the three months ended February
29, 2008. The increase in tax benefit rate was primarily the result of reduction
in permanent differences between our financial statements and income tax
returns.





Global Services
Division





We
recorded an income tax expense for the Global Services Division of $65,341 for
the three months ended February 28, 2009. The effective tax rate for the Global
Services Division for this period was 48.9%.




26





Comparison
of Six Months Ended February 28, 2009 and February 29, 2009




The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
each of the six months ended February 28, 2009 and February 29,
2008.




EMTEC,
INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)


Six
      Months EndedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              Change
              
              
              %RevenuesProcurement
      services
              
              $
              85,772,778
              
              
              $
              111,691,000
              
              
              $
              (25,918,222
              )
              
              
              (23.2
              )%Service
      and consulting
              
              
              26,207,622
              
              
              
              7,017,688
              
              
              
              19,189,934
              
              
              
              273.5
              %Total
      Revenues
              
              
              111,980,400
              
              
              
              118,708,688
              
              
              
              (6,728,288
              )
              
              
              (5.7
              )%Cost
      of SalesCost
      of procurement services
              
              
              76,762,952
              
              
              
              99,655,022
              
              
              
              (22,892,070
              )
              
              
              (23.0
              )%Service
      and consulting
              
              
              20,297,062
              
              
              
              5,437,446
              
              
              
              14,859,616
              
              
              
              273.3
              %Total
      Cost of Sales
              
              
              97,060,014
              
              
              
              105,092,468
              
              
              
              (8,032,454
              )
              
              
              (7.6
              )%Gross
      ProfitProcurement
      services
              
              
              9,009,826
              
              
              
              12,035,978
              
              
              
              (3,026,152
              )
              
              
              (25.1
              )%Procurement
      services %
              
              
              10.5
              %
              
              
              10.8
              %Service
      and consulting
              
              
              5,910,560
              
              
              
              1,580,242
              
              
              
              4,330,318
              
              
              
              274.0
              %Service
      and consulting %
              
              
              22.6
              %
              
              
              22.5
              %Total
      Gross Profit
              
              
              14,920,386
              
              
              
              13,616,220
              
              
              
              1,304,166
              
              
              
              9.6
              %Total
      Gross Profit %
              
              
              13.3
              %
              
              
              11.5
              %Operating
      expenses:Selling,
      general, and administrative expenses
              
              
              11,935,963
              
              
              
              10,676,389
              
              
              
              1,259,574
              
              
              
              11.8
              %Rent
      expense – related party
              
              
              304,992
              
              
              
              178,650
              
              
              
              126,342
              
              
              
              70.7
              %Depreciation
      and amortization
              
              
              1,101,645
              
              
              
              608,014
              
              
              
              493,631
              
              
              
              81.2
              %Total
      operating expenses
              
              
              13,342,600
              
              
              
              11,463,053
              
              
              
              1,879,547
              
              
              
              16.4
              %Pecent
      of revenues
              
              
              11.9
              %
              
              
              9.7
              %Operating
      income
              
              
              1,577,786
              
              
              
              2,153,167
              
              
              
              (575,381
              )
              
              
              (26.7
              )%Percent
      of revenues
              
              
              1.4
              %
              
              
              1.8
              %Other
      expense (income):Interest
      income – other
              
              
              (11,188
              )
              
              
              (66,663
              )
              
              
              55,475
              
              
              
              (83.2
              )%Interest
      expense
              
              
              523,993
              
              
              
              652,743
              
              
              
              (128,750
              )
              
              
              (19.7
              )%Other
              
              
              4,411
              
              
              
              (18
              )
              
              
              4,429
              
              
              
              N/AIncome
      before income taxes
              
              
              1,060,570
              
              
              
              1,567,105
              
              
              
              (506,535
              )
              
              
              (32.3
              )%Provision
      for income taxes
              
              
              439,645
              
              
              
              712,281
              
              
              
              (272,636
              )
              
              
              (38.3
              )%Net
      income
              
              $
              620,925
              
              
              $
              854,824
              
              
              $
              (233,899
              )
              
              
              (27.4
              )%Percent
      of revenues
              
              
              0.6
              %
              
              
              0.7
              %




27




Total
Revenues




Our total
revenues, by segments, are comprised of the following:




Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008(Unaudited)RevenuesSystems
      Division
              
              
              92,442,187
              
              
              
              118,708,688Global
      Services Division
              
              
              19,538,213
              
              
              
              -Total
      Revenue
              
              
              111,980,400
              
              
              
              118,708,688




Systems
Division




Our
Systems Division’s revenues, by client types and revenue type, are comprised of
the following:




For
      the Six Months EndedClient
      Type
            
            February
      28, 2009
            
            
            %
      of Total
            
            
            February
      29, 2008
            
            
            %
      of TotalDepartments
      of the U.S.Government
            
            $
            51,439,447
            
            
            
            55.7
            %
            
            $
            74,853,433
            
            
            
            63.1
            %State
      and Local Governments
            
            
            4,945,273
            
            
            
            5.3
            %
            
            
            5,980,610
            
            
            
            5.0
            %Commercial
      Companies
            
            
            15,200,564
            
            
            
            16.4
            %
            
            
            24,469,810
            
            
            
            20.6
            %Education
      and other
            
            
            20,856,903
            
            
            
            22.6
            %
            
            
            13,404,835
            
            
            
            11.3
            %Total
      Revenues
            
            $
            92,442,187
            
            
            
            100.0
            %
            
            $
            118,708,688
            
            
            
            100.0
            %




For
      Six Months EndedFebruary
      28, 2009
              
              
              February
      29, 2008
              
              
              Change
              
              
              %RevenuesProcurement
      services
              
              $
              85,772,778
              
              
              $
              111,691,000
              
              
              
              ##########
              
              
              
              (23.2
              )%Service
      and consulting
              
              
              6,669,409
              
              
              
              7,017,688
              
              
              
              (348,279
              )
              
              
              (5.0
              )%Total
      Revenues
              
              
              92,442,187
              
              
              
              118,708,688
              
              
              
              (26,266,501
              )
              
              
              (22.1
              )%




Systems
Division’s total revenues decreased $26.27 million, or 22.1%, to $92.44 million
for the six months ended February 28, 2009, compared to $118.71 million for the
six months ended February 29, 2008.  Procurement services revenue
decreased $25.91 million or 23.2%, to $85.77 million for the six months ended
February 28, 2009, compared to $111.69 million for the six months ended February
29, 2008. Services and consulting revenue for the Systems Division decreased
$348,279, or 5.0%, to $6.67 million for the six months ended February 28, 2009,
compared to $7.02 million for the six months ended February 29,
2008.  These decreases are mainly due to an overall decrease in our
client’s IT spending, particularly in various departments of the U.S. government
and our agency and commercial business and various governmental agencies in the
State of New Jersey. We believe that this decrease in revenues can be attributed
to the current economic downturn and the deferral of some larger computer
roll-out projects in future quarters.




During
the six months ended February 28, 2009 and February 29, 2008, U.S. governmental
department and agency related revenues represented approximately 55.7% and 63.1%
of total Systems 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, Department
of Commerce and the General Service Administration. Revenues from various
civilian and military U.S. governmental departments and agencies decreased by
approximately $23.41 million during the six months ended February 28, 2009
compared with the six months ended February 29, 2008. This is mainly due to a
large computer hardware sale to the Department of the Air Force of approximately
$15.1 million and Federal Bureau of Prisons of approximately $11.0 million
in  the six months ended February 29, 2008. The same clients only
accounted for approximately $2.57 million and $3.94 million in revenue for the
three months ended February 28, 2009, respectively.




28




We expect
that federal government business revenues will continue to represent a large
portion of our total revenues as we continue to strive to penetrate wider and
deeper into various civilian and military agencies. The federal business
typically experiences increased activity during the months of August through
February.





The state
and local government business remains uncertain due to the tight budgetary
pressures within governmental agencies in the State of New Jersey as a result of
decreasing tax revenues associated with the slowing economy.




Revenues
from commercial clients decreased by approximately $9.27 million during the six
months ended February 28, 2009 compared with the six months ended February 29,
2008. This decrease is mainly due to the current economic downturn that caused
reductions in technology and discretionary spending by our commercial
clients.





During
the six months ended February 28, 2009, revenues from our education business
increased by approximately $7.45 million compared with the six months ended
February 29, 2008. This increase is attributable to increase in various computer
roll-out projects for school districts in Florida and Georgia during the six
months ended February 28, 2009.





Global Services
Division





Our
Global Services Division’s revenues were $19.54 million for the six months ended
February 28, 2009. Global Services Division consists of revenues from our
recently acquired subsidiaries Luceo, eBAS, Aveeva and KOAN-IT.





Gross
Profit







Our total
gross profit, by segments, is comprised of the following:




Six
      months endedFebruary
      28, 2009
              
              
              February
      29, 2008(Unaudited)Gross
      ProfitSystems
      Division
              
              
              11,172,102
              
              
              
              13,616,220Global
      Services Division
              
              
              3,748,284
              
              
              
              -Gross
      Profit
              
              
              14,920,386
              
              
              
              13,616,220


Systems
Division




Aggregate
gross profit for our Systems Division decreased $2.44 million, or 18.0%, to
$11.17 million for the six months ended February 28, 2009 as compared to $13.62
million for the six months ended February 29, 2008. This decrease is mainly due
to a decrease in revenue as discussed in the total revenue section.




29




Measured
as a percentage of revenues, our gross profit margin for Systems Division
increased to 12.1% of our Systems Division’s revenues for the six months ended
February 28, 2009 from 11.5% for the six months ended February 29, 2008. This
increase is primarily a result of 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 computer
roll-out projects for school districts in Florida and Georgia during the three
months ended February 28, 2009.





Global Services
Division





Our
Global Services Division’s gross profit was $3.75 million for the six months
ended February 28, 2009.





Selling, General and
Administrative Expenses





Systems
Division




Selling,
general and administrative expenses for our Systems Division decreased by
$957,576, or 9.0% to $9.72 million for the six months ended February 28, 2009,
compared to $10.68 million for the six months ended February 29, 2008. A portion
of the $957,576 decrease represented the recovery of $269,882 in professional
fees.  The Company previously expensed these professional fees
associated with defending the Company’s tax positions during the IRS’ 2003 and
2004 tax audits and appeals process.  During the quarter ended
November 30, 2008, the Company recognized the recovery of these previously paid
professional fees based on the successful results of an indemnification clause
associated with the April 2004 Westwood merger.





Without
the reduction of $269,882 in selling, general and administrative expenses
associated with indemnification claim, Systems Division’s selling, general and
administrative expenses would have decreased by $687,694, or 6.4% to $9.99
million for the six months ended February 28, 2009, compared to $10.68 million
for the six months ended February 29, 2008.  This decrease in selling,
general and administrative expenses for the six months ended February 28, 2009
is mainly due to a decrease in sales commission of approximately $366,000 and
bonus expense by approximately $193,000, which is directly related to the
decrease in our gross profit as discussed in the gross profit
section.  The remaining approximately $128,000 decrease in selling,
general and administrative expenses for the six months ended February 28, 2009
is primarily attributable to decrease in various expense categories such as
travel, lodging, telephone, office expenses, credit card bank fees, recruiting,
professional fees and merger and acquisition related costs.  In
January 2009, we implemented wage reductions to all employees whose earnings are
expected to be greater than $75,000 annually, froze salariy increases and
implemented many other cost containment measures. During the six months ended
February 28, 2009, we eliminated approximately 22 positions from various selling
and administrative departments in the Systems Division and incurred
approximately $102,000 in severance costs that are included in selling, general
and administrative expenses for the six months ended February 28,
2009.





Global Services
Division




30







Our
Global Services Division’s selling, general and administrative expenses for the
three months ended February 28, 2009 were $2.22 million.





Rent Expense-Related
Party





Systems
Division





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
certain directors and officers of the Company and their related family members.
The lease term is through April 2009 with monthly base rent of $15,000. We have
provided notice of renewal to extend the lease for an additional five year term.
During the six months ended February 28, 2009 and February 29, 2008, we recorded
$90,000 in expense under this lease.





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 certain officers of our company are passive
investors with an approximately 20% equity interest. The lease term is for 5
years with monthly base rent of $15,832. During the six months ended February
28, 2009 and February 29, 2008, the Company recorded expense under this lease
totaling to $94,992 and $88,650, respectively.





Global Services
Division







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. During the six
months ended February 28, 2009, we recorded $120,000 in expense under this
lease.




Management
believes the related party leases noted above are being leased at a rate
consistent with the market rate.





Depreciation and
Amortization





Systems
Division





Depreciation
and amortization expense for our Systems Division increased by 9.0%, or $54,721,
to $662,735 for the six months ended February 28, 2009, compared to $608,014 for
the six months ended February 29, 2008. This increase in depreciation expense is
mainly due to depreciation expense associated with purchase of computer
equipment, a document management system and other modifications made to our
accounting systems made during the six months ended February 28,
2009.





Intangible
assets of the Systems Division at February 28, 2009 and August 31, 2008
consisted of the value ascribed to customer relationships of $8,661,712 less
accumulated amortization of $2,099,463 and $1,809,288,
respectively.  The assets ascribed to customer relationships are being
amortized on a straight-line basis over 13 to 15 years.  Amortization
expense of the Systems Division was $290,175 for each of the six months ended
February 28, 2009 and February 29, 2008.





Global Services
Division




31





Our
Global Services Division’s depreciation and amortization expense for the six
months ended February 28, 2009 was $438,910.





Amortization
expense for the Global Services Division was $409,706 for the six months ended
February 28, 2009.





Operating
income





Systems
Division




Operating
income for our Systems Division for the six months ended February 28, 2009
decreased by 71.9%, or $1.55 million, to $605,563, compared to $2.15 million for
the six months ended February 29, 2008. This decrease in operating income is
mainly due to decreased revenues and gross profit as discussed in the Total
Revenue and Gross Profit sections above.





Global Services
Division




Our
Global Services Division’s operating income for the six months ended February
28, 2009 was $972,224.





Interest
expense





Systems
Division





Interest
expense for the Systems Division decreased by 54.2%, or $353,835, to $298,908
for the six months ended February 28, 2009, compared to $652,743 for the six
months ended February 29, 2008.  This is primarily attributable to
lower balance on various notes payable and a lower average interest rate charged
on the line of credit attributable to decreasing prime rate during this
period.





Global Services
Division





Our
Global Services Division’s interest expense for the six months ended February
28, 2009 was $225,084. This interest expense is related to acquisition debt from
the line of credit, 8% subordinated notes payable to Mr. Natarajan as part of
the acquisition of Luceo and 6% subordinated note payable to former shareholders
of KOAN-IT as part of the acquisition of KOAN-IT.





Provision for income
taxes





Systems
Division





Income
tax expense for Systems Division decreased by $592,326, to $119,955 for the six
months ended February 28, 2009, compared to $712,281 for the six months ended
February 29, 2008. This decrease is mainly due to  an
approximate $1.25 million decrease in income before income taxes in the six
months ended February 28, 2009 compared to the six months ended February 29,
2008. The effective tax rate for the Systems Division was 38.0% for the six
months ended February 28, 2009 versus an effective tax rate of 45.6% for the six
months ended February 29, 2008.  This was primarily attributable to
recording a $35,382 income tax benefit from the adjustment of
interest and penalties accrued for previously unrecognized tax
positions compared to a $24,179 income tax expense in the prior six month
period.




32





Global Services
Division





We
recorded an income tax expense for the Global Services Division of $319,690 for
the six months ended February 28, 2009. The effective tax rate for the Global
Services Division for this period was 42.9%.





Recently
Issued Accounting Standards




Fair
Value Measurements




In
September 2006, the Financial Accounting Standard Board (“FASB’) issued
Statement of Financial Accounting Standard No. 157, Fair Value Measurements
(“SFAS No. 157”). This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements, but provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those years. The
standard is effective for the Company as of the beginning of its first fiscal
year beginning after November 15, 2007, or September 1, 2008. The FASB, on
February 12, 2008, issued FASB Staff Position (“FSP”) FAS No. 157-2. This FSP
permits a delay in the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008, for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The delay is intended to
allow the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. On February 14, 2008, the FASB issued FSP FAS 157-1
to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive
accounting pronouncements from the scope of SFAS No. 157. The adoption of SFAS
No. 157 did not have a material impact on the Company’s financial
statements.




Fair
Value Option for Financial Assets and Liabilities




In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115(“SFAS No. 159”). SFAS No. 159 provides all entities
with an option to report selected financial assets and liabilities at fair
value. The objective of SFAS No. 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in earnings
caused by measuring related assets and liabilities differently without having to
apply the complex provisions of hedge accounting. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 does not eliminate disclosure
requirements included in other accounting standards.  The standard is
effective for the Company as of the beginning of its first fiscal year beginning
after November 15, 2007, or September 1, 2008. The adoption of SFAS No. 159 did
not have a material impact on the Company’s financial statements.




33




Noncontrolling
Interests in Consolidated Financial Statements





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
Amendment of ARB 51, (“SFAS 160”).” This statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its
adoption, effective as of the beginning of the Company’s fiscal 2010,
noncontrolling interests will be classified as equity in the Company’s financial
statements and income and comprehensive income attributed to the noncontrolling
interest will be included in the Company’s income and comprehensive income. The
provisions of this standard must be applied retrospectively upon adoption. The
Company does not currently expect that the adoption of this pronouncement will
have any effect on its financial statements since all of its existing
subsidiaries are wholly owned.





Business
Combinations





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) 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 acquire. The provisions of SFAS
141(R) are effective for our business combinations occurring on or after
September 1, 2009.





Liquidity
and Capital Resources




Cash at
February 28, 2009 of $3.10 million represented an increase of $1.08 million from
$2.02 million at August 31, 2008. 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 February 28,
2009 increased to $11.99 million from $8.58 million at August 31,
2008.  As of February 28, 2009, our net working capital (defined as
the excess of our current assets over our current liabilities) was approximately
$703,107 less than it was at August 31 2008. The decrease in working capital and
increase in line of credit is mainly due to the acquisition of KOAN-IT on
February 12, 2009. The purchase price for the acquisition of KOAN-IT, consisting
of cash at closing including capitalized professional fees less the amount of
cash acquired amounted to $896,960, which was funded through the borrowings
under the Credit Facility and the issuance of a subordinated promissory notes in
an aggregate principal amount of $407,683 which is payable on the 12 month
anniversary of the closing.




In
December 2006, the Company, Emtec NJ, Emtec LLC, and Emtec Federal
(collectively, the “Borrower”), entered into a Loan and Security Agreement with
De Lage Landen Financial Services, Inc. (the “Lender”) pursuant to which the
Lender provides the Borrower a 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, minus a $5.0
million reserve. 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.




34




To secure
the payment of the obligations under the Credit Facility, the Borrower granted
the Lender a security interest in all of Borrower’s assets, including inventory,
equipment, fixtures, accounts, chattel paper, instruments, deposit accounts,
documents, general intangibles, letters of credit rights, and all judgments,
claims and insurance policies.




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 has agreed to
extend the term of the loans issued to the Borrower under the Loan and Security
Agreement from December 7, 2008 until December 7, 2010 and to make certain other
amendments to the Loan and Security Agreement, including the
following:




·
            The
      First Amendment changes 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 changes the interest rate for revolving credit loans to
      the base rate plus 3.25% from the previous interest rate for revolving
      credit loans of the base rate minus 0.5%, and changes 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 amends the Schedule to provide that the Borrowers must pay
      the Lender a floorplan annual volume commitment fee if the aggregate
      amount of all floorplan loans does not equal or exceed $60,000,000 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 $60,000,000 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 pro rated
      portion of the annual volume commitment
fee.




In
addition by executing the First Amendment, Emtec Global, Luceo, eBAS and Aveeva
each joined the Credit Facility as a Borrower and granted DLL a security
interest in all of 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 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.





In
addition, the Lender and Avnet, Inc., one of our trade creditors, entered into
an inter-creditor agreement in which the Lender agreed to give Avnet a first
lien position on all future unbilled service maintenance billings and which
provides that, as regards to Avnet, all debt obligations to the Lender are
accorded priority.





As of
February 28, 2009, we had an outstanding balance of $11.99 million under the
revolving portion of the Credit Facility and $896,435 of outstanding (included
in the Company’s accounts payable) balances plus $503,600 in open approvals
under the floor plan portion of the Credit Facility with Lender. As of February
28, 2009, we had net availability of $6.11 million under the revolving portion
of the Credit Facility and additional net availability of $12.51 million under
the floor plan portion of the Credit Facility.





As of
February 28, 2009, the Company determined that it was in compliance with its
financial covenants with the Lender.




35





As of
February 28, 2009, we had open term credit facilities with our primary trade
vendors, including aggregators and manufacturers, of approximately $27.20
million with outstanding principal of approximately $10.76 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 $314,999 during the six months ended February 28, 2009 related
primarily to the purchase of computer equipment for internal use, purchase of a
document management system and software costs to upgrade various modules of our
accounting systems. We anticipate our total capital expenditures for our fiscal
year ending August 31, 2009 will be approximately $600,000, of which
approximately $250,000 will be for the upgrade of our organizational computer
system and the remaining $350,000 will primarily be for the purchase of computer
equipment for internal use, furniture, delivery trucks and leasehold
improvements.




We have
approximately $2.25 million in principal payments due on various notes payable
to related-parties during the upcoming quarter ending on May 31,
2009.  We plan to fund these payments from borrowing under the Credit
Facility.




We
anticipate that our primary sources of liquidity for the balance of fiscal year
2009 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 have
no arrangements or other relationships with unconsolidated entities or other
persons that are reasonably likely to materially affect liquidity or the
availability of or requirements for capital resources.




We
believe that funds generated from operations, trade vendor credit and bank
borrowings should be sufficient to meet our current operating cash requirements
through the next twelve months. However, there can be no assurance that all of
the aforementioned sources of cash can be realized.  Our lenders,
including the lender for our credit facility, may have suffered losses related
to their lending and other financial relationships, especially because of the
general weakening of the national economy and increased financial instability of
many borrowers.  As a result, lenders may become insolvent or tighten
their lending standards, which could make it more difficult for us to borrow
under our credit facility or to obtain other financing on favorable terms or at
all.  Our financial condition and results of operations would be
adversely affected if we were unable to draw funds under our credit facility
because of a lender default or to obtain other cost-effective
financing.





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.




36





Revenue
Recognition




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




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




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




Product
revenue represents sales of computer hardware and pre-packaged
software.  These arrangements often include software installations,
configurations, and imaging, along with delivery and set-up of
hardware.  We follow the criteria contained in EITF 00-21 and Staff
Accounting Bulletin 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.




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.




37




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, pursuant to the guidelines of Emerging Issues Task Force
99-19, “Reporting Revenue Gross as a Principal versus Net as an
Agent.”




Service
and consulting revenue include 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




We have
adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other
Intangible Assets” (“SFAS 142”).  As a result, amortization of
goodwill was discontinued.  Goodwill is the excess of the purchase
price over the fair value of the net assets acquired in a business combination
accounted for under the purchase method. We test goodwill and indefinite-lived
assets for impairment at least annually (on June 1) in accordance with SFAS
142.




Intangible
assets at February 28, 2009 and August 31, 2008 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 Statement of Financial Accounting Standards
No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  Recoverability of long-lived assets is assessed by a
comparison of the carrying amount to the estimated undiscounted future net cash
flows expected to result from the use of the assets and their eventual
disposition.  If estimated undiscounted future net cash flows are less
than the carrying amount, the asset is considered impaired and a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the asset.




38





Rebates





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





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.  On September 1, 2007, the Company adopted FASB
Interpretation No. 48 (“FIN 48”). FIN 48 prescribes a recognition threshold that
a tax position is required to meet before being recognized in the financial
statements and provides guidance on de-recognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and transition
issues.




39




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 February 28, 2009 was approximately $12.0
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 $120,000 annually.




40




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 February
28, 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 February 28, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




41




PART
II – OTHER INFORMATION




Item
1.  Legal Proceedings




On December
15, 2008, Unisys Corporation, one of our suppliers, filed a lawsuit against
us in the Superior Court of New Jersey in Union County alleging that we owe
$158,003 for various products and related services they claim to have
provided from November 2005 through March 2007, plus interest and legal fees, so
totaling $233,784. They have since withdrawn the lawsuit.





We are
occasionally involved in various lawsuits, claims, and administrative
proceedings arising in the normal course of business. We believe 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.




42





Item
1A.  Risk Factors




Our 2008
Annual Report on Form 10-K includes a detailed discussion of our risk
factors.  Additionally, our quarterly report on Form 10-Q for the
period ended November 30, 2008 includes updates to our risk
factors.  The information presented below amends, updates and should
be read in conjunction with the risk factors and information disclosed under
Item 1A of our Form 10-K for the year ended August 31, 2008, and of our Form
10-Q for the period ended November 30, 2008.




Fluctuations
in foreign currency exchange rates could negatively impact our results of
operations.





We are
exposed to gains and losses resulting from the effect that fluctuations in
foreign currency exchange rates have on the reported results in our Consolidated
Financial Statements due to the translation of operating results and financial
position of our foreign subsidiaries.





43




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




The
Annual Meeting of Shareholders of the Company (the “Meeting”) was held on
February 2, 2009. There were present at the Meeting in person or by proxy
shareholders holding an aggregate of 13,615,672 shares of Common Stock out of a
total number of 15,141,993 shares of Common Stock outstanding and entitled to
vote at the Meeting.




1.
            Election
      of  Directors.





The
following directors were elected as Class A directors.





NOMINEE
            
            FOR
            
            AGAINST
            
            ABSTENSIONSDinesh
      R. Desai
            
            13,532,069
            
            76,050
            
            7,553Brian
      McAdams
            
            13,519,819
            
            76,300
            
            19,553Gregory
      P. Chandler
            
            13,469,819
            
            138,300
            
            7,553





The
following director was elected as a Class B director.





NOMINEE
            
            FOR
            
            AGAINST
            
            ABSTENSIONSKeith
      Grabel
            
            13,531,402
            
            76,717
            
            7,553





Robert J.
Mannarino’s term as a director continues until the  2010 annual
meeting of stockholders.





2.
            The
      stockholders ratified the appointment of McGladrey & Pullen, LLP as
      the Company’s independent registered public accounting firm for the fiscal
      year ending August 31, 2009 by the vote set forth
  below:





FOR
            
            AGAINST
            
            ABSTENSIONS13,607,008
            
            250
            
            8,414








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





FOR
            
            AGAINST
            
            ABSTENSIONS13,900,633
            
            257,716
            
            734,960





44




Item
6.                        Exhibits




Exhibit 2.1 – Share
Purchase Agreement by and among 7119747 Canada Inc., Emtec Infrastructure
Services Corporation, KOAN-IT Corp. and the Shareholders of KOAN-IT Corp. dated
February 12, 2009.(1)




Exhibit 10.1 – First
Amendment and Joinder to Loan and Security Agreement and Schedule to Loan and
SecurityAgreement
dated December 5, 2008.(2)




Exhibit 21.1 – List
of Subsidiaries.




Exhibit 31.1 - Rule
13a-14(a)/15d-14(a) Certification of Dinesh R. Desai, Principal Executive
Officer, of Emtec, Inc. datedApril 14, 2009.




Exhibit 31.2 - Rule
13a-14(a)/15d-14(a) Certification of Stephen C. Donnelly, Principal Financial
Officer, of Emtec, Inc. dated April 14, 2009.




Exhibit 32.1 -
Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
Emtec, Inc. dated April 14, 2009.




Exhibit 32.2 -
Section 1350 Certificate of Stephen C. Donnelly, Principal Financial Officer, of
Emtec, Inc. dated April 14, 2009.




Exhibit 99.1 –
Employment Agreement between KOAN-IT Corp. and Peter Pranschke dated February
12, 2009.(1)




Exhibit 99.2 –
Employment Agreement between KOAN-IT Corp. and Kim Orava dated February 12,
2009.(1)




Exhibit 99.3 –
Employment Agreement between KOAN-IT Corp. and Tim Stratton dated February 12,
2009.(1)




Exhibit 99.4 –
Employment Agreement between KOAN-IT Corp. and Dominique Roberge dated February
12, 2009.(1)







(1) Previously filed as an exhibit to
Registrant’s Current Report on Form 8-K, filed on February 13, 2009 and
incorporated herein by reference.


(2) Previously filed as an exhibit to
Registrant’s Current Report on Form 8-K, filed on December 11, 2008 and
incorporated herein by reference.








45








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 Chief Executive
      Officer(Principal
      Executive Officer)




By:
              /s/ STEPHEN C.
      DONNELLYStephen
      C. DonnellyChief
      Financial Officer(Principal
      Financial Officer)




Date:
April 14, 2009





46