**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 May 31, 2008




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 IdentificationNo.)





**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  ̈




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




Large
      accelerated filer o Accelerated filer o Non-accelerated filer o Smaller
      reporting company x




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




As
      of
      July 10, 2008, there were outstanding 14,849,591 shares of the registrant’s
      common stock.
















**EMTEC,
      INC.**


**FORM
      10-Q FOR THE QUARTER ENDED MAY 31, 2008**




Table
      of
      Contents


**PART
                    I – FINANCIAL INFORMATION**Item
                    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 Financial Condition and
                    Results of Operations
                
                14Item
                    3 – Quantitative and Qualitative Information About Market
                    Risk
                
                33Item
                    4T – Controls and Procedures
                
                34**PART
                    II – OTHER INFORMATION**Item
                    6 – Exhibits
                
                35SIGNATURES
                
                36





**PART
      I – FINANCIAL INFORMATION**


**Item
      1.**  **Financial
      Statements**





**EMTEC,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**May 31, 2008**
              **(Unaudited)**
            
            **August 31, 2007****Assets**Current
                AssetsCash
            
            $
            1,268,626
            
            $
            2,251,352Receivables:Trade,
                less allowance for doubtful accounts
            
            
            19,788,007
            
            
            28,774,286Others
            
            
            3,690,219
            
            
            2,756,815Inventories,
                net
            
            
            2,411,115
            
            
            5,021,516Prepaid
                expenses
            
            
            501,841
            
            
            331,062Deferred
                tax asset - current
            
            
            685,623
            
            
            653,820Total
                current assets
            
            
            28,345,431
            
            
            39,788,851Property
                and equipment, net
            
            
            1,006,057
            
            
            1,308,582Other
                intangible assets, net
            
            
            8,364,167
            
            
            7,432,776Goodwill
            
            
            10,718,346
            
            
            9,014,055Deferred
                tax asset - long term
            
            
            147,930
            
            
            —Restricted
                cash
            
            
            150,000
            
            
            150,000Other
                assets
            
            
            108,743
            
            
            112,505Total
                assets
            
            $
            48,840,674
            
            $
            57,806,769**Liabilities
                and Stockholders' Equity**Current
                LiabilitiesLine
                of credit
            
            $
            400,066
            
            $
            5,847,494Accounts
                payable
            
            
            22,154,365
            
            
            26,578,127Current
                portion of long term debt - related party
            
            
            2,645,307
            
            
            1,280,660Income
                taxes payable
            
            
            472,722
            
            
            9,255Accrued
                liabilities
            
            
            3,153,225
            
            
            4,172,008Due
                to former stockholders
            
            
            631,415
            
            
            631,415Customer
                deposits
            
            
            47,131
            
            
            183,220Deferred
                revenue
            
            
            1,165,494
            
            
            1,362,333Total
                current liabilities
            
            
            30,669,723
            
            
            40,064,512Deferred
                tax liability
            
            
            2,363,932
            
            
            1,307,155Accrued
                liabilities
            
            
            174,739
            
            
            —Long
                term debt - related party
            
            
            1,159,408
            
            
            2,745,514Total
                liabilities
            
            
            34,367,802
            
            
            44,117,181Commitments
                and contingent liabilitiesStockholders'
                EquityCommon
                stock $0.01 par value; 25,000,000 shares authorized;
              17,714,180
                and 17,249,875 shares issued and 14,849,591 and 14,385,286, outstanding
                at
                May 31, 2008 and August 31, 2007, respectively
            
            
            177,142
            
            
            172,499Additional
                paid-in capital
            
            
            20,557,148
            
            
            20,348,736Accumulated
                deficit
            
            
            (665,371
            )
            
            (1,235,600
            )20,068,919
            
            
            19,285,635Less:
                treasury stock, at cost, 2,864,589 shares
            
            
            (5,596,047
            )
            
            (5,596,047
            )Total
                stockholders' equity
            
            
            14,472,872
            
            
            13,689,588Total
                liabilities and stockholders' equity
            
            $
            48,840,674
            
            $
            57,806,769





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 May 31,**
            
            **Nine months ended May 31****2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenues
            
            $
            38,929,191
            
            $
            44,163,067
            
            $
            157,637,879
            
            $
            150,256,583Cost
                of revenues
            
            
            33,233,642
            
            
            39,493,643
            
            
            138,326,110
            
            
            135,176,544Gross
                profit
            
            
            5,695,549
            
            
            4,669,424
            
            
            19,311,769
            
            
            15,080,039Operating
                expenses:Selling,
                general, and administrative expenses
            
            
            5,348,986
            
            
            4,787,338
            
            
            16,025,377
            
            
            15,890,166Management
                fee – related party
            
            
            —
            
            
            —
            
            
            —
            
            
            145,834Amended
                employment agreements and management agreement charges
            
            
            —
            
            
            —
            
            
            —
            
            
            2,329,800Rent
                expense – related party
            
            
            91,439
            
            
            89,325
            
            
            270,089
            
            
            267,975Depreciation
                and amortization
            
            
            336,086
            
            
            297,815
            
            
            944,100
            
            
            848,551Total
                operating expenses
            
            
            5,776,510
            
            
            5,174,478
            
            
            17,239,565
            
            
            19,482,326Operating
                income (loss)
            
            
            (80,961
            )
            
            (505,054
            )
            
            2,072,204
            
            
            (4,402,287
            )Other
                expense (income):Interest
                income – other
            
            
            (11,144
            )
            
            (15,995
            )
            
            (77,807
            )
            
            (73,910
            )Interest
                expense
            
            
            180,276
            
            
            267,120
            
            
            833,018
            
            
            830,718Other
            
            
            (256
            )
            
            (29
            )
            
            (274
            )
            
            (442
            )(Loss)
                income before income taxes
            
            
            (249,837
            )
            
            (756,150
            )
            
            1,317,267
            
            
            (5,158,653
            )Provision
                (benefit) for income taxes
            
            
            (98,055
            )
            
            (290,902
            )
            
            614,226
            
            
            (2,030,712
            )Net
                (loss) income
            
            $
            (
                151,782
            )
            $
            (
                465,248
            )
            $
            703,041
            
            $
            (3,127,941
            )Net
                (loss) income per common shareBasic
                and Diluted
            
            $
            (0.01
            )
            $
            (0.03
            )
            $
            0.05
            
            $
            (0.22
            )Weighted
                Average Shares OutstandingBasic
            
            
            14,519,049
            
            
            14,385,286
            
            
            14,519,049
            
            
            14,385,286Diluted
            
            
            14,519,049
            
            
            14,385,286
            
            
            14,636,249
            
            
            14,385,286




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


2


**EMTEC,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Nine
                  months ended May 31,****2008**
              
              
              **2007****Cash
                  Flows From Operating Activities**Net
                  income (loss)
              
              $
              703,041
              
              $
              (3,127,941
              )**Adjustments
                  to Reconcile Net Income (loss) to Net****Cash
                  Provided By (Used In) Operating Activities**Depreciation
              
              
              475,491
              
              
              413,288Amortization
                  related to intangible assets
              
              
              468,609
              
              
              435,263Deferred
                  income tax expense (benefit)
              
              
              461,576
              
              
              (2,031,400
              )Stock-based
                  compensation
              
              
              213,055
              
              
              291,868Amended
                  employment agreements and management agreement charges
              
              
              -
              
              
              2,329,800**Changes
                  In Operating Assets and Liabilities**Receivables
              
              
              10,760,434
              
              
              4,096,623Inventories
              
              
              2,610,401
              
              
              (4,837,664
              )Prepaid
                  expenses and other assets
              
              
              (155,753
              )
              
              (341,836
              )Accounts
                  payable
              
              
              (4,477,624
              )
              
              4,017,139Deferred
                  revenue
              
              
              (196,839
              )
              
              (75,920
              )Customer
                  deposits
              
              
              (136,089
              )
              
              (572,118
              )Income
                  taxes payable
              
              
              19,629
              
              
              (26,424
              )Accrued
                  liabilities
              
              
              (3,315,341
              )
              
              (873,500
              )Deferred
                  compensation
              
              
              -
              
              
              (272,332
              )**Net
                  Cash Provided By (Used In) Operating Activities**
              
              
              **7,430,588**
              
              
              **(575,154**
              **)****Cash
                  Flows From Investing Activities**Purchases
                  of property and equipment
              
              
              (172,965
              )
              
              (502,880
              )Acquisition
                  of business, net of cash acquired
              
              
              (1,751,461
              )
              
              -**Net
                  Cash Used In Investing Activities**
              
              
              **(1,924,426**
              **)**
              
              **(502,880**
              **)****Cash
                  Flows From Financing Activities**Net
                  increase (decrease) in line of credit
              
              
              (5,447,428
              )
              
              2,882,124Repayment
                  of debt
              
              
              (1,041,460
              )
              
              (1,074,643
              )**Net
                  Cash (Used In) Provided By Financing Activities**
              
              
              **(6,488,888**
              **)**
              
              **1,807,481****Net
                  (decrease) increase in Cash**
              
              
              **(982,726**
              **)**
              
              **729,447****Beginning
                  Cash**
              
              
              2,251,352
              
              
              917,683**Ending
                  Cash**
              
              **$**
              **1,268,626**
              
              **$**
              **1,647,130****Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the period for:Income
                  taxes
              
              $
              934,016
              
              $
              40,457Interest
              
              
              1,198,147
              
              
              550,456**Supplemental
                  Schedule of Non Cash Investing and Financing
                  Activities**Acquisition
                  of Capital Stock of Luceo
              
              $
              820,000
              
              
              -




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, 2007.





**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 clients. The Company’s areas of specific
      practices include communications, data management, enterprise computing, managed
      services, storage and data center planning and development. The Company’s client
      base is comprised of departments of the United States Federal Government, U.S.
      state and local governments, schools and commercial businesses throughout the
      United States. The most significant portion of the Company’s revenue is derived
      from activities as a reseller of IT products, such as workstations, servers,
      microcomputers, and 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.




With
      the
      acquisition of Luceo, 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”).




*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, and EGS’s wholly owned subsidiary Luceo.
      Significant intercompany account balances and transactions have been eliminated
      in consolidation.





4




*Reclassifications*





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





*Earnings
      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 (loss) per share is similar to the 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. The assumed conversion of options and warrants resulted
      in 117,200 additional dilutive shares for the nine months ended May 31, 2008.
      Diluted shares consisting of stock options, restricted stock awards and warrants
      totaling to 177,640, 47,031 and 67,075 shares were not included in the
      calculation of diluted net loss per share for the three months ended May 31,
      2008 and May 31, 2007 and nine months ended May 31, 2007, respectively, because
      the effect of the inclusion would be anti-dilutive. In addition, outstanding
      stock warrants to purchase 1,649,955 and 1,598,365 common shares as of and
      for
      the periods ended May 31, 2008 and 2007, respectively, were also not included
      in
      the computation of diluted earnings (loss) per share because the exercise price
      was greater than the average market price of the Company’s common shares over
      those periods.




*Income
      Taxes*




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.




As
      a
      result of the implementation of FIN 48 on September 1, 2007, the Company
      recorded a liability for unrecognized tax obligations of $539,580. In accordance
      with FIN 48, the cumulative effect of the change in accounting principle was
      required to be treated as an adjustment to opening retained earnings. The
      Company’s adoption of FIN 48 resulted in a decrease in retained earnings of
      $132,812.




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 income. During the three and
      nine
      months ended May 31, 2008, the Company recorded interest associated with
      uncertain tax positions in the accrued liabilities in the amount of $11,467
      and
      $35,646, respectively, as an increase to current income tax expense.




The
      total
      liability for unrecognized tax obligations was $539,580 as of May 31, 2008
      and,
      as noted below, primarily related uncertain tax obligations related to an
      ongoing IRS tax audit. The remainder would not affect the provision, and would
      be adjusted against either deferred tax assets or goodwill based on the nature
      of its origin.




5




During
      the fiscal 2006 year, Emtec Federal, formerly Westwood Computer Corporation
      (“Westwood”) was audited by the IRS. The IRS audited the two-predecessor tax
      years ended April 16, 2004. With one exception, all tax matters identified
      by
      the IRS have been settled, with appropriate adjustments recorded in the current
      tax expense for the year ended August 31, 2006. The one currently unsettled
      matter involves a disagreement with the IRS over the valuation of real property
      sold by Westwood to a related party during Westwood’s 2003 fiscal year. The IRS
      has asserted that the Company’s property valuation and resulting taxable gain
      was understated by $1.5 million, which could result in approximately $521,000
      in
      federal income tax liability plus potential interest and penalties. Discussions
      with the IRS are continuing. The Company has submitted a letter to the IRS
      objecting to the IRS’s valuation, explaining the basis for Westwood’s valuation
      of the property, and requesting a conference with the Appeals Office of IRS.
      While the Company believes that it has adequately supported the valuation of
      the
      transaction and reported the appropriate income taxes, there can be no assurance
      that its valuation will ultimately be accepted by the IRS. It is reasonably
      possible that this audit could be completed within the next twelve months with
      the Company and the IRS resolving all issues. We estimate a range of reasonably
      possible increase or decrease in total unrecognized federal and state income
      tax
      of approximately $200,000 that could result from a settlement with IRS.




Under
      the
      provisions of the merger agreement executed in connection with its acquisition
      of Westwood, some of the potential liability recorded in connection with the
      dispute with the IRS is subject to indemnification coverage by the former owners
      of Westwood. As of May 31, 2008, the Company recorded a $341,165 other
      receivable on the balance sheet to record this potential recovery under the
      indemnification provisions. The accounting effect of recording the $341,165
      other receivable was to decrease goodwill by $341,165.




We
      conduct business nationally and, as a result, file income tax returns in the
      U.S
      federal jurisdiction and various state and local jurisdictions. With few
      exceptions, we are no longer subject to federal, state or local income tax
      examinations for tax returns filed for fiscal years 2002 and prior.




**3.
      Acquisition**




On
      March
      20, 2008, EGS, Luceo and Sivapatham Natarajan (“Mr. Natarajan”) entered into a
      Stock Purchase Agreement, pursuant to which EGS agreed to acquire all of the
      outstanding stock of Luceo from Mr. Natarajan for the purchase price that
      consists 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 the next three years on the anniversary of the
      closing 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 .




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 Luceo’s net assets on March 20, 2008 was $1,047,139, which resulted in
      an excess purchase price over fair value of net assets acquired of $1,567,861,
      which was recognized as goodwill.




6




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


Cash
              
              $
              215,235Trade
                  receivables
              
              
              2,093,654Other
                  receivables
              
              
              272,741Prepaid
                  expenses
              
              
              7,873Customer
                  relationships
              
              
              1,300,000Noncompete
                  asset
              
              
              100,000Other
                  assets
              
              
              3,390Accounts
                  payable
              
              
              (53,862
              )Other
                  current liabilities
              
              
              (1,791,282
              )Income
                  tax payable
              
              
              (443,838
              )Deferred
                  tax liabilities
              
              
              (656,773
              )Fair
                  value of net assets acquired
              
              $
              1,047,139Purchase
                  price
              
              
              2,615,000Excess
                  purchase price
              
              $
              1,567,861




The
      allocation is preliminary and such amounts are subject to adjustments as
      additional analysis is performed or obtained from third party sources. $1.3
      million was allocated to customer relationships at the acquisition date and
      is
      being amortized over a period of nine years. $100,000 was allocated to
      noncompete asset at the acquisition and is being amortized over a period of
      five
      years.




The
      Company capitalized professional fees of $171,696
      that were associated with the acquisition of Luceo.




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




**4.
      Stock Options, Non-Vested Shares and Warrants**




Stock
      Options




The
      Company’s 2006 Stock-Based Incentive Compensation Plan (the “2006 Plan”) was
      approved by the stockholders on May 8, 2006. The 2006 Plan authorizes the
      granting of stock options to directors and eligible employees. The Company
      has
      reserved 1,400,000 shares of its common stock for issuance under the 2006 Plan
      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 vest from immediately through a term of 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 and used historical
      exercise 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.




7




A
      summary
      of stock options for the nine months ended May 31, 2008 is as
      follows:


**For
                  the Nine Months Ended May 31, 2008**
              
              Shares
              
              Weighted Average
                  Exercise Price
              
              Weighted Average
                  Remaining Term
              
              AggregateIntrinsic ValueOptions
                  Outstanding -September 1, 2007
              
              
              396,500
              
              $
              1.22Options
                  Granted
              
              
              32,500
              
              $
              0.68Options
                  Exercised
              
              
              —Options
                  Forfeited or Expired
              
              
              (42,500
              )
              $
              1.24Options
                  Outstanding -May 31, 2008
              
              
              386,500
              
              $
              1.17
              
              
              6.30
                  years
              
              $
              5,200Options
                  Exercisable -May 31, 2008
              
              
              149,750
              
              $
              1.18
              
              
              7.32
                  years
              
              $
              5,200




There
      were no options granted during the three months ended May 31, 2008.




The
      following assumptions were used to value stock options issued during the nine
      months ended May 31, 2008:


Nine Months EndedMay 31, 2008Weighted-Average
                  Fair Value
              
              $
              0.53*Assumptions*Expected
                  Volatility
              
              
              101
              %Expected
                  Term
              
              
              4.87
                  yearsExpected
                  Forfeiture Rate
              
              
              0
              %Dividend
                  Yield
              
              
              0
              %Risk-Free
                  Interest Rate
              
              
              3.27
              %




Non-vested
      Stock (Restricted Stock)




During
      the fiscal year ended August 31, 2007, the Company granted 459,224 shares of
      non-vested (restricted) stock to certain members of senior management and
      employees. These non-vested shares vest equally over 4 years. During January
      2008, the Company granted 10,331 shares of stock to a member of senior
      management team. 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.




8




A
      summary
      of non-vested (restricted) shares for the nine months ended May 31, 2008 is
      as
      follows:


**For
                  the Nine Months Ended May 31, 2008**
              
              Shares
              
              Weighted AverageGrant Date Fair ValueNonvested
                  - September 1, 2007
              
              
              456,974
              
              $
              1.25Granted
              
              
              10,331
              
              $
              1.21Vested
              
              
              (133,763
              )Forfeited
              
              
              (3,000
              )
              $
              1.44Nonvested
                  -May 31, 2008
              
              
              330,542
              
              $
              1.24Vested
                  -May 31, 2008
              
              
              133,763
              
              $
              1.26




Stock-Based
      Compensation - Stock Options and Non-vested (Restricted) Stock




Stock-based
      compensation costs related to the 2006 Plan totaled $66,980 and $213,055 during
      the three months and nine months ended May 31, 2008, respectively. As of May
      31,
      2008, the Company had recognized a total of $640,092 in compensation cost and
      had $294,170 of unrecognized compensation cost related to these instruments.
      The
      cost is expected to be recognized over a weighted-average period of 4
      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
      1,649,955 and 1,598,365 shares, with an exercise price of $2.24 and $2.31 per
      share, as of May 31, 2008 and 2007, respectively. The outstanding stock
      warrants were anti-dilutive for the nine months ended May 31, 2008 and 2007,
      because the exercise price was greater than the average market price of the
      Company’s common shares over such nine-month periods.




**5.
      Line of Credit**




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.




Borrowings
      under the Credit Facility bear interest at an annual rate equal to the rate
      of
      interest published in the “Money Rates” section of the Wall Street Journal minus
      0.5% (4.50% as of May 31, 2008) for revolving credit loans. Floor plan loans
      do
      not bear interest until, and unless, the Borrower is in default, unless a
      floorplan loan is unsubsidized, then, such floor plan loan will accrue interest
      once made, at the rate agreed to by the parties. Interest on outstanding floor
      plan loans accrues at the rate of 2.5% per annum in excess of the interest
      rate
      published in the “Money Rates” section of the Wall Street Journal. The rate in
      effect was 7.50% as of May 31, 2008.




9




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.




The
      Company had balances of $400,066 and $5.85 million outstanding under the
      revolving portion of the Credit Facility, and balances of $616,283 and $2.63
      million (included in the Company’s accounts payable) outstanding plus $885,500
      and $1.80 million in open approvals under the floor plan portion of the Credit
      Facility with the Lender at May 31, 2008 and August 31, 2007, respectively.
      Net
      availability of $10.43 million and $8.78 million was available under the
      revolving portion of the Credit Facility, and $23.67 million and $12.95 million
      was available under the floor plan portion of the Credit Facility, as of May
      31,
      2008 and August 31, 2007, respectively.





As
      of May
      31, 2008, the Company determined that it was in compliance with its financial
      covenants with the Lender.




**6.
      Concentration of Credit Risk and Significant Clients** ****




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




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




For the Three Months EndedMay 31, 2008
            
            % of Total
            
            May 31, 2007
            
            % of TotalDepartments
                of the United States Government
            
            $
            13,136,567
            
            
            33.7
            %
            $
            19,408,973
            
            
            43.9
            %State
                and Local Governments
            
            
            2,153,215
            
            
            5.5
            %
            
            2,791,328
            
            
            6.3
            %Commercial
                Companies
            
            
            15,624,874
            
            
            40.1
            %
            
            13,579,759
            
            
            30.7
            %Education
                and other
            
            
            8,014,535
            
            
            20.6
            %
            
            8,383,007
            
            
            19.0
            %Total
                Revenues
            
            $
            38,929,191
            
            
            100.0
            %
            $
            44,163,067
            
            
            100.0
            %




For the Nine Months EndedMay 31, 2008
            
            % of Total
            
            May 31, 2007
            
            % of TotalDepartments
                of the United States Government
            
            $
            87,990,000
            
            
            55.8
            %
            $
            86,922,169
            
            
            57.8
            %State
                and Local Governments
            
            
            8,133,825
            
            
            5.2
            %
            
            9,559,667
            
            
            6.4
            %Commercial
                Companies
            
            
            40,094,684
            
            
            25.4
            %
            
            37,643,792
            
            
            25.1
            %Education
                and other
            
            
            21,419,370
            
            
            13.6
            %
            
            16,130,955
            
            
            10.7
            %Total
                Revenues
            
            $
            157,637,879
            
            
            100.0
            %
            $
            150,256,583
            
            
            100.0
            %




Gwinnett
      County Public School District accounted for approximately $6.0 million or 15.4%,
      and $12.82 million or 8.1% of the Company’s total revenues for the three and
      nine months ended May 31, 2008. The same customer accounted for approximately
      $5.55 million or 12.6% and $8.52 million or 5.7% of the Company’s total revenue
      for the three and nine months ended May 31, 2007.




10




The
      Company reviews a customer'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 customers, 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 the Company ceases its collection efforts.





The
      trade
      account receivables consist of the following:


May 31,
              
              August 31,2008
              
              2007Trade
                  receivables
              
              $
              20,179,144
              
              $
              29,165,423Allowance
                  for doubtful accounts
              
              $
              (391,137
              )
              $
              (391,137
              )Trade
                  receivables, net
              
              $
              19,788,007
              
              $
              28,774,286




**7.
      Accrued Liabilities**




Current
      accrued liabilities consisted of the following:


May 31, 2008
              
              August 31, 2007Accrued
                  payroll
              
              $
              912,445
              
              $
              934,517Accrued
                  commissions
              
              
              413,922
              
              
              507,317Accrued
                  state sales taxes
              
              
              165,104
              
              
              286,158Accrued
                  third party service fees
              
              
              49,742
              
              
              115,776Other
                  accrued expenses
              
              
              1,612,011
              
              
              2,328,240$
              3,153,225
              
              $
              4,172,008




Long-term
      accrued liabilities consisted of $174,739 in unrecognized tax obligations
      recorded as a result of the implementation of FIN 48 on September 1,
      2007.





**8.
      Accumulated deficit**





Accumulated
      deficit roll-forward for the nine months ended May 31, 2008 consisted of the
      following:


AccumulatedDeficitBalance
                  at August 31, 2007
              
              $
              (1,235,600
              )Adoption
                  of FIN 48 -September 1, 2007( see footnote 2 Income
                  Taxes)
              
              
              (132,812
              )Net
                  income for nine months ended May 31, 2008
              
              
              703,041Balance
                  at May 31, 2008
              
              $
              (665,371
              )




11




**9.
      Related Party Transactions**




The
      Company recorded a monthly management fee of approximately $29,166, pursuant
      to
      the Management Services Agreement (the “Management Services Agreement”) between
      DARR Global Holdings, Inc. (“DARR Global”) and Westwood, dated April 16, 2004
      through January 31, 2007. On February 5, 2007, in connection with the issuance
      of the promissory note to DARR Global, Westwood and DARR Global terminated
      the
      Management Services Agreement. DARR Global is a management consulting company
      100% owned by the Company’s Chairman and Chief Executive Officer. For the nine
      months ended May 31, 2007, the Company recorded $145,834, for this management
      fee in the accompanying consolidated statements of operations.




One
      of
      the Company’s facilities is leased under a non-cancelable operating lease
      agreement with an entity that is owned by officers of the Company. Rent expense
      was $135,000 for each of the nine months ended May 31, 2008 and 2007. The
      facilities consist of office and warehouse space totaling 42,480 square feet,
      located in Springfield, New Jersey. Management believes the lease payments
      are
      at or below market rate for similar facilities.




The
      Company is occupying approximately 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, owning approximately 20% of the equity interest. The lease
      term is for 5 years, with monthly base rent of $15,832. During the three months
      ended May 31, 2008 and 2007, the Company recorded expense under this lease
      totaling to $46,439 and $44,325, respectively. During the nine months ended
      May
      31, 2008 and 2007, the Company recorded expense under this lease totaling to
      $135,089 and $132,975, respectively.




EgisNova
      Corp. is an information technology staffing company, which is owned by the
      spouse of the President of Luceo. EgisNova Corp. provides subcontractor services
      to Luceo. EgisNova Corp. provided gross services to Luceo totaling $51,481
      for
      the period from March 20, 2008 through May 31, 2008.




**10.
      Amended Employment Agreements and Management Agreement
      Charges**




On
      February 5, 2007, in connection with the amended and restated employment
      agreements with Keith Grabel and Mary Margaret Grabel, and in connection with
      the termination of the Management Services Agreement, Westwood issued
      subordinated promissory notes to Mr. Grabel, Mrs. Grabel and DARR Global in
      the
      principal amount of $671,300, $655,600, and $1,002,900, respectively. The total
      principal amount of these notes, equaling $2,329,800, has been recorded as
      amended employment agreement and management agreement charges on the
      consolidated statements of operations for the nine months ended May 31,
      2007.




**11.**  **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 clients. Emtec
      System’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, U.S. 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 including IT project management services, packaged software
      implementation, web technologies/client server application development and
      extended service maintenance and upgrades. Global Services is comprised
      primarily of the business operations acquired through the acquisition of Luceo
      on March 20, 2008 therefore no financial activity is reported in this document
      for this segment prior to the three and nine months ended May 31, 2008.





12


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


**May 31, 2008**
              
              **August 31,****(Unaudited)**
              
              **2007****Identifiable Assets:**Systems
                  Division
              
              
              43,299,475
              
              
              57,806,769Global
                  Services Division
              
              
              5,541,199
              
              
              —Total
                  Assets
              
              
              48,840,674
              
              
              57,806,769




**Three months ended May 31,**
              
              **Nine month ended May 31,****2008**
              
              **2007**
              
              **2008**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**RevenuesSystems
                  Division
              
              
              36,582,591
              
              
              44,163,067
              
              
              155,291,279
              
              
              150,256,583Global
                  Services Division
              
              
              2,346,600
              
              
              —
              
              
              2,346,600
              
              
              —Total
                  Revenue
              
              
              38,929,191
              
              
              44,163,067
              
              
              157,637,879
              
              
              150,256,583Gross
                  ProfitSystems
                  Division
              
              
              5,204,948
              
              
              4,669,424
              
              
              18,821,168
              
              
              15,080,039Global
                  Services Division
              
              
              490,601
              
              
              —
              
              
              490,601
              
              
              —Gross
                  Profit
              
              
              5,695,549
              
              
              4,669,424
              
              
              19,311,769
              
              
              15,080,039Operating
                  Income (Loss)Systems
                  Division
              
              
              (226,688
              )
              
              (505,054
              )
              
              1,926,477
              
              
              (4,402,287
              )Global
                  Services Division
              
              
              145,727
              
              
              —
              
              
              145,727
              
              
              —Operating
                  Income (Loss)
              
              
              (80,961
              )
              
              (505,054
              )
              
              2,072,204
              
              
              (4,402,287
              )Interest
                  and Other Expense (Income)Systems
                  Division
              
              
              155,576
              
              
              251,496
              
              
              741,637
              
              
              756,366Global
                  Services Division
              
              
              13,300
              
              
              —
              
              
              13,300
              
              
              —Interest
                  and Other Expense (Income)
              
              
              168,876
              
              
              251,496
              
              
              754,937
              
              
              756,366Provision
                  (Benefit) for Income TaxesSystems
                  Division
              
              
              (160,611
              )
              
              (290,902
              )
              
              551,670
              
              
              (2,030,712
              )Global
                  Services Division
              
              
              62,556
              
              
              —
              
              
              62,556
              
              
              —Provision
                  (Benefit) for Income Taxes
              
              
              (98,055
              )
              
              (290,902
              )
              
              614,226
              
              
              (2,030,712
              )Net
                  Income (Loss)Systems
                  Division
              
              
              (221,653
              )
              
              (465,648
              )
              
              633,170
              
              
              (3,127,941
              )Global
                  Services Division
              
              
              69,871
              
              
              —
              
              
              69,871
              
              
              —Net
                  Income (Loss)
              
              
              (151,782
              )
              
              (465,648
              )
              
              703,041
              
              
              (3,127,941
              )
  13




**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, 2007 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, U.S.
      Federal Government, education, U.S. state and local 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.




On
      March
      20, 2008, we acquired through our subsidiary EGS all of the outstanding stock
      of
      Luceo, headquartered in Naperville, IL. 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.




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.




14




**Results
      of Operations**




**Comparison
      of Three Months Ended May 31, 2008 and May 31, 2007**




The
      following discussion and analysis provides information that management believes
      is relevant to an assessment and understanding of our Results of Operations
      for
      each of the three months ended May 31, 2008 and 2007.




**EMTEC,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**


**Three
      Months Ended May 31,**




**2008**
              
              **2007**
              
              **Change**
              
              **%**Revenues
              
              $
              38,929,191
              
              $
              44,163,067
              
              $
              (5,233,876
              )
              
              -11.9
              %Cost
                  of revenues
              
              
              33,233,642
              
              
              39,493,643
              
              
              (6,260,001
              )
              
              -15.9
              %Gross
                  profit
              
              
              5,695,549
              
              
              4,669,424
              
              
              1,026,125
              
              
              22.0
              %Percent
                  of revenues
              
              
              14.6
              %
              
              10.6
              %Operating
                  expenses:Selling,
                  general, and administrative expenses
              
              
              5,348,986
              
              
              4,787,338
              
              
              561,648
              
              
              11.7
              %Rent
                  expense – related party
              
              
              91,439
              
              
              89,325
              
              
              2,114
              
              
              2.4
              %Depreciation
                  and amortization
              
              
              336,086
              
              
              297,815
              
              
              38,271
              
              
              12.9
              %Total
                  operating expenses
              
              
              5,776,510
              
              
              5,174,478
              
              
              602,032
              
              
              11.6
              %Pecent
                  of revenues
              
              
              14.8
              %
              
              11.7
              %Operating
                  loss
              
              
              (80,961
              )
              
              (505,054
              )
              
              424,093
              
              
              -84.0
              %Percent
                  of revenues
              
              
              -0.2
              %
              
              -1.1
              %Other
                  expense (income):Interest
                  income – other
              
              
              (11,144
              )
              
              (15,995
              )
              
              4,851
              
              
              -30.3
              %Interest
                  expense
              
              
              180,276
              
              
              267,120
              
              
              (86,844
              )
              
              -32.5
              %Other
              
              
              (256
              )
              
              (29
              )
              
              (227
              )
              
              N/ALoss
                  before income taxes
              
              
              (249,837
              )
              
              (756,150
              )
              
              506,313
              
              
              -67.0
              %Provision
                  (benefit) for income taxes
              
              
              (98,055
              )
              
              (290,902
              )
              
              192,847
              
              
              66.3
              %Net
                  loss
              
              $
              (151,782
              )
              $
              (465,248
              )
              $
              313,466
              
              
              -67.4
              %




15




***Total
      Revenues***




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




**Three months ended May 31,****2008**
            
            **2007**RevenuesSystems
                Division
            
            
            36,582,591
            
            
            44,163,067Global
                Services Division
            
            
            2,346,600
            
            
            —Total
                Revenue
            
            
            38,929,191
            
            
            44,163,067




Systems
      Division




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


For the Three Months EndedMay 31, 2008
              
              % of Total
              
              May 31, 2007
              
              % of TotalDepartments of
                  the United StatesGovernment
              
              $
              13,136,567
              
              
              35.9
              %
              $
              19,408,973
              
              
              43.9
              %State
                  and Local Governments
              
              
              2,153,215
              
              
              5.9
              %
              
              2,791,328
              
              
              6.3
              %Commercial
                  Companies
              
              
              13,278,274
              
              
              36.3
              %
              
              13,579,759
              
              
              30.7
              %Education
                  and other
              
              
              8,014,535
              
              
              21.9
              %
              
              8,383,007
              
              
              19.0
              %Total
                  Revenues
              
              $
              36,582,591
              
              
              100.0
              %
              $
              44,163,067
              
              
              100.0
              %




Systems
      Division’s revenues decreased $7.58 million, or 17.2%, to $36.58 million for the
      three months ended May 31, 2008, compared to $44.16 million for the three months
      ended May 31, 2007. This decrease is mainly due to a decrease in our revenues
      from Departments of the United States Government.




During
      the three months ended May 31, 2008 and 2007, U.S. governmental department
      and
      agency related revenues represented approximately 35.9% and 43.9% of total
      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 these various civilian and
      military U.S. governmental departments and agencies decreased by approximately
      $6.27 million during the three months ended May 31, 2008 compared with the
      three
      months ended May 31, 2007. This is mainly due to a decrease in our volume of
      business with various civilian and military U.S. governmental departments and
      agencies that are existing clients due to ordinary course of business reductions
      by these departments and agencies and the delayed timing of certain projects
      with these departments and agencies.




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. We have broadened the number
      of multi-year contracts in which we are participating, and in fiscal 2007 we
      were one of nine awardees of a U.S. Army contract that contemplates the awardees
      participating in government purchases that may approximate $5.0 billion in
      the
      aggregate for all the awardees over 10 years. Additionally, in fiscal 2007,
      we
      were awarded a NASA SEWP IV contract under which we will be able to participate
      in possible government purchases of IT products and associated services, and
      we
      continue to bid on new contracts. Furthermore, during the current quarter,
      we
      were awarded a contract under the Air Force Quarterly Enterprise Buy (“QEB”)
      program to provide approximately 70,000 monitors and 1,000 convertible personal
      computer tablets. Under a series of delivery orders, we will manage staged
      deployments of the systems to various agencies across all United States Air
      Force Organizations worldwide over the next several months. The federal business
      typically experiences increased activity during the months of August through
      November.




16




The
      state
      and local government business remains uncertain due to the tight budgetary
      pressures within governmental agencies in the State of New Jersey.




Revenues
      from various commercial clients decreased by approximately $301,000 during
      the
      three months ended May 29, 2008, compared with the three months ended May 28,
      2007. This decrease is mainly due to a decrease in our ordinary course business
      with various existing commercial clients. There is a solid well-established
      client base to build upon as we expand our product and service offerings to
      existing clients as well as develop new relationships.





During
      the three months ended May 31, 2008, revenues from our education business
      decreased by approximately $368,000 compared with the three months ended May
      28,
      2007. This decrease is mainly due to the delayed delivery timing of various
      computer roll-out projects which we are currently implementing. The education
      business is expected to grow during the upcoming months as we continue to
      implement various computer roll-out projects with various school
      districts.




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.




Global
      Services Division





Our
      Global Services Division’s revenues for period from March 20, 2008 through May
      31, 2008, were $2.35 million. Global Services Division consists of revenues
      from
      our recently acquired subsidiary Luceo.





***Gross
      Profit***




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


**Three months ended May 31,****2008**
              
              **2007**Gross
                  ProfitSystems
                  Division
              
              
              5,204,948
              
              
              4,669,424Global
                  Services Division
              
              
              490,601
              
              
              —Gross
                  Profit
              
              
              5,695,549
              
              
              4,669,424




17




Systems
      Division




Aggregate
      gross profit for our Systems Division increased $535,524, or 11.5%, to $5.20
      million for the three months ended May 31, 2008 as compared to $4.67 million
      for
      the three months ended May 31, 2007. This increase is primarily attributable
      to
      various volume and other incentive rebates offered by certain manufactures
      and
      distributors, certain pricing strategies, and mix of client type that made
      up
      our Systems Division’s revenue for the three months ended May 31, 2008.





Measured
      as a percentage of revenues, our gross profit margin for Systems Division
      increased to 14.2% of our Systems Division’s revenues for the three months ended
      May 31, 2008 from 10.6% for the three months ended May 31, 2007. This increase
      is primarily attributable to pricing strategies, volume incentive rebates
      received, the mix of product and services sold, the mix of client type and
      higher utilization of our technical engineers during this period.





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.





Global
      Services Division





Our
      Global Services Division’s gross profit for the period from March 20, 2008
      through May 31, 2008, was $490,601. Measured, as a percentage of revenues,
      Global Services Division’s gross profit margin was 20.9% of its revenue for the
      period from March 20, 2008 through May 31, 2008.





***Selling,
      General and Administrative Expenses***





Systems
      Division





Selling,
      general and administrative expenses for our Systems Division increased by
      $250,119, or 5.2% to $5.04 million for the three months ended May 31, 2008,
      compared to $4.79 million for the three months ended May 31, 2007. This increase
      in selling, general and administrative expenses for the three months ended
      May
      31, 2008 is mainly due to an increase in sales commission and bonus expense
      by
      approximately $182,000, which is directly related to the increase in our gross
      profit as discussed in the gross profit section. The remainder of the $68,000
      increase includes various categories such as recruiting, investment in building
      sales team, administrative bonuses and credit card processing fees.





Global
      Services Division





Our
      Global Services Division’s selling, general and administrative expenses for the
      period from March 20, 2008 through May 31, 2008, were $311,529.





Factors
      that may in the future have a negative impact on our selling, general and
      administrative expenses to 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.





18




***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 and related family members of the Company. The
      lease term is through April 2009 with monthly base rent of $15,000. During
      the
      three months ended May 31, 2008 and 2007, we recorded $45,000 in expense under
      this lease.





We
      also
      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, owning approximately a 20% equity interest. The lease term is for
      5
      years with monthly base rent of $15,832. During the three months ended May
      31,
      2008 and 2007, the Company recorded expense under this lease totaling to $46,439
      and $44,325, respectively.





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 1.7%, or $4,925,
      to $302,740 for the three months ended May 31, 2008, compared to $297,815 for
      the three months ended May 31, 2007. This increase in depreciation expense
      is
      mainly due to depreciation expense associated with computer equipment purchased
      during the fiscal year ended August 31, 2007 and a change in the estimated
      life
      of the computer equipment purchased during the fiscal year ended August 31,
      2007.





Intangible
      assets of our Systems Division at May 31, 2008 and August 31, 2007 consisted
      of
      the value ascribed to customer relationships of $8,661,712 less accumulated
      amortization of $1,664,199 and $1,228,936, respectively. The assets ascribed
      to
      customer relationships are being amortized on a straight-line basis over 13
      to
      15 years. Amortization expense for our Systems Division was $145,088 for each
      of
      the three months ended May 31, 2008 and 2007.




Global
      Services Division





Intangible
      assets of our Global Services Division at May 31, 2008 consisted of the
      estimated value ascribed to customer relationships of $1,300,000 less
      accumulated amortization of $29,290, and estimated value ascribed to non-compete
      of $100,000 less accumulated amortization of $4,056. The assets ascribed to
      customer relationships and to non-compete is being amortized on a straight-line
      basis over 9 years and over 5 years, respectively. Amortization expense for
      our
      Global Services Division was $33,346 for the period from March 20, 2008 through
      May 31, 2008.





19


***Operating
      income (loss)***





Systems
      Division





Operating
      loss for our Systems Division for the three months ended May 31, 2008 decreased
      by 55.1%, or $278,366, to $226,688, compared to $505,054 for the three months
      ended May 31, 2007. This decrease in operating loss is primarily attributable
      to
      increased gross profit attributable to various volume and other incentive
      rebates offered by certain manufactures and distributors, certain pricing
      strategies, and mix of client type that made up our Systems Division’s revenue
      for the three months ended May 31, 2008.





Global
      Services Division





Our
      Global Services Division’s operating income for the period from March 20, 2008
      through May 31, 2008, was $145,727.





***Interest
      expense***





Systems
      Division





Interest
      expense for the Systems Division decreased by 37.5%, or $100,144, to $166,976
      for the three months ended May 31, 2008, compared to $267,120 for the three
      months ended May 31, 2007. This is primarily attributable to lower average
      balance on our line of credit during three months ended May 31, 2008 as compared
      to the three months ended May 31, 2007 and a lower average interest rate during
      this quarter.





Global
      Services Division





Our
      Global Services Division’s interest expense for the period from March 20, 2008
      through May 31, 2008, was $13,300. This interest expense is related to 8%
      subordinated note payable to Mr. Natarajan as part of the acquisition of Luceo.




***Provision
      for Income Taxes***





Systems
      Division





We
      recorded an income tax benefit for the Systems Division of $160,611 for the
      three months ended May 31, 2008 as compared to an income tax benefit of $290,902
      for the three months ended May 31, 2007.  The effective tax rate was 42%
      for the three months ended May 31, 2008 versus 38% for the three months ended
      May 31, 2007. The increase in the tax rate was the result of the effect of
      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 $62,556
      for
      the period from March 20, 2008 through May 31, 2008. The effective tax rate
      for
      this period was 47.2% due to the permanent difference of approximately
      $8,000.




20




**Comparison
      of Nine Months Ended May 31, 2008 and May 31, 2007**




The
      following discussion and analysis provides information that management believes
      is relevant to an assessment and understanding of our Results of Operations
      for
      each of the nine months ended May 31, 2008 and 2007.




**EMTEC,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**


**Nine
      Months Ended May 31,**





**2008**
            
            **2007**
            
            **Change**
            
            **%**Revenues
            
            $
            157,637,879
            
            $
            150,256,583
            
            $
            7,381,296
            
            
            4.9
            %Cost
                of revenues
            
            
            138,326,110
            
            
            135,176,544
            
            
            3,149,566
            
            
            2.3
            %Gross
                profit
            
            
            19,311,769
            
            
            15,080,039
            
            
            4,231,730
            
            
            28.1
            %Percent
                of revenues
            
            
            12.3
            %
            
            10.0
            %Operating
                expenses:Selling,
                general, and administrative expenses
            
            
            16,025,377
            
            
            15,890,166
            
            
            135,211
            
            
            0.9
            %Management
                fee – related party
            
            
            —
            
            
            145,834
            
            
            (145,834
            )
            
            -100.0
            %Amended
                employment agreements and management agreement charges
            
            
            —
            
            
            2,329,800
            
            
            (2,329,800
            )
            
            -100.0
            %Rent
                expense – related party
            
            
            270,089
            
            
            267,975
            
            
            2,114
            
            
            0.8
            %Depreciation
                and amortization
            
            
            944,100
            
            
            848,551
            
            
            95,549
            
            
            11.3
            %Total
                operating expenses
            
            
            17,239,565
            
            
            19,482,326
            
            
            (2,242,761
            )
            
            -11.5
            %Pecent
                of revenues
            
            
            10.9
            %
            
            13.0
            %Operating
                income (loss)
            
            
            2,072,204
            
            
            (4,402,287
            )
            
            6,474,491
            
            
            147.1
            %Percent
                of revenues
            
            
            1.3
            %
            
            -2.9
            %Other
                expense (income):Interest
                income – other
            
            
            (77,807
            )
            
            (73,910
            )
            
            (3,897
            )
            
            5.3
            %Interest
                expense
            
            
            833,018
            
            
            830,718
            
            
            2,300
            
            
            0.3
            %Other
            
            
            (274
            )
            
            (442
            )
            
            168
            
            
            -38.0
            %Income
                (loss) before income taxes
            
            
            1,317,267
            
            
            (5,158,653
            )
            
            6,475,920
            
            
            125.5
            %Provision
                (benefit) for income taxes
            
            
            614,226
            
            
            (2,030,712
            )
            
            2,644,938
            
            
            130.2
            %Net
                income (loss)
            
            $
            703,041
            
            $
            (3,127,941
            )
            $
            3,830,982
            
            
            122.5
            %




21


***Total
      Revenues***




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




**Nine month ended May 31,****2008**
            
            **2007**RevenuesSystems
                Division
            
            
            155,291,279
            
            
            150,256,583Global
                Services Division
            
            
            2,346,600
            
            
            —Total
                Revenue
            
            
            157,637,879
            
            
            150,256,583




Systems
      Division




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





For the Nine Months EndedMay 31, 2008
            
            % of Total
            
            May 31, 2007
            
            % of TotalDepartments
                of the United States Government
            
            $
            87,990,000
            
            
            56.7
            %
            $
            86,922,166
            
            
            57.8
            %State
                and Local Governments
            
            
            8,133,825
            
            
            5.2
            %
            
            9,559,668
            
            
            6.4
            %Commercial
                Companies
            
            
            37,748,084
            
            
            24.3
            %
            
            37,643,793
            
            
            25.1
            %Education
                and other
            
            
            21,419,370
            
            
            13.8
            %
            
            16,130,956
            
            
            10.7
            %Total
                Revenues
            
            $
            155,291,279
            
            
            100.0
            %
            $
            150,256,583
            
            
            100.0
            %




Systems
      Division’s revenues increased $5.03 million, or 3.4%, to $155.29 million for the
      nine months ended May 31, 2008, compared to $150.26 million for the nine months
      ended May 31, 2007. This increase is primarily attributable to an overall
      increase in our customers’ IT spending particularly with Departments of the
      United States Government and education business.




During
      the nine months ended May 31, 2008 and 2007, U.S. governmental department and
      agency related revenues represented approximately 56.7% and 57.8% of total
      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 increased by approximately $1.07 million
      during the nine months ended May 31, 2008 compared with the nine months ended
      May 31, 2007. This is primarily attributable to a large computer hardware sale
      to the Department of the Air Force of approximately $15.36 million and Federal
      Bureau of Prisons of approximately $11.01 million during the nine months ended
      May 31, 2008. These two customers accounted for approximately $2.06 million
      and
      $239,000, respectively, for the nine months ended May 31, 2007.




The
      state
      and local government business remains uncertain due to the tight budgetary
      pressures within governmental agencies in the State of New Jersey.




Revenues
      from various commercial customers increased by approximately $104,000 during
      the
      nine months ended May 31, 2008 compared with the nine months ended May 31,
      2007.
      This increase is primarily attributable to an overall increase in our commercial
      customers’ IT spending during this period.




22




During
      the nine months ended May 31, 2008, revenues from our education business
      increased to approximately $21.41 million from $16.13 million for the nine
      months ended May 31, 2007. This increase was primarily attributable to various
      computer roll-out projects we began to implement in May 2007 which were
      completed during the quarter ended November 30, 2007. The education business
      is
      expected to improve during the upcoming months as we continue to implement
      various computer roll-out projects with various school districts.





Global
      Services Division





Our
      Global Services Division’s revenues for period from March 20, 2008 through May
      31, 2008, were $2.35 million. Global Services Division consists of revenues
      from
      our recently acquired company Luceo.





***Gross
      Profit***




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




**Nine month ended May 31,****2008**
            
            **2007**Gross
                ProfitSystems
                Division
            
            
            18,821,168
            
            
            15,080,039Global
                Services Division
            
            
            490,601
            
            
            —Gross
                Profit
            
            
            19,311,769
            
            
            15,080,039




Systems
      Division





Aggregate
      gross profit for the Systems Division increased $3.74 million, or 24.8%, to
      $18.82 million for the nine months ended May 31, 2008 as compared to $15.08
      million for the nine months ended May 31, 2007. This increase is primarily
      attributable to an increase in revenues as discussed in the Total Revenues
      section, an increase in our services gross profit attributable to higher
      utilization of our engineers, various computer roll-out projects in our
      education business which we completed during this period, and various volume
      incentive rebates and other incentives offered by certain manufacturers. We
      also
      receive special pricing rebates from various manufacturers. The application
      of
      the special pricing rebates to gross profit is also impacted by the price to
      a
      customer, the cost to purchase the product and the size of the applicable
      special pricing rebate.





Measured
      as a percentage of revenues, our gross profit margin for the Systems Division
      increased to 12.1% of total revenues for the nine months ended May 31, 2008
      from
      10.0% for the nine months ended May 31, 2007. This increase is primarily
      attributable to pricing strategies, volume incentive rebates received, the
      mix
      of product and services sold, the mix of client type and higher utilization
      of
      our technical engineers during this period.




Global
      Services Division





Our
      Global Services Division’s gross profit for the period from March 20, 2008
      through May 31, 2008, was $490,601. Measured, as a percentage of revenues,
      Global Services Division’s gross profit margin was 20.9% of its revenue for the
      period from March 20, 2008 through May 31, 2008.




23




***Selling,
      General and Administrative Expenses***





Systems
      Division





Selling,
      general and administrative expenses for the Systems Division decreased by
      $176,318, or 1.1% to $15.71 million for the nine months ended May 31, 2008,
      compared to $15.89 million for the nine months ended May 31, 2007. This decrease
      in selling, general and administrative expenses for the nine months ended May
      31, 2008 is primarily attributable to following: merger and acquisition related
      costs expensed during the nine months ended May 31, 2008 which were
      approximately $137,000 compared with $678,116 incurred during the nine months
      ended May 31, 2008; stock compensation expense related to the issuance of stock
      options and non-vested stock which was $213,055 for the nine months ended May
      31, 2008 compared with $291,868 for the nine months ended May 31, 2007;
      severance costs of approximately $242,000 which were incurred during the nine
      months ended May 31, 2007; and office consolidation costs of approximately
      $125,000 which were incurred during the nine months May 31, 2007.





Excluding
      the above listed decreases, our selling, general and administrative expenses
      for
      the Systems Division would have increased by approximately $810,000 for the
      nine
      month ended May 31, 2008 compared with the nine months ended May 31, 2007.
      This
      increase in selling, general and administrative expenses for the nine months
      ended May 31, 2008 is mainly due to an increase in sales commission and bonus
      expense by approximately $738,000, which is directly related to the increase
      in
      our gross profit as discussed in the gross profit section. The remainder of
      $71,000 increase includes various categories such as recruiting, investment
      in
      building sales team, administrative bonuses, credit card processing fees, and
      other.





Global
      Services Division





Our
      Global Services Division’s selling, general and administrative expenses for the
      period from March 20, 2008 through May 31, 2008, were $311,529.





***Management
      Fee-Related Party***





Systems
      Division





The
      Management Services Agreement was terminated on February 5, 2007. Under the
      terms of the agreement, DARR Global Holdings, Inc. (“DARR Global”), a related
      party, charged the Company a monthly management fee of $29,167.




***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 and related family members of the Company. The
      lease term is through April 2009 with monthly base rent of $15,000. During
      the
      nine months ended May 31, 2008 and 2007, we recorded $135,000 in expense under
      this lease.




24




We
      also
      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, owning approximately a 20% equity interest. The lease term is for
      5
      years with monthly base rent of $15,832. During the nine months ended May 31,
      2008 and 2007, the Company recorded expense under this lease totaling to
      $135,089 and $132,975, respectively.





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 the Systems Division increased by 7.3%, or $62,203,
      to $910,754 for the nine months ended May 31, 2008, compared to $848,551 for
      the
      nine months ended May 31, 2007. This increase in depreciation expense is mainly
      due to depreciation expense associated with computer equipment purchased during
      the fiscal year ended August 31, 2007 and a change in the estimated life of
      the
      computer equipment purchased during the fiscal year ended August 31, 2007.





Intangible
      assets of the Systems Division at May 31, 2008 and August 31, 2007 consisted
      of
      the value ascribed to customer relationships of $8,661,712 less accumulated
      amortization of $1,664,199 and $1,228,936, 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 $435,263 for each
      of
      the nine months ended May 31, 2008 and 2007.




Global
      Services Division





Intangible
      assets of the Global Services Division at May 31, 2008 consisted of the
      estimated value ascribed to customer relationships of $1,300,000 less
      accumulated amortization of $29,290, and estimated value ascribed to non-compete
      of $100,000 less accumulated amortization of $4,056. The assets ascribed to
      customer relationships and to non-compete is being amortized on a straight-line
      basis over 9 years and over 5 years, respectively. Amortization expense for
      the
      Global Services Division was $33,346 for the period from March 20, 2008 through
      May 31, 2008.




***Operating
      income (loss)***





Systems
      Division





Operating
      income for the Systems Division increased $6.33 million, to $1.93 million for
      the nine months ended May 31, 2008, compared to operating loss of $4.40 million
      for the nine months ended May 31, 2007. This increase in operating income is
      primarily attributable to reasons discussed in the sections above including
      increased revenues; increased gross profit; decreased selling, general and
      administrative expenses; and the non-recurrence of charges in the nine months
      ended May 31, 2008 that were incurred in the nine months ended May 31, 2007
      as a
      result of the amended employment agreements and management agreement entered
      into during the nine months ended February 28, 2007





25


Global
      Services Division





Our
      Global Services Operating income for the period from March 20, 2008 through
      May
      31, 2008, was $145,727.





***Interest
      expense***





Systems
      Division





Interest
      expense for the Systems Division decreased by 1.3%, or $11,000, to $819,718
      for
      the nine months ended May 31, 2008, compared to $830,718 for the nine months
      ended May 31, 2007. This is primarily attributable to lower average balance
      on
      our line of credit during nine months ended May 31, 2008 as compared to the
      three months ended May 31, 2007 and a lower average interest rate during this
      period.





Global
      Services Division





Our
      Global Services Division’s interest expense for the period from March 20, 2008
      through May 31, 2008, was 13,300. This interest expense is related to 8%
      subordinated note payable to Mr. Natarajan as part of the acquisition of Luceo.




***Provision
      for Income Taxes***





Systems
      Division





We
      recorded an income tax expense for the Systems Division of $551,670 during
      the
      nine months ended May 31, 2008 as compared to income tax benefit of $2.03
      million for the nine months ended May 31, 2007.  The effective tax rate for
      the Systems Division was 47% for the nine months ended May 31, 2008 versus
      an
      effective tax rate of 39% for the nine months ended May 31, 2007. The higher
      current tax rate was primarily the result of FIN 48 interest expense recorded
      in
      the current period classified as income taxes, a tax benefit shortfall from
      stock compensation grants in the current period that increased income tax
      expense and the effect of 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 $62,556
      for
      the period from March 20, 2008 through May 31, 2008. The effective tax rate
      for
      the Global Services Division for this period was 47.2%.




26




**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. On November 14,
      2007, the FASB voted for a proposed deferral of a portion of SFAS No. 157.
      The
      Company does not expect adoption of SFAS No. 157 to have a material impact
      on
      its 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 Company is currently reviewing the impact of SFAS No.
      159
      on our financial statements.




*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 June 1, 2009.





27




**Liquidity
      and Capital Resources**




Cash
      at
      May 31, 2008 of $1.27 million represented a decrease of $982,726 from $2.25
      million at August 31, 2007. 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 May 31, 2008 decreased to
      approximately $400,000 from $5.85 million at August 31, 2007. As of May 31,
      2008, our net working capital (defined as the excess of our current assets
      over
      our current liabilities) was approximately $2.05 million less than it was at
      August 31, 2007. The decrease in working capital is mainly due to the increase
      in current liabilities associated with the acquisition of Luceo. The purchase
      price for the acquisition of Luceo consisted of cash paid at closing in an
      aggregate amount of $1,795,000, which was funded through the borrowings under
      the Credit Facility and the issuance of a subordinated promissory notes 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.




In
      addition, the decrease in working capital is also due to payments made on the
      various notes payable totaling to approximately $1.03 million and change in
      the
      classification of the $1.1 million, 8% subordinated note payable to DARR
      Westwood LLC from long term debt to current portion of long term debt. These
      decreases in working capital were offset by our positive operating income of
      $2.07 million for the nine months ended May 31, 2008.




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.




Borrowings
      under the Credit Facility bear interest at an annual rate equal to the rate
      of
      interest published in the “Money Rates” section of the Wall Street Journal minus
      0.5% (4.50% as of May 31, 2008) for revolving credit loans. Floor plan loans
      do
      not bear interest until the Borrower is in default, unless a floorplan loan
      is
      unsubsidized, then, such floor plan loan will accrue interest once made, at
      the
      rate agreed to by the parties. Interest on outstanding floor plan loans accrues
      at the rate of 2.5% per annum in excess of the interest rate published in the
      “Money Rates” section of the Wall Street Journal (7.50% as of May 31, 2008).




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.




In
      addition, the Lender and Avnet, Inc., one of our trade creditors, entered into
      an intercreditor 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.




28


As
      of May
      31, 2008, we had an outstanding balance of $400,066 under the revolving portion
      of the Credit Facility and $616,283 of outstanding (included in the Company’s
      accounts payable) balances plus $885,500 in open approvals under the floor
      plan
      portion of the Credit Facility with Lender. As of May 31, 2008, we had net
      availability of $10.43 million under the revolving portion of the Credit
      Facility and net availability of $23.67 million under the floor plan portion
      of
      the Credit Facility.





As
      of May
      31, 2008, the Company determined that it was in compliance with its financial
      covenants with the Lender.





As
      of May
      31, 2008, we had open term credit facilities with our primary trade vendors,
      including aggregators and manufacturers, of approximately $29.20 million with
      outstanding principal of approximately $17.40 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 $172,964 during the nine months ended May 31, 2008 related
      primarily to the purchase of computer equipment for internal use, furniture
      and
      a delivery truck for our Georgia location. We anticipate our total capital
      expenditures for our fiscal year ending August 31, 2008 will be approximately
      $600,000, of which approximately $350,000 will be for the upgrade of our
      organizational computer system and the remaining $250,000 will primarily be
      for
      the purchase of computer equipment for internal use, furniture, delivery trucks
      and leasehold improvements.




We
      anticipate that our primary sources of liquidity in fiscal year 2008 will be
      cash generated from operations, trade vendor credit and cash available to us
      under our Credit Facility. Our future financial performance will depend on
      our
      ability to continue to reduce and manage operating expenses as well as our
      ability to grow revenues. Any loss of clients, whether due to price competition
      or technological advances, will have an adverse affect on our revenues. Our
      future financial performance could be negatively affected by unforeseen factors
      and unplanned expenses. See “Forward Looking Statements” and “Business - Risk
      Factors” discussed in our Annual Report on Form 10-K for the year ended August
      31, 2007.




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




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





***Critical
      Accounting Policies***




Our
      financial statements are prepared in accordance with accounting principles
      that
      are generally accepted in the United States. The methods, estimates, and
      judgments we use in applying our most critical accounting policies have a
      significant impact on the results we report in our financial statements. The
      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.




29


*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 customers. The customer is invoiced at the date of revenue
                recognition when all of the criteria have been
                met.




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




30




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




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





*Trade
      Receivables*





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





*Inventories*




Inventory
      is stated at the lower of average cost 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 May 31, 2008 and August 31, 2007 consisted of the value ascribed
      to
      customer relationships and noncompete assets. The assets ascribed to customer
      relationships are being amortized on a straight-line basis over 9 to 15 years.
      The assets ascribed to noncompete assets are being amortized on a straight-line
      basis over 5 years. Intangible assets are tested for recoverability whenever
      events or changes in circumstances indicate that their carrying amount may
      not
      be recoverable in accordance with Statement of Financial Accounting Standards
      No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Recoverability of long-lived assets is assessed by a comparison of the carrying
      amount to the estimated undiscounted future net cash flows expected to result
      from the use of the assets and their eventual disposition. If estimated
      undiscounted future net cash flows are less than the carrying amount, the asset
      is considered impaired and a loss would be recognized based on the amount by
      which the carrying value exceeds the fair value of the asset.




31


*Rebates*





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





*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.




32


**Item
      3.**  **Quantitative and Qualitative Information About Market Risk**




We
      do not
      engage in trading market risk sensitive instruments and do not purchase hedging
      instruments or “other than trading” instruments that are likely to expose us to
      market risk, whether interest rate, foreign currency exchange, commodity price
      or equity price risk. We have issued no debt instruments, entered into no
      forward or future contracts, purchased no options and entered into no swaps.
      Our
      primary market risk exposures are those of interest rate fluctuations. A change
      in interest rates would affect the rate at which we could borrow funds under
      our
      revolving credit facility. Our balance on the line of credit at May 31, 2008
      was
      approximately $400,000. Assuming no material increase or decrease in such
      balance, a one percent change in the interest rate would change our interest
      expense by approximately $4,000 annually.




33


**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 May 31,
      2008. 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 May 31, 2008 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




34


**PART
      II** **–
      OTHER INFORMATION**




**Item
      6.**  **Exhibits**




Exhibit
      10.1 –
Stock
      Purchase Agreement by and among Emtec Global Services LLC, Luceo, Inc. and
      Sivapatham Natarajan dated March 20, 2008, incorporated herein by reference
      to
      Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed March 26, 2007.




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. dated July 14,
      2008 .




Exhibit
      31.2 - Rule
      13a-14(a)/15d-14(a) Certification of Stephen C. Donnelly, Principal Financial
      Officer, of Emtec, Inc. dated July 14, 2008.




Exhibit
      32.1 -
      Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
      Emtec, Inc. dated July 14, 2008.




Exhibit
      32.2 -
      Section 1350 Certificate of Stephen C. Donnelly, Principal Financial Officer,
      of
      Emtec, Inc. dated July 14, 2008.




Exhibit
      99.1 –
      Subordinated Promissory Note dated March 20, 2008 issued by Emtec Global
      Services, LLC in favor of Sivapatham Natarajan.




35


**SIGNATURES**





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





EMTEC,
                INC.By:
            /s/
            DINESH
                R. DESAIDinesh
                R. DesaiChairman
                and ChiefExecutive
                Officer(Principal
                Executive Officer)By:
            /s/
            STEPHEN
                C. DONNELLYStephen
                C. DonnellyChief
                Financial Officer(Principal
                Financial Officer)Date:
                July 14, 2008




36