UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


______________





FORM
10-Q





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





For the
quarterly period ended November 30, 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 Identification No.)





525
Lincoln Drive


5
Greentree Center, Suite 117


Marlton,
New Jersey 08053


(Address
of principal executive offices, including zip code)





(856)
552-4204


(Registrant’s
telephone number, including area code)








Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes  xNo  o





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





Large
accelerated filer oAccelerated filer  oNon-accelerated
filer  oSmaller reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes oNo
x





As of
January 12, 2009, there were outstanding 15,141,993 shares of the registrant’s
common stock.











EMTEC,
INC.


FORM
10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2008





Table of
Contents








PART
      I – FINANCIAL INFORMATIONItem
      1 - Financial StatementsCondensed
      Consolidated Balance Sheets
            1Condensed
      Consolidated Statements of Income
            2Condensed
      Consolidated Statements of Cash Flows
            3Notes
      to Condensed Consolidated Financial Statements
            4Item
      2  - Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            16Item
      3  - Quantitative and Qualitative Disclosures About Market
      Risk
            31Item
      4T - Controls and Procedures
            32PART
      II – OTHER INFORMATIONItem
      1 –   Legal Proceedings
            33Item
      1A – Risk Factors
            34Item
      6 – Exhibits
            35SIGNATURES
            36








PART
I – FINANCIAL INFORMATION


Item
1. Financial Statements




EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


November
      30, 2008(Unaudited)
              
              
              August
      31, 2008AssetsCurrent
      AssetsCash
              
              $
              2,260,529
              
              
              $
              2,025,098Receivables:Trade,
      less allowance for doubtful accounts
              
              
              34,428,421
              
              
              
              32,178,967Others
              
              
              2,364,900
              
              
              
              2,285,542Inventories,
      net
              
              
              2,473,912
              
              
              
              659,994Prepaid
      expenses and other
              
              
              836,055
              
              
              
              1,006,686Deferred
      tax asset - current
              
              
              835,389
              
              
              
              900,028Total
      current assets
              
              
              43,199,206
              
              
              
              39,056,315Property
      and equipment, net
              
              
              996,988
              
              
              
              1,108,327Intangible
      assets, net
              
              
              10,970,724
              
              
              
              11,315,422Goodwill
              
              
              10,535,853
              
              
              
              10,697,516Deferred
      tax asset- long term
              
              
              101,635
              
              
              
              171,985Other
      assets
              
              
              105,992
              
              
              
              124,475Total
      assets
              
              $
              65,910,398
              
              
              $
              62,474,040Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesLine
      of credit
              
              $
              10,057,456
              
              
              $
              8,583,552Accounts
      payable
              
              
              27,343,249
              
              
              
              24,824,365Current
      portion of long term debt - related party
              
              
              3,071,502
              
              
              
              2,810,937Income
      taxes payable
              
              
              791,711
              
              
              
              315,111Accrued
      liabilities
              
              
              4,629,051
              
              
              
              5,418,625Due
      to former stockholders
              
              
              -
              
              
              
              631,415Customer
      deposits
              
              
              -
              
              
              
              500Deferred
      revenue
              
              
              1,179,208
              
              
              
              1,323,177Total
      current liabilities
              
              
              47,072,177
              
              
              
              43,907,682Deferred
      tax liability
              
              
              2,238,237
              
              
              
              2,298,650Accrued
      liabilities
              
              
              124,359
              
              
              
              342,708Long
      term debt - related party
              
              
              257,080
              
              
              
              754,578Total
      liabilities
              
              
              49,691,853
              
              
              
              47,303,618Commitments
      and contingent liabilitiesStockholders'
      EquityCommon
      stock $0.01 par value; 25,000,000 shares authorized;18,006,582
      and 17,714,180 shares issued and 15,141,993 and14,849,591,
      outstanding at  November 30, 2008 and August 31, 2008,
      respectively
              
              
              180,066
              
              
              
              177,142Additional
      paid-in capital
              
              
              20,675,223
              
              
              
              20,635,972Retained
      earnings (accumulated deficit)
              
              
              959,303
              
              
              
              (46,645
              )21,814,592
              
              
              
              20,766,469Less:
      treasury stock, at cost, 2,864,589 shares
              
              
              (5,596,047
              )
              
              
              (5,596,047
              )Total
      stockholders' equity
              
              
              16,218,545
              
              
              
              15,170,422Total
      liabilities and stockholders' equity
              
              $
              65,910,398
              
              
              $
              62,474,040


The
accompanying notes are integral parts of these consolidated financial
statements.
  1
  EMTEC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 THREE
MONTHS ENDED NOVEMBER 30, 2008 and 2007
  2008
              
              
              2007RevenuesProcurement
      services
              
              $
              56,358,723
              
              
              $
              70,762,377Service
      and consulting
              
              
              13,660,387
              
              
              
              3,877,809Total
      Revenues
              
              
              70,019,110
              
              
              
              74,640,186Cost of
      SalesCost
      of procurement services
              
              
              50,392,498
              
              
              
              63,029,313Service
      and consulting
              
              
              10,832,626
              
              
              
              2,965,896Total Cost of
      Sales
              
              
              61,225,124
              
              
              
              65,995,209Gross
      ProfitProcurement
      services
              
              
              5,966,225
              
              
              
              7,733,064Service
      and consulting
              
              
              2,827,761
              
              
              
              911,913Total Gross
      Profit
              
              
              8,793,986
              
              
              
              8,644,977Operating
      expenses:Selling,
      general, and administrative expenses
              
              
              6,177,875
              
              
              
              5,755,443Rent
      expense – related parties
              
              
              152,496
              
              
              
              89,325Depreciation
      and amortization
              
              
              533,899
              
              
              
              300,503Total
      operating expenses
              
              
              6,864,270
              
              
              
              6,145,271Operating
      income
              
              
              1,929,716
              
              
              
              2,499,706Other
      expense (income):Interest
      income – other
              
              
              (4,903
              )
              
              
              (17,775
              )Interest
      expense
              
              
              254,062
              
              
              
              337,023Other
      expense (income)
              
              
              4,164
              
              
              
              (18
              )Income
      before income taxes
              
              
              1,676,393
              
              
              
              2,180,476Provision
      for income taxes
              
              
              670,446
              
              
              
              934,274Net
      income
              
              $
              1,005,947
              
              
              $
              1,246,202Net
      income per common shareBasic
      and Diluted
              
              $
              0.07
              
              
              $
              0.09Weighted
      Average Shares OutstandingBasic
              
              
              14,578,827
              
              
              
              14,445,064Diluted
              
              
              14,632,335
              
              
              
              14,566,446




2
 
 EMTEC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 THREE
MONTHS ENDED NOVEMBER 30, 2008 and 2007
  2008
                  
                  
                  2007Cash
      Flows From Operating ActivitiesNet
      income
                  
                  $
                  1,005,947
                  
                  
                  $
                  1,246,202Adjustments
      to Reconcile Net Income to NetCash
      (Used In) Operating ActivitiesDepreciation
      and amortization
                  
                  
                  189,201
                  
                  
                  
                  155,415Amortization
      related to intangible assets
                  
                  
                  344,698
                  
                  
                  
                  145,088Deferred
      income taxes
                  
                  
                  (215,551
                  )
                  
                  
                  360,333Stock-based
      compensation
                  
                  
                  42,175
                  
                  
                  
                  67,352Indemnification
      of professional fees
                  
                  
                  (269,882
                  )
                  
                  
                  -Changes
      In Operating Assets and LiabilitiesReceivables
                  
                  
                  (2,669,976
                  )
                  
                  
                  (19,742,179
                  )Inventories
                  
                  
                  (1,813,918
                  )
                  
                  
                  2,833,400Prepaid
      expenses and other assets
                  
                  
                  189,114
                  
                  
                  
                  (99,937
                  )Accounts
      payable
                  
                  
                  2,518,885
                  
                  
                  
                  9,739,003Customer
      deposits
                  
                  
                  (500
                  )
                  
                  
                  (136,089
                  )Income
      taxes payable
                  
                  
                  476,600
                  
                  
                  
                  530,783Accrued
      liabilities
                  
                  
                  (411,898
                  )
                  
                  
                  77,561Deferred
      revenue
                  
                  
                  (143,969
                  )
                  
                  
                  (21,686
                  )Net
      Cash Used In Operating Activities
                  
                  
                  (759,074
                  )
                  
                  
                  (4,844,754
                  )Cash
      Flows From Investing ActivitiesPurchases
      of property and equipment
                  
                  
                  (77,864
                  )
                  
                  
                  (17,836
                  )Increase
      to goodwill/ tax settlement
                  
                  
                  (164,602
                  )
                  
                  
                  -Net
      Cash Used In Investing Activities
                  
                  
                  (242,466
                  )
                  
                  
                  (17,836
                  )Cash
      Flows From Financing ActivitiesNet
      increase (decrease)  in line of credit
                  
                  
                  1,473,904
                  
                  
                  
                  4,121,129Repayment
      of debt
                  
                  
                  (236,932
                  )
                  
                  
                  (239,200
                  )Net
      Cash Provided By Financing Activities
                  
                  
                  1,236,972
                  
                  
                  
                  3,881,929Net
      increase (decrease) in Cash
                  
                  
                  235,431
                  
                  
                  
                  (980,661
                  )Beginning
      Cash
                  
                  
                  2,025,098
                  
                  
                  
                  2,251,352Ending
      Cash
                  
                  $
                  2,260,529
                  
                  
                  $
                  1,270,691Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
                  
                  $
                  208,635
                  
                  
                  $
                  33,050Interest
                  
                  $
                  146,309
                  
                  
                  $
                  199,756Supplemental
      Schedule of Non Cash Investing and Financing ActivitiesIndemnification
      receivable due from former shareholders settled by the amounts
                      due
      to former shareholders
                  
                  $
                  631,415
                  
                  
                  
                  -




3




EMTEC,
INC


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
Basis of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and note
disclosures required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
condensed consolidated financial statements.  Quarterly results are
not necessarily indicative of results for the full year.For
further information, refer to the annual financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended August
31, 2008.





2. General





Description of
Business





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





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





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





4




Principles of
Consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Emtec, Inc., a New Jersey Corporation (“Emtec NJ”),
Emtec Viasub LLC (“Emtec LLC”), Emtec LLC’s wholly owned subsidiary Emtec
Federal, Inc. (“Emtec Federal”), EGS, EGS’s wholly owned subsidiaries Luceo,
eBAS, Aveeva and Aveeva’s subsidiary Aviance. Significant intercompany account
balances and transactions have been eliminated in consolidation.





Reclassifications


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





Accounting
Estimates





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





Goodwill




Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired companies.  In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 142, “Goodwill and Other Intangible Assets,”
goodwill is not amortized but tested for impairment annually, or more frequently
if events or changes in circumstances indicate that the asset might be
impaired.  The Company has set an annual impairment testing date of
June 1.  An impairment charge will be recognized only when the implied
fair value of a reporting unit, including goodwill, is less than its carrying
amount.





The
changes in the carrying amount of goodwill for the three months ended November
30, 2008 are as follows:


Balance
      at August 31, 2008
                
                $
                10,697,516Reduction
      in goodwill arising from settlement of tax
                    uncertainties
      acquired  in April 16, 2004 merger
                
                
                (161,663
                )Balance
      at November 30, 2008
                
                $
                10,535,853


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





5




Based on
the income (discounted cash flows) and market-based (guideline company method)
approaches there was no goodwill impairment for the System Division at June 1,
2008. Based on the income (discounted cash flow) approach there was no goodwill
impairment for the Luceo reporting unit at June 1, 2008. At November 30, 2008,
Emtec's market capitalization was less than its total stockholders' equity,
which is one factor the Company considered when determining whether goodwill
should be tested for impairment between annual tests.  The Company
does not currently believe that the reduced market capitalization represents a
goodwill impairment indicator as of November 30, 2008, however, if current
market conditions persist and the Company’s estimated value under the income and
market-based approaches is effected, then it is possible that the Company may
have to take a goodwill impairment charge against earnings in a future
period.





Identifiable Intangible
Assets





At
November 30, 2008 and August 31, 2008, the components of identifiable intangible
assets are as follows:





November 30, 2008
                
                
                August 31, 2008Customer
      relationships
                
                $
                12,861,712
                
                
                $
                12,861,712Non-compete
      agreements
                
                
                370,000
                
                
                
                370,00013,231,712
                
                
                
                13,231,712Accumulated
      amortization
                
                
                (2,260,988
                )
                
                
                (1,916,290
                )$
                10,970,724
                
                
                $
                11,315,422




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





Non-compete
agreements represent the value ascribed to covenants not to compete employment
agreements with certain members of Luceo and eBAS/Aveeva’s management entered
into at the date of the respective acquisitions.  The amounts ascribed
to non-compete agreements are being amortized on a straight-line basis over five
years.





Amortization
expense was $344,698 and $145,088 for the three months ended November 30, 2008
and 2007, respectively.  We currently expect future amortization for
the next 5 years ending August 31, 2009 through 2013 will be approximately
$1,370,000 per year.





Long-lived
assets, including customer relationships and property and equipment, are tested
for recoverability whenever events or changes in circumstances indicate that
their carrying amount may not be recoverable in accordance with “SFAS” No. 144
“Accounting for the Impairment or Disposal of Long-Lived
Assets.”  Recoverability of long-lived assets is assessed by a
comparison of the carrying amount to the estimated undiscounted future net cash
flows expected to result from the use of the assets and their eventual
disposition.  If estimated undiscounted future net cash flows are less
than the carrying amount, the asset is considered impaired, and a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the asset.  No impairment of long-lived assets occurred
during the three months ended November 30, 2008.





Earnings Per
Share





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





6




The
computation of diluted earnings per share is similar to the computation of basic
earnings (loss) per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if
dilutive options, restricted stock awards and warrants had been exercised as of
the end of the period. Potentially dilutive shares consist of stock options,
restricted stock awards and warrants totaling 53,508 and 121,382 shares for the
three months ended November 30, 2008 and 2007, respectively. Outstanding
warrants to purchase 1,682,444 and 1,648,807 common shares as of November 30,
2008 and 2007, respectively, were not included in the computation of diluted
earnings per share for the three months ended November 30, 2008 and 2007,
because the exercise price was greater than the average market price of the
Company’s common shares over those periods.





Income Taxes and Due to
Former Stockholders





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





In
October 2008, the Company settled the August 2003 and April 2004 tax audits of
Emtec-Federal {formerly Westwood Computer Corporation (“Westwood”)} with the
Appeals Office of the IRS.  The settlement agreement resulted in an
additional federal income tax payment of $145,070, which included interest of
$40,908.  The Company has initiated the preparation of 2003 and 2004
amended New Jersey income tax returns to pay additional New Jersey tax liability
that results from the IRS settlement.  The accounting to record the
settlements of these pre-merger tax liabilities under FIN 48 resulted in
adjustments to goodwill and to deferred tax assets.  Since the
underlining provisions of the executed Westwood merger agreement included
indemnification coverage by Westwood’s former stockholders, the Company recorded
a receivable “due from the Westwood former stockholders”, of
$631,415.  The $631,415 included pre-merger tax liabilities totaling
$361,533 plus associated professional fees to defend the Company’s tax positions
totaling $269,882.  The $361,533 portion of the Company’s indemnity
claim was recorded as a reduction to goodwill acquired in the April 2004
Westwood merger.  The remaining $269,882 portion was recorded as a
reduction to selling, general & administrative expenses for the three months
ended November 30, 2008.





The “due
from Westwood former stockholders” receivable was satisfied during October 2008,
based on offsetting amounts “due to Westwood former stockholders” totaling
$631,415.  The amounts “due to Westwood former stockholders”
represented funds we held as unclaimed merger consideration.




7


Reconciliation of
      Unrecognized Tax Liability for the three months ended November 30,
      2008:Balance
      at September 1, 2008
                
                $
                692,532Unrecognized
      tax postions of prior periods:Increase
                
                
                -Decrease
                
                
                -Unrecognized
      tax postions of current year:Increase
                
                
                3,371Decrease
                
                
                -Decrease
      in Unrecognized tax benefits due to settlements
                
                
                (547,119
                )Decrease
      in Unrecognized tax benefits due to lapse ofstatute of
      limitations
                
                
                -Balance
      at November 30, 2008
                
                $
                148,784Total
      amount of unrecognized tax benefits that, if recognized,
                    would affect the
      effective tax rate
                
                $
                50,903Accrued
      interest and penalties for unrecognized tax benefits
                    as
      of November 30, 2008 balance sheet
                
                $
                63,470Interest
      and penalties classified as income tax expense (benefit)-
                    for
      the three months ended November 30, 2008
                
                $
                (23,594
                )


3.
Acquisitions





Luceo, Inc.





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. During the year ended August 31,
2008, the purchase price was reduced by $68,489 in connection with the working
capital adjustment.




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





eBusiness
Applications Solutions, Inc. and Aveeva, Inc.




On August
13, 2008, EGS, a wholly-owned subsidiary of Emtec, eBAS, Aveeva and Ms. Chopra
entered into a Purchase Agreement, pursuant to which EGS agreed to acquire all
of the outstanding stock of eBAS and Aveeva from Ms. Chopra. The purchase price
consists of (i) cash at closing in an aggregate amount equal to $7,313,500 and
(ii) the potential right to pay contingent consideration of $1 million each year
for the next three years on the anniversary of the closing if certain
performance goals are met. The purchase price may be increased or decreased
pursuant to a post-closing working capital adjustment.





8




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




Three
      months endedNovember 30,2008
              
              
              2007Revenue
              
              $
              70,019,110
              
              
              $
              84,011,475Net
      income
              
              
              1,005,947
              
              
              
              1,480,863Basic
      and diluted earning per share
              
              $
              0.07
              
              
              $
              0.10


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





4. Stock-Based
Compensation 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 over the
expected term of the stock options.  The Company also used historical
exercise patterns and forfeiture behaviors to estimate the options, expected
term and our forfeiture rate.  The risk-free interest rate is based on
the U.S. Treasury zero-coupon yield curve in effect on the grant
date.  Both expected volatility and the risk-free interest rate are
based on a period that approximates the expected term.


A summary
of stock options for the three months ended November 30, 2008 is as
follows:





For the Three Months
      Ended November 30, 2008
              
              Shares
              
              
              Weighted
      Average Exercise Price
              
              Weighted
      Average
                Remaining
      Term
              
              Aggregate
      Intrinsic
                Value
      *Options
      Outstanding -September 1, 2008
              
              
              386,500
              
              
              $
              1.22Options
      Granted
              
              
              20,000
              
              
              $
              0.33Options
      Exercised
              
              
              -Options
      Forfeited or Expired
              
              
              (1,000
              )
              
              $
              1.31Options
      Outstanding - November 30, 2008
              
              
              405,500
              
              
              $
              1.13
              
              6.06
      years
              
              $
              6,200Options
      Exercisable -November 30, 2008
              
              
              169,500
              
              
              $
              1.08
              
              7.27
      years
              
              $
              6,200




*
Represents the total pre-tax intrinsic value based on the Company’s average
closing stock prices for the three months ended November 30, 2008.




9


2008
              
              
              2007Weighted-Average
      Fair Value
              
              $
              0.28
              
              
              $
              0.47AssumptionsExpected
      Volatility
              
              
              106.49
              %
              
              
              100
              %Expected
      Term
              
              5
      years
              
              
              5
      yearsExpected
      Forfeiture Rate
              
              
              0
              %
              
              
              0
              %Dividend
      Yield
              
              
              0
              %
              
              
              0
              %Risk-Free
      Interest Rate
              
              
              1.89
              %
              
              
              3.21
              %


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. During November 2008, the Company
granted 292,402 shares of non-vested (restricted) stock to certain members of
senior management in connection with annual bonus compensation. These non-vested
shares vest over a one-year period. The fair value of these shares was
determined based upon the quoted closing price of the Company’s stock on the
Over-the-Counter Bulletin Board on the grant date.  The Company
recognizes compensation expense associated with the issuance of such shares
using the closing price of the Company’s common stock on the date of grant over
the vesting period on a straight-line basis.





The
following table summarizes the Company’s restricted stock activity during the
three months ended November 30, 2008:





For
      the Three Months Ended November 30, 2008
              
              Shares
              
              
              Weighted
      Average Grant Date Fair Value
              
              
              Fair
      ValueNonvested
      - September 1, 2008
              
              
              330,542
              
              
              $
              1.24Granted
              
              
              292,402
              
              
              $
              0.36Vested
              
              
              (59,778
              )
              
              $
              1.24
              
              
              $
              21,520
              (a)Forfeited
              
              
              -
              
              
              
              -Nonvested
      -November 30, 2008
              
              
              563,166
              
              
              $
              0.78
              
              
              $
              202,740
              (b)Vested
      -November 30, 2008
              
              
              193,541
              
              
              $
              1.25
              
              
              $
              150,166
              (a)


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


(b)
            The
      aggregate fair value of the non-vested restricted stock shares expected to
      vest represents the total pre-tax fair value, based on the Company’s
      closing stock price as of November 30, 2008 which would have been received
      by holders of restricted stock shares had all such holders sold their
      underlying shares on that date.




Stock Options and Non-vested
Stock




Stock-based
compensation costs related to the 2006 Plan totaled $42,175 and $67,352 during
the three months ended November 30, 2008 and 2007, respectively.  As
of November 30, 2008, the Company had recognized a cumulative total of $756,448
in compensation costs and had $295,959 of unrecognized compensation cost related
to these instruments.  The cost is expected to be recognized over a
remaining period of 3 years.




10




Warrants




On August
5, 2005, the Company issued certain stockholders stock warrants that evidence
the obligation of the Company to issue a variable number of shares, in the
aggregate, equal to 10% of then total issued and outstanding shares of the
Company’s common stock, measured on a post-exercise basis, at any date during
the 5-year term of the warrants, which ends August 5, 2010.  The aggregate
exercise price of these warrants is fixed at $3,695,752.  The exercise
price per warrant will vary based upon the number of shares issuable under the
warrants.  The number of shares issuable under the warrants totaled
1,682,444 and 1,648,807 shares, with an exercise price of $2.20 and $2.24 per
share, as of November 30, 2008 and 2007, respectively. The outstanding
warrants were anti-dilutive for the three months ended November 30, 2008 and
2007, because the exercise price was greater than the average market price of
the Company’s common shares.





5. Line
of Credit





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





As of
November 30, 2008, borrowings under the Credit Facility bore 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% (3.50% as of November 30, 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 6.50% as of
November 2008.  The Company did not have any unsubsidized floorplan
loans during the three months ended November 30, 2008 and 2007. The rates
discussed in this paragraph were in effect through the December 6, 2008
renewal date of the Credit Facility.





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 $10.06 million and $8.58 million outstanding under the
revolving portion of the Credit Facility, and balances of $2.91 million and
$2.05 million (included in the Company’s accounts payable) outstanding plus
$1.15 million and $444,700 in open approvals under the floor plan portion of the
Credit Facility at November 30, 2008 and August 31, 2008, respectively. Net
availability of $16.55 million and $14.44 million was available under the
revolving portion of the Credit Facility, and additionally $1.33 million and
$6.49 million was available under the floor plan portion of the Credit Facility,
as of November 30, 2008 and August 31, 2008, respectively.


As of
November 30, 2008, the Company determined that it was in compliance with its
financial covenants with the Lender.





11




On
December 5, 2008, the Borrower entered into a First Amendment and Joinder to
Loan and Security Agreement and Schedule to Loan and Security Agreement (the
“First Amendment”) with the Lender, pursuant to which the Lender has agreed to
extend the term of the Credit Facility from December 7, 2008 until December 7,
2010 and to make certain other amendments to the Credit Facility, including the
following:





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





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





§
            The
      First Amendment amends the Schedule to provide that the Borrowers must pay
      the Lender a floorplan annual volume commitment fee if the aggregate
      amount of all floorplan loans does not equal or exceed $60,000,000 in a 12
      month period from December 1st through November 30th.  The
      floorplan commitment fee is equal to the amount that the floorplan usage
      during such 12 month period is less than $60,000,000 multiplied by
      1%.  If the Borrower terminates the Credit Facility during a 12
      month period, the Borrower shall be required to pay the Lender a pro rated
      portion of the annual volume commitment
fee.





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





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.





12




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




For
      the Three Months Ended November 30,2008
              
              
              %
      of Total
              
              
              2007
              
              
              %
      of TotalDepartments
      of the U.S. Government
              
              $
              40,195,246
              
              
              
              57.4
              %
              
              $
              48,370,513
              
              
              
              64.8
              %State
      and Local Governments
              
              
              2,996,195
              
              
              
              4.3
              %
              
              
              3,718,015
              
              
              
              5.0
              %Commercial
      Companies
              
              
              16,758,915
              
              
              
              23.9
              %
              
              
              13,082,477
              
              
              
              17.5
              %Education
      and other
              
              
              10,068,754
              
              
              
              14.4
              %
              
              
              9,469,181
              
              
              
              12.7
              %Total
      Revenues
              
              $
              70,019,110
              
              
              
              100.0
              %
              
              $
              74,640,186
              
              
              
              100.0
              %





Major
Customers





Three months ended November
30, 2008





Sales to
a school district in Georgia accounted for approximately $8.9 million or 12.8%
and $5.6 million or 7.5% of the Company’s total revenues for three months ended
November 30, 2008 and 2007, respectively.





Three months ended November
30, 2007





Sales to
a department of the United States Government accounted for approximately $10.2
million or 13.7% and $3.7 million or 4.8% of the Company’s total revenue for the
three months ended November 30, 2007 and 2008, respectively.





The
Company reviews a client's credit history before extending
credit.  The Company does not require collateral or other security to
support credit sales.  The Company provides for an allowance for
doubtful accounts based on the credit risk of specific clients, historical
experience and other identified risks. Trade receivables are carried at original
invoice less an estimate made for doubtful receivables, based on review by
management of all outstanding amounts on a periodic basis.  Trade
receivables are considered delinquent when payment is not received within
standard terms of sale, and are charged-off against the allowance for doubtful
accounts when management determines that recovery is unlikely and ceases its
collection efforts.





The trade
account receivables consist of the following:





November
      30,
              
              
              August
      31,2008
              
              
              2008Trade
      receivables
              
              $
              34,819,558
              
              
              $
              32,570,104Allowance
      for doubtful accounts
              
              
              (391,137
              )
              
              
              (391,137
              )Trade
      receivables, net
              
              $
              34,428,421
              
              
              $
              32,178,967




13




7.  Accrued
Liabilities




Current
accrued liabilities consisted of the following:





November 30, 2008
            
            
            August 31, 2008Accrued
      payroll
            
            $
            1,763,173
            
            
            $
            2,384,922Accrued
      commissions
            
            
            719,696
            
            
            
            730,848Accrued
      state sales taxes
            
            
            95,428
            
            
            
            97,514Accrued
      third party service fees
            
            
            132,625
            
            
            
            108,070Other
      accrued expenses
            
            
            1,918,129
            
            
            
            2,097,271$
            4,629,051
            
            
            $
            5,418,625




8. Related
Party Transactions





One of
the Company’s facilities is leased under a non-cancelable operating lease
agreement with an entity that is owned by certain directors and officers of the
Company and their related family members. Rent expense was $45,000 for each of
the three months ended November 30, 2008 and 2007, respectively.  The
facilities consist of office and warehouse space totaling 42,480 square feet,
located in Springfield, New Jersey





The
Company is occupying approximately 26,000 square feet of office and warehouse
space in a 70,000- square-foot building in Suwannee, GA. This space is leased
from GS&T Properties, LLC, in which certain officers of the Company are
passive investors with an approximately 20% equity interest. The lease term is
for 5 years, with monthly base rent of $15,832. During the three months ended
November 30, 2008 and 2007, the Company recorded expense under this lease
totaling $47,496 and $44,325, respectively.





In
conjunction with the acquisition of eBAS/Aveeva, the Company entered into a
lease for approximately 20,000 square feet of office space.  This
space is leased from the spouse of the President of eBAS/Aveeva.  The
lease term is through August 31, 2011, with a monthly rent of
$20,000.  For the three months ended November 30, 2008, the Company
recorded expense under this lease totaling $60,000.





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





EgisNova
Corp. is an information technology staffing company, owned by the spouse of the
President of Luceo. EgisNova Corp. provides subcontractor services to Luceo.
EgisNova Corp. provided gross services to Luceo totaling $306 for the three
months ended November 30, 2008.





9. Segment
Information





The
Company has adopted Statement of Financial Accounting Standard No. 131,
“Disclosure about Segments of an Enterprise and Related Information.”  The
Company’s business activities are divided into two business segments, Systems
Division and Global Services Division.  Systems Division provides services
and products to commercial, federal, education, state and local government
clients.  System Division’s areas of specific practices include
communications, data management, enterprise computing, managed services, storage
and data center planning and development.  Systems Division’s client base
is comprised of departments of the United States Federal Government, state and
local governments, schools and commercial businesses throughout the United
States.  Global Services Division offers a broad range of
consulting/contracting services to clients throughout the United States
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 acquisitions of Luceo on March 20, 2008
and eBAS/Aveeva on August 13, 2008.





14




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




November
      30,2008
            
            
            August
      31, 2008(Unaudited)Identifiable
      Assets:Systems
      Division
            
            
            49,629,764
            
            
            
            46,212,267Global
      Services Division
            
            
            16,280,634
            
            
            
            16,261,773Total
      Assets
            
            
            65,910,398
            
            
            
            62,474,040




Three
      months ended November 30,2008
                
                
                2007(Unaudited)RevenuesSystems
      Division
                
                
                59,306,220
                
                
                
                74,640,186Global
      Services Division
                
                
                10,712,890
                
                
                
                -Total
      Revenue
                
                
                70,019,110
                
                
                
                74,640,186Gross
      ProfitSystems
      Division
                
                
                6,686,672
                
                
                
                8,644,977Global
      Services Division
                
                
                2,107,314
                
                
                
                -Gross
      Profit
                
                
                8,793,986
                
                
                
                8,644,977Operating
      IncomeSystems
      Division
                
                
                1,200,045
                
                
                
                2,499,706Global
      Services Division
                
                
                729,670
                
                
                
                -Operating
      Income
                
                
                1,929,716
                
                
                
                2,499,706Interest and Other
      Expense (Income)Systems
      Division
                
                
                134,558
                
                
                
                319,230Global
      Services Division
                
                
                118,764
                
                
                
                -Interest
      and Other Expense (Income)
                
                
                253,323
                
                
                
                319,230Provision for Income
      TaxesSystems
      Division
                
                
                416,097
                
                
                
                934,274Global
      Services Division
                
                
                254,349
                
                
                
                -Provision
      for Income Taxes
                
                
                670,446
                
                
                
                934,274Net
      IncomeSystems
      Division
                
                
                649,390
                
                
                
                1,246,202Global
      Services Division
                
                
                356,557
                
                
                
                -Net
      Income
                
                
                1,005,947
                
                
                
                1,246,202





15




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




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





Cautionary
Statement Regarding Forward-Looking Statements





You
should carefully review the information contained in this Quarterly Report on
Form 10-Q and in other reports or documents that we file from time to time with
the Securities and Exchange Commission (the “SEC”).  In addition to
historical information, this Quarterly Report on Form 10-Q contains our beliefs
regarding future events and our future financial performance.  In some
cases, you can identify those so-called “forward-looking statements” by words
such as “may,” “will,” “should,” expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative of those
words and other comparable words.  You should be aware that those
statements are only our predictions.  Actual events or results may
differ materially.  We undertake no obligation to publicly release any
revisions to forward-looking statements after the date of this report. In
evaluating those statements, you should specifically consider various factors,
including the risk factors discussed in our Annual Report on Form 10-K for the
year ended August 31, 2008 and other reports or documents that we file from time
to time with the SEC.  All forward-looking statements attributable to
us or a person acting on our behalf are expressly qualified in their entirety by
this cautionary statement.





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





Overview
of Emtec





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





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





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





16




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.





For three
months ended November 30, 2008 and 2007, our Systems Divisions revenues
decreased to $59.31 million from $74.64 million. If we are unable to increase
our revenues in future periods, whether due to the effects of the economic
downturn on our commercial business or otherwise, then we may be forced to
consolidate our operations to reduce operating expenses sufficiently to achieve
profitable operations. We have implemented several cost containment measures
beginning in December 2008 that will reduce our selling, general and
administrative expenses in future quarters, but there can be no assurance that
we will be able to generate sufficient new business or that our cost containment
measures in place will provide us the ability to maintain profitability in the
future.





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




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





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




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.





Results
of Operations





Comparison
of Three Months Ended November 30, 2008 and November 30, 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 November 30, 2008 and 2007.





17


EMTEC,
INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 (Unaudited)
  Three
Months Ended November 30,


2008
            
            
            2007
            
            
            Change
            
            
            %RevenuesProcurement
      services
            
            $
            56,358,723
            
            
            $
            70,762,377
            
            
            $
            (14,403,654
            )
            
            
            -20.4
            %Service
      and consulting
            
            
            13,660,387
            
            
            
            3,877,809
            
            
            
            9,782,578
            
            
            
            252.3
            %Total
      Revenues
            
            
            70,019,110
            
            
            
            74,640,186
            
            
            
            (4,621,076
            )
            
            
            -6.2
            %Cost of
      SalesCost
      of procurement services
            
            
            50,392,498
            
            
            
            63,029,313
            
            
            
            (12,636,815
            )
            
            
            -20.0
            %Service
      and consulting
            
            
            10,832,626
            
            
            
            2,965,896
            
            
            
            7,866,730
            
            
            
            265.2
            %Total Cost of
      Sales
            
            
            61,225,124
            
            
            
            65,995,209
            
            
            
            (4,770,085
            )
            
            
            -7.2
            %Gross
      ProfitProcurement
      services
            
            
            5,966,225
            
            
            
            7,733,064
            
            
            
            (1,766,839
            )
            
            
            -22.8
            %Procurement
      services %
            
            
            10.6
            %
            
            
            10.9
            %Service
      and consulting
            
            
            2,827,761
            
            
            
            911,913
            
            
            
            1,915,848
            
            
            
            210.1
            %Service
      and consulting %
            
            
            20.7
            %
            
            
            23.5
            %Total Gross
      Profit
            
            
            8,793,986
            
            
            
            8,644,977
            
            
            
            149,009
            
            
            
            1.7
            %Total Gross Profit
      %
            
            
            12.6
            %
            
            
            11.6
            %Operating
      expenses:Selling,
      general, and administrative expenses
            
            
            6,177,875
            
            
            
            5,755,443
            
            
            
            422,432
            
            
            
            7.3
            %Rent
      expense – related party
            
            
            152,496
            
            
            
            89,325
            
            
            
            63,171
            
            
            
            70.7
            %Depreciation
      and amortization
            
            
            533,899
            
            
            
            300,503
            
            
            
            233,396
            
            
            
            77.7
            %Total
      operating expenses
            
            
            6,864,270
            
            
            
            6,145,271
            
            
            
            718,999
            
            
            
            11.7
            %Pecent
      of revenues
            
            
            9.8
            %
            
            
            8.2
            %Operating
      income
            
            
            1,929,716
            
            
            
            2,499,706
            
            
            
            (569,990
            )
            
            
            -22.8
            %Percent
      of revenues
            
            
            2.8
            %
            
            
            3.3
            %Other
      expense (income):Interest
      income – other
            
            
            (4,903
            )
            
            
            (17,775
            )
            
            
            12,872
            
            
            
            -72.4
            %Interest
      expense
            
            
            254,062
            
            
            
            337,023
            
            
            
            (82,961
            )
            
            
            -24.6
            %Other
            
            
            4,164
            
            
            
            (18
            )
            
            
            4,182
            
            
            
            N/AIncome
      before income taxes
            
            
            1,676,393
            
            
            
            2,180,476
            
            
            
            (504,083
            )
            
            
            -23.1
            %Provision
      for income taxes
            
            
            670,446
            
            
            
            934,274
            
            
            
            (263,828
            )
            
            
            -28.2
            %Net
      income
            
            $
            1,005,947
            
            
            $
            1,246,202
            
            
            $
            (240,255
            )
            
            
            -19.3
            %Percent
      of revenues
            
            
            1.4
            %
            
            
            1.7
            %




18




Total
Revenues





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




Three
      months ended November 30,2008
              
              
              2007(Unaudited)RevenuesSystems
      Division
              
              
              59,306,220
              
              
              
              74,640,186Global
      Services Division
              
              
              10,712,890
              
              
              
              -Total
      Revenue
              
              
              70,019,110
              
              
              
              74,640,186


Systems
Division




Our
Systems Division’s revenues, by client types and revenue type, are comprised of
the following:
  For the Three Months Ended
      November 30,2008
                                                                                    
                                                                                    
                                                                                    % of Total
                                                                                    
                                                                                    
                                                                                    2007
                                                                                    
                                                                                    
                                                                                    % of TotalDepartments of the U.S.
      Government
                                                                                    
                                                                                    $
                                                                                    40,195,246
                                                                                    
                                                                                    
                                                                                    
                                                                                    67.8
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    48,370,513
                                                                                    
                                                                                    
                                                                                    
                                                                                    64.8
                                                                                    %State and Local
      Governments
                                                                                    
                                                                                    
                                                                                    2,996,195
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    3,718,015
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.0
                                                                                    %Commercial
      Companies
                                                                                    
                                                                                    
                                                                                    6,046,025
                                                                                    
                                                                                    
                                                                                    
                                                                                    10.2
                                                                                    %
                                                                                    
                                                                                    
                                                                                    13,082,477
                                                                                    
                                                                                    
                                                                                    
                                                                                    17.5
                                                                                    %Education and
      other
                                                                                    
                                                                                    
                                                                                    10,068,754
                                                                                    
                                                                                    
                                                                                    
                                                                                    17.0
                                                                                    %
                                                                                    
                                                                                    
                                                                                    9,469,181
                                                                                    
                                                                                    
                                                                                    
                                                                                    12.7
                                                                                    %Total
    Revenues
                                                                                    
                                                                                    $
                                                                                    59,306,220
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    74,640,186
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %


For
      the Three Months Ended November 30,2008
              
              
              2007
              
              
              Change
              
              
              %RevenuesProcurement
      services
              
              $
              56,358,723
              
              
              $
              70,762,377
              
              
              $
              (14,403,653
              )
              
              
              -20.4
              %Service
      and consulting
              
              
              2,947,497
              
              
              
              3,877,809
              
              
              
              (930,312
              )
              
              
              -24.0
              %Total
      Revenues
              
              
              59,306,220
              
              
              
              74,640,186
              
              
              
              (15,333,965
              )
              
              
              -20.5
              %





Systems
Division’s total revenues decreased $15.33 million, or 20.5%, to $59.31 million
for the three months ended November 30, 2008, compared to $74.64 million for the
three months ended November 30, 2007.  Procurement services revenue
decreased $14.40 million or 20.4%, to $56.36 million for the three months ended
November 30, 2008, compared to $70.76 million for the three months ended
November 30, 2007. Services and consulting revenue for the Systems Division
decreased $930,312, or 24.0%, to $2.95 million for the three months ended
November 30, 2008.  These decreases are primarily due to an overall
decrease in our clients’ IT spending, particularly in our commercial business
and in various governmental agencies in the State of New Jersey. We believe that
this decrease in revenues can be attributed to the current economic
downturn.





During
the three months ended November 30, 2008 and 2007, U.S. governmental department
and agency related revenues represented approximately 67.8% and 64.8% of total
Systems Division’s revenues, respectively. These clients include the Department
of Defense, Department of Justice, Department of Homeland Security, Department
of Health and Human Services, Department of Agriculture, Department of Commerce
and the General Service Administration. Revenues from various civilian and
military U.S. governmental departments and agencies decreased by approximately
$8.17 million during the three months ended November 30, 2008 compared with the
three months ended November 30, 2007. This is mainly due to a large computer
hardware sale of approximately $10.2 million to a department of the United
States Government in three months ended November 30, 2007. The same client only
accounted for approximately $3.7 million in revenue for the current three months
ended November 30, 2008.





19




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





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


Revenues
from commercial clients decreased by approximately $7.04 million during the
three months ended November 30, 2008 compared with the three months ended
November 30, 2007. This decrease is mainly due to the current economic downturn
that caused reductions in technology and discretionary spending by our
commercial clients.





During
the three months ended November 30, 2008, revenues from our education business
increased by approximately $600,000 compared with the three months ended
November 30, 2007. This increase is attributable to increase in various computer
roll-out projects for a school district in Georgia during the three months ended
November 30, 2008.





Global Services
Division





Our
Global Services Division’s revenues were $10.71 million for the three months
ended November 30, 2008. Global Services Division consists of revenues from our
recently acquired subsidiaries Luceo, eBAS and Aveeva.





Gross
Profit





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





Three
      months ended November 30,2008
              
              
              2007(Unaudited)Gross
      ProfitSystems
      Division
              
              
              6,686,672
              
              
              
              8,644,977Global
      Services Division
              
              
              2,107,314
              
              
              
              -Gross
      Profit
              
              
              8,793,986
              
              
              
              8,644,977





Systems
Division





Aggregate
gross profit for our Systems Division decreased $1.96 million, or 22.7%, to
$6.69 million for the three months ended November 30, 2008 as compared to $8.64
million for the three months ended November 30, 2007. This decrease is mainly
due to a decrease in revenue as discussed in the total revenue section.
Additionally, in the quarter ended November 30, 2008 we received less
manufacturer incentives and rebates than in the quarter ended November 30,
2007.





20




Measured
as a percentage of revenues, our gross profit margin for Systems Division
decreased to 11.3% of our Systems Division’s revenues for the three months ended
November 30, 2008 from 11.6% for the three months ended November 30, 2007. This
decrease is mainly due to competitive pressure, aggressive pricing strategies,
changes in the volume incentive rebates programs offered by certain
manufacturers, the mix of client type and the mix of products and services sold
affected our margin percentages.





Global Services
Division





Our
Global Services Division’s gross profit was $2.11 million for the three months
ended November 30, 2008.





Selling, General and
Administrative Expenses





Systems
Division





Selling,
general and administrative expenses for our Systems Division decreased by $
685,700, or 11.9% to $5.07 million for the three months ended November 30, 2008,
compared to $5.76 million for the three months ended November 30, 2007. During
the three months ended November 30, 2008, the Company recorded an
indemnification claim recovery of $631,415 by offset against a liability due to
former shareholders of Westwood.   A $361,533 portion of the
indemnification claim pertained to total settled tax liabilities attributable to
Westwood pre-merger tax years and was recorded as a collection of the $341,165
other receivable and a $20,368 decrease to goodwill.  The remaining
$269,882 portion of the indemnification claim was recorded as reduction in
selling, general and administrative expense for the three months ended November
30, 2008.  This portion of the claim pertained to professional fees
expensed post-merger associated with defending the Company’s tax positions
during the IRS tax audit and appeals process.





Without
the reduction of $269,882 in selling, general and administrative expenses
associated with indemnification claim, Systems Division’s selling, general and
administrative expenses would have decreased by $415,818, or 7.2% to $5.34
million for the three months ended November 30, 2008, compared to $5.76 million
for the three months ended November 30, 2007.  This decrease in
selling, general and administrative expenses for the three months ended November
30, 2008 is mainly due to a decrease in sales commission of approximately
$348,000 and bonus expense by approximately $137,000, which is directly related
to the decrease in our gross profit as discussed in the gross profit
section.





Global Services
Division





Our
Global Services Division’s selling, general and administrative expenses for the
three months ended November 30, 2008 were $1.11 million.





21




Rent Expense-Related
Party





Systems
Division





We occupy
approximately 42,000 square feet of office and warehouse space in Springfield,
New Jersey. This space is leased from a limited liability company owned by
certain directors and officers of the Company and their related family members.
The lease term is through April 2009 with monthly base rent of $15,000. We have
provided notice of renewal to extend the lease for an additional five year term.
During the three months ended November 30, 2008 and 2007, we recorded $45,000 in
expense under this lease.





We occupy
approximately 26,000 square feet of office and warehouse space in a 70,000
square foot building in Suwannee, GA.  This space is leased from a
limited liability company in which certain officers of our company are passive
investors with an approximately 20% equity interest. The lease term is for 5
years with monthly base rent of $15,832. During the three months ended November
30, 2008 and 2007, the Company recorded expense under this lease totaling to
$47,496 and $44,325, respectively.





Global Services
Division





We occupy
approximately 20,000 square feet of office space in Fremont, CA.  This
space is leased from the spouse of the President of eBAS/Aveeva.  The
lease term is for 3 years with monthly base rent of $20,000. During the three
months ended November 30, 2008, we recorded $60,000 in expense under this
lease.


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





Depreciation and
Amortization





Systems
Division





Depreciation
and amortization expense for our Systems Division increased by 7.9%, or $23,884,
to $324,387 for the three months ended November 30, 2008, compared to $300,503
for the three months ended November 30, 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.





Intangible
assets of the Systems Division at November 30, 2008 and August 31, 2008
consisted of the value ascribed to customer relationships of $8,661,712 less
accumulated amortization of $1,954,376 and $1,809,288,
respectively.  The assets ascribed to customer relationships are being
amortized on a straight-line basis over 13 to 15 years.  Amortization
expense of the Systems Division was $145,088 for each of the three months ended
November 30, 2008 and 2007.





Global Services
Division





Our
Global Services Division’s depreciation expense for the three months ended
November 30, 2008 was $9,901.





22




Intangible
assets of the Global Services Division at August 31, 2008 consisted of the
estimated value ascribed to customer relationships of $4,200,000 less
accumulated amortization of $276,303, and estimated value ascribed to
non-compete of $370,000 less accumulated amortization of $30,311.  The
assets ascribed to customer relationships are being amortized on a straight-line
basis over 5 to 9 years and non-compete covenants are being amortized on a
straight-line basis over 5 years.  Amortization expense for the Global
Services Division was $199,611 for the three months ended November 30,
2008.





Operating
income





Systems
Division





Operating
income for our Systems Division for the three months ended November 30, 2008
decreased by 52.0%, or $1.30 million, to $1.20 million, compared to $2.50
million for the three months ended November 30, 2007. This decrease in operating
income is mainly due to decreased revenues and gross profit as discussed in the
Total Revenue and Gross Profit sections above.   Additionally,
the recording of $269,882 portion of the indemnification claim associated with
professional fees in selling, general and administrative expense increased
operation income by the same amount for the three months ended November 30,
2008.





Global Services
Division





Our
Global Services Division’s operating income for the three months ended November
30, 2008 was $729,671.





Interest
expense





Systems
Division





Interest
expense for the Systems Division decreased by 59.1%, or $199,183, to $137,840
for the three months ended November 30, 2008, compared to $337,023 for the three
months ended November 30, 2007.  This is primarily attributable to
lower balance on various notes payable and a lower average interest rate charged
on the line of credit attributable to decreasing prime rate during this
period.





Global Services
Division





Our
Global Services Division’s interest expense for the three months ended November
30, 2008 was $116,222. This interest expense is related to acquisition debt from
the line of credit and 8% subordinated note payable to Mr. Natarajan as part of
the acquisition of Luceo.





Provision for Income
Taxes





Systems
Division





Income
tax expense for Systems Division decreased by $518,177, to $416,097 for the
three months ended November 30, 2008, compared to $934,274 for the three months
ended November 30, 2007. This decrease is mainly due to $1.11 million decrease
in income before income taxes in the quarter ended November 30, 2008 compared to
the quarter ended November 30, 2007. The effective tax rate for the Systems
Division was 39.1% for the three months ended November 30, 2008 versus an
effective tax rate of 42.8% for the three months ended November 30,
2007.  This was primarily attributable to recording of $23,594 income
tax benefit from the adjustment of interest and penalties accrued for previously
unrecognized tax positions.




23




Global Services
Division





We
recorded an income tax expense for the Global Services Division of $254,349 for
the three months ended November 30, 2008. The effective tax rate for the Global
Services Division for this period was 41.6%.





Recently
Issued Accounting Standards




Fair
Value Measurements





In
September 2006, the Financial Accounting Standard Board (“FASB’) issued
Statement of Financial Accounting Standard No. 157, Fair Value Measurements
(“SFAS No. 157”). This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements, but provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those years. The
standard is effective for the Company as of the beginning of its first fiscal
year beginning after November 15, 2007, or September 1, 2008. The FASB, on
February 12, 2008, issued FASB Staff Position (“FSP”) FAS No. 157-2. This FSP
permits a delay in the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008, for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The delay is intended to
allow the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. On February 14, 2008, the FASB issued FSP FAS 157-1
to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive
accounting pronouncements from the scope of SFAS No. 157. The 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 does not expect
adoption of SFAS No. 159 to have a material impact on its financial
statements.





24




Noncontrolling
Interests in Consolidated Financial Statements





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





Business
Combinations





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures the assets acquired, liabilities assumed, and
any  noncontrolling interest in the acquire. The provisions of SFAS
141(R) are effective for our business combinations occurring on or after
September 1, 2009.





Liquidity
and Capital Resources





Cash at
November 30, 2008 of $2.26 million represented an increase of $235,431 from
$2.02 million at August 31, 2008. We are a net borrower; consequently, we
believe our cash balance must be viewed along with the available balance on our
line of credit.  Borrowings under our line of credit at November 30,
2008 increased to $10.06 million from $8.58 million at August 31, 2008. The
increase in line of credit is primarily attributable higher revenues in the
quarter ended November 30, 2008 compared with the quarter ended August 31, 2008.
As of November 30, 2008, our net working capital (defined as the excess of our
current assets over our current liabilities) was approximately $978,397 greater
than it was at August 31 2008. The increase in working capital is primarily
attributable to net income of $1.01 million for the three months ended November
30, 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.





As 
of November 30, 2008, borrowings under the Credit Facility bore 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% (3.50% as of November 30, 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 6.50% as of
November 2008.  The Company did not have any unsubsidized floorplan
loans during the three months ended November 30, 2008 and 2007.  The rates
discussed in this paragraph were in effect thru the December 6, 2008,
renewal date of the Credit Facility.





25




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 inter-creditor agreement in which the Lender agreed to give Avnet a first
lien position on all future unbilled service maintenance billings and which
provides that, as regards to Avnet, all debt obligations to the Lender are
accorded priority.





As of
November 30, 2008, we had an outstanding balance of $10.06 million under the
revolving portion of the Credit Facility and $2.91 million of outstanding
(included in the Company’s accounts payable) balances plus $1.15 million in open
approvals under the floor plan portion of the Credit Facility with Lender. As of
November 30, 2008, we had net availability of $16.55 million under the revolving
portion of the Credit Facility and additional net availability of $1.33 million
under the floor plan portion of the Credit Facility.





As of
November 30, 2008, the Company determined that it was in compliance with its
financial covenants with the Lender.





On
December 5, 2008, the Borrower entered into a First Amendment and Joinder to
Loan and Security Agreement and Schedule to Loan and Security Agreement (the
“First Amendment”) with the Lender, pursuant to which the Lender has agreed to
extend the term of the Credit Facility from December 7, 2008 until December 7,
2010 and to make certain other amendments to the Credit Facility, including the
following:





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





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





§
            The
      First Amendment amends the Schedule to provide that the Borrowers must pay
      the Lender a floorplan annual volume commitment fee if the aggregate
      amount of all floorplan loans does not equal or exceed $60,000,000 in a 12
      month period from December 1st through November 30th.  The
      floorplan commitment fee is equal to the amount that the floorplan usage
      during such 12 month period is less than $60,000,000 multiplied by
      1%.  If the Borrower terminates the Credit Facility during a 12
      month period, the Borrower shall be required to pay the Lender a pro rated
      portion of the annual volume commitment
fee.





26




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





As of
November 30, 2008, we had open term credit facilities with our primary trade
vendors, including aggregators and manufacturers, of approximately $30.20
million with outstanding principal of approximately $17.33 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 $77,864 during the three months ended November 30, 2008 related
primarily to the purchase of computer equipment for internal use. We anticipate
our total capital expenditures for our fiscal year ending August 31, 2009 will
be approximately $600,000, of which approximately $250,000 will be for the
upgrade of our organizational computer system and the remaining $350,000 will
primarily be for the purchase of computer equipment for internal use, furniture,
delivery trucks and leasehold improvements.




We
anticipate that our primary sources of liquidity for the balance of fiscal year
2009 will be cash generated from operations, trade vendor credit and cash
available to us under our Credit Facility.  Our future financial
performance will depend on our ability to continue to reduce and manage
operating expenses as well as our ability to grow revenues. Any loss of clients,
whether due to price competition or technological advances, will have an adverse
affect on our revenues. Our future financial performance could be negatively
affected by unforeseen factors and unplanned expenses.





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


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





Critical
Accounting Policies





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





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Revenue
Recognition





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





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





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





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





§
            In
      some instances, the “set-up” service is performed after date of
      delivery.  We recognize revenue for the “hardware” component at
      date of delivery when the amount of revenue allocable to this component is
      not contingent upon the completion of “set-up” services and, therefore,
      our client has agreed that the transaction is complete as to the
      “hardware” component.  In instances where our client does not
      accept delivery until “set-up” services are completed, we defer all
      revenue in the transaction until client acceptance
  occurs.





§
            There
      are occasions when a client requests a transaction on a “bill & hold”
      basis.  We follow the SAB 104 criteria and recognize revenue
      from these sales prior to date of physical delivery only when all the
      criteria of SAB 104 are met. We do not modify our normal billing and
      credit terms for these clients. The client is invoiced at the date of
      revenue recognition when all of the criteria have been
  met.





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





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Revenues
from the sale of third party manufacturer warranties and manufacturer support
service contracts where the manufacturer is responsible for fulfilling the
service requirements of the client are recognized immediately on their contract
sale date.  Manufacturer support service contracts contain
cancellation privileges that allow our clients to terminate a contract with 90
days’ written notice.  In this event, the client is entitled to a
pro-rated refund based on the remaining term of the contract, and we would owe
the manufacturer a pro-rated refund of the cost of the
contract.  However, we have experienced no client cancellations of any
significance during our most recent 3-year history and we do not expect
cancellations of any significance in the future.  As the Company is
not obligated to perform these services, we determined it is more appropriate to
recognize the net amount of the revenue and related payments as net revenue at
the time of sale, pursuant to the guidelines of Emerging Issues Task Force
99-19, “Reporting Revenue Gross as a Principal versus Net as an
Agent.”





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





Trade
Receivables





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





Inventories





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




Goodwill and Intangible
Assets





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




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Intangible
assets at November 30, 2008 and August 31, 2008 consisted of the value ascribed
to customer relationships and non-compete covenants.  The assets
ascribed to customer relationships are being amortized on a straight-line basis
over 5 to 15 years and five years for non-compete
covenants.  Intangible assets are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may not
be recoverable in accordance with Statement of Financial Accounting Standards
No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  Recoverability of long-lived assets is assessed by a
comparison of the carrying amount to the estimated undiscounted future net cash
flows expected to result from the use of the assets and their eventual
disposition.  If estimated undiscounted future net cash flows are less
than the carrying amount, the asset is considered impaired and a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the asset.




Rebates





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





Income
Taxes




Income
taxes are accounted for under an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. In estimating future tax consequences, we generally consider all
expected future events other than the enactment of changes in tax laws or rates.
A valuation allowance is recognized if, on weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.  On September 1, 2007, the Company adopted FASB
Interpretation No. 48 (“FIN 48”). FIN 48 prescribes a recognition threshold that
a tax position is required to meet before being recognized in the financial
statements and provides guidance on de-recognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and transition
issues.





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Item
3. Quantitative and Qualitative Information About Market Risk





We do not
engage in trading market risk sensitive instruments and do not purchase hedging
instruments or “other than trading” instruments that are likely to expose us to
market risk, whether interest rate, foreign currency exchange, commodity price
or equity price risk.  We have issued no debt instruments, entered
into no forward or future contracts, purchased no options and entered into no
swaps.  Our primary market risk exposures are those of interest rate
fluctuations.  A change in interest rates would affect the rate at
which we could borrow funds under our revolving credit facility.  Our
balance on the line of credit at November 30, was approximately $10.0 million.
Assuming no material increase or decrease in such balance, a one percent change
in the interest rate would change our interest expense by approximately $100,000
annually.





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Item
4T. Controls and Procedures





(a) Our
management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of November
30, 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 November 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





32




PART
II – OTHER INFORMATION





Item
1. Legal Proceedings





On December
15, 2008, Unisys Corporation, one of our suppliers, filed a lawsuit against
us in the Superior Court of New Jersey in Union County alleging that we owe
$158,003 for various products and related services they claim to have
provided from November 2005 through March 2007, plus interest and legal fees
totaling to $233,784. We believe that the claims made by Unisys are without
merit and intend to vigorously defend against this action.  We do not
believe that this claim will have a material adverse effect on our financial
position, cash flows or results of operations. However, due to the uncertain
nature of such litigation, we cannot predict the outcome of this
matter.





We are
occasionally involved in various lawsuits, claims, and administrative
proceedings arising in the normal course of business. We believe that any
liability or loss associated with such matters, individually or in the
aggregate, will not have a material adverse effect on the Company’s financial
condition or results of operations.





33




Item
1A. Risk Factors





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





If
we are unable to generate sufficient revenues, we may have to further down
size.





For three
months ended November 30, 2008 and 2007, total revenues decreased to
$70.02 million from $74.64 million. Our Systems Division’s revenues for the
three months ended November 30, 2008, decreased $15.33 million, to $59.31
million from $74.64 million for the three months ended November 30, 2007. If we
are unable to increase our revenues in future periods, whether due to the
effects of the economic downturn on our commercial business or otherwise, then
we may be forced to consolidate our operations to reduce operating expenses
sufficiently to achieve profitable operations. There can be no assurances that
we will be able to generate sufficient new business or that our cost containment
measures in place will provide us the ability to attain profits in the
future.





We
have a significant amount of goodwill and intangible assets, the value of which
could become impaired.





We have
recorded significant portions of the purchase price of certain acquisitions as
goodwill and/or intangible assets. At November 30, 2008, we had approximately
$10.54 million and $10.97 million of goodwill and intangible assets,
respectively. Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and
Other Intangible Assets” and as a result, goodwill is not amortized but tested
for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired.  We have set an annual
impairment testing date of June 1.  If we determine that the carrying
values of our goodwill and/or intangible assets are impaired, we may incur a
non-cash charge to earnings, which could have a material adverse effect on our
results of operations for the period in which the impairment
occurs.




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Item
6. Exhibits





Exhibit 31.1 - Rule
13a-14(a)/15d-14(a) Certification of Dinesh R. Desai, Principal Executive
Officer, of Emtec, Inc. datedJanuary 20, 2009.





Exhibit 31.2 - Rule
13a-14(a)/15d-14(a) Certification of Stephen C. Donnelly, Principal Financial
Officer, of Emtec, Inc. dated January 20, 2009.





Exhibit 32.1 -
Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
Emtec, Inc. dated January 20, 2009.





Exhibit 32.2 -
Section 1350 Certificate of Stephen C. Donnelly, Principal Financial Officer, of
Emtec, Inc. dated January 20, 2009.





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:
January 20, 2009





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