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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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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, 2005

Commission file
number: 0-32789

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

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 87-0273300                          
|(State of incorporation
  or organization)                     |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|572 Whitehead Road, Bldg.#1                                   
|Trenton, New Jersey 08619                                     
|(Address of principal executive
  offices, including zip code)
|                                                              
|(609) 528-8500                                                
|(Registrants telephone number,
  including area code)        

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

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (see definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act).

Check one: Large accelerated filer   oAccelerated
filer   oNon-accelerated
filer    x

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

As
of January 13, 2006, there were outstanding 14,381,286 shares of the
registrants common stock.

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EMTEC,
INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2005

Table of Contents

|                                                                      |                                                                         |  
|--------------------------------------------------------------------- | ----------------------------------------------------------------------- | -
|PART I  FINANCIAL
  INFORMATION                                      |                                                                        
|                                                                     
|Item 1 -
  Financial Statements                                       |                                                                        
|                                                                      |                                                                         |  
|                                                                      | Consolidated Balance Sheets                                             |  
|                                                                      | November 30, 2005 (Unaudited) and
  August 31, 2005                     | 1
|                                                                      |                                                                         |  
|                                                                      | Consolidated Statements of
  Operations                                 |  
|                                                                      | Three months ended November 30, 2005
  (Unaudited) and 2004 (Unaudited) | 2
|                                                                      |                                                                         |  
|                                                                      | Consolidated Statements of Cash
  Flows                                 |  
|                                                                      | Three months ended November 30, 2005
  (Unaudited) and 2004 (Unaudited) | 3
|                                                                      |                                                                         |  
|                                                                      | Notes to Consolidated Financial
  Statements (Unaudited)                | 4
|                                                                      |                                                                        
|Item 2 -
  Managements Discussion and Analysis of Financial          |                                                                        
|                                                                      | Condition and Result of Operations                                      | 9
|                                                                      |                                                                         |  
|Item 3  Quantitative and Qualitative
  Information About Market Risk | 21                                                                     
|                                                                      |                                                                        
|Item 4  Controls and Procedures                                      | 22                                                                     
|                                                                      |                                                                        
|PART II  OTHER INFORMATION                                           |                                                                        
|                                                                      |                                                                        
|Item 1A  Risk Factors                                                | 23                                                                     
|                                                                      |                                                                        
|Item 6  Exhibits                                                     | 24                                                                     
|                                                                      |                                                                        
|SIGNATURES                                                            | 25                                                                     

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PART I 
FINANCIAL INFORMATION

Item 1.                    Financial Statements

|                                  
|----------------------------------
|EMTEC, INC.                       
|CONSOLIDATED BALANCE
        SHEET
|                                  
|                                  

|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | ----------------------- | - | ---------- | 
|Assets                                                                                                                                                                                                    |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  | November
        30, 2005 |            | August
        31, 2005 |  
|                                                                                                                                                                                                          |  |                           |            |                         |  
|Current
        Assets                                                                                                                                                                                    |  |                           |            |                         |   |            | 
|Cash
        & cash equivalents                                                                                                                                                                           |  | $                         | 415,032    |                         | $ | 1,021,237  | 
|Receivables:                                                                                                                                                                                              |  |                           |            |                         |   |            | 
|Trade,
        less allowance
        for doubtful accounts                                                                                                                                               |  |                           | 55,087,448 |                         |   | 34,541,373 | 
|Others                                                                                                                                                                                                    |  |                           | 3,871,800  |                         |   | 3,385,891  | 
|Inventories,
        net                                                                                                                                                                                  |  |                           | 4,565,502  |                         |   | 5,770,590  | 
|Prepaid
        expenses                                                                                                                                                                                  |  |                           | 459,038    |                         |   | 433,238    | 
|Deferred
        tax asset - current                                                                                                                                                                      |  |                           | 603,533    |                         |   | 603,533    | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Total
        Current Assets                                                                                                                                                                              |  |                           | 65,002,353 |                         |   | 45,755,862 | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Net
        property and equipment                                                                                                                                                                        |  |                           | 1,070,538  |                         |   | 917,159    | 
|Customer
        Relationships                                                                                                                                                                            |  |                           | 8,448,392  |                         |   | 8,592,844  | 
|Goodwill                                                                                                                                                                                                  |  |                           | 8,999,055  |                         |   | 8,974,610  | 
|Restricted
        cash                                                                                                                                                                                   |  |                           | 150,000    |                         |   | 5,650,000  | 
|Other
        assets                                                                                                                                                                                      |  |                           | 132,490    |                         |   | 119,444    | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Total Assets                                                                                                                                                                                              |  | $                         | 83,802,828 |                         | $ | 70,009,918 | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Liabilities and Shareholders
        Equity                                                                                                                                                              |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Current
        Liabilities                                                                                                                                                                               |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                         
|Line
        of credit                                                                                                                                                                                    |  |                           | 17,959,333 |                         |   | 4,412,526  | 
|Accounts
        payable - trade                                                                                                                                                                          |  |                           | 35,692,789 |                         |   | 29,738,061 | 
|Accounts
        payable - related party                                                                                                                                                                  |  |                           | 158,333    |                         |   | 133,333    | 
|Current
        portion of long term debt                                                                                                                                                                 |  |                           | 524,874    |                         |   | 524,874    | 
|Income
        taxes payable                                                                                                                                                                              |  |                           | 137,331    |                         |   | 828,659    | 
|Accrued
        liabilities                                                                                                                                                                               |  |                           | 5,168,392  |                         |   | 4,190,728  | 
|Due
        to former stockholders                                                                                                                                                                        |  |                           | 631,415    |                         |   | 631,415    | 
|Customer
        deposits                                                                                                                                                                                 |  |                           | 654,043    |                         |   | 1,268,672  | 
|Deferred
        revenue                                                                                                                                                                                  |  |                           | 1,162,453  |                         |   | 1,125,205  | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Total
        Current Liabilities                                                                                                                                                                         |  |                           | 62,088,963 |                         |   | 42,853,473 | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Accrued
        severance                                                                                                                                                                                 |  |                           | 346,806    |                         |   | 380,356    | 
|Deferred
        tax liability                                                                                                                                                                            |  |                           | 2,782,698  |                         |   | 2,838,298  | 
|Long
        term debt                                                                                                                                                                                    |  |                           | 2,824,860  |                         |   | 3,010,219  | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Total Liabilities                                                                                                                                                                                         |  |                           | 68,043,327 |                         |   | 49,082,346 | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Shareholders
        Equity                                                                                                                                                                              |  |                           |            |                         |   |            | 
|Common
        Stock $0.01 par value; 25,000,000 shares authorized; 17,245,875 and 17,232,134
        shares issued and 14,381,286 and 17,232,134 outstanding at November 30,
        and August 31, 2005 |  |                           | 172,459    |                         |   | 172,321    | 
|Additional
        paid-in capital                                                                                                                                                                        |  |                           | 19,920,577 |                         |   | 19,908,779 | 
|Retained
        Earnings                                                                                                                                                                                 |  |                           | 1,262,512  |                         |   | 846,472    | 
|Less:
        Treasury stock                                                                                                                                                                              |  |                           | (5,596,047 | )                       |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Total Shareholders Equity                                                                                                                                                                                |  |                           | 15,759,501 |                         |   | 20,927,572 | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 
|Total Liabilities and
        Shareholders Equity                                                                                                                                                        |  | $                         | 83,802,828 |                         | $ | 70,009,918 | 
|                                                                                                                                                                                                          |  |                           |            |                         |   |            | 

1

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

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|                                     
|-------------------------------------
|EMTEC, INC.                          
|CONSOLIDATED STATEMENTS OF OPERATIONS
|                                     
|                                     
|                                     

|                                                      |  |                                 |            |      |   |            |  
|----------------------------------------------------- |  | ------------------------------- | ---------- | ---- | - | ---------- | -
|                                                      |  | THREE MONTHS ENDED NOVEMBER 30, |           
|                                                      |  | 2005                            |            | 2004 |  
|                                                      |  |                                 |            |      |  
|Revenues                                              |  | $                               | 84,780,685 |      | $ | 45,528,612 |  
|Cost of revenues                                      |  |                                 | 76,558,518 |      |   | 41,775,107 |  
|                                                      |  |                                 |            |      |   |            |  
|Gross profit                                          |  |                                 | 8,222,167  |      |   | 3,753,505  |  
|                                                      |  |                                 |            |      |   |            |  
|Operating expenses:                                   |  |                                 |            |      |   |            |  
|Selling,
        general, and administrative expenses |  |                                 | 6,923,785  |      |   | 2,654,706  |  
|Management
        fee  related party                |  |                                 | 87,500     |      |   | 87,500     |  
|Rent
        expense  related parties                |  |                                 | 88,154     |      |   | 45,000     |  
|Depreciation
        and amortization                 |  |                                 | 213,504    |      |   | 25,216     |  
|                                                      |  |                                 |            |      |   |            |  
|Total operating expenses                              |  |                                 | 7,312,943  |      |   | 2,812,422  |  
|                                                      |  |                                 |            |      |   |            |  
|                                                      |  |                                 |            |      |   |            |  
|Operating income                                      |  |                                 | 909,224    |      |   | 941,083    |  
|                                                      |  |                                 |            |      |   |            |  
|Other expense (income):                               |  |                                 |            |      |   |            |  
|Interest
        income  other                       |  |                                 | (9,324     | )    |   | (22,988    | )
|Interest
        expense                              |  |                                 | 256,235    |      |   | 134,506    |  
|Other
        expense (income)                        |  |                                 | (27,563    | )    |   | (546       | )
|                                                      |  |                                 |            |      |   |            |  
|                                                      |  |                                 |            |      |   |            |  
|Income before income
        taxes                    |  |                                 | 689,876    |      |   | 830,111    |  
|Provision for income taxes                            |  |                                 | 273,836    |      |   | 358,000    |  
|                                                      |  |                                 |            |      |   |            |  
|Net income                                            |  | $                               | 416,040    |      | $ | 472,111    |  
|                                                      |  |                                 |            |      |   |            |  
|                                                      |  |                                 |            |      |   |            |  
|Preferred stock dividends                             |  |                                 |           |      |   | (19,945    | )
|                                                      |  |                                 |            |      |   |            |  
|                                                     
|Net income available
        to common stockholders   |  | $                               | 416,040    |      | $ | 452,166    |  
|                                                      |  |                                 |            |      |   |            |  
|                                                     
|Net income per common share                           |  |                                 |            |      |   |            |  
|Basic
        and Diluted                             |  | $                               | 0.03       |      | $ | 0.05       |  
|                                                      |  |                                 |            |      |   |            |  
|Weighted Average Shares Outstanding                   |  |                                 |            |      |   |            |  
|Basic                                                 |  |                                 | 15,447,752 |      |   | 9,528,110  |  
|                                                      |  |                                 |            |      |   |            |  
|Diluted                                               |  |                                 | 15,476,018 |      |   | 9,528,110  |  

2

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

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EMTEC, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS

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|                                                                                                           |  | THREE MONTHS
        ENDED 
        NOVEMBER 30, |            
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | -----------
|                                                                                                           |  | 2005                                             |            
|                                                                                                           |  |                                                  |            
|Cash Flows From Operating
        Activities                                                               |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Net income for the three months                                                                            |  | $                                                | 416,040    
|                                                                                                           |  |                                                  |            
|Adjustments to Reconcile
        Net Income to Net
        Cash (Used In) Provided by Operating Activities |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Depreciation and amortization                                                                              |  |                                                  | 213,504    
|Deferred income tax
        (benefit) expense                                                              |  |                                                  | (55,600    
|Put option valuation                                                                                       |  |                                                  | (11,500    
|                                                                                                           |  |                                                  |            
|Changes In Operating
        Assets and Liabilities                                                        |  |                                                  |            
|Receivables                                                                                                |  |                                                  | (21,031,984
|Inventories                                                                                                |  |                                                  | 1,205,088  
|Prepaid expenses and other assets                                                                          |  |                                                  | (38,846    
|Accounts payable                                                                                           |  |                                                  | 5,979,728  
|Customer deposits                                                                                          |  |                                                  | (614,629   
|Income Taxes Payable                                                                                       |  |                                                  | (691,328   
|Accrued liabilities                                                                                        |  |                                                  | 989,166    
|Deferred compensation                                                                                      |  |                                                  | (33,550    
|Deferred revenue                                                                                           |  |                                                  | 37,248     
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Net Cash Used In
        Operating Activities                                                              |  |                                                  | (13,636,663
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Cash Flows From Investing Activities                                                                       |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Purchases of property
        and equipment                                                                |  |                                                  | (222,432   
|Decrease in restricted cash                                                                                |  |                                                  | 5,500,000  
|Acquisition of businesses,
        net of cash acquired                                                    |  |                                                  | (24,445    
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Net Cash Used In Investing Activities                                                                      |  |                                                  | 5,253,123  
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Cash Flows From Financing
        Activities                                                               |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Net Increase in line of credit                                                                             |  |                                                  | 13,546,807 
|Proceeds from issuance
        of common stock                                                             |  |                                                  | 11,933     
|Purchase of treasury stock                                                                                 |  |                                                  | (5,596,044 
|Repayment of debt                                                                                          |  |                                                  | (185,360   
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Net Cash Provided By Financing Activities                                                                  |  |                                                  | 7,777,336  
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Net (decrease) increase
        in Cash and Cash Equivalents                                               |  |                                                  | (606,204   
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Beginning Cash and Cash Equivalents                                                                        |  |                                                  | 1,021,237  
|                                                                                                           |  |                                                  |            
|                                                                                                           |  |                                                  |            
|Ending Cash and Cash
        Equivalents                                                                   |  | $                                                | 415,032    
|                                                                                                           |  |                                                  |            

3

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

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EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTHREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
(unaudited)

|   |                      
|-- | ---------------------
|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
generally accepted accounting principles 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. Operating results
for the three months ended November 30, 2005 are not necessarily indicative of
results that may be expected for the year ended August 31, 2006. For further
information, refer to the annual financial statements and notes thereto
included in the Companys Form 10-K for the year ended August 31, 2005.

Overview of Business

On August 5, 2005,
Emtec, Inc. (Old Emtec) completed a merger with Darr Westwood Technology
Corporation (Darr) pursuant to which the two companies merged and now operate
as a consolidated entity that has retained the name Emtec, Inc. (the Company
or Emtec) (the Merger). Management concluded that the transaction resulted in a
change
in control of the Company and that the transaction should be accounted for as a
reverse Merger, whereby Darr was considered the accounting acquirer of Old
Emtec for financial reporting purposes. In what was regarded as a recapitalization, the historical
stockholders
equity of Darr, the accounting acquirer, prior to the Merger, was retroactively
restated for the equivalent number of shares received in the Merger after
giving effect to any difference in the par value of Old Emtecs and Darrs
stock with an offset to paid-in capital. Retained earnings of Darr are carried
forward after the Merger. Operations prior to the Merger are those of Darr.
Earnings per share for periods prior to the Merger were restated to reflect the
equivalent number of shares.

The consolidated financial statements include the
  accounts and transactions of the combined company for the quarter ended November
  30, 2005 and only of Darr for the quarter ended November 30, 2004.

The Company is an information technology company,
  providing consulting, services and products to commercial, federal, education,
  state and local verticals. The Company's areas of specific practices include
  communications, data management, enterprise computing, managed services, storage
  and data center planning and development. The Companys client base is
  comprised of departments of the United States Federal Government, U.S. state
  and local governments, schools and commercial businesses throughout the United
  States. The most significant portion of the Companys revenue is derived
  from activities as a reseller of Information Technology (IT) products,
  such as workstations, servers, microcomputers, and application software and
  networking and communications equipment.

The Company considers all of its operating activity to
be generated from a single operating segment.

|   |                           
|-- | --------------------------
|2. | Stock Options and Warrants

The Companys 1996 Stock Option Plan (amended in 1999)
(the Plan) authorizes the granting of stock options to directors and eligible
employees. The Company has reserved 1,000,000 shares of its

4

---



common stock for issuance under the Plan at prices
  not less than 100% of the fair value of the Companys common stock on the
  date of grant (110% in the case of shareholders owning more than 10% of the
  Companys common stock). Options under the plan typically terminate after
  5 years and vest over a four year period. Options have been issued by Old Emtec
  prior to August 5, 2005 and no other options were issued by the Company. Options
  outstanding and exercisable at November 30, 2005 totaled 48,712 and their weighted
  average exercise price is $0.87.

Option
activity is summarized in the following table:

| |                                                          |  |  |         |  
| | -------------------------------------------------------- |  |  | ------- | -
| | Options outstanding  September 1, 2005                  |  |  | 92,453  |  
| |                                                          |  |  |         |  
| | Activity for the three months ended November 30,
  2005: |  |  |         |  
| | Options granted                                          |  |  |        |  
| | Options exercised                                        |  |  | (13,741 | )
| | Options forfeited or expired                             |  |  | (30,000 | )
| |                                                          |  |  |         |  
| | Options outstanding  November 30, 2005                  |  |  | 48,712  |  
| |                                                          |  |  |         |  

Because the Company did not include a consent of its
independent registered accounting firm with its audited financial statements
included in its Form 10-K for the year ended August 31, 2005, the Company has
not incorporated those financial statements by reference to its registration
statement on Form S-8. As a result, until the receipt of a consent and
completion of the Form S-8, the Company will not be granting any options to
purchase its common stock.

In connection with the Merger, stock warrants were
issued to the former Darr shareholders that evidence the obligation of the
Company to issue a variable number of shares, in the aggregate, equal to 10% of
the total issued and outstanding shares of the Companys common stock, measured
on a post exercise basis, at any date during the 5 year term of the warrants,
which ends August 5, 2010. The aggregate exercise price of these warrants is
fixed at $3,645,752. 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 decreased to 1,597,921 with an exercise price of $2.28 per
share as of November 30, 2005. This decrease was the result of the net decrease
in the number of shares of outstanding common stock during the three months
ended November 30, 2005. The outstanding stock warrants were
anti-dilutive for the three months ended November 30, 2005.

|   |               
|-- | --------------
|3. | Line of Credit

The Company maintains a credit facility under two
agreements with GE Commercial Distribution Finance Corporation (Lender). The
credit facility finances purchases from specified vendors, as defined, and
allows for borrowings based on a percentage of eligible accounts receivable, as
defined. Borrowings under both agreements are limited to an aggregate borrowing
of the lesser of $35,000,000 or 85% of eligible accounts receivable, plus 100%
of unsold inventory financed by the Lender, minus $3.15 million. Borrowings
under both agreements bear interest at the greater of the prime rate as
published by JP Morgan Chase Bank or 4.0%. The underlying agreements allow for
an increased borrowing base during periods of high seasonal activity. On
November 22, 2005, the Lender increased the Companys credit facility from
$35.0 million to $48.0 million. This temporary increase was available to the
Company through December 15, 2005.

5

---



The credit facility is secured by substantially all of
the Companys assets and the underlying agreements contain certain restrictive
covenants that limit dividends to stockholders and require the Company to meet
defined financial covenants. In addition, the credit facility requires that the
Company maintain a lock-box for all cash receipts related to trade accounts
receivable, from which the financing company releases funds to the Company for
operations pursuant to terms identified in the underlying agreements.

At November 30, 2005, the Company had a $17.96 million
outstanding balance under the accounts receivable credit facility, and an
$18.70 outstanding plus $3.19 in open approvals under the floor plan credit
facility with the Lender and an aggregate unused availability of $8.15 million
of which $2.72 million was available under the accounts receivable credit
facility.

At November 30, 2005, the Company determined that
  it was not in compliance with its financial covenants with the Lender. The Company
  is in discussions with the Lender, who is currently considering the Companys
  request for a waiver and the Company believes, based on these discussions, that
  the Company will obtain a waiver, however the Company cannot state with any
  certainty the terms, if any, upon which the Lender will waive such non-compliance;
  the terms, if any, upon which the credit facility will be continued; or the
  duration of the facility. The Companys non-compliance could result in
  a demand for immediate repayment or revised terms that could materially limit
  our financial and operating flexibility.

|   |                                                       
|-- | ------------------------------------------------------
|4. | Concentration of Credit
  Risk and Significant Clients

A substantial portion of the Companys client base is
related departments of the United States government and state and local
governments. The Company does not require collateral or other security to
support credit sales, but provides an allowance for doubtful accounts based on
historical experience and specifically identified risks. Accounts receivable
are considered delinquent when payment is not received within standard terms of
sale and are charged off against the allowance for doubtful accounts when
management determines that recovery is unlikely and the Company ceases its
collection efforts.

The Companys revenues are comprised of the following
client types for the periods ended:

|                                            |  |                   |            |                   |   |            | 
|------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ---------- | 
|                                            |  | November 30, 2005 |            | November 30, 2004 |  
|                                            |  |                   |            |                   |  
|Departments of the United States Government |  | $                 | 53,539,406 |                   | $ | 39,850,941 | 
|State and Local Governments                 |  |                   | 7,032,406  |                   |   | 2,604,685  | 
|Commercial Companies                        |  |                   | 15,827,882 |                   |   | 2,466,757  | 
|Education and other                         |  |                   | 8,380,990  |                   |   | 606,229    | 
|                                            |  |                   |            |                   |   |            | 
|Total Revenues                              |  | $                 | 84,780,685 |                   | $ | 45,528,612 | 
|                                            |  |                   |            |                   |   |            | 

|                                            |  |                   |        |                   |  |        | 
|------------------------------------------- |  | ----------------- | ------ | ----------------- |  | ------ | 
|                                            |  | November 30, 2005 |        | November 30, 2004 | 
|                                            |  |                   |        |                   | 
|Departments of the United States Government |  |                   | 63.2%  |                   |  | 87.5%  | 
|State and Local Governments                 |  |                   | 8.3%   |                   |  | 5.7%   | 
|Commercial Companies                        |  |                   | 18.7%  |                   |  | 5.4%   | 
|Education and other                         |  |                   | 9.9%   |                   |  | 1.3%   | 
|                                            |  |                   |        |                   |  |        | 
|Total Revenues                              |  |                   | 100.0% |                   |  | 100.0% | 
|                                            |  |                   |        |                   |  |        | 

6

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The Company provides an allowance for losses on trade
receivables based on a review of the current status of existing receivables and
managements evaluation of periodic aging of the accounts. Trade accounts
receivable consists of the following:

|                                |  |                     |            |                   |   |            |  
|------------------------------- |  | ------------------- | ---------- | ----------------- | - | ---------- | -
|                                |  | November
  30, 2005 |            | August 31,
  2005 |  
|                                |  |                     |            |                   |  
|Trade Receivables               |  | $                   | 55,312,448 |                   | $ | 34,766,373 |  
|Allowance for doubtful accounts |  |                     | (225,000   | )                 |   | (225,000   | )
|                                |  |                     |            |                   |   |            |  
|Trade Receivables, net          |  | $                   | 55,087,448 |                   | $ | 34,541,373 |  
|                                |  |                     |            |                   |   |            |  

| |    |          
| | -- | ---------
| | 5. | Inventory

Inventory is stated at the lower of average cost
(specific identification) or market. Inventory is finished goods purchased for
resale and consists of computer hardware, computer software, computer
peripherals and related supplies. The Company provides an inventory reserve for
products it determines are obsolete or where salability has deteriorated based
on managements review of products and sales. The Company disposed of $105,882
of old and obsolete inventory during this quarter which was charged against the
inventory reserve.

The
components of inventory at November 30, and August 31, 2005 are as follows:

|                                           |  |                     |           |                   |   |           |  
|------------------------------------------ |  | ------------------- | --------- | ----------------- | - | --------- | -
|                                           |  | November
  30, 2005 |           | August 31,
  2005 |  
|                                           |  |                     |           |                   |  
|Hardware, software, accessories, and parts |  | $                   | 4,712,804 |                   | $ | 6,070,728 |  
|Less: Inventory reserve                    |  |                     | (147,302  | )                 |   | (300,138  | )
|                                           |  |                     |           |                   |   |           |  
|Net Inventory                              |  | $                   | 4,565,502 |                   | $ | 5,770,590 |  
|                                           |  |                     |           |                   |   |           |  

| |    |                    
| | -- | -------------------
| | 6. | Accrued Liabilities

Accrued liabilities consisted of the following at
November 30, 2005 and August 31, 2005.

|                                 |  |                   |           |                 |   |           | 
|-------------------------------- |  | ----------------- | --------- | --------------- | - | --------- | 
|                                 |  | November 30, 2005 |           | August 31, 2005 |  
|                                 |  |                   |           |                 |  
|Accrued payroll                  |  | $                 | 1,138,989 |                 | $ | 1,042,864 | 
|Accrued commissions              |  |                   | 998,171   |                 |   | 511,858   | 
|Accrued state sales taxes        |  |                   | 142,351   |                 |   | 366,432   | 
|Accrued third party service fees |  |                   | 1,078,600 |                 |   | 627,526   | 
|Industrial funding fee           |  |                   | 331,870   |                 |   | 216,126   | 
|Other accrued expenses           |  |                   | 1,478,411 |                 |   | 1,425,923 | 
|                                 |  |                   |           |                 |   |           | 
|                                 |  | $                 | 5,168,392 |                 | $ | 4,190,728 | 
|                                 |  |                   |           |                 |   |           | 

| |    |                           
| | -- | --------------------------
| | 7. | Related Party Transactions

7

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The Company is charged a monthly management fee of
$29,166 by Darr Global Holdings, Inc. Darr Global Holdings, Inc. is a
management consulting company 100% owned by the Companys Chief Executive
Officer. For the three months ended November 30, 2005 and 2004, the Company
recorded $87,500 for this management fee in the accompanying condensed
consolidated statements of operations.

One of the Companys facilities is leased under a
non-cancelable operating lease agreement with an entity that is owned by
officers of the Company. Rent expense was $45,000 for the three months ended
November 30, 2005 and 2004.

The Company is occupying approximately 21,000 square
  feet of office and warehouse space out of a total of approximately 70,000 square
  feet. This space is leased from GS&T Properties, LLC, in which certain officers
  of the Company are passive investors, owning approximately 20% equity interest.
  The lease term is for 5 years with monthly base rent of $12,500. During the
  three months ended November 30, 2005, the Company recorded $43,154 in expense
  under this lease. The lease commenced on November 30, 2004 with Old Emtec, and
  thus there were no related expenses during the three months ended November 30,
  2004.

|   |               
|-- | --------------
|8. | Treasury Stock

Pursuant to the Merger, the Company initiated a self
tender offer on September 7, 2005. When the self tender offer closed on October
4, 2005, 4,984,185 shares had been properly tendered and not withdrawn. Because
the number of shares of common stock tendered exceeded the number of shares
that the Company offered to purchase 57.473 percent of the shares that were
tendered were repurchased by the Company. The Company funded the payment for
the 2,864,584 shares of common stock validly tendered and accepted under the
self tender offer from borrowings of $5.5 million under its revolving credit
facility made prior to August 31, 2005. Treasury stock of $5,596,047 was
recorded during this quarter.

|                                                           |  |   |           | 
|---------------------------------------------------------- |  | - | --------- | 
|Self Tender Offer
  (purchased 2,864,584 @ $1.92 per share |  | $ | 5,500,000 | 
|                                                           |  |   |           | 
|Add: Legal costs incurred                                  |  |   | 96,047    | 
|                                                           |  |   |           | 
|                                                           |  |   |           | 
|Treasury stock                                             |  | $ | 5,596,047 | 
|                                                           |  |   |           | 

|   |                 
|-- | ----------------
|9. | Subsequent Event

On December 19, 2005, the
Company shipped products to a client via a third party freight carrier which
were damaged in-transit.  The
replacement value of these products is approximately $483,000. The Company is
currently in discussion with the freight carrier and is pursuing an insurance
claim with its insurance carrier and a negligence claim with the freight
carrier. The Company does not anticipate the loss to exceed $263,000.

8

---



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 and
in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the SEC).  In this Quarterly Report, we state our beliefs of future events
and of our future financial performance.
In some cases, you can identify those so-called forward-looking
statements by words such as may, will, should, expects, plans,
anticipates,
believes, estimates, predicts, potential, or continue or the negative
of those words and other comparable words.
You should be aware that those statements are only our predictions.  Actual events or results may differ
materially.  In evaluating those
statements, you should specifically consider various factors, including the
risks discussed in this Annual Report for the year ended August 31, 2005 and
other reports or documents that we file from time to time with the SEC.  Those factors may cause our actual results
to differ materially from any of our forward-looking statements.  All forward-looking statements attributable
to us or a person acting on our behalf are expressly qualified in their
entirety by this cautionary statement.

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

Overview of Emtec

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

Our
  primary business objective is to become a leading single-source provider of
  high quality and innovative IT consulting, services and products. With the Merger,
  we believe we have created a strong, stable platform for growth with management
  depth. We have an expanded array of products through our strategic partners
  and technology solutions to offer our clients.

Our
  goal is to improve our profitability. In an effort to achieve the highest level
  of operational efficiencies within the organization, we have undertaken various
  cost containment initiatives including a review of personnel levels, the elimination
  of certain non-essential services and we have made several operational and management
  changes to our business. Many of the cost containment strategies have been implemented
  in the current quarter and will be implemented over the next several months.
  We continue to emphasize operating efficiencies through cost containment strategies,
  re-engineering efforts and improved service delivery techniques, particularly
  within the cost of services, selling, marketing, general and administrative
  expenses.

Merger with Darr

On
August 5, 2005, we completed our merger under the Agreement and Plan of Merger
dated as of July 14, 2005 (the Merger Agreement), by and among us, Emtec
Viasub LLC, a Delaware limited liability company and our wholly-owned
subsidiary (MergerCo), and Darr Westwood Technology Corporation, a Delaware
corporation (Darr). Pursuant to the terms of the Merger Agreement, Darr
merged with and into MergerCo, with MergerCo remaining as the surviving company
(the Surviving Company) and a wholly-owned subsidiary of Emtec (the Merger).

The
Merger has been
accounted for as a capital transaction followed by a recapitalization.  Our management concluded that the
transaction resulted in a change in control of the Company and that the

9

---



Merger should be accounted for as a reverse
acquisition. Accordingly, Darr is deemed to be the acquiring company for
financial reporting purposes and its financial statements became the historical
financial statements of Emtec.  In
conjunction with the Merger, Emtec changed its fiscal year end from March 31 to
August 31.

Overview of Financial Statements Presented Herein

The consolidated financial statements include the
accounts and transactions of the combined company for the quarter ended
November 30, 2005 and only of the Darr for the quarter ended November 30, 2004.

10

---



Results
of Operations

The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
the three months ended November 30, 2005, and 2004.

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended November 30,

|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|--------------------------------------------- |  | ---- | ---------- | ---- | -- | ---------- | - | - | ---------- | - |  |  | ------ | - | 
|                                              |  | 2005 |            | 2004 |    | Change     |   |   |            | % |  | 
|                                              |  |      |            |      |    |            |   |   |            |   | 
|Revenues                                      |  | $    | 84,780,685 |      | $  | 45,528,612 |   | $ | 39,252,073 |   |  |  | 86.2   | % | 
|Cost of revenues                              |  |      | 76,558,518 |      | $  | 41,775,107 |   |   | 34,783,411 |   |  |  | 83.3   | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Gross profit                                  |  |      | 8,222,167  |      |    | 3,753,505  |   |   | 4,468,662  |   |  |  | 119.1  | % | 
|Percent of revenues                           |  |      | 9.7        | %    |    | 8.2        | % |   |            |   |  |  |        |   | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Operating expenses:                           |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Selling, general, and administrative expenses |  |      | 6,923,785  |      | $  | 2,656,078  |   |   | 4,267,707  |   |  |  | 160.7  | % | 
|Management fee  related party                |  |      | 87,500     |      |    | 87,500     |   |   |           |   |  |  | 0.0    | % | 
|Rent expense  related party                  |  |      | 88,154     |      | $  | 45,000     |   |   | 43,154     |   |  |  | 95.9   | % | 
|Depreciation and amortization                 |  |      | 213,504    |      | $  | 23,844     |   |   | 189,660    |   |  |  | 795.4  | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Total operating expenses                      |  |      | 7,312,943  |      |    | 2,812,422  |   |   | 4,500,521  |   |  |  | 160.0  | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Pecent of revenues                            |  |      | 8.6        | %    |    | 6.2        | % |   |            |   |  |  | 0.0    | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Operating income                              |  |      | 909,224    |      |    | 941,083    |   |   | (31,859    | ) |  |  | -3.4   | % | 
|Percent of revenues                           |  |      | 1.1        | %    |    | 2.1        | % |   |            |   |  |  |        |   | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Other expense (income):                       |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Interest income  other                       |  |      | (9,324     | )    | ($ | 22,988     | ) |   | 13,664     |   |  |  | -59.4  | % | 
|Interest expense                              |  |      | 256,235    |      | $  | 134,506    |   |   | 121,729    |   |  |  | 90.5   | % | 
|Other expense (income)                        |  |      | (27,563    | )    |    | (546       | ) |   | (27,017    | ) |  |  | 4948.2 | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Income before income taxes                    |  |      | 689,876    |      |    | 830,111    |   |   | (140,235   | ) |  |  | -16.9  | % | 
|Provision for income taxes                    |  |      | 273,836    |      | $  | 358,000    |   |   | (84,164    | ) |  |  | -23.5  | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Net income                                    |  | $    | 416,040    |      | $  | 472,111    |   | $ | (56,071    | ) |  |  | -11.9  | % | 
|                                              |  |      |            |      |    |            |   |   |            |   |  |  |        |   | 
|Percent of revenues                           |  |      | 0.5        | %    |    | 1.0        | % |   |            |   |  |  |        |   | 

Comparison of Three Months Ended November 30, 2005 and 2004

Total
Revenues

Total
revenues, increased by 86.2% or $39.25 million to $84.78 million for the three
months ended November 30, 2005, compared to $45.53 million for the three months
ended November 30, 2004. This increase is primarily attributable to the Merger
with Old Emtec in August 2005. Total

11

---



additional revenue attributed to this acquisition approximated
$25.01 million for the three months ended November 30, 2005. Even without this incremental
revenue that resulted from the acquisition, our total revenue would have
increased by 31.1% or $14.15 million for the three months ended November 30,
2005. This increase is primarily attributable to an overall increase in the
federal government business during this quarter.

A
large potion of our revenues is drawn from various civilian and military U.S.
governmental departments and agencies. These clients include the Department of
Defense, Department of Justice, Department of Homeland Security, Department of
Health and Human Services, Department of Agriculture, Department of Commerce
and the GSA. During the three months ended November 30, 2005 and 2004, U.S.
governmental department and agency related revenues represented approximately
63.2% and 87.5% of total revenues, respectively. The federal government
business typically experiences increased activity during the months August
through November.

Gross
Profit

Aggregate
gross profit increased by 119.1% or $4.47 million to $8.22 million for the
three months ended November 30, 2005, as compared to $3.75 million for the
three months ended November 30, 2004. This increase is primarily attributable to
the Merger with Old Emtec in August 2005. Gross profit associated with this
acquisition equaled $3.22 million for the three months ended November 30, 2005,
which represented approximately 85.9% of our total increase in gross profit. Even
without this acquisition, our gross profit would have increased by 33.1% or $1.24
million for the three months ended November 30, 2005. This increase is
primarily attributable to an overall increase in the federal government
business during this quarter as outlined in the section of total revenue above.

Measured
as a percentage of revenues, our gross profit margin increased to 9.7% of total
revenues for the three months ended November 30, 2005 from 8.2% for the three
months ended November 30, 2004. This increase is also mainly attributable to the
acquisition of Old Emtec. Gross profit margin of the Old Emtec business equaled
to 12.8% of Old Emtec total revenues for the three months ended November 30,
2005. Without this acquisition our gross profit margin would have only
increased to 8.4% of total revenues for the three months ended November 30,
2005 from 8.2% for the three months ended November 30, 2004.

Factors
that may affect gross margins in the future include changes in product margins,
changes in technical employee utilization rates, the mix of products and
services sold, and the decision to aggressively price certain products and
services.

Selling,
General, and Administrative Expenses

Selling,
general and administrative expenses increased by 160.7% or $4.27 million to $6.92
million for the three months ended November 30, 2005, compared to $2.66 million
for the three months ended November 30, 2004. This increase is mainly due to
the Merger with Old Emtec; selling, general and administrative expenses
associated with Old Emtec approximated $2.75 million for the three months ended
November 30, 2005. Without this acquisition, our selling, general and
administrative expenses would have increased by 58.6%, or $1.56 million to
$4.21 million for the three months ended November 30, 2005. This increase in
selling, general and administrative expenses is mainly due to the following:

| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | Professional fees increased approximately $385,000
        due to compliance costs associated with the Securities and Exchange Commission
        and in connection with the Merger and the self tender offer;

12

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| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | Compensation and benefits expense increased
  approximately $500,000 due to an increase in head count company-wide
  associated with our long-term investment in new employees;
| |   |                                                                                                                                                                                
| | o | Variable sales compensation increased approximately
  $375,000 due to increased sales levels;                                                                                  
| |   |                                                                                                                                                                                
| | o | Advertising and promotional expenses increased
  approximately $140,000 increase due to investment in building our revenue
  base.                                             

The
  remaining increase of approximately $150,000 in selling, general and administrative
  expenses is mainly due to various expenses such as travel, meals, entertainment,
  telephones, postage, utilities and other related expenses.

In an effort to improve operational
efficiencies within the organization, we have made several operational and management
changes to our business. In recent months, we have eliminated approximately $1.4 million
in annualized expenses related to the integration of Darr and Old Emtec. We anticipate
that our total expenses will decrease beginning in January 2006 and we will continue to
emphasize operating efficiencies through cost containment strategies, re-engineering
efforts and improved service delivery techniques, particularly within selling, marketing,
general and administrative expenses.

Factors
that may in the future have a negative impact on our selling, general and
administrative costs include costs associated with marketing and selling
activities, compliance costs associated with Securities and Exchange Commission
rules and insurance markets.

Management
Fee-Related Party

The
is no change in the management fee paid to a related-party for the three months
ended November 30, 2005 compared to the three months ended November 30, 2004. DARR
Global Holdings, Inc. (DARR Global) is a management consulting company owned
by Dinesh Desai, our Chief Executive Officer. DARR Global charges us a
management fee of $350,000 annually.

Rent
Expense-Related Party

Rent
Expense-Related Party increased by 95.9% or $43,154 to $88,154 for the three
months ended November 30, 2005 compared to $45,000 for the three months ended
November 30, 2004. The increase in rent expense-related party is due to the
Merger with Emtec on August 5, 2005. We occupy approximately 21,000 square feet of office and warehouse space
out of a total of approximately 70,000 square feet in Suwannee, GA. This space
is leased from GS&T Properties, LLC, a company in which officers of our company
are passive investors, owning approximately 20% equity interest. The lease term
is for 5 years with monthly base rent of $12,500. During the period ended November
30, 2005, we recorded $43,154 in expense under this lease.

We
also occupy approximately 43,000 square feet of office and warehouse space in
Springfield, New Jersey. This space is leased from Westwood Property Holdings,
LLC, in which Mr. Keith Grabel, our director and an executive officer, Mrs.
Mary Margaret Grabel, spouse of our director and an executive officer, and Mr.
David Micales, our Vice President of Operations are members. The lease term is
through April 2009 with monthly base rent of $15,000.

Depreciation
and Amortization

Depreciation
and Amortization expense increased by 795.4% or $189,660 to $213,504 for the
three months ended November 30, 2005 compared to $23,844 for the three months
ended November 30, 2004. This increase is primarily attributable to the Merger
with Old Emtec acquisition on August 5, 2005. Old Emtecs post-merger
depreciation and amortization accounted approximately for $166,819 of increase.
Additionally, we made fixed asset acquisitions of $222,432 and $491,310 during
the three months ended November 30, 2005 and the year ended August 31, 2005,
which increased our depreciation expense. These capital assets acquisitions
were primarily for the purchase of

13

---



computer equipment for internal use, purchase of
software licenses to upgrade our accounting systems, and for furniture and
fixtures.

Intangible
  assets at November 30, 2005 and August 31, 2005 consisted of the value ascribed
  to customer relationships of $8,661,712 less accumulated amortization of $213,320,
  and $68,868, respectively. The assets ascribed to customer relationships are
  being amortized on a straight-line basis over 13 to 15 years. Amortization expense
  was $144,452 and $5,453 for the three months ended November 30, 2005 and, 2004,
  respectively. Amortization expense of $580,356 is expected to be recorded each
  year through August 31, 2016, $573,085 for the year ended August 31, 2017, $558,544
  for the years ended August 31, 2018 and 2019, and $518,755 for the year ended
  August 31, 2020.

Interest
expense

Interest
expense increased by 90.5% or $121,729 to $256,235 for the three months ended
November 30, 2005, compared to $134,506 for the three months ended November 30,
2004. This is mainly due to a higher balance on our line of credit, and higher
days sales outstanding during the period.

Income
Taxes

Income
taxes decreased by 23.5% or $84,164 to $273,836 for the three months ended
November 30, 2005, compared to $358,000 for the three months ended November 30,
2004. This decrease is primarily attributable to the decrease in taxable
income. Taxable income decreased by 20.1% or $167,046 to $663,065 for the three
months ended November 30, 2005, compared to $830,111 for the three months ended
November 30, 2004.

Liquidity
and Capital Resources

Cash
  and cash equivalents at November 30, 2005 of $415,032 represented a decrease
  of $606,205 from $1.02 million at August 31, 2005. We are a net borrower; consequently,
  we believe our cash and cash equivalents balance must be viewed along with the
  available balance on our line of credit. Borrowing under our line of credit
  at November 30, 2005 represented an increase of $13.55 million from $4.41 million
  at August 31, 2005. At November 30, 2005, our working capital was approximately
  $11,000 more than that of at August 31, 2005.

Since
  our inception, we have funded our operations primarily from borrowings under
  our credit facility. On August 5, 2005, our subsidiaries, Emtec, Inc. (Emtec
  NJ) and Westwood Computer Corporation (Westwood and together
  with the Emtec NJ, the Borrower), entered into a Business Financing
  Agreement with GE Commercial Distribution Finance Corporation (Lender)
  pursuant to which the Lender has agreed to provide to Borrower an accounts receivable
  facility (the Credit Facility). The Credit Facility provides for
  aggregate borrowings of the lesser of $35.0 million or 85% of eligible accounts
  receivable, plus 100% of unsold inventory financed by the Lender, minus $3.15
  million. The Credit Facility includes certain financial covenants that we must
  maintain on a quarterly basis and we are also subject to certain mandatory prepayments
  upon the occurrence of certain events, subject to certain exceptions, set forth
  in the Business Financing Agreement.

Borrowings
under the Credit Facility bear interest at an annual rate equal to the greater
of (i) the rate of interest which JP Morgan Chase Bank (or its successor)
publicly announces from time to time as its prime rate or reference rate or
(ii) four percent (4%).

14

---



To
secure the payment of the obligations under the Credit Facility, Borrower
granted to Lender a security interest in all of Borrowers interests in certain
of its assets, including inventory, equipment, fixtures, accounts, chattel
paper, instruments, deposit accounts, documents, general intangibles, letter of
credits rights, and all judgments, claims and insurance policies.

In
connection with the Credit Facility, Emtec NJ and Westwood (together, the Dealer)
entered into the Agreement for Wholesale Financing with the Lender on August 5,
2005 (the Wholesale Agreement). The Wholesale Agreement provides for an
extension of credit by the Lender to the Dealer from time to time, subject to
the maximum aggregate borrowings set forth in the Credit Facility, to purchase
inventory from approved vendors and for other purposes. The financial terms of
any advance by the Lender are not set forth in the Wholesale Agreement because
such terms depend upon many variable factors, including availability of vendor
discounts, payment terms or other incentives and purchase volume. The Wholesale
Agreement contains certain customary representations and warranties and events
of default, including the failure to pay interest, principal or fees, any
material inaccuracy of any representation and warranty, bankruptcy and
insolvency events.

In
addition, our current credit facility with one of our primary trade vendors MRA
Systems, Inc. (dba GE Access) was also collateralized by substantially all of
our assets, the Lender and GE Access entered into an intercreditor agreement in
which the Lender agreed to give GE Access a first lien position on all future
unbilled service maintenance billings and which provide that as regards to GE
Access, all debt obligations to the Lender are accorded priority.

We
  determined that we were not in compliance with our financial covenants with
  the Lender as of November 30, 2005. We had $17.96 million outstanding balance
  under the Credit Facility, and $18.70 million outstanding plus $3.19 million
  in open approvals under the Wholesale Agreement with the Lender. As of November
  30, 2005 we had an aggregate unused availability of $8.15 million under our
  lending agreements, of which $2.72 million was available under the Credit Facility.
  We are in discussions with the Lender, who is currently considering our request
  for waiver and believe, based on these discussions, that we will obtain a waiver,
  however there can be no assurance that the Lender will grant a waiver and if
  it does the terms, if any, upon which the Lender will waive such non-compliance,
  the terms, if any, upon which the credit facility will be continued, or the
  duration of the facility. This non-compliance could result in a demand for immediate
  repayment or revised terms that could materially limit our financial and operating
  flexibility.

On
  November 22, 2005, the Lender increased our total credit facility from $35.0
  million to $48.0 million. This is a temporary increase available to us through
  December 15, 2005.

As
  of January 19, 2006, we had $5.29 million outstanding balance under the Credit
  Facility, and $7.80 million outstanding plus $1.43 million in open approvals
  under the Wholesale Agreement with the Lender and an aggregate unused availability
  of $20.48 million of which $6.25 million was available under the Credit Facility.

Our
open term credit facilities at November 30, 2005 with our primary trade
vendors, including aggregators and manufacturers, was $25.50 million with
outstanding principal of approximately $10.07 million. Under these lines, we
are obligated to pay each invoice within 30-45 days from the date of such
invoice. These credit lines could be reduced or eliminated without notice and
this action could have material adverse affect our business, result of operations,
and financial condition.

Capital
expenditures of $222,432 during the quarter ended November 30, 2005 were
primarily for the purchase of computer equipment for internal use, purchase of
software licenses to upgrade our accounting systems, and for furniture and
fixtures. We anticipate our capital expenditures for fiscal year ending August
31, 2006 will be approximately $650,000 of which approximately $540,000 will be
for the upgrade of our organizational computer system, including the
implementation and data conversion costs, and the remaining $110,000 will
primarily be for the purchase of computer equipment for internal use.

15

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We
anticipate that our primary sources of liquidity in fiscal 2006 will be cash
generated from operations, trade vendor credit and cash available to us under
our Credit Facility. Our future financial performance will depend on our
ability to continue to reduce and manage operating expenses as well as our
ability to grow revenues. Our revenues will continue to be impacted by the loss
of clients due to price competition and technological advances. Our future
financial performance could be negatively affected by unforeseen factors and
unplanned expenses. See Forward Looking Statements and Business  Risk
Factors discussed in our Form 10-K for the year ended August 31, 2005.

Although
we have no definite plans to undertake any future debt or equity financing, we
will continue to pursue all potential funding alternatives. Among the
possibilities for raising additional funds are issuances of debt or equity
securities, and other borrowings under secured or unsecured loan arrangements.
There can be no assurances that additional funds will be available to us on
acceptable terms or in a timely manner.

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

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

Critical Accounting
Policies

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

Revenue
Recognition

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

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

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

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

Trade
Receivables

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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. The allowance for doubtful accounts was $225,000 and $225,000 as of
  November 30, and August 31, 2005, respectively.

Inventories

Inventory
is stated at the lower of average cost (specific identification) or market.
Inventory is entirely finished goods purchased for resale and consists of
computer hardware, computer software, computer peripherals and related
supplies. We provide an inventory reserve for products we determine are
obsolete or where salability has deteriorated based on managements review of
products and sales. We disposed of $105,882 of old and obsolete inventory
during this quarter which was charged against the inventory reserve.

The components
of inventory at November 30, and August 31, 2005 are as follows:

|                                             |  |                     |           |                   |   |           |  
|-------------------------------------------- |  | ------------------- | --------- | ----------------- | - | --------- | -
|                                             |  | November
  30, 2005 |           | August 31,
  2005 |  
|                                             |  |                     |           |                   |  
|Hardware,
  software, accessories, and parts |  | $                   | 4,712,804 |                   | $ | 6,070,728 |  
|Less:
  Inventory reserve                    |  |                     | (147,302  | )                 |   | (300,138  | )
|                                             |  |                     |           |                   |   |           |  
|Net
  Inventory                              |  | $                   | 4,565,502 |                   | $ | 5,770,590 |  
|                                             |  |                     |           |                   |   |           |  

Property
and Equipment

We
estimate the useful lives of property and equipment in order to determine the
amount of depreciation and amortization expense to be recorded during any
reporting period. The majority of our equipment is depreciated over a three to
five year period. The estimated useful lives are based on the historical
experience with similar assets as well as taking into account anticipated
technological or other changes. If technological changes were to occur more
rapidly than anticipated or in a different form than anticipated, the useful
lives assigned to these assets may need to be accelerated, resulting in the recognition
of increased depreciation and amortization expense in future periods. We
evaluate the recoverability of our long-lived assets (other than intangibles
and deferred tax assets) in accordance with Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS No. 144). Long-lived assets are reviewed for impairment under
SFAS No. 144 whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 144 requires
recognition of impairment of long-lived assets in the event that the net book
value of such assets exceeds the future undiscounted net cash flows
attributable to such assets. Impairment, if any, is recognized in the period of
identification to the extent the carrying amount of an asset exceeds the fair
value of such asset.

Property
and equipment along with their components are as follows:

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|                                   |  |                     |           |                   |   |                          |   |  |        | 
|---------------------------------- |  | ------------------- | --------- | ----------------- | - | ------------------------ | - |  | ------ | 
|                                   |  | November
  30, 2005 |           | August
  31, 2005 |   | Estimated
  Life
  Years |  
|                                   |  |                     |           |                   |   |                          |  
|Leasehold
  improvements           |  | $                   | 245,472   |                   | $ | 197,903                  |   |  | 4.67   | 
|Computer
  equipment               |  |                     | 623,598   |                   |   | 572,728                  |   |  | 3 to 5 | 
|Furniture
  and fixtures           |  |                     | 114,648   |                   |   | 31,156                   |   |  | 3 to 5 | 
|Automobiles                        |  |                     | 72,956    |                   |   | 72,956                   |   |  | 3 to 5 | 
|Software                           |  |                     | 212,911   |                   |   | 172,410                  |   |  | 3 to 5 | 
|                                   |  |                     |           |                   |   |                          |   |  |        | 
|Total
  Property Plant & Equipment |  | $                   | 1,269,585 |                   | $ | 1,047,153                |   |  |        | 
|Less
  accumulated depreciation    |  |                     | (199,047  | )                 |   | (129,994                 | ) |  |        | 
|                                   |  |                     |           |                   |   |                          |   |  |        | 
|                                   |  | $                   | 1,070,538 |                   | $ | 917,159                  |   |  |        | 
|                                   |  |                     |           |                   |   |                          |   |  |        | 

Goodwill
and Intangible Assets

We
have adopted Statement of Financial Accounting Standards No. 141 Business
Combinations and No. 142 Goodwill and Other Intangible Assets. 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. During this quarter, we
recorded goodwill related to the acquisition of Old Emtec of $24,445. At
November 30, and August 31, 2005, goodwill related to the acquisition of Old
Emtec was $8,999,055, and $8,974,610, respectively. We test goodwill and
indefinite-lived assets for impairment at least annually in accordance with
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (SFAS 142). Our annual impairment test is made on
June 1 of each year. Intangible
assets that have finite useful lives are amortized over their useful lives.

Intangible
assets at November 30, 2005 and August 31, 2005 consisted of the value ascribed
to customer relationships of $8,661,712 less accumulated amortization of
$213,320, and $68,868, respectively. The assets ascribed to customer
relationships are being amortized on a straight-line basis over 13 to 15 years.
Amortization expense was $144,452 and $5,453 for the three months ended
November 30, 2005 and, 2004, respectively. Amortization expense of $580,356 is
expected to be recorded each year through August 31, 2016, $573,085 for the
year ended August 31, 2017, $558,544 for the years ended August 31, 2018, and
2019, and $518,755 for the year ended August 31, 2020.

Property
and equipment and customer relationship 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 (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.

Rebates

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

Income
Taxes

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Income
taxes are accounted for under an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. In estimating future tax consequences, we generally consider all
expected future events other than the enactment of changes in tax laws or
rates. A valuation allowance is recognized if, on weight of available evidence,
it is more likely than not that some portion or all the deferred tax assets
will not be realized.

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Item 3. Quantitative
and Qualitative Information About Market Risk

We
do not engage in trading market risk sensitive instruments and do not purchase
hedging instruments or other than trading instruments that are likely to
expose us to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. We have issued no debt instruments,
entered into no forward or future contracts, purchased no options and entered
into no swaps. Our primary market risk exposures are those of interest rate
fluctuations. A change in interest rates would affect the rate at which we
could borrow funds under our revolving credit facility. Our balance on the line
of credit at November 30, 2005 was approximately $17.96 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 $180,000 annually.

21

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Item 4. Controls
and Procedures

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 of November 30, 2005. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 are recorded, processed, summarized
and reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

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, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

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PART II
 OTHER INFORMATION

Item 1A. Risk Factors

Our 2005 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 in that Form 10-K.

Since our inception, we have funded our operations primarily
from borrowings under our credit facility.

Our lending agreement with GE Commercial Distribution
  Finance Corporation contains financial covenants. As of November 30, 2005 we
  have determined that we are not in compliance with all of our financial covenants
  under the lending agreement. As of November 30, 2005, we had a $17.96 million
  outstanding balance under the working capital credit facility, an $18.70 million
  outstanding balance under the wholesale financing credit facility and an unused
  line of $8.15 million. GE CDF is currently considering our request for waiver
  and we believe, based on these discussions, that we will obtain a waiver, however
  there can be no assurance that GE CDF will grant a waiver and if it does the
  terms, if any, upon which GE CDF will waive such non-compliance; the terms,
  if any, upon which it will continue the lending agreements and there can be
  no assurance that GE CDF will not restrict our borrowing ability or immediately
  call for repayment of the outstanding borrowings under the credit facility.
  If any of our indebtedness were accelerated, our assets may not be sufficient
  to repay in full that indebtedness.

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Item 6. Exhibits

Exhibit 31.1
- Rule 13a-14(a)/15 d-14(a) Certification of Dinesh R. Desai, Principal
Executive Officer, of Emtec, Inc. dated January 23, 2006.

Exhibit 31.2
- Rule 13a-14(a)/15 d-14(a) Certification of Stephen C. Donnelly, Principal
Financial Officer, of Emtec, Inc. dated January 23, 2006.

Exhibit 32.1
- Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
Emtec, Inc. dated January 23, 2006.

Exhibit 32.2
- Section 1350 Certificate of Stephen C. Donnelly, Principal Financial Officer,
of Emtec, Inc. dated January 23, 2006.

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SIGNATURES

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

| |             |                                 | 
| | ----------- | ------------------------------- | 
| | EMTEC, INC. |                                
| |             |                                
| | By:         | /s/ DINESH R. DESAI             | 
| |             |                                 | 
| |             | Dinesh
  R. Desai               | 
| |             | Chairman,
  and Chief           | 
| |             | Executive
  Officer             | 
| |             | (Principal
  Executive Officer) | 
| |             |                                 | 
| | By:         | /s/ STEPHEN C. DONNELLY         | 
| |             |                                 | 
| |             | Stephen C. Donnelly             | 
| |             | Chief Financial Officer         | 
| |             | (Principal Financial
  Officer) | 

Date: January 23, 2006

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