UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549









FORM
10-Q





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





For the
quarterly period ended May 31, 2009





Commission
file number: 0-32789




EMTEC,
INC.


(Exact
name of registrant as specified in its charter)




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





525
      Lincoln Drive
                5
      Greentree Center, Suite 117
                Marlton,
      New Jersey 08053
                (Address
      of principal executive offices, including zip
  code)





(856)
552-4204


(Registrant’s
telephone number, including area code)




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




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




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




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




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




As of July 6,
2009, there were outstanding 15,195,090 shares of the registrant’s common
stock.









EMTEC,
INC.


FORM
10-Q FOR THE QUARTER ENDED MAY 31, 2009




Table of
Contents




PART I – FINANCIAL INFORMATIONItem
      1 - Financial StatementsCondensed
      Consolidated Balance Sheets
              1Condensed
      Consolidated Statements of Operations
              2Condensed
      Consolidated Statements of Cash Flows
              3Notes
      to Condensed Consolidated Financial Statements
              4Item
      2  - Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              19Item
      3  - Quantitative and Qualitative Disclosures About Market
      Risk
              44Item
      4T - Controls and Procedures
              45PART
      II – OTHER INFORMATIONItem
      6 – Exhibits
              46SIGNATURES
              47







PART
I – FINANCIAL INFORMATION


Item
      1.
            Financial
      Statements





EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





May
      31, 2009(Unaudited)
                    
                    
                    August
      31, 2008AssetsCurrent
      AssetsCash
                    
                    $
                    2,986,776
                    
                    
                    $
                    2,025,098Receivables:Trade,
      less allowance for doubtful accounts
                    
                    
                    25,587,844
                    
                    
                    
                    32,178,967Others
                    
                    
                    1,689,765
                    
                    
                    
                    2,285,542Inventories,
      net
                    
                    
                    7,638,388
                    
                    
                    
                    659,994Prepaid
      expenses and other
                    
                    
                    1,848,579
                    
                    
                    
                    1,006,686Deferred
      tax asset - current
                    
                    
                    625,254
                    
                    
                    
                    900,028Total
      current assets
                    
                    
                    40,376,606
                    
                    
                    
                    39,056,315Property
      and equipment, net
                    
                    
                    1,354,240
                    
                    
                    
                    1,108,327Intangible
      assets, net
                    
                    
                    11,640,721
                    
                    
                    
                    11,315,422Goodwill
                    
                    
                    11,375,985
                    
                    
                    
                    10,697,516Deferred
      tax asset- long term
                    
                    
                    108,869
                    
                    
                    
                    171,985Other
      assets
                    
                    
                    146,738
                    
                    
                    
                    124,475Total
      assets
                    
                    $
                    65,003,159
                    
                    
                    $
                    62,474,040Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesLine
      of credit
                    
                    $
                    10,781,650
                    
                    
                    $
                    8,583,552Accounts
      payable
                    
                    
                    26,693,628
                    
                    
                    
                    24,824,365Current
      portion of long term debt - related party
                    
                    
                    1,218,142
                    
                    
                    
                    2,810,937Income
      taxes payable
                    
                    
                    189,994
                    
                    
                    
                    315,111Accrued
      liabilities
                    
                    
                    4,804,628
                    
                    
                    
                    5,418,625Due
      to former stockholders
                    
                    
                    -
                    
                    
                    
                    631,415Customer
      deposits
                    
                    
                    -
                    
                    
                    
                    500Deferred
      revenue
                    
                    
                    2,286,488
                    
                    
                    
                    1,323,177Total
      current liabilities
                    
                    
                    45,974,530
                    
                    
                    
                    43,907,682Deferred
      tax liability
                    
                    
                    2,475,201
                    
                    
                    
                    2,298,650Accrued
      liabilities
                    
                    
                    147,235
                    
                    
                    
                    342,708Long
      term debt - related party
                    
                    
                    82,084
                    
                    
                    
                    754,578Total
      liabilities
                    
                    
                    48,679,050
                    
                    
                    
                    47,303,618Commitments
      and contingent liabilitiesStockholders'
      EquityCommon
      stock $0.01 par value; 25,000,000 shares authorized;18,059,679
      and 17,714,180 shares issued and 15,195,090 and14,849,591,
      outstanding at  May 31, 2009 and August 31, 2008,
      respectively
                    
                    
                    180,597
                    
                    
                    
                    177,142Additional
      paid-in capital
                    
                    
                    20,719,053
                    
                    
                    
                    20,635,972Retained
      earnings (accumulated deficit)
                    
                    
                    846,576
                    
                    
                    
                    (46,645
                    )Cumulative
      translation adjustment
                    
                    
                    173,930
                    
                    
                    
                    -21,920,156
                    
                    
                    
                    20,766,469Less:
      treasury stock, at cost, 2,864,589 shares
                    
                    
                    (5,596,047
                    )
                    
                    
                    (5,596,047
                    )Total
      stockholders' equity
                    
                    
                    16,324,109
                    
                    
                    
                    15,170,422Total
      liabilities and stockholders' equity
                    
                    $
                    65,003,159
                    
                    
                    $
                    62,474,040





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




1




EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three
      months ended
                            
                            
                            Nine
      months endedMay
      31,2009
                            
                            
                            May
      31,2008
                            
                            
                            May
      31, 2009
                            
                            
                            May
      31, 2008RevenuesProcurement
      services
                            
                            $
                            35,321,294
                            
                            
                            $
                            34,155,671
                            
                            
                            $
                            121,094,073
                            
                            
                            $
                            145,846,671Service
      and consulting
                            
                            
                            13,898,413
                            
                            
                            
                            4,773,520
                            
                            
                            
                            40,106,035
                            
                            
                            
                            11,791,208Total
      Revenues
                            
                            
                            49,219,707
                            
                            
                            
                            38,929,191
                            
                            
                            
                            161,200,108
                            
                            
                            
                            157,637,879Cost
      of SalesCost
      of procurement services
                            
                            
                            31,204,269
                            
                            
                            
                            29,387,865
                            
                            
                            
                            107,967,221
                            
                            
                            
                            129,042,886Service
      and consulting
                            
                            
                            10,369,122
                            
                            
                            
                            3,845,777
                            
                            
                            
                            30,666,184
                            
                            
                            
                            9,283,224Total
      Cost of Sales
                            
                            
                            41,573,391
                            
                            
                            
                            33,233,642
                            
                            
                            
                            138,633,405
                            
                            
                            
                            138,326,110Gross
      ProfitProcurement
      services
                            
                            
                            4,117,025
                            
                            
                            
                            4,767,806
                            
                            
                            
                            13,126,852
                            
                            
                            
                            16,803,785Service
      and consulting
                            
                            
                            3,529,291
                            
                            
                            
                            927,743
                            
                            
                            
                            9,439,851
                            
                            
                            
                            2,507,984Total
      Gross Profit
                            
                            
                            7,646,316
                            
                            
                            
                            5,695,549
                            
                            
                            
                            22,566,703
                            
                            
                            
                            19,311,769Operating
      expenses:Selling,
      general, and administrative expenses
                            
                            
                            6,197,867
                            
                            
                            
                            5,348,986
                            
                            
                            
                            18,133,830
                            
                            
                            
                            16,025,377Rent
      expense – related parties
                            
                            
                            147,246
                            
                            
                            
                            91,439
                            
                            
                            
                            452,238
                            
                            
                            
                            270,089Depreciation
      and amortization
                            
                            
                            632,323
                            
                            
                            
                            336,086
                            
                            
                            
                            1,733,969
                            
                            
                            
                            944,100Total
      operating expenses
                            
                            
                            6,977,436
                            
                            
                            
                            5,776,511
                            
                            
                            
                            20,320,037
                            
                            
                            
                            17,239,566Operating
      income (loss)
                            
                            
                            668,880
                            
                            
                            
                            (80,962
                            )
                            
                            
                            2,246,666
                            
                            
                            
                            2,072,203Other
      expense (income):Interest
      income – other
                            
                            
                            (4,675
                            )
                            
                            
                            (11,144
                            )
                            
                            
                            (15,862
                            )
                            
                            
                            (77,807
                            )Interest
      expense
                            
                            
                            169,361
                            
                            
                            
                            180,276
                            
                            
                            
                            693,354
                            
                            
                            
                            833,018Other
      expense (income)
                            
                            
                            16,607
                            
                            
                            
                            (256
                            )
                            
                            
                            21,019
                            
                            
                            
                            (274
                            )Income
      (loss) before income taxes
                            
                            
                            487,587
                            
                            
                            
                            (249,838
                            )
                            
                            
                            1,548,155
                            
                            
                            
                            1,317,266Provision
      (benefit) for income taxes
                            
                            
                            215,289
                            
                            
                            
                            (98,055
                            )
                            
                            
                            654,934
                            
                            
                            
                            614,226Net
      income (loss)
                            
                            $
                            272,298
                            
                            
                            $
                            (151,783
                            )
                            
                            $
                            893,221
                            
                            
                            $
                            703,040Net
      income (loss) per common shareBasic
      and Diluted
                            
                            $
                            0.02
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.06
                            
                            
                            $
                            0.05Weighted
      Average Shares OutstandingBasic
                            
                            
                            14,629,231
                            
                            
                            
                            14,519,049
                            
                            
                            
                            14,629,231
                            
                            
                            
                            14,519,049Diluted
                            
                            
                            14,888,272
                            
                            
                            
                            14,519,049
                            
                            
                            
                            14,883,734
                            
                            
                            
                            14,636,249





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




2





EMTEC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      months endedMay
      31, 2009
                          
                          
                          May
      31, 2008Cash
      Flows From Operating ActivitiesNet
      income
                          
                          $
                          893,221
                          
                          
                          $
                          703,040Adjustments
      to Reconcile Net Income to NetCash
      Provided By Operating ActivitiesDepreciation
      and amortization
                          
                          
                          626,435
                          
                          
                          
                          475,491Amortization
      related to intangible assets
                          
                          
                          1,107,534
                          
                          
                          
                          468,609Deferred
      income taxes (benefit)
                          
                          
                          (240,034
                          )
                          
                          
                          461,576Stock-based
      compensation
                          
                          
                          86,536
                          
                          
                          
                          213,055Indemnification
      of professional fees
                          
                          
                          (269,882
                          )
                          
                          
                          -Changes
      In Operating Assets and LiabilitiesReceivables
                          
                          
                          8,017,116
                          
                          
                          
                          10,760,434Inventories
                          
                          
                          (6,978,394
                          )
                          
                          
                          2,610,401Prepaid
      expenses and other assets
                          
                          
                          (173,809
                          )
                          
                          
                          (155,753
                          )Accounts
      payable
                          
                          
                          1,291,452
                          
                          
                          
                          (4,477,624
                          )Customer
      deposits
                          
                          
                          (500
                          )
                          
                          
                          (136,089
                          )Income
      taxes payable
                          
                          
                          (93,087
                          )
                          
                          
                          19,629Accrued
      liabilities
                          
                          
                          (855,045
                          )
                          
                          
                          (3,315,341
                          )Deferred
      revenue
                          
                          
                          (35,849
                          )
                          
                          
                          (196,839
                          )Net
      Cash Provided By Operating Activities
                          
                          
                          3,375,694
                          
                          
                          
                          7,430,587Cash
      Flows From Investing ActivitiesPurchases
      of property and equipment
                          
                          
                          (794,838
                          )
                          
                          
                          (172,965
                          )Acquisition
      of businesses, net of cash acquired
                          
                          
                          (1,129,372
                          )
                          
                          
                          (1,751,461
                          )Goodwill/
      tax settlement
                          
                          
                          (164,602
                          )
                          
                          
                          -Net
      Cash Used In Investing Activities
                          
                          
                          (2,088,812
                          )
                          
                          
                          (1,924,426
                          )Cash
      Flows From Financing ActivitiesNet
      increase (decrease)  in line of credit
                          
                          
                          2,198,098
                          
                          
                          
                          (5,447,428
                          )Repayment
      of debt
                          
                          
                          (2,723,439
                          )
                          
                          
                          (1,041,460
                          )Net
      Cash Used In Financing Activities
                          
                          
                          (525,341
                          )
                          
                          
                          (6,488,888
                          )Effect
      of rate changes on cash
                          
                          
                          200,137
                          
                          
                          
                          -Net
      increase (decrease) in Cash
                          
                          
                          961,678
                          
                          
                          
                          (982,727
                          )Beginning
      Cash
                          
                          
                          2,025,098
                          
                          
                          
                          2,251,352Ending
      Cash
                          
                          $
                          2,986,776
                          
                          
                          $
                          1,268,625Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
                          
                          $
                          697,162
                          
                          
                          $
                          934,016Interest
                          
                          $
                          780,429
                          
                          
                          $
                          1,198,147Supplemental
      Schedule of Non Cash Investing and Financing ActivitiesIndemnification
      receivable due from former shareholders settled by the
    amountsdue
      to former shareholders
                          
                          $
                          631,415
                          
                          
                          
                          -Acquisition
      of Capital Stock of Luceo
                          
                          $
                          -
                          
                          
                          $
                          820,000Note
      payable issued, acquisition of Capital Stock of Koan-IT
                          
                          $
                          396,950
                          
                          
                          
                          -





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




3




EMTEC,
INC


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.  Basis
of Presentation





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





2.  General





Description of
Business





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





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





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





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




4




On May
12, 2009, the Company acquired through its subsidiary, KOAN-IT (US), certain
assets of Enterprise Management Solutions, Inc. (“EMS”), a company under Chapter
11 bankruptcy protection in the Middle District of Florida. Prior to the
acquisition, EMS was a consulting firm, headquartered in Clearwater, Florida,
specializing in business service management methodologies for its clients
throughout the United States.




Principles of
Consolidation




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




Segment
Reporting




With the
acquisitions of Luceo, eBAS, Aveeva, KOAN-IT and certain asset of EMS, the
Company divides its operating activity into two operating segments for reporting
purposes: Emtec Infrastructure Services Division (“EIS”) and Emtec Global
Services Division (“EGS”). EIS is the Company’s historical business (“Systems
Division”) which includes Emtec NJ, Emtec LLC, Emtec Federal and the business
service management solutions offered by KOAN-IT and KOAN-IT(US). EGS is the
Company’s enterprise applications services solutions and training business
including Luceo, eBAS and Aveeva.  Further,
the Company determined that it has four reporting units under SFAS 142: Systems
Division, KOAN-IT, Luceo and eBAS/Aveeva.





Reclassifications




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





Accounting
Estimates




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




Goodwill




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




5




The
changes in the carrying amount of goodwill for the nine months ended May 31,
2009 are as follows:





Balance
      at August 31, 2008
                                  
                                  $
                                  10,697,516Increase
      in goodwill arising from acquistion of KOAN-IT
                                  
                                  
                                  548,435Increase
      in goodwill arising from acquistion of assets of EMS
                                  
                                  
                                  226,452Foreign
      currency translation effect of Canadian goodwill
                                  
                                  
                                  65,245Reduction
      in goodwill arising from settlement of taxuncertainties
      associated with April 16, 2004 merger
                                  
                                  
                                  (161,663
                                  )Balance
      at May 31, 2009
                                  
                                  $
                                  11,375,985





Based on
the income (discounted cash flows) and market-based (guideline company method)
approaches, there was no goodwill impairment for the Systems Division, KOAN-IT,
Luceo and eBAS/Aveeva at June 1, 2009. At May 31, 2009, Emtec's market
capitalization was less than its total stockholders' equity, which is one factor
the Company considered when determining whether goodwill should be tested for
impairment between annual tests.  The Company does not currently
believe that the reduced market capitalization represents a goodwill impairment
indicator as of May 31, 2009, however, if current market conditions persist and
the Company’s estimated value under the income and market-based approaches is
effected, then it is possible that the Company may have to take a goodwill
impairment charge against earnings in a future period.





Identifiable Intangible
Assets





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




May 31, 2009
                      
                      
                      August 31, 2008Customer
      relationships
                      
                      $
                      14,097,881
                      
                      
                      $
                      12,861,712Noncompete
      agreements
                      
                      
                      398,095
                      
                      
                      
                      370,000Trademarks
                      
                      
                      168,569
                      
                      
                      
                      -14,664,545
                      
                      
                      
                      13,231,712Accumulated
      amortization
                      
                      
                      (3,023,824
                      )
                      
                      
                      (1,916,290
                      )$
                      11,640,721
                      
                      
                      $
                      11,315,422




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





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




6




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





Amortization
expense was $1,107,534 and $468,609 for the nine months ended May 31, 2009 and
2008, respectively.  We currently expect future amortization for the
next five years ending August 31, 2009 through 2013 will be approximately
$1,590,000 per year.





Long-lived
assets, including customer relationships and property and equipment, are tested
for recoverability whenever events or changes in circumstances indicate that
their carrying amount may not be recoverable in accordance with SFAS No. 144
“Accounting for the Impairment or Disposal of Long-Lived
Assets.”  Recoverability of long-lived assets is assessed by a
comparison of the carrying amount to the estimated undiscounted future net cash
flows expected to result from the use of the assets and their eventual
disposition.  If estimated undiscounted future net cash flows are less
than the carrying amount, the asset is considered impaired and a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the asset.  No impairment of long-lived assets occurred
during the nine months ended May 31, 2009.





Foreign Currency Translation
and Other Comprehensive Income (Loss)





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





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





Three
      months ended
                  
                  
                  Nine
      months endedMay
      31, 2009
                  
                  
                  May
      31, 2008
                  
                  
                  May
      31, 2009
                  
                  
                  May
      31, 2008Net
      Income (loss)
                  
                  $
                  272,298
                  
                  
                  $
                  (151,783
                  )
                  
                  $
                  893,221
                  
                  
                  $
                  703,040Cumulative
      translation adjustment
                  
                  
                  211,389
                  
                  
                  
                  -
                  
                  
                  
                  173,930
                  
                  
                  
                  -Total
      comprehensive income (loss)
                  
                  $
                  483,687
                  
                  
                  $
                  (151,783
                  )
                  
                  $
                  1,067,151
                  
                  
                  $
                  703,040





Earnings (loss) Per
Share





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





The
computation of diluted earnings per share is similar to the computation of basic
earnings (loss) per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if
dilutive options, restricted stock awards and warrants had been exercised as of
the end of the period. Potentially dilutive shares consist of stock options,
restricted stock awards and warrants totaling 259,041 and 177,640, and 254,503
and 117,200 for the three and nine months ended May 31, 2009 and 2008,
respectively. Diluted shares for the three months ended May 31, 2008 were not
included in the calculation of diluted net loss per share because the effect of
the inclusion would be anti-dilutive. In addition, outstanding warrants to
purchase 1,688,354 and 1,649,955 common shares as of and for the periods ended
May 31, 2009 and 2008, respectively, were also not included in the computation
of diluted earnings per share because the exercise price was greater than the
average market price of the Company’s common shares over those
periods.




7




Income Taxes and Due to
Former Stockholders





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





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





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




8




Reconciliation of
liabilities for Unrecognized Tax Benefits for the nine months ended May 31,
2009:





Balance
      at September 1, 2008
                                                        
                                                        $
                                                        692,532Unrecognized
      tax positions of prior periods:Increase
                                                        
                                                        
                                                        -Decrease
                                                        
                                                        
                                                        -Unrecognized
      tax positions of current year:Increase
                                                        
                                                        
                                                        12,548DecreaseDecrease
      in Unrecognized tax benefits due to settlements
                                                        
                                                        
                                                        (547,119
                                                        )Decrease
      in Unrecognized tax benefits due to lapse ofstatute
      of limitations
                                                        
                                                        
                                                        -Balance
      at May 31, 2009
                                                        
                                                        $
                                                        157,961Total
      amount of unrecognized tax benefits that, if recognized,would
      affect the effective tax rate
                                                        
                                                        $
                                                        56,959Accrued
      interest and penalties for unrecognized tax benefitsas
      of May 31, 2009 balance sheet
                                                        
                                                        $
                                                        71,354Interest
      and penalties classified as income tax expense (benefit)-for
      the nine months ended May 31, 2009
                                                        
                                                        $
                                                        (31,440
                                                        )





3.
Acquisitions





Enterprise
Management Solutions, Inc.





On May
12, 2009, KOAN-IT (US) acquired certain assets of EMS, a company under
Chapter 11 bankruptcy protection in the Middle District of
Florida.  The purchase price consisted of $150,000 cash at closing.
Additionally, the Company capitalized professional fees of
$82,412that were
associated with the acquisition ofthe assets of
EMS. The
acquisition wasalsofunded through borrowings
under the Credit Facility with the Lender.





The
Company accounted for the acquisition under the purchase method, whereby,
amounts were assigned to assets acquired based on their fair values on the date
of the acquisition. Management determined the fair value of EMS’ assets on May
12, 2009 were $5,960 (property and equipment), which resulted in an excess
purchase price over fair value of assets acquired of $226,452 that was
recognized as goodwill.





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




9




KOAN-IT Corp.





On
February 12, 2009, EIS Canada, EIS-US, KOAN-IT and the shareholders of KOAN-IT
(the “Shareholders”) entered into a Share Purchase Agreement pursuant to which
(i) EIS-Canada acquired all of the outstanding stock of KOAN-IT from the
Shareholders and (ii) EIS- US acquired all of the outstanding stock of KOAN-IT
(US), from KOAN-IT for an aggregate consideration of up to approximately $3.3
million.  The purchase price consisted of (i) cash at closing in an
aggregate amount equal to $1,223,049 (consisting of $1,202,665 for the
outstanding stock of KOAN-IT and $20,384 for the outstanding stock of KOAN-IT
(US)), (ii) unsecured subordinated 6% promissory notes issued to each of the
Shareholders in an aggregate principal amount of $407,683 payable in full on the
12 month anniversary of the closing and (iii) the potential right to receive
additional cash consideration each year for the next three years on the
anniversary of the closing, in the aggregate totaling $1,630,731, if certain
performance goals are met. The acquisition was funded through borrowings under
the Credit Facility with the Lender.





The
Company accounted for the acquisition under the purchase method, whereby,
amounts were assigned to assets acquired and liabilities assumed based on their
fair values, on the date of the acquisition. Management determined the fair
value of KOAN-IT and KOAN-IT (US)’s net assets on February 12, 2009 were
$1,082,297, which resulted in an excess purchase price over fair value of net
assets acquired of $548,435, which was recognized as goodwill.





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





Cash
                      
                      $
                      571,613Accounts receivable,
      net
                      
                      
                      984,817Prepaid
      expenses & other current assets
                      
                      
                      582,566Plant
      and equipment
                      
                      
                      69,677Customer
      relationships
                      
                      
                      1,100,000Trademarks
                      
                      
                      150,000Noncompete
      asset
                      
                      
                      25,000Accounts
      payable
                      
                      
                      (463,033
                      )Income
      taxes payable
                      
                      
                      27,355Deferred
      tax liabilities
                      
                      
                      (414,607
                      )Deferred
      revenue
                      
                      
                      (848,488
                      )Accrued
      expenses
                      
                      
                      (702,604
                      )Fair
      value of net assets acquired
                      
                      
                      1,082,297Purchase
      price
                      
                      
                      1,630,731Excess
      purchase price
                      
                      $
                      548,435





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




The
Company capitalized professional fees of $245,524 that were associated with the
acquisition of KOAN-IT and KOAN-IT (US).




10




in this report because the effect of the acquisition
is not material .




eBusiness
Applications Solutions, Inc. and Aveeva, Inc.





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





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




Three
      months ended
                              
                              
                              Nine
      months endedMay
      31, 2009
                              
                              
                              May
      31, 2008
                              
                              
                              May
      31, 2009
                              
                              
                              May
      31, 2008Revenue
                              
                              $
                              49,219,707
                              
                              
                              $
                              47,822,396
                              
                              
                              $
                              161,200,108
                              
                              
                              $
                              183,802,224Income
      from continuing operations
                              
                              
                              272,298
                              
                              
                              
                              126,876
                              
                              
                              
                              893,221
                              
                              
                              
                              1,367,790Net
      income
                              
                              
                              272,298
                              
                              
                              
                              126,876
                              
                              
                              
                              893,221
                              
                              
                              
                              1,367,790Basic
      and diluted earning per sharefrom
      continuing operations
                              
                              $
                              0.02
                              
                              
                              $
                              0.01
                              
                              
                              $
                              0.06
                              
                              
                              $
                              0.09Basic
      and diluted earning per share
                              
                              $
                              0.02
                              
                              
                              $
                              0.01
                              
                              
                              $
                              0.06
                              
                              
                              $
                              0.09





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





Luceo, Inc.





On March
20, 2008, EGS, Luceo and Sivapatham Natarajan (“Mr. Natarajan”) entered into a
Stock Purchase Agreement pursuant to which EGS acquired all of the outstanding
stock of Luceo from Mr. Natarajan for the purchase price that consisted of (i)
cash at closing in an aggregate amount equal to $1,795,000; (ii) a subordinated
promissory note in a principal amount of $820,000 which was payable in two equal
installments of $410,000 each on the 12 month and 18 month anniversaries of the
closing and (iii) contingent payments of additional cash consideration each year
for three years on the anniversary of the closing if certain performance goals
are met. During the year ended August 31, 2008, the purchase price was reduced
by $68,489 in connection with the working capital adjustment. The first payment
on the promissory note was paid on the due date. There were no contingent
payments of additional cash consideration earned for the first year
anniversary.




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




11




4.  Stock-Based
Compensation and Warrants




Stock
Options




An
amendment to the Company’s 2006 Stock-Based Incentive Compensation Plan (the
“2006 Plan”) was approved by the stockholders on February 2, 2009. The 2006 Plan
authorizes the granting of stock options to directors and eligible employees.
The amendment increased the aggregate number of shares of Common Stock available
under the 2006 Plan from 1,400,000 shares to 2,543,207 shares eligible for
issuance at prices not less than 100% of the fair value of the Company’s common
stock on the date of grant (110% in the case of stockholders owning more than
10% of the Company’s common stock). Options under the 2006 Plan have terms from
7 to 10 years and certain options vest immediately and others through a term up
to 4 years.




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




A summary
of stock options for the nine months ended May 31, 2009 is as
follows:





For the Nine Months Ended May 31,
      2009
                                        
                                        Shares
                                        
                                        
                                        Weighted
      Average
                                          Exercise
      Price
                                        
                                        WeightedAverage
                                          Remaining
      Term
                                        
                                        AggregateIntrinsic
                                          Value*Options
      Outstanding -September 1, 2008
                                        
                                        
                                        386,500
                                        
                                        
                                        $
                                        1.22Options
      Granted
                                        
                                        
                                        25,000
                                        
                                        
                                        $
                                        0.39Options
      Exercised
                                        
                                        
                                        -Options
      Forfeited or Expired
                                        
                                        
                                        (71,000
                                        )
                                        
                                        $
                                        0.89Options
      Outstanding - May 31, 2009
                                        
                                        
                                        340,500
                                        
                                        
                                        $
                                        1.17
                                        
                                        5.75
      years
                                        
                                        $
                                        6,000Options
      Exercisable - May 31, 2009
                                        
                                        
                                        252,935
                                        
                                        
                                        $
                                        1.14
                                        
                                        6.15
      years
                                        
                                        $
                                        6,000




*
Represents the total pre-tax intrinsic value based on the Company’s average
closing stock prices for the nine months ended May 31, 2009.




There
were 5,000 and 20,000 stock options issued during the three months ended May 31,
2009 and November 30, 2008, respectively. The following assumptions were used to
value stock options issued during each of the three months ended May 31, 2009
and November 30, 2008:




Three
      Months EndedMay 31, 2009
                      
                      
                      November 30, 2008Weighted-Average
      Fair Value
                      
                      $
                      0.54
                      
                      
                      $
                      0.28AssumptionsExpected
      Volatility
                      
                      
                      125.96
                      %
                      
                      
                      106.49
                      %Expected
      Term
                      
                      5
      years
                      
                      
                      5
      yearsExpected
      Forfeiture Rate
                      
                      
                      0
                      %
                      
                      
                      0
                      %Dividend
      Yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %Risk-Free
      Interest Rate
                      
                      
                      2.04
                      %
                      
                      
                      1.89
                      %




12




Nonvested Stock (Restricted
Stock)




The
following table summarizes the Company’s restricted stock activity during the
nine months ended May 31, 2009:




For the Nine Months Ended May 31,
      2009
                        
                        Shares
                        
                        
                        Weighted
      Average
                          Grant
      Date Fair Value
                        
                        
                        Fair
      ValueNonvested
      - September 1, 2008
                        
                        
                        330,542
                        
                        
                        $
                        1.24Granted
                        
                        
                        439,902
                        
                        
                        $
                        0.45Vested
                        
                        
                        (110,182
                        )
                        
                        $
                        1.24
                        
                        
                        $
                        46,218
                        (a)Forfeited
                        
                        
                        (144,403
                        )
                        
                        
                        -Nonvested
      -May 31, 2009
                        
                        
                        515,859
                        
                        
                        $
                        0.74
                        
                        
                        $
                        355,943
                        (b)




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




(b)
            The
      aggregate fair value of the nonvested restricted stock shares expected to
      vest represents the total pre-tax fair value, based on the Company’s
      closing stock price as of May 31, 2009 which would have been received by
      holders of restricted stock shares had all such holders sold their
      underlying shares on that date.




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




Stock Options and Nonvested
Stock




Stock-based
compensation costs related to the 2006 Plan totaled $2,764 and $66,980 during
the three months ended May 31, 2009 and 2008, respectively. Stock-based
compensation costs related to the 2006 Plan totaled $86,536 and $213,055 during
the nine months ended May 31, 2009 and 2008, respectively.  As of May
31, 2009, the Company had $223,930 of unrecognized compensation cost related to
these instruments.  The cost is expected to be recognized over a
remaining period of 3 years.




Warrants




On August
5, 2005, the Company issued certain stockholders stock warrants that evidence
the obligation of the Company to issue a variable number of shares, in the
aggregate, equal to 10% of then total issued and outstanding shares of the
Company’s common stock, measured on a post-exercise basis, at any date during
the 5-year term of the warrants, which ends August 5, 2010.  The aggregate
exercise price of these warrants is fixed at $3,695,752.  The exercise
price per warrant will vary based upon the number of shares issuable under the
warrants.  The number of shares issuable under the warrants totaled
1,688,354 and 1,649,955 shares, with an exercise price of $2.19 and $2.24 per
share, as of May 31, 2009 and 2008, respectively. The outstanding warrants
were anti-dilutive for the three and nine months ended May 31, 2009 and 2008
because the exercise price was greater than the average market price of the
Company’s common shares.




13




5.  Line
of Credit




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





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





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





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





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





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





The
Company had balances of $10.78 million and $8.58 million outstanding under the
revolving portion of the Credit Facility, and balances of $3.47 million and
$2.05 million (included in the Company’s accounts payable) outstanding plus
$366,700 and $444,700 in open approvals under the floor plan portion of the
Credit Facility at May 31, 2009 and August 31, 2008, respectively. Net
availability was $7.27 million and $14.44 million under the revolving portion of
the Credit Facility, and additionally $10.11 million and $6.49 million was
available under the floor plan portion of the Credit Facility as of May 31, 2009
and August 31, 2008, respectively.




As of May
31, 2009, the Company determined that it was in compliance with its financial
covenants with the Lender.




14






6.  Concentration
of Credit Risk and Significant Clients




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




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




For
      the Three Months EndedMay
      31, 2009
                    
                    
                    %
      of Total
                    
                    
                    May
      31, 2008
                    
                    
                    %
      of TotalDepartments
      of the U.S. Government
                    
                    $
                    11,720,964
                    
                    
                    
                    23.8
                    %
                    
                    $
                    13,136,567
                    
                    
                    
                    33.7
                    %Canada
      Government Agencies
                    
                    
                    619,774
                    
                    
                    
                    1.3
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %State
      and Local Governments
                    
                    
                    1,216,672
                    
                    
                    
                    2.5
                    %
                    
                    
                    2,153,215
                    
                    
                    
                    5.5
                    %Commercial
      Companies
                    
                    
                    15,555,543
                    
                    
                    
                    31.6
                    %
                    
                    
                    15,624,874
                    
                    
                    
                    40.1
                    %Education
      and other
                    
                    
                    20,106,754
                    
                    
                    
                    40.8
                    %
                    
                    
                    8,014,535
                    
                    
                    
                    20.6
                    %Total
      Revenues
                    
                    $
                    49,219,707
                    
                    
                    
                    100.0
                    %
                    
                    $
                    38,929,191
                    
                    
                    
                    100.0
                    %





For
      the Nine Months EndedMay
      31, 2009
                    
                    
                    %
      of Total
                    
                    
                    May
      31, 2008
                    
                    
                    %
      of TotalDepartments
      of the U.S. Government
                    
                    $
                    63,160,411
                    
                    
                    
                    39.2
                    %
                    
                    $
                    87,990,000
                    
                    
                    
                    55.8
                    %Canada
      Government Agencies
                    
                    
                    619,774
                    
                    
                    
                    0.4
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %State
      and Local Governments
                    
                    
                    6,161,945
                    
                    
                    
                    3.8
                    %
                    
                    
                    8,133,825
                    
                    
                    
                    5.2
                    %Commercial
      Companies
                    
                    
                    50,294,320
                    
                    
                    
                    31.2
                    %
                    
                    
                    40,094,684
                    
                    
                    
                    25.4
                    %Education
      and other
                    
                    
                    40,963,658
                    
                    
                    
                    25.4
                    %
                    
                    
                    21,419,370
                    
                    
                    
                    13.6
                    %Total
      Revenues
                    
                    $
                    161,200,108
                    
                    
                    
                    100.0
                    %
                    
                    $
                    157,637,879
                    
                    
                    
                    100.0
                    %





Major
Customers





Sales to
school districts in Georgia and Florida accounted for approximately $13.8
million or 28.1%, and $6.27 million or 12.7% of the Company’s total revenues for
three months ended May 31, 2009, respectively. The same customers accounted for
approximately $6.00 million or 15.4%, and $1.51 million or 3.9% of the Company’s
total revenues for the three months ended May 31, 2008,
respectively.





Sales to
a school district in Georgia accounted for approximately $27.0 million or 16.8%
of the Company’s total revenues for nine months ended May 31, 2009. The same
customer accounted for approximately $12.82 million or 8.1% the Company’s total
revenues for the nine months ended May 31, 2008.





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





The trade
account receivables consist of the following:





15





May
      31,
                  
                  
                  August
      31,2009
                  
                  
                  2008Trade
      receivables
                  
                  $
                  25,805,723
                  
                  
                  $
                  32,570,104Allowance
      for doubtful accounts
                  
                  
                  (217,879
                  )
                  
                  
                  (391,137
                  )Trade
      receivables, net
                  
                  $
                  25,587,844
                  
                  
                  $
                  32,178,967




7.  Inventories




Inventories
are stated at the lower of average cost or market. Inventories consist of
finished goods purchased for resale, including computer hardware, computer
software, computer peripherals and related supplies.





May
      31,
                  
                  
                  August
      31,2009
                  
                  
                  2008Hardware,
      software, accessories and parts
                  
                  $
                  7,866,840
                  
                  
                  $
                  901,532Less:
      inventory reserve
                  
                  
                  (228,452
                  )
                  
                  
                  (241,538
                  )Net
      inventories
                  
                  $
                  7,638,388
                  
                  
                  $
                  659,994





At May
31, 2009, net inventories increased, this is primarily attributable to timing of
various computer roll-out projects for school districts in Georgia and Florida,
as well as computer roll-out projects for various commercial and federal
agencies, for which we have purchase orders from these entities.




8.  Accrued
Liabilities




Current
accrued liabilities consisted of the following:





May 31, 2009
                    
                    
                    August 31, 2008Accrued
      payroll
                    
                    $
                    1,564,484
                    
                    
                    $
                    2,384,922Accrued
      commissions
                    
                    
                    449,214
                    
                    
                    
                    730,848Accrued
      state sales taxes
                    
                    
                    78,649
                    
                    
                    
                    97,514Accrued
      third-party service fees
                    
                    
                    61,970
                    
                    
                    
                    108,070Other
      accrued expenses
                    
                    
                    2,650,311
                    
                    
                    
                    2,097,271$
                    4,804,628
                    
                    
                    $
                    5,418,625





16




9.  Long-Term
Debt




The
Company’s long-term debt consists of the following:




May 31, 2009
                  
                  
                  August 31, 20088%
      junior subordinated notes payable to Darr Westwood LLC
                  
                  $
                  -
                  
                  
                  $
                  1,102,794Subordinate
      note payable to Darr Westwood LLC
                  
                  
                  -
                  
                  
                  
                  231,659Subordinate
      note payable to Four Kings Management
                  
                  
                  -
                  
                  
                  
                  390,0005%
      subordinated note payable to Mr. Keith Grabel
                  
                  
                  -
                  
                  
                  
                  200,0675%
      subordinated note payable to Ms. Mary Margaret Grabel
                  
                  
                  -
                  
                  
                  
                  193,0895%
      subordinated note payable to DARR Global Holdings, Inc.
                  
                  
                  432,076
                  
                  
                  
                  627,9068%
      subordinated note payable to Siva Natarajan
                  
                  
                  410,000
                  
                  
                  
                  820,0006%
      subordinated note payable to Former Sharholders of KOAN-IT
                  
                  
                  458,150
                  
                  
                  
                  -Total
      debt
                  
                  
                  1,300,226
                  
                  
                  
                  3,565,515Less
      current portion
                  
                  
                  (1,218,142
                  )
                  
                  
                  (2,810,937
                  )Long-term
      debt, net of current portion
                  
                  $
                  82,084
                  
                  
                  $
                  754,578




10.  Related
Party Transactions





One of
the Company’s facilities is leased under a non-cancelable operating lease
agreement with an entity that is owned by a director and an officer of the
Company and their related family members. During
the three months ended May 31, 2009 and 2008, the Company recorded expense under
this lease totaling $47,250 and $45,000, respectively. During the nine months
ended May 31, 2009 and 2008, the Company recorded expense under this lease
totaling $137,250 and $135,000, respectively. The
facilities consist of office and warehouse space totaling 42,480 square feet
located in Springfield, New Jersey.





The
Company is occupying approximately 26,000 square feet of office and warehouse
space in a 70,000 square-foot building in Suwannee, GA. This space is leased
from GS&T Properties, LLC, in which certain officers of the Company are
passive investors with an approximately 20% equity interest. The lease term is
for 5 years, with monthly base rent of $15,832. During the three months ended
May 31, 2009 and 2008, the Company recorded expense under this lease totaling
$47,496 and $46,439, respectively. During the nine months ended May 31, 2009 and
2008, the Company recorded expense under this lease totaling $142,488 and
$135,089, respectively.





In
conjunction with the acquisition of eBAS/Aveeva, the Company entered into a
lease for approximately 20,000 square feet of office space in Fremont,
California.  This space is leased from the spouse of an officer of
eBAS/Aveeva.  The lease term is through August 31, 2011 with a monthly
rent of $20,000. In March 2009, the Company subleased portion of the building
for a monthly rent of $2,500 on a month-to-month basis. Rent expense was $52,500
and $172,500 for each of the three and nine months ended May 31, 2009,
respectively.




17




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





11.  Segment
Information


The
Company has adopted Statement of Financial Accounting Standard No. 131,
“Disclosure about Segments of an Enterprise and Related Information.”  The
Company’s business activities are divided into two business segments, EIS and
EGS. EIS is the Company’s historical business which includes Emtec NJ, Emtec
LLC, Emtec Federal and the business service management solutions offered by
KOAN-IT and KOAN-IT (US).  EGS offers a broad range of
consulting/contracting services to clients including IT project management
services, packaged software implementation, web technologies/client server
application development.  EGS is comprised primarily of the business
operations acquired through the acquisitions of Luceo on March 20, 2008, eBAS
and Aveeva on August 13, 2008.





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





May
      31, 2009
                      (Unaudited)
                    
                    
                    August
      31, 2008Identifiable Assets:EIS
                    
                    $
                    50,461,675
                    
                    
                    $
                    46,212,267EGS
                    
                    
                    14,541,484
                    
                    
                    
                    16,261,773Total
      Assets
                    
                    $
                    65,003,159
                    
                    
                    $
                    62,474,040




Three
      months ended
                            
                            
                            Nine
      months endedMay
      31, 2009
                            
                            
                            May
      31, 2008
                            
                            
                            May
      31, 2009
                            
                            
                            May
      31, 2008(Unaudited)
                            
                            
                            (Unaudited)RevenuesEIS
                            
                            $
                            40,534,574
                            
                            
                            $
                            36,582,591
                            
                            
                            $
                            133,137,651
                            
                            
                            $
                            155,291,279EGS
                            
                            
                            8,685,133
                            
                            
                            
                            2,346,600
                            
                            
                            
                            28,062,457
                            
                            
                            
                            2,346,600Total
      Revenue
                            
                            $
                            49,219,707
                            
                            
                            $
                            38,929,191
                            
                            
                            $
                            161,200,108
                            
                            
                            $
                            157,637,879Gross ProfitEIS
                            
                            $
                            6,199,535
                            
                            
                            $
                            5,204,948
                            
                            
                            $
                            17,398,562
                            
                            
                            $
                            18,821,168EGS
                            
                            
                            1,446,781
                            
                            
                            
                            490,601
                            
                            
                            
                            5,168,141
                            
                            
                            
                            490,601Gross
      Profit
                            
                            $
                            7,646,316
                            
                            
                            $
                            5,695,549
                            
                            
                            $
                            22,566,703
                            
                            
                            $
                            19,311,769Operating IncomeEIS
                            
                            $
                            581,357
                            
                            
                            $
                            (226,689
                            )
                            
                            $
                            1,149,218
                            
                            
                            $
                            1,926,476EGS
                            
                            
                            87,523
                            
                            
                            
                            145,727
                            
                            
                            
                            1,097,448
                            
                            
                            
                            145,727Operating
      Income
                            
                            $
                            668,880
                            
                            
                            $
                            (80,962
                            )
                            
                            $
                            2,246,666
                            
                            
                            $
                            2,072,203Interest and Other Expense
      (Income)EIS
                            
                            $
                            99,558
                            
                            
                            $
                            155,577
                            
                            
                            $
                            390,068
                            
                            
                            $
                            741,637EGS
                            
                            
                            81,735
                            
                            
                            
                            13,300
                            
                            
                            
                            308,443
                            
                            
                            
                            13,300Interest
      and Other Expense (Income)
                            
                            $
                            181,293
                            
                            
                            $
                            168,877
                            
                            
                            $
                            698,511
                            
                            
                            $
                            754,937Provision for Income TaxesEIS
                            
                            $
                            199,640
                            
                            
                            $
                            (160,611
                            )
                            
                            $
                            306,827
                            
                            
                            $
                            551,670EGS
                            
                            
                            15,649
                            
                            
                            
                            62,556
                            
                            
                            
                            348,107
                            
                            
                            
                            62,556Provision
      for Income Taxes
                            
                            $
                            215,289
                            
                            
                            $
                            (98,055
                            )
                            
                            $
                            654,934
                            
                            
                            $
                            614,226Net IncomeEIS
                            
                            $
                            282,159
                            
                            
                            $
                            (221,654
                            )
                            
                            $
                            452,323
                            
                            
                            $
                            633,169EGS
                            
                            
                            (9,861
                            )
                            
                            
                            69,871
                            
                            
                            
                            440,898
                            
                            
                            
                            69,871Net
      Income
                            
                            $
                            272,298
                            
                            
                            $
                            (151,783
                            )
                            
                            $
                            893,221
                            
                            
                            $
                            703,040




18




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




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




Cautionary
Statement Regarding Forward-Looking Statements




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




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




Overview
of Emtec




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





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





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





19





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





For the
nine months ended May 31, 2009 and May 31, 2008, our EIS division’s revenues
decreased to $133.14 million from $155.29 million. If we are unable to increase
our revenues in future periods, whether due to the effects of the economic
downturn on our commercial business or otherwise, then we may be forced to
consolidate our operations to further reduce operating expenses sufficiently to
achieve profitable operations. We have implemented several cost containment
measures beginning in December 2008 that have and will reduce our selling,
general and administrative expenses in future quarters, but there can be no
assurance that we will be able to generate sufficient new business or that our
cost containment measures currently in place will provide us the ability to
maintain profitability in the future.





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




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





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





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




On May
12, 2009, we acquired through our subsidiary, KOAN-IT (US), certain assets of
EMS, a company under Chapter 11 bankruptcy protection in the Middle District of
Florida.  Prior to the Chapter 11 acquisition, EMS was a consulting
firm, headquartered in Clearwater, Florida, specializing in business service
management methodologies  for its clients throughout the United
States.




20




With the acquisitions of Luceo, eBAS,
Aveeva, KOAN-IT and the assets of EMS, the Company divides its operating
activity into two operating segments for reporting purposes: EIS and EGS. EIS is
the Company’s historical business  which includes Emtec NJ, Emtec LLC,
Emtec Federal and business service management solutions offered by KOAN-IT and
KOAN-IT(US) and EGS is the Company’s enterprise applications services solutions
and training business including Luceo, eBAS and
Aveeva.





Results
of Operations





Comparison
of Three Months Ended May 31, 2009 and 2008




The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
each of the three months ended May 31, 2009 and 2008.




EMTEC,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended May 31,2009
                              
                              
                              2008
                              
                              
                              Change
                              
                              
                              %RevenuesProcurement
      services
                              
                              $
                              35,321,294
                              
                              
                              $
                              34,155,671
                              
                              
                              $
                              1,165,623
                              
                              
                              
                              3.4
                              %Service
      and consulting
                              
                              
                              13,898,413
                              
                              
                              
                              4,773,520
                              
                              
                              
                              9,124,893
                              
                              
                              
                              191.2
                              %Total Revenues
                              
                              
                              49,219,707
                              
                              
                              
                              38,929,191
                              
                              
                              
                              10,290,516
                              
                              
                              
                              26.4
                              %Cost of SalesCost
      of procurement services
                              
                              
                              31,204,269
                              
                              
                              
                              29,387,865
                              
                              
                              
                              1,816,404
                              
                              
                              
                              6.2
                              %Service
      and consulting
                              
                              
                              10,369,122
                              
                              
                              
                              3,845,777
                              
                              
                              
                              6,523,345
                              
                              
                              
                              169.6
                              %Total Cost of Sales
                              
                              
                              41,573,391
                              
                              
                              
                              33,233,642
                              
                              
                              
                              8,339,749
                              
                              
                              
                              25.1
                              %Gross ProfitProcurement
      services
                              
                              
                              4,117,025
                              
                              
                              
                              4,767,806
                              
                              
                              
                              (650,781
                              )
                              
                              
                              (13.6
                              )%Procurement
      services %
                              
                              
                              11.7
                              %
                              
                              
                              14.0
                              %Service
      and consulting
                              
                              
                              3,529,291
                              
                              
                              
                              927,743
                              
                              
                              
                              2,601,548
                              
                              
                              
                              280.4
                              %Service
      and consulting %
                              
                              
                              25.4
                              %
                              
                              
                              19.4
                              %Total Gross Profit
                              
                              
                              7,646,316
                              
                              
                              
                              5,695,549
                              
                              
                              
                              1,950,767
                              
                              
                              
                              34.3
                              %Total Gross Profit %
                              
                              
                              15.5
                              %
                              
                              
                              14.6
                              %Operating
      expenses:Selling,
      general, and administrative expenses
                              
                              
                              6,197,867
                              
                              
                              
                              5,348,986
                              
                              
                              
                              848,881
                              
                              
                              
                              15.9
                              %Rent
      expense – related party
                              
                              
                              147,246
                              
                              
                              
                              91,439
                              
                              
                              
                              55,807
                              
                              
                              
                              61.0
                              %Depreciation
      and amortization
                              
                              
                              632,323
                              
                              
                              
                              336,086
                              
                              
                              
                              296,237
                              
                              
                              
                              88.1
                              %Total
      operating expenses
                              
                              
                              6,977,436
                              
                              
                              
                              5,776,511
                              
                              
                              
                              1,200,925
                              
                              
                              
                              20.8
                              %Pecent
      of revenues
                              
                              
                              14.2
                              %
                              
                              
                              14.8
                              %Operating
      Income (loss)
                              
                              
                              668,880
                              
                              
                              
                              (80,962
                              )
                              
                              
                              749,842
                              
                              
                              
                              926.2
                              %Percent
      of revenues
                              
                              
                              1.4
                              %
                              
                              
                              -0.2
                              %Other
      expense (income):Interest
      income – other
                              
                              
                              (4,675
                              )
                              
                              
                              (11,144
                              )
                              
                              
                              6,469
                              
                              
                              
                              (58.0
                              )%Interest
      expense
                              
                              
                              169,361
                              
                              
                              
                              180,276
                              
                              
                              
                              (10,915
                              )
                              
                              
                              (6.1
                              )%Other
                              
                              
                              16,607
                              
                              
                              
                              (256
                              )
                              
                              
                              16,863
                              
                              
                              
                              N/AIncome
      (loss) before income taxes
                              
                              
                              487,587
                              
                              
                              
                              (249,838
                              )
                              
                              
                              737,425
                              
                              
                              
                              295.2
                              %Provision
      for income taxes
                              
                              
                              215,289
                              
                              
                              
                              (98,055
                              )
                              
                              
                              313,344
                              
                              
                              
                              319.6
                              %Net
      income (loss)
                              
                              $
                              272,298
                              
                              
                              $
                              (151,783
                              )
                              
                              $
                              424,081
                              
                              
                              
                              279.4
                              %Percent
      of revenues
                              
                              
                              0.6
                              %
                              
                              
                              (0.4
                              )%




21




Total
Revenues




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





Three
      months endedMay
      31, 2009
                    
                    
                    May
      31, 2008(Unaudited)RevenuesEIS
                    
                    $
                    40,534,574
                    
                    
                    $
                    36,582,591EGS
                    
                    
                    8,685,133
                    
                    
                    
                    2,346,600Total
      Revenue
                    
                    $
                    49,219,707
                    
                    
                    $
                    38,929,191




EIS




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





For
      the Three Months EndedMay
      31, 2009
                          
                          
                          %
      of Total
                          
                          
                          May
      31, 2008
                          
                          
                          %
      of TotalClient
      TypeDepartments
      of the U.S. Government
                          
                          $
                          11,720,965
                          
                          
                          
                          28.9
                          %
                          
                          $
                          13,136,567
                          
                          
                          
                          35.9
                          %Canada
      Government Agencies
                          
                          
                          619,774
                          
                          
                          
                          1.5
                          %
                          
                          
                          -
                          
                          
                          
                          0.0
                          %State
      and Local Governments
                          
                          
                          1,216,672
                          
                          
                          
                          3.0
                          %
                          
                          
                          2,153,215
                          
                          
                          
                          5.9
                          %Commercial
      Companies
                          
                          
                          6,870,409
                          
                          
                          
                          16.9
                          %
                          
                          
                          13,278,274
                          
                          
                          
                          36.3
                          %Education
      and other
                          
                          
                          20,106,754
                          
                          
                          
                          49.6
                          %
                          
                          
                          8,014,535
                          
                          
                          
                          21.9
                          %Total
      Revenues
                          
                          $
                          40,534,574
                          
                          
                          
                          100.0
                          %
                          
                          $
                          36,582,591
                          
                          
                          
                          100.0
                          %





EIS
division’s total revenues increased $3.95 million, or 10.8%, to $40.53 million
for the three months ended May 31, 2009, compared to $36.58 million for the
three months ended May 31, 2008.  EIS division’s total revenue
includes revenues from our Systems Division and KOAN-IT which was acquired on
February 12, 2009 and the assets of  EMS which were acquired on May
12, 2009.  KOAN-IT’s total revenues (including revenues derived from
assets acquired from EMS) for the three months ended May 31, 2009 was $1.82
million. Without these acquisitions Systems Division’s revenue increased $2.13
million, or 5.8%, to $38.71 million for the three months ended May 31, 2009,
compared to $36.58 million for the three months ended May 31,
2008.  Procurement services revenue increased $454,261 or 1.3%, to
$34.61 million for the three months ended May 31, 2009, compared to $34.15
million for the three months ended May 31, 2008. This increase in procurement
services revenue is mainly attributable to various computer roll-out projects
for school districts in Florida and Georgia during the three months ended May
31, 2009 of approximately $12.0 million, which was off-set by an overall
decrease in our client’s IT spending, particularly in various departments of the
U.S. government, agency and commercial business and various governmental
agencies in the State of New Jersey. We believe that this decrease in revenues
can be attributed to the current economic downturn. Services and consulting
revenue for the Systems Division increased $1.67 million, or 69.0%, to $4.10
million for the three months ended May 31, 2009, compared to $2.43 million for
the three months ended May 31, 2008. This increase is mainly attributable to
various installation and configuration related services associated with computer
roll-out projects for school districts in Florida, Georgia and various
governmental agencies in the State of New Jersey during the three months ended
May 31, 2009.




22




During
the three months ended May 31, 2009 and 2008, U.S. governmental department and
agency related revenues represented approximately 28.9% and 35.9% of total EIS
division’s revenues, respectively. These clients include the Department of
Defense, Department of Justice, Department of Homeland Security, Department of
Health and Human Services, Department of Agriculture and Department of
Commerce.





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





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




Revenues
from commercial clients decreased by approximately $6.41 million during the
three months ended May 31, 2009 compared with the three months ended May 31,
2008. This decrease is mainly due to the current economic downturn that caused
reductions in technology and discretionary spending by our commercial
clients.





During
the three months ended May 31, 2009, revenues from our education business
increased by approximately $12.09 million compared with the three months ended
May 31, 2008. This increase is attributable to increase in various computer
roll-out projects for school districts in Florida and Georgia during the three
months ended May 31, 2009.





EGS





EGS
division’s total revenues increased $6.34 million, or 270.1%, to $8.69 million
for the three months ended May 31, 2009, compared to $2.35 million for the three
months ended May 31, 2008. This increase is primarily attributable to
acquisitions of eBAS and Aveeva on August 13, 2008. Without these acquisitions
of eBAS and Aveeva, Luceo’s revenue for the three months ended May 31, 2009 was
$2.48 million compared to $2.35 million for the period from March 20, 2008
through May 31, 2008.





Gross
Profit




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





Three
      months endedMay
      31, 2009
                    
                    
                    May
      31, 2008(Unaudited)Gross ProfitEIS
                    
                    $
                    6,199,535
                    
                    
                    $
                    5,204,948EGS
                    
                    
                    1,446,781
                    
                    
                    
                    490,601Gross
      Profit
                    
                    $
                    7,646,316
                    
                    
                    $
                    5,695,549




23




EIS




Aggregate
gross profit for our EIS division increased $994,586, or 19.1%, to $6.20 million
for the three months ended May 31, 2009 as compared to $5.20 million for the
three months ended May 31, 2008. EIS division’s gross profit includes gross
profit from Systems Division and recently acquired KOAN-IT which was acquired on
February 12, 2009 and the assets of  EMS which were acquired on May
12, 2009.  KOAN-IT’s gross profit (including gross profit derived from
the assets acquired from EMS) for the three months ended May 31, 2009 was
$335,742. Without these acquisitions Systems Division’s gross profit increased
$658,844, or 12.7%, to $5.86 million for the three months ended May 31, 2009,
compared to $5.20 million for the three months ended May 31, 2008. This increase
is attributable to various installation and configuration related services
associated with computer roll-out projects for school districts in Florida,
Georgia and various governmental agencies in the State of New Jersey during the
three months ended May 31, 2009.





Measured
as a percentage of revenues, our gross profit margin for EIS division increased
to 15.3% of our EIS division’s revenues for the three months ended May 31, 2009,
from 14.2% for the three months ended May 31, 2008. This increase is primarily a
result of increase in our service and consulting gross profit margin
attributable to higher utilization of our engineering resources and increase in
our services and consulting revenue associated with computer roll-out projects
for school districts in Florida, Georgia and various governmental agencies in
the State of New Jersey during the three months ended May 31, 2009.





EGS





EGS
division’s gross profit increased $956,180, or 194.9%, to $1.45 million for the
three months ended May 31, 2009, compared to $490,601 for the three months ended
May 31, 2008. This increase is primarily attributable to acquisitions of eBAS
and Aveeva on August 13, 2008. Without these acquisitions of eBAS and Aveeva,
Luceo’s gross profit for the three months ended May 31, 2009 was $374,613
compared to $490,601 for the period from March 20, 2008 through May 31, 2008.
This decrease in gross profit is mainly due to lower utilization of our
engineering resources and lower effective billing rates. We believe that this
decrease in gross profit can be attributed to the current economic
downturn.





Measured
as percentages of revenues, our gross profit margin for EGS division decreased
to 16.7% of our EGS division’s revenues for the three months ended May 31, 2009
from 20.9% for the three months ended May 31, 2008. We believe this decrease is
mainly due to lower utilization of our engineering resources and lower effective
billing rates.





Selling, General and
Administrative Expenses





EIS





Selling,
general and administrative expenses for our EIS division increased by $75,808,
or 1.5% to $5.11 million for the three months ended May 31, 2009, compared to
$5.04 million for the three months ended May 31, 2008. EIS division’s selling,
general and administrative expenses includes selling, general and administrative
expenses from Systems Division and KOAN-IT which was acquired on February 12,
2009 and the assets of EMS which were acquired on May 12,
2009.  KOAN-IT’s selling, general and administrative expenses
(inclusding selling, general and administrative expenses related to the assets
acquired from EMS) for the three months ended May 31, 2009 was $400,983. Without
these acquisitions Systems Division’s selling, general and administrative
expenses decreased by $325,175, or 6.5% to $4.71 million for the three months
ended May 31, 2009, compared to $5.04 million for the three months ended May 31,
2008. This decrease in selling, general and administrative expenses for the
three months ended May 31, 2009 is primarily attributable to the reduction of
various expense categories including compensation, travel, lodging, telephone,
office expenses, credit card bank fees, recruiting, professional fees and merger
and acquisition related costs.  In January 2009, we implemented wage
reductions to all employees whose earnings are expected to be greater than
$75,000 annually, froze salary increases and implemented many other cost
containment measures.





24





EGS





EGS
division’s selling, general and administrative expenses increased $773,073, or
248.2%, to $1.08 million for the three months ended May 31, 2009, compared to
$311,529 for the three months ended May 31, 2008. This increase is primarily
attributable to acquisitions of eBAS and Aveeva on August 13, 2008. Without
these acquisitions of eBAS and Aveeva, Luceo’s selling, general and
administrative expenses for the three months ended May 31, 2009 were $290,521
compared to $311,529 for the period from March 20, 2008 through May 31, 2008.
This decrease is primarily attributable to the reduction of immigration related
application fees and legal fees associated with net new hires due to the
slow-down in the economy.  Additionally, we recorded approximately
$112,000 in retention bonuses paid to business development personnel during the
three months ended May 31, 2009.





Rent Expense-Related
Party





EIS





We occupy
approximately 42,000 square feet of office and warehouse space in Springfield,
New Jersey. This space is leased from a limited liability company owned by
certain directors and officers of the Company and their related family members.
The original lease term was through April 2009 with monthly base rent of
$15,000. We renewed the lease for an additional five years term through April
2014, with monthly base rent of $17,500. During the three months ended May 31,
2009 and 2008, we recorded $47,250 and $45,000 in expense under this lease,
respectively.





We occupy
approximately 26,000 square feet of office and warehouse space in a 70,000
square foot building in Suwannee, GA.  This space is leased from a
limited liability company in which certain officers of our company are passive
investors with an approximately 20% equity interest. The lease term is for 5
years with monthly base rent of $15,832. During the three months ended May 31,
2009 and 2008, we recorded expense under this lease totaling $47,496 and
$46,439, respectively.





EGS





We occupy
approximately 20,000 square feet of office space in Fremont, CA.  This
space is leased from the spouse of the President of eBAS/Aveeva.  The
lease term is for 3 years with monthly base rent of $20,000. In March 2009, we
subleased portion of the building for a monthly rent of $2,500 on month-to-month
basis to reduce costs. During the three months ended May 31, 2009, we recorded
$52,500 in expense under this lease.


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




25




Depreciation and
Amortization





EIS





Depreciation
and amortization expense for our EIS division increased by 35.5%, or $107,426,
to $410,167 for the three months ended May 31, 2009, compared to $302,740 for
the three months ended May 31, 2008.  EIS division’s depreciation and
amortization expense includes depreciation and amortization expense from Systems
Division and KOAN-IT which was acquired on February 12, 2009 and the assets of
EMS which were acquired on May 12, 2009.  KOAN-IT’s depreciation and
amortization expense (including depreciation and amortization expense relating
to the assets acquired from EMS) for the three months ended May 31, 2009 was
$61,285. Without these acquisitions, Systems Division’s depreciation and
amortization expense increased by $46,141, or 15.2% to $348,881 for the three
months ended May 31, 2009, compared to $302,740 for the three months ended May
31, 2008. This increase in depreciation expense is mainly due to depreciation
expense associated with our purchase of phone system, computer equipment, a
document management system and other modifications made to our accounting
systems made during the three months ended May 31, 2009.





As of May
31, 2009, intangible assets of the EIS division consisted of the estimated value
ascribed to customer relationships of $9,897,881 less accumulated amortization
of $2,306,218; the estimated value ascribed to non-compete of $28,095 less
accumulated amortization of $1,682; and the estimated value ascribed to
trademarks of $168,569 less accumulated amortization of $10,091. As of August
31, 2008 intangible assets of the EIS consisted of the estimated value ascribed
to customer relationships of $8,661,712 less accumulated amortization of
$1,809,288. The assets ascribed to customer relationships are being amortized on
a straight-line basis over 6 to 15 years and noncompete covenants and trademarks
are being amortized on a straight-line basis over 5 years.  Amortization
expense for the EIS division was $208,044, and $145,088 for the three months
ended May 31, 2009 and 2008, respectively.





EGS





EGS
division’s depreciation and amortization expense increased $188,811, or 566.2%,
to $222,157 for the three months ended May 31, 2009, compared to $33,346 for the
three months ended May 31, 2008. This increase is primarily attributable to
acquisitions of eBAS and Aveeva on August 13, 2008. Without these acquisitions
of eBAS and Aveeva, Luceo’s depreciation and amortization expenses for the three
months ended May 31, 2009 was $54,541 compared to $33,346 for the period from
March 20, 2008 through May 31, 2008. This increase in depreciation expense is
mainly due to depreciation expense associated with our purchase of computer
equipment made during the current fiscal year.





As of May
31, 2009, intangible assets of the EGS division consisted of the estimated value
ascribed to customer relationships of $4,200,000 less accumulated amortization
of $638,523 and the estimated value ascribed to non-compete of $370,000 less
accumulated amortization of $67,311. As of August 31, 2008 intangible assets of
the EGS division consisted of the estimated value ascribed to customer
relationships of $4,200,000 less accumulated amortization of $95,192 and the
estimated value ascribed to non-compete of $370,000 less accumulated
amortization of $11,811. The assets ascribed to customer relationships are being
amortized on a straight-line basis over 5 to 9 years and noncompete covenants
and trademarks are being amortized on a straight-line basis over 5 years.
Amortization expense for the EGS division was $199,609 for the three months
ended May 31, 2009 and $33,346 for the period from March 20, 2008 through May
31, 2008. Amortization expense for the EGS division was $598,831 for the nine
months ended May 31, 2009 and $33,346 for the period from March 20, 2008 through
May 31, 2008. This increase in amortization expense is mainly due to
amortization expense related to intangible assets acquired in connection with
the acquisitions of eBAS and Aveeva.





26





Operating income
(loss)





EIS




Operating
income for our EIS division for the three months ended May 31, 2009 increased
by  $808,045, to $581,357, compared to an operating loss of ($226,689)
for the three months ended May 31, 2008. EIS division’s operating income (loss)
includes operating income (loss) from Systems Division and KOAN-IT which was
acquired on February 12, 2009 and the assets of  EMS which were
acquired on May 12, 2009.  KOAN-IT’s operating income (loss)
(including operating income(loss) attributable to the assets acquired from EMS)
for the three months ended May 31, 2009 was ($126,526). Without these
acquisitions Systems Division’s operating income (loss) increased $934,571 to
$707,882 for the three months ended May 31, 2009, compared to ($226,689) for the
three months ended May 31, 2008. This increase in operating income is mainly
attributable to increased revenues and gross profit as discussed in the Total
Revenue and Gross Profit sections above.





EGS




Operating
income for our EGS division for the three months ended May 31, 2009 decreased by
39.9%, or $58,203, to $87,523, compared to operating income of $145,727 for the
three months ended May 31, 2008. Without the acquisitions of eBAS and Aveeva,
Luceo’s operating income for the three months ended May 31, 2009 was $29,551
compared to $145,727 for the period from March 20, 2008 through May 31, 2008.
The reduction in operating income was due to approximately $132,500 in retention
bonuses we paid to business development and technical personnel during the three
months ended May 31, 2009.





Interest
expense





EIS





Interest
expense for the EIS division decreased by 48.5%, or $81,051, to $85,924 for the
three months ended May 31, 2009, compared to $166,975 for the three months ended
May 31, 2008.  The decrease is primarily attributable to lower
balances on various notes payable compared with prior period.





EGS





Our EGS
division’s interest expense for the three months ended May 31, 2009 was $83,437.
This interest expense is related to acquisition debt from the line of credit and
the 8% subordinated note payable to Mr. Natarajan as part of the consideration
for the acquisition of Luceo.





Provision (benefit) for
income taxes





EIS





We
recorded an income tax expense of $199,640 for the three months ended May 31,
2009 as compared to an income tax benefit of $160,611 for the three months ended
May 31, 2008. The effective tax benefit rate was 41.4% for the three months
ended May 31, 2009 versus 42.0% for the three months ended May 31,
2008.





27





EGS





We
recorded an income tax expense of $15,649 for the three months ended May 31,
2009 as compared to an income tax expense of $62,556 for the three months ended
May 31, 2008. The effective tax rate was 270.4% for the three months ended May
31, 2009 versus 47.2% for the three months ended May 31, 2008. The increase in
effective tax is due to permanent differences between our financial statements
and income tax returns.




28




Comparison
of Nine Months Ended May 31, 2009 and 2008




The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our Results of Operations for
each of the nine months ended May 31, 2009 and 2008.




EMTEC,
INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)





Nine
      Months Ended May 31,2009
                              
                              
                              2008
                              
                              
                              Change
                              
                              
                              %RevenuesProcurement
      services
                              
                              $
                              121,094,073
                              
                              
                              $
                              145,846,671
                              
                              
                              $
                              (24,752,598
                              )
                              
                              
                              (17.0
                              )%Service
      and consulting
                              
                              
                              40,106,035
                              
                              
                              
                              11,791,208
                              
                              
                              
                              28,314,827
                              
                              
                              
                              240.1
                              %Total Revenues
                              
                              
                              161,200,108
                              
                              
                              
                              157,637,879
                              
                              
                              
                              3,562,229
                              
                              
                              
                              2.3
                              %Cost of SalesCost
      of procurement services
                              
                              
                              107,967,221
                              
                              
                              
                              129,042,886
                              
                              
                              
                              (21,075,665
                              )
                              
                              
                              (16.3
                              )%Service
      and consulting
                              
                              
                              30,666,184
                              
                              
                              
                              9,283,224
                              
                              
                              
                              21,382,960
                              
                              
                              
                              230.3
                              %Total Cost of Sales
                              
                              
                              138,633,405
                              
                              
                              
                              138,326,110
                              
                              
                              
                              307,295
                              
                              
                              
                              0.2
                              %Gross ProfitProcurement
      services
                              
                              
                              13,126,852
                              
                              
                              
                              16,803,785
                              
                              
                              
                              (3,676,933
                              )
                              
                              
                              (21.9
                              )%Procurement
      services %
                              
                              
                              10.8
                              %
                              
                              
                              11.5
                              %Service
      and consulting
                              
                              
                              9,439,851
                              
                              
                              
                              2,507,984
                              
                              
                              
                              6,931,867
                              
                              
                              
                              276.4
                              %Service
      and consulting %
                              
                              
                              23.5
                              %
                              
                              
                              21.3
                              %Total Gross Profit
                              
                              
                              22,566,703
                              
                              
                              
                              19,311,769
                              
                              
                              
                              3,254,934
                              
                              
                              
                              16.9
                              %Total Gross Profit %
                              
                              
                              14.0
                              %
                              
                              
                              12.3
                              %Operating
      expenses:Selling,
      general, and administrative expenses
                              
                              
                              18,133,830
                              
                              
                              
                              16,025,377
                              
                              
                              
                              2,108,453
                              
                              
                              
                              13.2
                              %Rent
      expense – related party
                              
                              
                              452,238
                              
                              
                              
                              270,089
                              
                              
                              
                              182,149
                              
                              
                              
                              67.4
                              %Depreciation
      and amortization
                              
                              
                              1,733,969
                              
                              
                              
                              944,100
                              
                              
                              
                              789,869
                              
                              
                              
                              83.7
                              %Total
      operating expenses
                              
                              
                              20,320,037
                              
                              
                              
                              17,239,566
                              
                              
                              
                              3,080,471
                              
                              
                              
                              17.9
                              %Pecent
      of revenues
                              
                              
                              12.6
                              %
                              
                              
                              10.9
                              %Operating
      income
                              
                              
                              2,246,666
                              
                              
                              
                              2,072,203
                              
                              
                              
                              174,463
                              
                              
                              
                              8.4
                              %Percent
      of revenues
                              
                              
                              1.4
                              %
                              
                              
                              1.3
                              %Other
      expense (income):Interest
      income – other
                              
                              
                              (15,862
                              )
                              
                              
                              (77,807
                              )
                              
                              
                              61,945
                              
                              
                              
                              (79.6
                              )%Interest
      expense
                              
                              
                              693,354
                              
                              
                              
                              833,018
                              
                              
                              
                              (139,664
                              )
                              
                              
                              (16.8
                              )%Other
                              
                              
                              21,019
                              
                              
                              
                              (274
                              )
                              
                              
                              21,293
                              
                              
                              
                              N/AIncome
      before income taxes
                              
                              
                              1,548,155
                              
                              
                              
                              1,317,266
                              
                              
                              
                              230,889
                              
                              
                              
                              17.5
                              %Provision
      for income taxes
                              
                              
                              654,934
                              
                              
                              
                              614,226
                              
                              
                              
                              40,708
                              
                              
                              
                              6.6
                              %Net
      income
                              
                              $
                              893,221
                              
                              
                              $
                              703,040
                              
                              
                              $
                              190,181
                              
                              
                              
                              27.1
                              %Percent
      of revenues
                              
                              
                              0.6
                              %
                              
                              
                              0.4
                              %




29




Total
Revenues




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





Nine
      months endedMay
      31, 2009
                            
                            
                            May
      31, 2008(Unaudited)RevenuesEISEGS
                            
                            $
                            133,137,651
                            
                            
                            $
                            155,291,279Total
      Revenue
                            
                            
                            28,062,457
                            
                            
                            
                            2,346,600$
                            161,200,108
                            
                            
                            $
                            157,637,879




EIS




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





For
      the Nine Months EndedMay
      31, 2009
                        
                        
                        %
      of Total
                        
                        
                        May
      31, 2008
                        
                        
                        %
      of TotalClient
      TypeDepartments
      of the U.S. Government
                        
                        $
                        63,160,412
                        
                        
                        
                        47.4
                        %
                        
                        $
                        87,990,000
                        
                        
                        
                        56.7
                        %Canada
      Government Agencies
                        
                        
                        619,774
                        
                        
                        
                        0.5
                        %
                        
                        
                        -
                        
                        
                        
                        0.0
                        %State
      and Local Governments
                        
                        
                        6,161,945
                        
                        
                        
                        4.6
                        %
                        
                        
                        8,133,825
                        
                        
                        
                        5.2
                        %Commercial
      Companies
                        
                        
                        22,231,863
                        
                        
                        
                        16.7
                        %
                        
                        
                        37,748,084
                        
                        
                        
                        24.3
                        %Education
      and other
                        
                        
                        40,963,656
                        
                        
                        
                        30.8
                        %
                        
                        
                        21,419,370
                        
                        
                        
                        13.8
                        %Total
      Revenues
                        
                        $
                        133,137,651
                        
                        
                        
                        100.0
                        %
                        
                        $
                        155,291,279
                        
                        
                        
                        100.0
                        %





EIS
division’s total revenues decreased $22.15 million, or 14.3%, to $133.14 million
for the nine months ended May 31, 2009, compared to $155.29 million for the nine
months ended May 31, 2008.  EIS division’s total revenue includes
revenues from Systems Division and KOAN-IT which was acquired on February 12,
2009 and the assets of  EMS which were acquired on May 12,
2009.  KOAN-IT’s total revenues (including revenues derived from the
assets acquired from EMS) for the nine months ended May 31, 2009 was $1.98
million. Without these acquisitions Systems Division’s revenue decreased $24.14
million, or 15.5%, to $131.15 million for the nine months ended May 31, 2009,
compared to $155.29 million for the nine months ended May 31, 2008. Procurement
services revenue decreased $25.46 million, or 17.5%, to $120.38 million for the
nine months ended May 31, 2009, compared to $145.85 million for the nine months
ended May 31, 2008. This decrease is mainly due to an overall decrease in our
client’s IT spending, particularly in various departments of the U.S. government
and agencies and commercial business and various governmental agencies in the
State of New Jersey, which was off-set by increase in our education business
attributable to various computer roll-out projects for school districts in
Florida and Georgia. We believe that this decrease in revenues can be attributed
to the current economic downturn and the deferral of some larger computer
roll-out projects to future quarters. Services and consulting revenue for the
Systems Division increased $1.33 million, or 14.0%, to $10.77 million for the
nine months ended May 31, 2009, compared to $9.44 million for the nine months
ended May 31, 2008. This increase is mainly attributable to various installation
and configuration related services associated with computer roll-out projects
for school districts in Florida, Georgia and various governmental agencies in
the State of New Jersey during the nine months ended May 31, 2009.




30




During the nine months ended May
31,2009and 2008, U.S. governmental department
and agency related revenues represented approximately 47.4% and 56.7% of total
EIS division’s revenues, respectively. These clients include the Department of
Defense, Department of Justice, Department of Homeland Security, Department of
Health and Human Services, Department of Agriculture and Department of Commerce.
Revenues from various civilian and military U.S. governmental departments and
agencies decreased by approximately $24.83 million during the nine months ended
May 31, 2009 compared with the nine months ended May 31, 2008. This is mainly
due toa large computer
hardware sale to the Department of the Air Force of approximately $15.36 million
and Federal Bureau of Prisons of approximately $10.98 millionin  the nine months ended May
31, 2008. The same clients only accounted for approximately $2.76 million and
$3.97 million in revenue for the three months ended May 31, 2009,
respectively.




Revenues
from commercial clients decreased by approximately $15.52 million during the
nine months ended May 31, 2009 compared with the nine months ended May 31, 2008.
This decrease is mainly due to the current economic downturn that caused
reductions in technology and discretionary spending by our commercial
clients.





During
the nine months ended May 31, 2009, revenues from our education business
increased by approximately $19.54 million compared with the nine months ended
May 31, 2008. This increase is attributable to increase in various computer
roll-out projects for school districts in Florida and Georgia during the nine
months ended May 31, 2009.





EGS





EGS
division’s total revenues increased $25.72 million, or 1095.9%, to $28.06
million for the nine months ended May 31, 2009, compared to $2.35 million for
the nine months ended May 31, 2008. This increase is primarily attributable to
acquisitions of eBAS and Aveeva on August 13, 2008. Without these acquisitions
of eBAS and Aveeva, Luceo’s revenue for the nine months ended May 31, 2009 was
$7.36 million compared to $2.35 million for the period from March 20, 2008
through May 31, 2008. The increase is primarily due to comparing a full nine
months of operations to a shorter stub period in 2008.





Gross
Profit




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




Nine months endedMay 31, 2009
                          
                          
                          May 31, 2008(Unaudited)Gross
      ProfitEIS
                          
                          $
                          17,398,562
                          
                          
                          $
                          18,821,168EGS
                          
                          
                          5,168,141
                          
                          
                          
                          490,601Gross
      Profit
                          
                          $
                          22,566,703
                          
                          
                          $
                          19,311,769




EIS




Aggregate gross profit for our EIS
division decreased $1.42 million, or 7.6%, to $17.40 million for the nine months
ended May 31, 2009 as compared to $18.82 million for the nine months ended May
31, 2008. EIS division’s gross profit includes gross profit from Systems
Division and KOAN-IT which was acquired on February 12, 2009 and the assets of
EMS which were acquired on May 12, 2009.  KOAN-IT’s gross profit
(including profit derived from the assets acquired from EMS) for the nine months
ended May 31, 2009 was $362,666. This decrease is mainly due to a decrease in
procurement services revenue as discussed in the total revenue
section.


31




Measured
as a percentage of revenues, our gross profit margin for EIS division increased
to 13.1% of our EIS division’s revenues for the nine months ended May 31, 2009
from 12.1% for the nine months ended May 31, 2008. This increase is primarily a
result of an increase in our service and consulting gross profit margin
attributable to higher utilization of our engineering resources and increase in
our services and consulting revenue associated with computer roll-out projects
for school districts in Florida, Georgia and various governmental agencies in
the State of New Jersey during the nine months ended May 31, 2009.





EGS





EGS
division’s gross profit increased $4.68 million, or 953.4%, to $5.17 million for
the nine months ended May 31, 2009, compared to $490,601 for the nine months
ended May 31, 2008. This increase is primarily attributable to the acquisitions
of eBAS and Aveeva on August 13, 2008. Without these acquisitions of eBAS and
Aveeva, Luceo’s gross profit for the nine months ended May 31, 2009 was $1.09
million compared to $490,601 for the period from March 20, 2008 through May 31,
2008. The increase is primarily due to comparing a full nine months of
operations to a shorter stub period in 2008.





Measured
as percentages of revenues, our gross profit margin for EGS division decreased
to 18.4% of our EGS division’s revenues for the nine months ended May 31, 2009
from 20.9% for the nine months ended May 31, 2008. We believe this decrease is
mainly due to lower utilization of our engineering resources.





Selling, General and
Administrative Expenses





EIS




Selling, general and administrative
expenses for our EIS division decreased by $828,869, or 5.3% to $14.88 million
for the nine months ended May 31, 2009, compared to $15.71 million for the nine
months ended May 31, 2008. EIS division’s selling, general and administrative
expenses includes selling, general and administrative expenses from Systems
Division and KOAN-IT which was acquired on February 12, 2009 and the assets of
EMS which were acquired on May 12, 2009.  KOAN-IT’s selling, general
and administrative expenses (including selling, general and administrative
expenses related to the assets acquired from EMS) for the nine months ended May
31, 2009 was $453,884. Without these acquisitions Systems Division’s selling,
general and administrative expenses decreased by $1.28 million, or 8.2% to
$14.43 million for the nine months ended May 31, 2009, compared to $15.71
million for the nine months ended May 31, 2008. A portion of the $1.28 million
decrease represented the recovery of $269,882 in professional
fees.  The Company previously expensed these professional fees
associated with defending the Company’s tax positions during the IRS’ 2003 and
2004 tax audits and appeals process.  During the quarter ended
November 30, 2008, the Company recognized the recovery of these previously paid
professional fees based on an indemnification right associated with the April
2004 Westwood merger.


32





Without
the reduction of $269,882 in selling, general and administrative expenses
associated with the indemnification claim, Systems Division’s selling, general
and administrative expenses would have decreased by $1.01 million, or 6.4% for
the nine months ended May 31, 2009.  This decrease in selling, general
and administrative expenses for the nine months ended May 31, 2009 is mainly due
to a decrease in sales commission of approximately $495,000 and bonus expense by
approximately $298,000, which is directly related to the decrease in our gross
profit as discussed in the gross profit section.  The remaining
approximately $219,000 decrease in selling, general and administrative expenses
for the nine months ended May 31, 2009 is primarily attributable to decrease in
various expense categories such as travel, lodging, telephone, office expenses,
credit card bank fees, recruiting, professional fees and merger and acquisition
related costs.  In January 2009, we implemented wage reductions to all
employees whose earnings are expected to be greater than $75,000 annually, froze
salary increases and implemented many other cost containment measures. During
the nine months ended May 31, 2009, we eliminated approximately 24 positions
from various selling and administrative departments in the Systems Division and
incurred approximately $208,000 in severance costs that are included in selling,
general and administrative expenses for the nine months ended May 31,
2009.





EGS





EGS
division’s selling, general and administrative expenses increased $2.94 million,
or 942.9%, to $3.25 million for the nine months ended May 31, 2009, compared to
$311,529 for the nine months ended May 31, 2008. This increase is primarily
attributable to the acquisitions of eBAS and Aveeva on August 13, 2008. Without
these acquisitions of eBAS and Aveeva, Luceo’s selling, general and
administrative expenses for the nine months ended May 31, 2009 was $808,512
compared to $311,529 for the period from March 20, 2008 through May 31, 2008.
The increase is primarily due to comparing a full nine months of operations to a
shorter stub period in 2008.





Rent Expense-Related
Party





EIS





We occupy
approximately 42,000 square feet of office and warehouse space in Springfield,
New Jersey. This space is leased from a limited liability company owned by
certain directors and officers of the Company and their related family members.
The original lease term was through April 2009 with monthly base rent of
$15,000. We renewed the lease for an additional five years term through April
2014, with monthly base rent of $17,500. During the nine months ended May 31,
2009 and 2008, we recorded $137,250 and $135,000 in expense under this lease,
respectively.





We occupy approximately 26,000 square
feet of office and warehouse space in a 70,000 square foot building in Suwannee,
GA.  This space is leased from a limited liability company in which
certain officers of our company are passive investors with an approximately 20%
equity interest. The lease term is for 5 years with monthly base rent of
$15,832. During the nine months ended May 31, 2009 and 2008, we recorded expense
under this lease totaling $142,488 and $135,089,
respectively.


33




EGS




We occupy
approximately 20,000 square feet of office space in Fremont, CA.  This
space is leased from the spouse of the President of eBAS/Aveeva.  The
lease term is for 3 years with monthly base rent of $20,000. In March 2009,wesubleased portion of the building for a
monthly rent of $2,500on
month-to-month basis to reduce costs.During the nine months ended May
31, 2009, we recorded $172,500 in expense under this lease.




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





Depreciation and
Amortization





EIS





Depreciation
and amortization expense for our EIS division increased by 19.1%, or $173,873,
to $1.08 million for the nine months ended May 31, 2009, compared to $910,752
for the nine months ended May 31, 2008.  EIS division’s depreciation
and amortization expense includes depreciation and amortization expense from
Systems Division and KOAN-IT which was acquired on February 12, 2009 and the
assets of EMS which were acquired on May 12, 2009.  KOAN-IT’s
depreciation and amortization expense (including depreciation and amortization
expense related to the assets acquired from EMS) for the nine months ended May
31, 2009 was $73,009. Without these acquisitions, Systems Division’s
depreciation and amortization expense increased by $100,864, or 11.1% to $1.01
million for the nine months ended May 31, 2009, compared to $910,752 for the
nine months ended May 31, 2008. This increase in depreciation expense is mainly
due to depreciation expense associated with our purchase of phone system,
computer equipment, a document management system and other modifications made to
our accounting systems made during the period ended May 31, 2009.





As of May 31, 2009, intangible assets of
the EIS division consisted of the estimated value ascribed to customer
relationships of$9,897,881less accumulated amortization of$2,306,218; the estimated value ascribed to
non-compete of$28,095less accumulated amortization of$1,682; and the estimated value ascribed to
trademarks of$168,569less accumulated amortization of$10,091. As of August 31, 2008 intangible
assets of the EIS consisted of the estimated value ascribed to customer
relationships of $8,661,712 less accumulated amortization of $1,809,288. The
assets ascribed to customer relationships are being amortized on a straight-line
basis over 6 to 15 years and noncompete covenants and trademarks are being
amortized on a straight-line basis over 5 years.  Amortization expense for
the EIS division was$508,704, and $435,263 for the nine months ended
May 31, 2009 and 2008, respectively.





EGS





EGS
division’s depreciation and amortization expense increased $615,997, or 1847.3%,
to $649,343 for the nine months ended May 31, 2009, compared to $33,346 for the
nine months ended May 31, 2008. This increase is primarily attributable to the
acquisitions of eBAS and Aveeva on August 13, 2008. Without these acquisitions
of eBAS and Aveeva, Luceo’s depreciation and amortization expenses for the nine
months ended May 31, 2009 was $141,906 compared to $33,346 for the period from
March 20, 2008 through May 31, 2008. This increase in depreciation expense is
mainly due to depreciation expense associated with our purchase of computer
equipment made during the current fiscal year and increased amortization expense
is due to nine month period in the current reporting period compared to the
period from March 20, 2008 through May 31, 2008.


34


As of May 31, 2009, intangible assets of
the EGS division consisted of the estimated value ascribed to customer
relationships of $4,200,000 less accumulated amortization of $638,523 andthe estimated value ascribed to
non-compete of $370,000 less accumulated amortization of $67,311. As of August
31, 2008 intangible assets of the EGS division consisted of the estimated value
ascribed to customer relationships of $4,200,000 less accumulated amortization
of $95,192 and the estimated value ascribed to non-compete of $370,000 less
accumulated amortization of $11,811. The assets ascribed to customer
relationships are being amortized on a straight-line basis over 5 to 9 years and
noncompete covenants and trademarks are being amortized on a straight-line basis
over 5 years. Amortization expense for the EGS division was $199,609 for the
nine months ended May 31, 2009, and $33,346 for the period from March 20, 2008
through May 31, 2008. Amortization expense for the EGS division was$598,831for the nine months ended May 31, 2009,
and $33,346 for the period from March 20, 2008 through May 31,
2008.





Operating
income





EIS




Operating income for our EIS division
for the nine months ended May 31, 2009 decreased by 40.3%, or $777,260, to $1.15
million, compared to operating income of $1.93 million for the nine months ended
May 31, 2008. EIS division’s operating income (loss) includes operating income
(loss) from Systems Division and KOAN-IT which was acquired on February 12, 2009
and the assets of EMS which were acquired on May 12, 2009.  KOAN-IT’s
operating income (loss) (including operating income (loss) attributable to the
assets acquired from EMS) for the nine months ended May 31, 2009 was ($164,227).
Without these acquisitions Systems Division’s operating income decreased
$613,033, or 31.8%, to $1.31 million for the nine months ended May 31, 2009,
compared to $1.93 million for the nine months ended May 31, 2008. This decrease
in operating income is mainly due to decreased revenues and gross profit as
discussed in the Total Revenue and Gross Profit sections
above.





EGS




Operating income for our EGS division
for the nine months ended May 31, 2009 increased by 653.1%, or $951,721, to
$1.10 million, compared to operating income of $145,727 for the nine months
ended May 31, 2008. Without the acquisitions of eBAS and Aveeva, Luceo’s
operating income for the nine months ended May 31, 2009 was $141,521 compared to
$145,727 for the period from March 20, 2008 through May 31, 2008. The decrease
in operating income was attributable to approximately $132,500 in retention
bonuses paid to business development and technical personnel during the nine
months ended May 31, 2009.





Interest
expense





EIS





Interest
expense for the EIS division decreased by 52.9%, or $433,673, to $386,046 for
the nine months ended May 31, 2009, compared to $819,718 for the nine months
ended May 31, 2008.  This is primarily attributable to lower balance
on various notes payable and a lower average interest rate charged on the line
of credit attributable to a decrease in the prime rate during this
period.




35




EGS





Our EGS
division’s interest expense for the nine months ended May 31, 2009 was $307,308.
This interest expense is related to acquisitions debt from the line of credit
and 8% subordinated note payable to Mr. Natarajan as part of the consideration
for the acquisition of Luceo.





Provision for income
taxes





EIS





We
recorded an income tax expense of $306,827 for the nine months ended May 31,
2009 as compared to $551,670 for the nine months ended May 31, 2008. The
effective tax rate was 40.4% for the nine months ended May 31, 2009 versus 46.6%
for the nine months ended May 31, 2008. The higher tax rate in 2008 was
primarily the result of FIN 48 interest expense recorded as income taxes, a tax
benefit shortfall from stock compensation grants in 2008, increased income tax
expense and the effect of permanent differences between our financial statements
and income tax returns.





EGS





We
recorded an income tax expense of $348,107 for the nine months ended May 31,
2009 as compared to $62,556 for the nine months ended May 31, 2008. The
effective tax rate was 44.1% for the nine months ended May 31, 2009 versus 47.2%
for the nine months ended May 31, 2008. The decrease in effective tax rate is
due to permanent differences between our financial statements and income tax
returns.





Recently
Issued Accounting Standards




Fair
Value Measurements




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




36




Fair
Value Option for Financial Assets and Liabilities




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





Noncontrolling
Interests in Consolidated Financial Statements





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





Business
Combinations





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures the assets acquired, liabilities assumed, and
any  noncontrolling interest in the acquire. The provisions of SFAS
141(R) are effective for our business combinations occurring on or after
September 1, 2009. During nine months ended May 31, 2009, the Company
capitalized total of approximately $328,000 in professional fees associated with
the acquisition of KOAN-IT and the acquisition of assets of
EMS.  Under the provisions of SFAS 141(R) effective September 1, 2009,
professional fees associated with acquisitions will be expensed.





Determination
of the Useful Life of Intangible Assets





In April
2008, the FASB issued Staff Position No. 142-3, Determination of the Useful
Life of Intangible Assets (“FSP No. 142-3”). FSP No. 142-3 amends the
factors to be considered in assumptions used to determine the useful lives of
recognized intangible assets recognized under SFAS No. 142. The new
guidance applies to intangible assets with contractual lives that are acquired
individually or with a group of assets as well as those assets acquired in a
business combination. The new guidance is effective for fiscal years beginning
after December 15, 2008 and subsequent interim periods. We will adopt the
statement on September 1, 2009 which is the beginning of our 2010 fiscal
year. We do not expect adoption of FSP No. 142-3 to have a significant
impact on our consolidated financial position or results of
operations.


37




Liquidity
and Capital Resources




Cash at May 31, 2009 was $2.99 million,
which represented an increase of $961,678 from $2.02 million at August 31, 2008.
We are a net borrower; consequently, we believe our cash balance must be viewed
along with the available balance on our line of credit.  Borrowings
under our line of credit at May 31, 2009 increased to $10.78 million from $8.58
million at August 31, 2008.  As of May 31, 2009, our net working
capital (defined as the excess of our current assets over our current
liabilities) was approximately $746,557 less than it was at August 31
2008.  The decrease in working capital and increase in line of credit
is mainly due to the acquisition of KOAN-IT on February 12, 2009 and acquisition
of certain assets of EMS on May 12, 2009. The purchase price for the acquisition
of KOAN-IT, consisting of cash at closing including capitalized professional
fees less the amount of cash acquired amounted to $896,960, which was funded
through  borrowings under the Credit Facility and the issuance of a
subordinated promissory notes in an aggregate principal amount of $407,683 which
is payable on the 12 month anniversary of the
closing.The
purchase pricefor the
acquisition of certain assets of EMSconsisted
of $150,000 cash at closing.Additionally, the Company capitalizedprofessional fees of $82,412that were associated with the
acquisition.The acquisition was funded through
borrowings under the Credit Facility with the Lender. Additionally, we paid approximately
$2.25 million in principal payments on various notes payable to related-parties
on April 16, 2009 (footnote 9). We funded these payments from borrowing under
the Credit Facility.




In December 2006, the Company, Emtec NJ,
Emtec LLC, and Emtec Federal (collectively, the “Borrower”), entered into a Loan
and Security Agreement with De Lage Landen Financial Services, Inc. (the
“Lender”) pursuant to which the Lender provides the Borrower a with a revolving
credit loan and floor plan loan (the “Credit Facility”). The Credit Facility
provides for aggregate borrowings of the lesser of $32.0 million or 85%of Borrower’s eligible
accounts receivable, plus 100% of unsold inventory financed by the Lender, minus
a $5.0million reserve. The
floor plan loan portion of the Credit Facility is for the purchase of inventory
from approved vendors and for other business purposes. The Credit Facility
subjects the Borrower to mandatory repayments upon the occurrence of certain
events as set forth in the Credit Facility.




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




In August 2008, the Lender eliminated
the requirement of $5.0 million reserve from the calculation of eligible
accounts receivable, plus 100% of unsold inventory financed by the
Lender.




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




38




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




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




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




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





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





As of May
31, 2009, we had an outstanding balance of $10.78 million under the revolving
portion of the Credit Facility and $3.47 million of outstanding (included in the
Company’s accounts payable) balances plus $366,700 in open approvals under the
floor plan portion of the Credit Facility with Lender. As of May 31, 2009, we
had net availability of $7.27 million under the revolving portion of the Credit
Facility and additional net availability of $10.11 million under the floor plan
portion of the Credit Facility.





As of May
31, 2009, the Company determined that it was in compliance with its financial
covenants with the Lender.





As of May 31, 2009, we had open term
credit facilities with our primary trade vendors, including aggregators and
manufacturers, of approximately $27.20 million with outstanding principal of
approximately $13.92 million. Under these lines, we are typically obligated to
pay each invoice within 30-45 days from the date of such invoice. These credit
lines could be reduced or eliminated without notice and this action could have a
material adverse affect on our business, result of operations, and financial
condition.


39


Capital expenditures of $794,838 during
the nine months ended May 31, 2009 related primarily to the purchase and
implementation of the voice over internet provider (VOIP) phone system, purchase
of computer equipment for internal use, purchase of adocument management system and software
costs to upgrade various modules of our accounting systems.We anticipate our total capital
expenditures for our fiscal year ending August 31, 2009 will be approximately
$1,000,000, of which approximately $250,000 will be for the upgrade of our
organizational computer system and the remaining $750,000 will primarily be for
the purchase of the VOIP phone system, the purchase of computer equipment for
internal use, furniture, delivery trucks and leasehold
improvements.




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





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




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





Critical
Accounting Policies




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




Revenue
Recognition




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




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




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




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




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




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




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




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


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





Trade
Receivables


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




Inventories




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




Goodwill and Intangible
Assets




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




Intangible
assets at May 31, 2009 and August 31, 2008 consisted of the value ascribed to
customer relationships and noncompete covenants.  The assets ascribed
to customer relationships are being amortized on a straight-line basis over 5 to
15 years and five years for noncompete covenants.  Intangible assets
are tested for recoverability whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable in accordance with
Statement of Financial Accounting Standards No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets.”  Recoverability of
long-lived assets is assessed by a comparison of the carrying amount to the
estimated undiscounted future net cash flows expected to result from the use of
the assets and their eventual disposition.  If estimated undiscounted
future net cash flows are less than the carrying amount, the asset is considered
impaired and a loss would be recognized based on the amount by which the
carrying value exceeds the fair value of the asset.





Rebates





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


42





Income
Taxes




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


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Item
      3.
            Quantitative
      and Qualitative Information About Market
Risk




We do not
engage in trading market risk sensitive instruments and do not purchase hedging
instruments or “other than trading” instruments that are likely to expose us to
market risk, whether interest rate, foreign currency exchange, commodity price
or equity price risk.  We have entered into no forward or future
contracts, purchased no options and entered into no swaps.  Our
primary market risk exposures are those of interest rate
fluctuations.  A change in interest rates would affect the rate at
which we could borrow funds under our revolving credit facility.  Our
balance on the line of credit at May 31, 2009 was approximately $11.0 million.
Assuming no material increase or decrease in such balance, a one percent change
in the interest rate would change our interest expense by approximately $110,000
annually.


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Item
      4T.
            Controls
      and Procedures




(a) Our
management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of May 31,
2009.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
including the accumulation and communication of disclosures to the Company’s
Chief Executive Officer and Chief Financial Officer as appropriate to allow
timely decision regarding required disclosure, were effective to provide
reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the SEC. It should be noted that the design of any system of controls
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving the
stated goals under all potential future conditions, regardless of how
remote.




(b) There
has not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13a-15(d) under the Exchange Act
that occurred during the quarter ended May 31, 2009 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
6.  Exhibits




Exhibit 10.1 –
Employment Agreement between the Company and Gregory P. Chandler dated April 30,
2009.




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




Exhibit 31.2 - Rule
13a-14(a)/15d-14(a) Certification of Gregory P. Chandler, Principal Financial
Officer, of Emtec, Inc. dated July 15, 2009.




Exhibit 32.1 -
Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of
Emtec, Inc. dated July 15, 2009.




Exhibit 32.2 -
Section 1350 Certificate of Gregory P. Chandler, Principal Financial Officer, of
Emtec, Inc. dated July 15, 2009.


46


SIGNATURES





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





EMTEC,
      INC.By:
                /s/  DINESH R.
    DESAIDinesh
      R. DesaiChairman
      and ChiefExecutive
      Officer(Principal
      Executive Officer)By:
                /s/  Gregory P.
      ChandlerGregory
      P. ChandlerChief
      Financial Officer(Principal
      Financial Officer)Date:
      July 15, 2009




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