UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549



FORM10-K

(Mark One)

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|----------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------
|S                                                                 |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934    
|FOR THE FISCAL YEAR ENDED AUGUST 31, 2006OR                      
|£                                                                 |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-32789



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



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|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State of incorporation or organization)                                         |  | 87-0273300(I.R.S. Employer Identification No.)
|572 Whitehead Road, Bldg. #1 Trenton, New Jersey(Address of principal executive offices) |  | 08619(Zip Code)                               

(609) 528-8500(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:

|                             
|-----------------------------
|Title of class               
|Common Stock, $0.01 par value



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes£NoR

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes£NoR

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. YesRNo£

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or
  information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.£

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large accelerated filer£Accelerated filer£Non-accelerated filerR

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 28, 2006 was approximately $5,828,544 computed by reference to the closing price of
  the common stock for that date.

As of November 13, 2006, there were outstanding 14,385,286 shares of the registrant’s common stock.



Documents Incorporated by Reference

Portions of the following document are incorporated by reference in the Part of this report indicated below:

Part IIIRegistrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders





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EMTEC, INC.2006 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS
PART IItem 1.
    
    Business
    
    1Item 1A.
    
    Risk Factors
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    13Item 2.
    
    Properties
    
    13Item 3.
    
    Legal Proceedings
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    14PART IIItem 5.
    
    Market for the Registrant’s Common Equity and Related Stockholder Matters
    
    16Item 6.
    
    Selected Financial Data
    
    16Item 7.
    
    Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
    
    17Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    31Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial
      Disclosure
    
    53Item 9A.
    
    Controls and Procedures
    
    54Item 9B.
    
    Other Information
    
    54PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    55Item 11.
    
    Executive Compensation
    
    55Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    
    55Item 13.
    
    Certain Relationships and Related Transactions
    
    55Item 14.
    
    Principal Accountant Fees and Services
    
    55PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    56Signatures
    
    60i

References in this Annual Report to “we,” “us,” or “our” are to Emtec, Inc. and its subsidiaries, unless the context specifies or requires otherwise.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). In this
  Annual Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,”
  expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those words and other comparable words. You should be aware that those statements are only our
  predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks discussed in this Annual Report for the year ended
  August 31, 2006 and other reports or documents that we file from time to time with the SEC. Those factors may cause our actual results to differ materially from any of our forward-looking statements. All
  forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business
  developments, the impact of which may cause us to alter our marketing, capital expenditure, or other budgets, which may in turn affect our business, financial position, results of operations, and cash flows.
ii

PART I
Item 1. Business
Introduction
Emtec, Inc. is an information technology (“IT”) company providing consulting, services and products to commercial and education clients, the U.S. Federal Government, as well as state and local authorities.
  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 seeking to increase the portion of our revenues that are derived from IT services.
Over the past two decades, we have built strong relationships with leading manufacturers, such as Cisco, HP, LENOVO, Microsoft, Sun Microsystems, Dell, and Veritas, thereby enabling us to provide cutting-
  edge, scalable, reliable and secure solutions. This development along with our background in information technology, positions us as a single-source provider of information systems, and network solutions.
Our clients are primarily large business organizations, federal, state and local governments, local school districts, and other large and mid-sized companies located principally in the New York/New Jersey
  Metropolitan area and the Southeastern United States. We service our client base from leased facilities in New Jersey, New York, Virginia, Georgia, and Florida as well as five sales offices in the South and
  Western United States. We provide IT products to federal government civilian and military locations throughout the United States.
Our executive offices are located at 572 Whitehead Road, Building #1, Trenton, New Jersey; telephone: (609) 528-8500. Our website is www.emtecinc.com. We have made available free of charge through our
  website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
  Exchange Act of 1934 as soon as reasonably practicable after such material was electronically filed with, or furnished to, the SEC. The information on our website is not part of this Annual Report.
Recent Developments
The Merger
On August 5, 2005, we completed our merger pursuant to the Agreement and Plan of Merger dated as of July 14, 2005 (the “Merger Agreement”), by and among Emtec, Inc., a Delaware corporation (“Old
  Emtec”), Emtec Viasub LLC, a Delaware limited liability company and a wholly-owned subsidiary of Old Emtec (“MergerCo”), and Darr Westwood Technology Corporation, a Delaware corporation (“Darr”).
  Pursuant to the terms of the Merger Agreement, Darr merged with and into MergerCo (the “Merger”) and became a part of the consolidated entity that retained the name Emtec, Inc. ( the “Company”).
The Merger has been accounted for as a capital transaction followed by a recapitalization. Our management concluded that the transaction resulted in a change in control of the Company and that the Merger
  should be accounted for as a reverse acquisition. Accordingly, Darr is deemed to be the acquiring company for financial reporting purposes and its financial statements became our historical financial statements. In
  conjunction with the Merger, we changed our fiscal year end from March 31 to August 31.
Upon completion of the Merger, all of the shares of Darr common stock issued and outstanding immediately prior to the Merger were exchanged for 9,528,110 shares of our common stock and the former
  Darr stockholders were issued warrants to purchase an additional 10% of our common stock calculated on a fully diluted basis for an aggregate exercise price of $3,695,752, measured on a post exercise basis.
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The Darr/Westwood Acquisition
Prior to the Merger, Darr was a holding company formed in April 2004 in order to effectuate the purchase of all of the outstanding capital stock of Westwood Computer Corporation (“Westwood”). Darr’s
  acquisition of Westwood’s capital stock was completed on April 16, 2004 (the “Westwood Acquisition”). Westwood is engaged in the sale and service of computers and peripherals to customers which include
  departments of the United States, state and local governments and commercial businesses throughout the United States.It has been recognized as one of the top 20 General Services Administration (“GSA”) vendors
  in the IT industry during each of the past nine years. Westwood has additional locations in New York and Virginia, as well as five sales offices in the South and Western United States.
The majority of Westwood’s sales are drawn from various U.S. governmental departments and agencies. These customers include the Department of Defense, Department of Justice, Department of Homeland
  Security, Department of Health and Human Services, Department of Agriculture, Department of Commerce and the GSA. During the last three fiscal years ended on August 31, 2006, August 31, 2005 and 2004,
  U.S. governmental department and agency related sales accounted for approximately 52.6%, 76.1%, and 75.6% of our total revenues, respectively. The federal government business typically experiences increased
  activity during the months August through November.
The government utilizes a variety of contracting methods, including negotiated bids, pre-negotiated blanket purchase agreement contracts and open market procurements when purchasing from Westwood.
  Westwood participate in formal government bids for all contract types, and also processes orders received on existing contracts on an ongoing basis.
Substantially, all of these bids are awarded on a “best value” to the government basis (which depending on the bid can be a combination of price, technical expertise, past performance on other government
  and commercial contracts and other factors). Westwood seeks to use partner contacts, purchasing power, distribution strength, value-added services and procurement expertise to compete successfully on these bids.
  These major procurements can generate millions of dollars in annual revenue, span multiple years and provide government personnel with an expedited method of purchasing from Westwood.
Westwood holds a GSA designated Schedule 70 contract for the sale of IT products and services. Schedule 70 contracts are multi-award schedule contracts managed by the GSA IT Acquisition Center. The
  current contract is valid through March 31, 2007 with two five-year renewals. Additionally, Westwood holds two Indefinite Delivery Indefinite Quantity (“IDIQ”) contracts that are valid for all federal government
  agencies. An Electronic Commodity Store III (“ECS III”) prime contract issued to Westwood by the National Institute of Health provides various governmental agencies with an efficient cost-effective means for
  buying commercial products. The ECS-III contract is valid through December 2011. The GSA contracts provide all government agencies, and non governmental agencies authorized by GSA, with an efficient cost-
  effective means for buying commercial products. GSA and IDIQ purchasers may place unlimited orders for products under GSA and IDIQ contracts. The GSA contracts contain a most favored customer clause
  requiring us to provide GSA our best pricing. The IDIQ contracts contain similar clauses that require us to maintain pricing on a level similar to GSA with some volume discounting variations allowed by federal
  acquisition regulations. Westwood is certified as a “small business” on all of these contracts, and that status is valid for the life of the contract, subject to potential regulatory changes that may be implemented by
  SBA and OFPP requiring recertification based on other criteria. If Westwood’s size status changes relative to any of these contracts, and we were to recertify as a “large business”, the contracts do remain in force.
  The impact of a change in our current size certification on these contracts and their potential revenue contribution is not considered significant at this time.
Individual GSA eligible ordering agencies may enter into GSA-authorized Blanket Purchase Agreements (“BPAs”) with GSA contract holders. BPA’s are similar to second-tier contracts under a contractor’s
  GSA contract. BPAs enable agencies to obtain better pricing based on volume ordering and they decrease an agency’s administrative costs by streamlining the ordering process.
Westwood maintains number of Federal Supply Schedule BPAs that are authorized under its GSA Schedule 70 contract. GSA authorized BPAs typically include the same terms and conditions as those applied
  to standard GSA orders, with agency specific additions. The products offered on the BPAs are typically a subset of the products offered on Westwood’s GSA Schedule, often at prices which are
2

pre-negotiated to be lower than those available on the standard GSA schedules, in return for volume purchasing commitments by the customer. Westwood normally enters into separate agreements with partners to
  offer reduced BPA prices to the government. The BPAs are agency specific and allow us to focus specific partner relationships on specific customers.
Westwood maintains a Small business designation with the federal government under its GSA Schedule, ECS III, ADMC-2 and all current BPAs held based upon our size status (headcount based) at the time
  of the contract’s original award date. As a small business, Westwood enjoys a number of benefits, including being able to compete for small business orders, qualifying as a small business subcontractor, bidding
  pursuant to small purchase procedures directed to non-manufacturer small business, and offering government agencies an avenue to meet their internal small business purchase goals.
In certain cases, Westwood initiates contract activity as both a primary contractor and a sub contractor where we are not qualified as a small business based on government criteria that are revenue based or
  head count based. It is our belief that future growth in headcount will provide sufficient additional capabilities and access to a broader customer base to more than offset any potential loss of business activity that
  may be based on a small business designation. Westwood expects to continue to operate within business segments as both a large business and a small business simultaneously.
Accounting Treatment
The issuance of our common stock in connection with the Merger gave the former Darr shareholders shares equal to approximately 55.7% of our total outstanding common stock post-merger and resulted in a
  change of control for Old Emtec. Accordingly, for financial reporting purposes, the Merger was treated as an acquisition of Emtec by Darr and a recapitalization of Darr and the registrant’s historical financial
  statements for periods prior to the Merger become those of Darr. In addition, for financial accounting purposes, the Westwood Acquisition was treated as an acquisition of Darr by Westwood with the result that the
  pre-Westwood Acquisition financial statements of Darr, and therefore, the Registrant are those of Westwood. As a result, the consolidated financial statements presented in this report consist of following financial
  statements:
1.
    
    
    
    Emtec for the year ended August 31, 2006 including the accounts and transactions of the company for the period from September 1, 2005 to August 31, 2006;2.
    
    
    
    Darr for the year ended August 31, 2005 (including the accounts and transactions of Old Emtec for the period from August 6, 2005 to August 31, 2005);3.
    
    
    
    Darr (following the Westwood Acquisition on April 16, 2004) for the period from April 17, 2004 to August 31, 2004 (the Darr Successor Period);4.
    
    
    
    Westwood for the period from September 1, 2003 to April 16, 2004 (the Darr Predecessor Period).Industry Background
The broad market in which we compete is the provision of IT services and products. This marketplace consists of traditional IT services such as hardware and software procurement, life-cycle services, and
  network consulting, as well as internet services such as web enablement, remote network monitoring, help desk services, and information security.
As the market for IT products has matured over the past several years, price competition has intensified. That factor, combined with abbreviated product lifecycles, has forced IT product manufacturers to
  pursue lower cost manufacturing and distribution strategies. Resellers who were able to serve the needs of corporate end users requiring diverse brands of products and related IT services were initial beneficiaries
  of this heightened competition. More recently, however, continuing competition and manufacturers’ renewed efforts to improve their cost structures have led to both consolidations and business failures among
  resellers. Manufacturers have shifted from exclusive distribution partners to “open sourcing” and some have begun direct selling efforts with a view toward capturing market share from resellers.
At the same time that the market for IT products is consolidating, the market for IT services is expanding. Many companies have become increasingly dependent on the use of IT as a competitive tool in
  today’s business environment. The need to distribute and access data on a real-time basis throughout an
3

organization and between organizations has led to the rapid growth in network computing infrastructures that connect numerous and geographically dispersed end users through local and wide area networks. This
  growth has been driven by the emergence of industry standard hardware, software, and communications tools, as well as the significant improvement in the performance, capacity, and utility of such network-based
  equipment and applications.
The decision-making process that confronts companies when planning, selecting, and implementing IT infrastructure and services continues to grow more complex. Organizations are continually faced with
  technology obsolescence and must design new networks, upgrade, and migrate to new systems. As a result of the rapid changes in IT products and the risks associated with the commitment of large capital
  expenditures for products and services whose features and perceived benefits are not within the day-to-day expertise of operating management, many businesses increasingly are outsourcing some or all of their
  network management and support functions and are seeking the expertise of independent providers of IT products and services.
Regarding the federal government business, the U.S. federal government is one of the largest purchasers of IT products and services in the world and one of the largest users of outside contractors. The use of
  outside contractors is driven primarily by an effort to address specific skills needed by the federal government. There is high demand requirement for certain service capabilities such as security, storage, networking
  and integration. Engagements support mission specific goals rather than routine and deferrable office automation efforts. While the government will likely always support small and disadvantaged businesses, efforts
  toward shared data and IT functions across agencies should increase the need for vendors with scale as prime contractors. Federal IT spending growth is expected to outpace the growth of private sector spending.
Our Strategy
Our primary business objective is to become a leading single-source provider of high quality and innovative IT consulting, services and products. With the Merger, we believe we have created a strong, stable
  platform for growth and management depth. Through our strategic partners, we have an expanded array of products and technology solutions to offer our clients. We believe that by working with a single-source
  provider, organizations will be able to adapt more quickly to technological changes and reduce their overall IT costs. To this end, we are pursuing the following strategies:
Pursuing Strategic Acquisitions
We are seeking to expand our service offerings. We plan to enhance our base of technical and sales personnel, and to nurture and expand client relationships by means of acquisitions of companies whose
  businesses complement our businesses and, in particular, expand into the area of software consulting services. We intend to focus on companies with management teams who are willing to commit to long-term
  participation in our organization and who share our vision of continued growth.
Capitalizing on Existing Relationships
We have invested in training and committed resources to obtain company certifications from key industry manufacturers, and have entered into agreements with most of these manufacturers, such as Sun
  Microsystems, IBM, LENOVO, HP, Dell, CISCO, Microsoft, Novell and Citrix. These agreements grant us a nonexclusive right to purchase the manufacturer’s hardware and license its software for our internal
  business use and for commercial integration and resale. Typically, our agreements with such manufacturers, such as those with Sun Microsystems, IBM, LENOVO, CISCO, Microsoft, Novell and Citrix, provide for
  a one-year term, renewable by the parties for successive one-year terms and are terminable by either party on prior written notice ranging from 30 to 45 days. They generally do not contain financial terms for
  resale of the manufacturer’s products, which terms are separately governed by purchase orders.
Moreover, we believe that our history of satisfying the IT product requirements of our larger customers is facilitating the marketing of our broad range of services to this important segment of our clientele.
4

Our Business
IT Reseller
We are an authorized reseller of the products of many leading IT manufacturers, such as 3Com, CISCO, HP, Lenovo, IBM, Intel, Microsoft, NEC, Veritas, Novell, Dell, and Sun Microsystems. Such products
  include workstations, servers, networking and communications equipment, enterprise computing products, and application software. Our business depends in large part upon our ongoing access to well established
  aggregators, as well as directly with manufacturers to enable us to acquire IT products at competitive prices and on reasonable terms for resale to our customers. Typically, we have not entered into any long-term
  supply contacts with any of our suppliers, as we purchase computers, computer systems, components, and parts on a purchase order basis. In general, our agreements with any of our suppliers including
  manufacturers can be terminated by such companies at any time upon 30 days prior notice.
Through our vendor alliances, we provide our customers with competitive pricing and value-added services such as electronic product ordering, product configuration, testing, warehousing, and delivery. Our
  relationships with our suppliers allow us to minimize inventory risk by ordering products primarily on an as-needed basis. We believe that in most cases our ability to acquire products on a cost-plus basis affords
  us the opportunity to avail ourselves of prices lower than those that could be obtained independently from manufacturers or other vendors. We utilize electronic ordering and pricing systems that provide real-time
  status checks on the aggregators’ inventories and maintain electronic data interchange links to other suppliers. Our sales team is thereby able to schedule shipments more accurately and to provide electronically-
  generated client price lists.
We receive manufacturer rebates resulting from certain equipment sales. In addition, we receive volume discounts and other incentives from various suppliers. Our accounting policy is to reduce cost of
  revenues for rebates, discounts, and other incentives received from these suppliers. Except for products in transit or products awaiting configuration at our facility, we generally do not maintain large inventory
  balances. Our primary vendors limit price protection to that provided by the manufacturer (generally less than 30 days) and they restrict product returns, other than defective returns, to a percentage (the percentage
  varies depending on the vendor and when the return is made) of products purchased. Those returns must occur during a defined period, at the lower of the invoiced price or the current price, subject to the specific
  manufacturer’s requirements and restrictions.
Our IT reseller activities accounted for approximately for 87.6%, 89.9%, 93.0% and 96.0% of our total revenues for the twelve months ended August 31, 2006, August 31, 2005, the period ended August 31,
  2004 (successor period), and the period ended April 16, 2004 (predecessor period), respectively.
IT Services
Enterprise Computing Solutions: We offer a full spectrum of IT product acquisition and support services needed to support client/server environments, including product sourcing, network design and
  implementation, technical support, server consolidation, and clustering and load balancing for high availability.
Managed Services and Staff Augmentation Solutions: We manage and support customers’ networks through the utilization of help desk and network monitoring services as well as through our own on-site
  engineering resources. This allows organizations to focus the majority of their efforts on their businessesnot on managing their IT infrastructures.
Data Communications Solutions: We offer Local Area Network/Wide Area Network and data wireless connectivity, voice over IP and structured cabling solutions that are designed to enhance communication
  capabilities, while decreasing costs.
Data Access Solutions: We enable on-demand access to information from anywhere over any network; our mobility, messaging, and management solutions provide secure data access, increased business
  productivity, and reduced IT costs for any organization.
Data Storage Solutions: We offer storage needs assessments, solution recommendations with hardware, software and implementation project requirements, implementation and integration services, post-sales
  training, maintenance and support services.
5

Data Center: We consult and design a Data Center plan that addresses facility needs. We organize servers and workstations with modular universal racking systems that take into consideration long-term needs
  for air flow, security, power distribution and cable management.
Lifecycle Management Services:Our lifecycle management services are designed to provide customers with continuous availability of service and support throughout the lifecycle of their IT investments,
  including the full spectrum of IT product acquisition and support services needed to support server environments. Our services include:
•
    
    
    
    Evaluation and prioritization of business objectives to determine the best course of action for our customers;•
    
    
    
    Consultation with customers to identify the right IT products and services for their needs;•
    
    
    
    Leveraging our vendor relationships to quickly source the right combination of products;•
    
    
    
    Providing logistical support needed to deploy a major technology roll out; and•
    
    
    
    Providing continuous support to enable a client to improve end-user satisfaction, minimize downtime, and lower the total cost of ownership.K-12 Specialized Services for Student and Faculty Needs:We integrate top-quality curriculum software and computer products into the classroom. We have significant experience in building local area
  networks that link many campuses together. We also provide district-wide support and sustain Internet access to educational resources worldwide. We tailor our array of services to make the best use of limited
  funds.
Manufacturers Support Services Contracts:We offer manufacturer support service contracts that provide our clients with extended technical support, onsite hardware service and access to new software
  releases at a fixed price.
Our IT services activities accounted for approximately for 12.4%, 10.1%, 7.0% and 4.0% of our total revenues for the twelve months ended August 31, 2006, August 31, 2005, the period ended August 31,
  2004 (successor period) and the period ended April 16, 2004 (predecessor period), respectively.
Backlog
Since the majority of our sales are on a purchase order basis, we do not have a significant backlog of business. Accordingly, backlog is not material to our business or indicative of future sales.
Distribution
Through our vendor alliances, we provide our customers with competitive pricing and value-added services such as electronic product ordering, product configuration, testing, warehousing, and delivery. Our
  relationships with our suppliers allow us to minimize inventory risk by ordering products primarily on an as-needed basis. We believe that in most cases our ability to acquire products on a cost-plus basis affords
  us the opportunity to avail ourselves of prices lower than those that could be obtained independently from manufacturers or other vendors. We utilize electronic ordering and pricing systems that provide real-time
  status checks on the aggregators’ inventories and maintain electronic data interchange links to other suppliers. Our sales team is thereby able to schedule shipments more accurately and to provide electronically-
  generated client price lists. Typically, our agreements with any of our suppliers including manufacturers can be terminated by such companies at any time upon 30 days prior notice.
Marketing
Our marketing efforts are focused on:
•
    
    
    
    Broadening our public image as an IT service provider;•
    
    
    
    Promoting our offerings to current customers, prospects, partners, and investors;•
    
    
    
    Maintaining a constant flow of marketing communications to increase and maintain our market presence;•
    
    
    
    Driving prospects to our web site; and•
    
    
    
    Increasing overall inquiries and sales from all sources.6

Our marketing division is charged with sales lead generation. Through diverse efforts that include seminars, tradeshows, direct mail, telemarketing, a bi-monthly newsletter, and through our website we create
  multiple and frequent “touches” of our prospective customers. The primary goal is to increase the number of face to face meeting opportunities between our account team and prospective clients, and to drive
  additional opportunities through our sales pipeline.
Customers
Our clients are primarily large business organizations, federal, state and local governments, local school districts, and other large and mid-sized companies located principally in the New York/New Jersey
  Metropolitan area and the Southeastern United States. The majority of our sales are drawn from various civilian and military U.S. governmental departments and agencies. We service our client base from leased
  facilities in New Jersey, New York, Virginia, Georgia, and Florida as well as five sales offices in the South and Western United States. We provide IT products to federal government civilian and military locations
  throughout the United States.
Our governmental agency customers include the Department of Defense, Department of Justice, Department of Homeland Security, Department of Health and Human Services, Department of Agriculture,
  Department of Commerce and the GSA. During the last three fiscal years ended on August 31, 2006, August 31, 2005, and 2004, U.S. governmental department and agency related sales accounted for
  approximately 52.6%, 76.1%, and 75.6% of our total revenues, respectively. The federal government business typically experiences increased activity during the months August through November.
Competition
The IT services industry is highly competitive. Our competitors include established computer product manufacturers (some of which supply products to us), distributors, computer resellers, systems integrators,
  and other IT service providers. In addition, many computer product manufacturers also sell to customers through their direct sales organizations and certain of them have announced their intention to enhance such
  direct sales efforts.
Many of our current and potential competitors have longer operating histories and financial, sales, marketing, technical, and other resources substantially greater than we do. As a result, our competitors may be
  able to adapt more quickly to changes in client needs or to devote greater resources than we can to the sales of IT products and the provision of IT services. Such competitors could also attempt to increase their
  presence in our markets by forming strategic alliances with our other competitors or with our customers, offering new or improved products and services to our customers or increasing their efforts to gain and
  retain market share through competitive pricing. Although, we hold a GSA designated Schedule 70 contract, an Electronic Commodity Store III (ECS-III) prime contract and have contracts with the State of
  New Jersey, Gwinnett County School System, Duval County School System and Tiffany & Co., we typically have no ongoing written commitments from any customers to purchase products, and all product sales are
  made on a purchase-order basis.
We are also in direct competition with local, regional, and national distributors of microcomputer products and related services as well as with various IT consulting companies. These competitors run the
  gamut from consulting companies to the established consulting arms of nationwide accounting and auditing firms. Several of these competitors offer most of the same basic products as we do. We also encounter
  competition from microcomputer suppliers that sell their products through direct sales forces, rather than through resellers such as ourselves, and from manufacturers and distributors that emphasize mail order and
  telemarketing sales.
Depending on the customer, the principal areas of competition may include price, pre-sale and post-sale technical support and service, availability of inventory, and breadth of product line. We have an
  insignificant market share of sales in the microcomputer industry and of the service markets that we serve. Most of our competitors at the regional and national levels are substantially larger, have more personnel,
  have materially greater financial, technological and marketing resources, and operate within a larger geographic area than we do.
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Employees
As of November 13, 2006, we employed 208 individuals, including 82 sales, marketing and related support personnel, 73 service and support employees, 30 operations and administration personnel, and
  23 employees in accounting, finance, and human resources. We believe that our ability to recruit and retain highly skilled technical and other management personnel will be critical to our ability to execute our
  business model and growth strategy. We believe that our relations with our employees are good.
Available Information
The public may read and copy any materials filed by us with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the
  operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other
  information about issuers such as us that file electronically with the SEC.
In addition, we make available free of charge on our website at www.emtecinc.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
  reports filed or furnished pursuant to Section 13(a) or 15(d) under the Exchange Act as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.
Item 1A. Risk Factors
We cannot assure you that we can successfully increase the portion of our revenues derived from IT services. If we are unsuccessful our future results may be adversely affected.
Our transition from an emphasis on reselling IT products to an emphasis on providing IT services has placed significant demands on our managerial, administrative, and operational resources. Our ability to
  manage this transition effectively is dependent upon our ability to develop and improve operational, financial, and other internal systems, as well as our business development capabilities, and to attract, train, retain,
  motivate, and manage our employees. If we are unable to do so, our ability to effectively deliver and support our services may be adversely affected. Further, our transitional efforts to access higher-margin services
  and consulting revenues may result in reduced IT product sales. If we successfully expand our IT services offerings, periods of variability in utilization may continue to occur. In addition, we are likely to incur
  greater technical training costs during such periods. Historically, our IT reseller activities accounted for approximately for 87.6%, 89.9%, 93.0% and 96.0% of our total revenues for the twelve months ended August
  31, 2006, August 31, 2005, the period ended August 31, 2004 (successor period), and the period ended April 16, 2004 (predecessor period), respectively. In contrast, our IT services activities accounted for
  approximately for 12.4%, 10.1%, 7.0% and 4.0% of our total revenues for the twelve months ended August 31, 2006, August 31, 2005, the period ended August 31, 2004 (successor period) and the period ended
  April 16, 2004 (predecessor period), respectively.
Our new services have not achieved widespread client acceptance. If they do not achieve market acceptance, our profit potential may be adversely affected.
We have limited experience in developing, marketing, or providing these services. We cannot assure you that we will be able to successfully market such services to either new or existing customers, that our
  services will achieve market acceptance, or that we will be able to effectively hire, integrate, and manage additional technical personnel to enable us to perform these services to our customers’ expectations.
We may not be able to compete effectively in the highly competitive IT services industry.
The IT services business is highly competitive. Our competitors include established computer product manufacturers, some of which supply products to us, distributors, computer resellers, systems integrators;
  and other IT service providers.
Many computer product manufacturers also sell to customers through their direct sales organizations and certain of them have announced their intentions to enhance such direct sales efforts. Many of our
  current and potential competitors have longer operating histories and financial, sales, marketing, technical, and other resources substantially greater than we do. As a result, our competitors may be able to adapt
8

more quickly to changes in client needs or to devote greater resources than we can to the sales of IT products and the provision of IT services and we may not have the resources to compete effectively.
Our inability to maintain high personnel utilization rates may adversely impact our profit potentiality.
The most significant cost relating to the services component of our business is personnel expense, which consists of salaries, benefits, and payroll related expenses. Thus, the financial performance of our
  service business is based primarily upon billing margins (billable hourly rates less the costs to us of service personnel on an hourly basis) and utilization rates (billable hours divided by paid hours). The future
  success of the services component of our business will depend in large part upon our ability to maintain high utilization rates at profitable billing margins. The competition for quality technical personnel has
  continued to intensify, resulting in increased personnel costs. This intense competition has caused our billing margins to be lower than they might otherwise have been. Our utilization rates for service personnel
  likely will also be adversely affected during periods of rapid and concentrated hiring.
Our revenues and expenses are unpredictable. A decrease in revenues or increase in expenses could materially adversely affect our operating results.
Our operating results have been, and will continue to be, impacted by changes in technical personnel billing and utilization rates. Moreover, we expect that downward pricing pressure will persist due to the
  continued commoditization of computer products. Further, there are numerous other factors, which are not within our control that can contribute to fluctuations in our operating results, including the following:
•
    
    
    
    patterns of capital spending by customers;•
    
    
    
    the timing, size, and mix of product and service orders and deliveries;•
    
    
    
    the timing and size of new projects, including projects for new customers; and•
    
    
    
    changes in trends affecting outsourcing of IT services.We also believe that, to a limited degree, our business is seasonal with a greater proportion of our product sales occurring in the first quarter of our fiscal year due to the capital budgeting and spending
  patterns of some of our larger customers. Operating results have been, and may in the future also be, affected by the cost, timing, and other effects of acquisitions, including the mix of product and service
  revenues of acquired companies.
Since our inception, we have funded our operations primarily from borrowings under our credit facility.
Our credit facility contains financial covenants. As of August 31, 2006, we were in compliance with all our financial covenants. We had $0.88 million and $4.41 million outstanding balances under the
  accounts receivable credit facility, and $3.25 million and $10.95 million (included in the Company’s accounts payable) outstanding balances plus $788,357 and $2.28 million in open approvals under the floor plan
  credit facility with Lender at August 31, 2006 and 2005, respectively. Net availability of $14.60 million and $11.16 million was available under the accounts receivable credit facility, and $15.47 million and $6.20
  million was available under the floor plan credit facility as of August 31, 2006 and 2005, respectively. However, there can be no assurance that we will be in compliance with all of our financial covenants in
  future and the Lender will not immediately call for repayment of the outstanding borrowings under the credit facility.
Reduction in or elimination of our credit facilities with our primary trade vendors could have a material adverse effect on our business and operations.
As of August 31, 2006, our open terms credit lines with our primary trade vendors, including aggregators and manufacturers was $27.25 million. Under these credit 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 a notice, and this action could have a material adversely affect our business, result of operations,
  and financial condition.
Our revenues are derived from a few major customers, the loss of any of which could cause our results of operations to be adversely affected.
A large potion of our revenues is drawn from various civilian and military U.S. governmental departments and agencies. These customers include the Department of Defense, Department of Justice, Department
  of Homeland Security, Department of Health and Human Services, Department of Agriculture,
9

Department of Commerce and the GSA. During the last three fiscal years ended on August 31, 2006, August 31, 2005, and 2004, U.S. governmental department and agency related sales accounted for
  approximately 52.6%, 76.1% and 75.6% of our total revenues, respectively.
Any of the following additional risk factors could have a material negative impact on our business:
•
    
    
    
    Seasonality of federal government related business makes future financial results less predictable;•
    
    
    
    Dependent on governments demand for IT products. A material decline in overall sales to the government as a whole, or to a certain key agency thereof, could have a material adverse effect on our results
      of operations. Several of the key factors in maintaining our relationships with the federal government agencies are:•
    
    
    
    Our performance on individual contracts and delivery orders•
    
    
    
    The strength of our professional reputation•
    
    
    
    The relationships of our key executives with customer personnel•
    
    
    
    Our compliance with complex procurement laws and regulations related to the formation, administration and performance of federal government contracts.Adverse changes in U.S. Federal Government fiscal spending could have a negative effect on our sales, gross margin, and cash flow.
Changes in U.S. Federal Government spending policies or budget priorities could directly affect our financial performance. Among the factors that could materially harm our business are:
•
    
    
    
    a significant decline in spending by the U.S. Federal Government in general or by specific departments or agencies in particular;•
    
    
    
    changes in the structure, composition and/or buying patterns of the U.S. Federal Government;•
    
    
    
    the adoption of new laws or regulations changing procurement practices; or•
    
    
    
    delays in the payment of our invoices by government payment offices.The U.S. Federal Government’s overall information technology spending for the 2007 fiscal year was announced to be $64 billion. This represents an increase of 2.8% over fiscal year 2006, a significant
  reduction over the five to six percent increases received in recent years. These or other factors could cause U.S. Federal Government agencies and departments to reduce their purchases under contracts, to exercise
  their right to terminate contracts, or not to exercise options to renew contracts, any of which would cause us to lose future revenue.
Our quarterly sales and cash flows are volatile, which makes our future financial results difficult to forecast.
Our sales, operating results and cash flows have been, and are expected to continue to be, subject to significant fluctuations from quarter to quarter due to a number of factors including:
•
    
    
    
    The seasonality of our business due to the U.S. Federal Government’s buying and funding patterns;•
    
    
    
    Fluctuations in our gross margins due to variations in the mix of products and services sold;•
    
    
    
    The number, size and scope of orders from our customers;•
    
    
    
    Availability of price protection, purchase discounts and rebate programs from vendors;•
    
    
    
    Contractual terms and degree of completion of projects;•
    
    
    
    Changes in our sales cycles as we move towards solution selling; and•
    
    
    
    Changes in accounting rules, such as recording expenses for employee stock option grants and tax accounting principles.Our recent level of gross margins may not be sustainable. In addition, changes in services gross margin may result from various factors such as changes in the mix between technical support services and
  advanced services, as well as the timing of service contract initiations, renewals and utilization of service personnel. As a consequence, sales volumes and operating results for future periods are difficult to predict
  and, therefore, prior results are not necessarily indicative of results to be expected in future periods.
10

We must maintain our status as an authorized reseller/service of IT products. The loss on any one of such authorizations could have a material adverse effect on our business and operations.
We are materially dependent on our continued status as an approved reseller of IT products and our continued authorization as an IT service provider. Without such authorizations, we would be unable to
  provide the range of products and services we currently offer, including warranty services, and manufacturers support services contracts. Our resale agreements with manufacturers generally are terminable by
  manufacturers upon 30 days’ prior written notice. The loss of one or more of such authorizations could have a material adverse effect on our business and results of operations.
We have no long-term sales commitments from any of our suppliers. A loss of any of our principal supplier would material adversely affect our IT reseller business.
Our IT reseller business depends on large part upon our access to aggregators and manufacturers, to supply us with products at competitive prices and on reasonable terms for resale by us to our customers.
  Certain agreements may be terminated by such companies upon 30 days prior written notice. We cannot assure you that we will be able to continue to obtain products from the aggregators and manufacturers at
  prices or on terms acceptable to us, if at all.
Our client engagements entail significant risks and a failure to meet a client’s expectations could materially adversely affect our reputation and business.
Many of our engagements involve projects that are critical to the operations of our customers’ businesses and provide benefits that may be difficult to quantify. Our failure or inability to meet a client’s
  expectations in the performance of our services could result in a material adverse change to the client’s operations and therefore could give rise to claims against us or damage our reputation, adversely affecting
  our business, results of operations, and financial condition.
We intend to expand our business through acquisitions of complementary businesses. There is no certainty, however, that we will be successful in acquiring any new businesses or that any such acquisitions
  will help us achieve our strategic objectives.
As a part of our business development strategy, we intend to pursue acquisitions of IT product and service businesses in order to expand our service offerings, to add and enhance our base of technical and
  sales personnel, or to provide desirable client relationships. The success of this strategy depends not only upon our ability to acquire complementary businesses on a cost-effective basis, but also upon our
  ability to integrate acquired operations into our organization effectively, to retain and motivate key personnel, and to retain customers of acquired firms. We cannot assure you that we will be able to acquire or
  integrate such businesses successfully. Furthermore, we cannot assure you that financing for any such acquisitions will be available on satisfactory terms, or that we will be able to accomplish our strategic
  objectives as a result of any such transaction or transactions. In addition, we expect to compete for attractive acquisition candidates with other companies or investors in the IT industry, which could have the effect
  of increasing the cost of pursuing our acquisition strategy, or it could reduce the number of attractive candidates to be acquired. Acquisitions also may involve a number of specific risks, including:
•
    
    
    
    possible adverse short-term effects on our operating results;•
    
    
    
    dependence on retaining key customers and personnel;•
    
    
    
    diversion of management’s attention;•
    
    
    
    amortization or impairment of acquired intangible assets; and•
    
    
    
    risks associated with unanticipated problems, liabilities, or contingencies.Acquisitions may also cause us to:
•
    
    
    
    issue common stock or preferred stock or assume stock option plans that would dilute current shareholders’ percentage ownership;•
    
    
    
    use cash, which may result in reduction of our liquidity•
    
    
    
    assume liabilities;•
    
    
    
    record goodwill and non-amortizable intangible assets that would be subject to impairment testing and potential periodic impairment charges;11

•
    
    
    
    incur large and immediate write-offs; and•
    
    
    
    become subject to litigation.Holders of our common stock may face a lack of liquidity.
Our common stock is currently traded on the Over-the-Counter Bulletin Board market. Given the fact that our common stock is thinly traded, there can be no assurance that the desirable characteristics of an
  active trading market for such securities will ever develop or be maintained. Therefore, each investor’s ability to control the timing of the liquidation of the investment in our common stock will be restricted and
  an investor may be required to retain his investment in our common stock indefinitely.
The market price of our common stock has been and is likely to continue to be volatile, which may make it difficult for shareholders to resell common stock when they want to and at prices they find
  attractive.
Our share price has been volatile due, in part, to the general volatile securities market. Factors other than our operating results may affect our share price may include the level of perceived growth of the
  industries in which we participate, market expectations of our performance success of the partners, and the sale or purchase of large amounts of our common stock.
Compliance with changing regulations of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, and new SEC regulations, are creating uncertainty for companies
  such as ours. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result their application in practice may evolve over
  time as new guidance is provided by regulatory and governing bodies. This could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply
  with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased selling, general and administrative expense and a diversion of management’s time and attention from
  revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of internal
  control over financial reporting and our external auditors’ audit of that assessment require the commitment of significant financial and managerial resources. Further, our Board members, Chief Executive Officer
  and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified Board members
  and executive officers, which could harm our business.
Infrastructure systems consolidation and implementation of new systems at Old Emtec could have a material adverse affect on our business.
We are highly dependent on our infrastructure to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, recognize revenue and otherwise carry on our business in
  the ordinary course. We are in a process of consolidating our systems and implementing Facts (Accounting System) at Old Emtec. This implementation of Facts is scheduled to occur on December 1, 2006 at all
  Old Emtec locations and this could result in problems which could disrupt our business and adversely affect our sales and margins.
The potential risks associated with this implementation of Facts are numerous including:
•
    
    
    
    difficulties in integrating the system with our current operations;•
    
    
    
    the build-up of excess and obsolete inventory from duplicate orders and higher than usual customer returns;•
    
    
    
    diversion of management’s attention away from normal daily operations of our business;•
    
    
    
    initial dependence on an unfamiliar system while training personnel in its use;•
    
    
    
    additional expenses and cash outlays for the maintenance and upkeep of the software;•
    
    
    
    difficulties in obtaining reports to accurately present our external financial results;•
    
    
    
    increased demand on our support operations; and•
    
    
    
    potential delay in the processing of customer orders for shipment of products.12

As a result of the above, our business, operating results and financial condition may have negative adverse impact on future periods.
Difficulties with the integration of the historical Darr business with the historical Emtec business may impose substantial costs and delays and cause other unanticipated problems for us.
The Merger involves a number of risks relating to our ability to integrate the historical Darr and historical Emtec businesses into one combined operation. The process of integrating these operations,
  particularly their personnel, could cause interruptions to our business. Some of the risks we face include:
•
    
    
    
    retention of key personnel, customers and vendors of both businesses;•
    
    
    
    the occurrence of a material adverse effect on the existing business relationships with customers or vendors, or both, could lead to a termination of or otherwise affect each businesses relationships with such
      customers or vendors;•
    
    
    
    impairments of goodwill and other intangible assets; and•
    
    
    
    contingent and latent risks associated with the past operations of, and other unanticipated costs and problems arising in either of the historical businesses.If we are unable to successfully integrate, we could be required to undertake unanticipated charges. These charges could have a material adverse effect on our business.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease space in six locations. Our corporate headquarters and principal operational facilities are currently located in Trenton, New Jersey. The following table contains certain information about each of our
  leased facilities:
Address
    
    Size(in square feet)
    
    Monthly Rent
    
    Expiration Date572 Whitehead Road, Bldg. #1Trenton, NJ 08619
    
    
    
    16,000
    
    
    
    $
    
    11,600
    
    
    May 31, 2006(1)500 Satellite Blvd.Suwanee, GA 30024
    
    
    
    21,284
    
    
    
    $
    
    12,416
    
    
    November 30, 20097843 Bayberry Road,Jacksonville, FL 32256
    
    
    
    3,340
    
    
    
    $
    
    2,218
    
    
    February 28, 2006880 Third Avenue, 12th floorNew York, NY 10022
    
    
    
    7,635
    
    
    
    $
    
    24,777
    
    
    June 30, 2008(2)11 Diamond RoadSpringfield, NJ 07081
    
    
    
    42,480
    
    
    
    $
    
    15,000
    
    
    April 30, 200914121 Parke Long Court Suite 200Chantilly, VA 20151
    
    
    
    5,837
    
    
    
    $
    
    8,610
    
    
    August 31, 2010352 Seventh Avenue, 17th floorNew York, NY 10001
    
    
    
    1,600
    
    
    
    $
    
    7,000
    
    
    May 31, 2007

(1)
    
    
    
    This office is space is currently on a month to month lease term. We have notified our landlord that we will be vacating this space effective December 31, 2006 as we consolidate our offices in our
      Springfield, NJ facility.(2)
    
    
    
    We assumed this lease on January 9, 2002 in connection with our acquisition of Devise Associates, Inc. We have sub-leased this office space though June 30, 2008 for an approximate monthly rental payment
      of $15,700.We believe these facilities will satisfy our anticipated needs for the foreseeable future.
13

Item 3. Legal Proceedings
In March 2002, Logical Business Solutions, Inc., one of our competitors, instituted an action in the Circuit Court, Fourth Judicial Circuit, in Duval County, Florida, against us and Cheryl Pullen, one of our
  employees, alleging that we wrongfully interfered with its contractual relationship with one of its customers. The amount of damages was not specified. The litigation is currently in the discovery stage. We believe
  that the claim is without merit and we intend to vigorously defend ourselves.
We are subject to legal proceedings that arise in the ordinary course of business, but we do not believe these claims will have a material adverse impact on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Executive Officers of the Registrant
The following table sets forth certain information as to each of our executive officers:
Name
    
    Age
    
    Positions and Offices Presently HeldDinesh R. Desai
    
    56
    
    Chairman of the Board, Chief Executive Officer and PresidentBrian McAdams
    
    64
    
    Director and Vice ChairmanKeith Grabel
    
    54
    
    Director and PresidentSales and MarketingStephen C. Donnelly
    
    48
    
    Chief Financial OfficerJohn P. Howlett
    
    62
    
    Vice Chairman of Corporate DevelopmentRonald A. Seitz
    
    59
    
    PresidentEmtec OperationsPhilip Spagnola
    
    50
    
    PresidentCommercial SalesSam Bhatt
    
    39
    
    Vice President of Finance and SecretaryDinesh R. Desai. Since August 5, 2005, Mr. Desai has been Chairman of the Board, Chief Executive Officer and President of the Company. Prior to August 2005 and from 1986, Mr. Desai has been the
  Chairman and CEO of DARR Global Holdings, Inc., a management consulting firm. Since 2004, he has served as Chairman on the Board of Directors of two private corporations, Westwood Computer Corporation
  and DARR Westwood Technology Corporation. Mr. Desai was a President, CEO, Co-Chairman and an owner of a privately-held manufacturer, Western Sky Industries (“Western Sky”), of highly engineered,
  proprietary component parts used primarily in aerospace applications. Western Sky grew from approximately $3mm in revenues to over $170 million in revenues during the 1990’s prior to being sold to McKechnie
  in 1999. Prior to 1986, Mr. Desai spent twelve years with American Can and Arco Chemical in various management positions, including marketing, manufacturing, finance, planning and research and development.
  Mr. Desai has also served as a member of the Board of Directors of the Enterprise Center, a Nonprofit Organization. Mr. Desai holds a Bachelor of Science Degree in chemical engineering from the Indian
  Institute of Technology in Bombay, India, and a Masters of Science Degree in both chemical and industrial engineering from Montana State University. He earned a Masters in Business Administration from
  Temple University in 1978.
Brian McAdams. Since August 5, 2005, Mr. McAdams has been Director and Vice Chairman of the Company. Prior to August 2005 and from 2001, Mr. McAdams has served as a Senior Partner with DARR
  Global Holdings, as the Vice Chairman of Westwood Computer Corporation, the CEO of Passport Express Services, Inc., and the CEO of My Help Desk, Inc. He has held prior positions as director at two public
  companies: Crusader Bank Corporation and National Media Corporation, where he served as both Chairman and CEO.
Keith Grabel. Since August 5, 2005, Mr. Grabel has been Director and President of Sales and Marketing of the Company. Prior to August 2005 and from 2000, Mr. Grabel has held the positions of president
  and director of Westwood Computer Corporation. For the past year, he has also served as president and director of DARR Westwood Technology Corp. Mr. Grabel graduated from the University of Miami School
  of Business in 1974.
14

Stephen Donnelly. Since August 5, 2005 Mr. Donnelly has been the Chief Financial Officer of the Company. Prior to August 5, 2005 and since 2002, Mr. Donnelly has been the Chief Financial Officer of
  DARR Global Holdings, Inc. a management consulting firm. Since 2004, he has served as an officer for Westwood Computer Corporation. Between 1993 and 2002, Mr. Donnelly worked as a Manager and
  Managing Director for Acquisition Management Services, Inc., a merger and acquisition advisory firm. Prior to that, he has worked as a Director of Operations for a privately-held human resource and employee
  benefits software developer and as a Financial Manager for a healthcare organization. Mr. Donnelly began his career with the accounting firm of PriceWaterhouse. He is a Certified Public Accountant with a
  Bachelor’s degree in Accounting from Villanova University (in 1980).
John P. Howlett. Since January 2006, John P. Howlett has been Vice Chairman of Corporate Development. Prior to January 2006, Mr. Howlett was President of EmtecNortheast Operations since August 5,
  2005. Prior to August 5, 2005 he was our Chairman of the Board and Chief Executive Officer since January 17, 2001 and Chief Executive Officer of Emtec-NJ since August, 1997 and Chairman of Emtec-NJ
  since August, 1998. He has been a director of Emtec-NJ since October, 1996. Mr. Howlett was the founder (in 1983) of Cranford, New Jersey-based Comprehensive Business Systems, Inc. (CBSI). CBSI primarily
  provided microcomputer systems, network integration, training, and data communications to mid-size and Fortune 1000 corporations. In October 1996, CBSI merged into Emtec-NJ. Prior to founding CBSI, Mr.
  Howlett was with the AT&T Long Lines Division for twelve years. He earned a Bachelor of Science degree in Electrical Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana, and a
  Master of Business Administration degree from Fairleigh Dickinson University in New Jersey. A Vietnam veteran, Mr. Howlett served in the U.S. Army for four years.
Ronald
  A. Seitz. Since March 2006, Ronald A. Seitz has been President of Emtec
  Operations. Prior to March 2006, Mr. Seitz was President of EmtecSoutheast
  Operations since August 5, 2005. Prior to August 5, 2005 he was our President
  and Chief Operating Officer since February 2003 and Executive Vice-President
  and a director since January 17, 2001 and Executive Vice President of Emtec-NJ
  since March, 1996. Prior to that he was the Chief Operating Officer of Emtec-NJ.
  He has been a director of Emtec-NJ since April, 1995. Mr. Seitz was the founder
  (in 1980) of Charleston, South Carolina-based Computer Source, Inc. (CSI). CSI
  primarily provided microcomputer systems, network integration, and data communications
  to mid-size and Fortune 1000 corporations. In April 1995, CSI merged with Landress
  Information Systems of Mt. Laurel, New Jersey to become Emtec-NJ. Prior to founding
  CSI, Mr. Seitz was employed for six years as an engineer with the U.S. government
  in Washington, DC. He graduated from North Carolina State University with a
  Bachelor of Science degree and from George Washington University with an MBA
  in computer science. Mr. Seitz also holds a DMD degree from the Dental School
  at the Medical University of South Carolina.
Philip Spagnola.Since January 2006, Philip Spagnola has been President of Commercial Sales. Prior to January 2006 he was our Vice President of Sales since February 2005. Previously, Mr. Spagnola held
  senior management positions at Unisys, Digital Equipment Corporation and General Electric over the past twenty six years. Mr. Spagnola is a 1977 graduate of the University at Albany where he earned a Bachelor
  of Science degree in Business and earned a Master’s degree in Management from the Hartford Graduate Center in 1984.
Sam Bhatt. Since August 5, 2005, Sam Bhatt has been Vice President of Finance and Secretary. Prior to August 5, 2005 he was our Vice President of Finance and Treasurer of Emtec since January 17, 2001
  and of Emtec-NJ since July 2000. Prior to that and from July, 1997, he was Director of Accounting for Emtec-NJ. He also held the positions at Emtec-NJ of Accounting Manager (from 1994 to July, 1997) and of
  Senior Accountant (from 1992 to 1994). Mr. Bhatt holds a Bachelor of Science Degree in business administration from Drexel University in Pennsylvania and a Diploma in Hotel Management from the Institute of
  Hotel Management and Catering Technology in Mumbai, India.
15

PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the Over-The-Counter Bulletin Board market under the symbol “ETEC”. The following table sets forth the high and low closing prices of our common stock for the periods
  indicated:
Three Months Ended
    
    High
    
    LowAugust 31, 2006
    
    
    $
    
    1.75
    
    
    
    $
    
    1.00May 31, 2006
    
    
    $
    
    1.85
    
    
    
    $
    
    1.11February 28, 2006
    
    
    $
    
    2.17
    
    
    
    $
    
    1.58November 30, 2005
    
    
    $
    
    2.48
    
    
    
    $
    
    1.60August 31, 2005
    
    
    $
    
    2.85
    
    
    
    $
    
    1.60May 31, 2005
    
    
    $
    
    2.00
    
    
    
    $
    
    1.32February 28, 2005
    
    
    $
    
    3.04
    
    
    
    $
    
    1.70November 30, 2004
    
    
    $
    
    2.25
    
    
    
    $
    
    0.88The above quotations represent prices between dealers and do not include retail mark-ups, markdowns or commissions. They do not necessarily represent actual transactions.
As of November 13, 2006, there were 568 record holders of our common stock, although we believe that beneficial holders approximate 850.
We have not previously declared any dividends. It is not likely that dividends on the shares will be declared in the foreseeable future. Under our current loan agreement, we may not declare any dividends
  without the consent of our lenders. However, even if our lenders consented, the determination and payment of dividends with respect to the shares in the future will be within the discretion of our board of
  directors and will depend on our earnings, capital requirements and operating and financial condition, among other factors.
Equity Compensation Plan Information
Plan category
    
    Number of securities to be issued upon exercise of
      outstanding options, warrants and rights
    
    Weighted-average exercise price of outstanding options,
      warrants and rights
    
    Number of securities remaining available for future issuance
      under equity compensation plans (excluding securities
      reflected in column(a))(a)
    
    (b)
    
    (c)Equity compensation plans approved by security
      holders(1)
    
    
    
    
    
    Equity compensation plans not approved by
      security holders(2)
    
    2,000
    
    $0.29
    
    656,733Total
    
    2,000
    
    $0.29
    
    656,733

(1)
    
    
    
    The Company’s 2006 Stock-Based Incentive Compensation Plan (the “2006 Plan”) was approved by the stockholder on May 8, 2006. The 2006 Plan authorizes the granting of stock options to directors and eligible employees. The Company has reserved 1,400,000
      shares of its common stock for issuance under the 2006 Plan at prices not less than 100% of the fair value of the Company’s common stock on the date of grant (110% in the case of shareholders owning more than 10% of the Company’s common stock).
      Options under the 2006 Plan may terminate after 10 years and may vest over a four year period. No options were granted or exercised under the 2006 Plan during the year ended August 31, 2006.(2)
    
    
    
    Our 1996 Stock Option Plan (the “Plan”) (amended in 1999) authorizes the granting of stock options to directors and eligible employees. We have reserved 1,000,000 shares of our common stock for issuance under the Plan at prices not less than 100% of the fair
      value of our common stock on the date of grants (110% in the case of shareholders owning more than 10% of our common stock). As of August 31, 2006, 341,267 options have been exercised under the Plan.Item 6. Selected Financial Data
The issuance of our common stock in connection with the Merger gave the former Darr shareholders shares equal to approximately 55.7% of our total outstanding common stock post-merger and resulted in a
  change of control for us. Accordingly, for financial reporting purposes, the Merger was treated as an acquisition of Emtec by Darr and a recapitalization of Darr and the registrant’s historical financial
16

statements for periods prior to the Merger become those of Darr. In addition, for financial accounting purposes, the Westwood Acquisition was treated as an acquisition of Darr by Westwood with the result that the
  pre-Westwood Acquisition financial statements of Darr, and therefore, the Registrant are those of Westwood. As a result, the consolidated financial statements included in this Form 10-K include (i) the accounts
  and transactions of Westwood for the period from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and for Westwood and Darr for the period from April 17, 2004 to August 31, 2004 (Darr
  Successor Period), (ii) the accounts and transactions of Darr for the period from September 1, 2004 to August 31, 2005 and including the accounts and transactions of Emtec for the period from August 6, 2005 to
  August 31, 2005 and (iii) Emtec for the year ended August 31, 2006 include the accounts and transactions of the combined company for the period from September 1, 2005 to August 31, 2006.
The following selected consolidated financial data below should be read in conjunction with our consolidated financial statements including the accompanying notes and Management’s Discussion and Analysis
  of Financial Condition and Results of Operations, both elsewhere in this Report. The data as of August 31, 2006 and 2005 and for each of the three years ended August 31, 2006, 2005 and for the periods from
  September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and from April 17, 2004 to August 31, 2004 (Darr Successor Period) have been derived from, and should be read in conjunction with, our audited
  consolidated financial statements and accompanying notes, which are contained elsewhere in this Report. The data as of August 31, 2003 and for the year ended August 31, 2003 have been derived from our
  audited financial statements, which are not contained in this Report. The data as of August 31, 2002 and for the year ended August 31, 2002 have been derived from our unaudited financial statements, which are
  not contained in this Report.
Years Ended August 31,(SuccessorPeriod)
    
    (PredecessorPeriod)2006
    
    2005
    
    2004
    
    2004
    
    2003
    
    2002(unaudited)Net revenues
    
    
    $
    
    224,511,942
    
    
    
    $
    
    162,632,042
    
    
    
    $
    
    41,641,604
    
    
    
    $
    
    88,229,719
    
    
    
    $
    
    97,449,611
    
    
    
    $
    
    94,165,222Net Income
    
    
    $
    
    197,915
    
    
    
    $
    
    826,985
    
    
    
    $
    
    122,281
    
    
    
    $
    
    885,837
    
    
    
    $
    
    467,390
    
    
    
    $
    
    549,605Net Income per common share (basic & diluted)
    
    
    $
    
    0.01
    
    
    
    $
    
    0.08
    
    
    
    $
    
    0.01
    
    
    
    $
    
    0.09
    
    
    
    $
    
    0.05
    
    
    
    $
    
    0.06At August 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(unaudited)Total assets
    
    
    $
    
    52,024,813
    
    
    
    $
    
    70,009,918
    
    
    
    $
    
    21,737,638
    
    
    
    $
    
    22,984,079
    
    
    
    $
    
    23,060,145Total long-term debt
    
    
    $
    
    2,290,862
    
    
    
    $
    
    3,010,219
    
    
    
    $
    
    2,405,084
    
    
    
    
    
    
    
    
    $
    
    351,112Total preferred stock *
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    1,030,000
    
    
    
    
    
    
    
    
    
    Total redeemable common stock
    
    
    
    
    
    
    
    $
    
    5,500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

*
    
    
    
    Liquidation value of $1,030,000There was a dividend in the form of the distribution of a note receivable in the amount of $399,958 paid to the shareholders of Westwood on April 15, 2004. There were no other dividends paid to common
  stockholders during the five year period ended on August 31, 2006.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Reference is made to the “Risk Factors” outlined in Item 1A for a discussion of important factors that could cause actual results to differ from expectations and any of our forward-looking statements
  contained herein. The following discussion as of August 31, 2006 and 2005 and the corresponding data for (i) the year ended August 31, 2006, (ii) the year ended August 31, 2005, and (ii) for the periods from (a)
  September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and (b) from April 17, 2004 to August 31, 2004 (Darr Successor Period) have been derived from, and should be read in conjunction with,
17

our audited consolidated financial statements and accompanying notes, which are contained elsewhere in this Report.
Overview
We are an information technology company, providing consulting, services and products to commercial and education clients, the U.S. Federal Government as well as state and local authorities. Our services
  and products address technology needs of our clients including communications, data management, enterprise computing, managed services, storage and data center planning and development. Our solutions are
  crafted to enable our clients to become more efficient and effective, thereby making them more profitable and giving them a competitive advantage. To date, the most significant portion of our revenues has been
  derived from our activities as a reseller of IT products, such as workstations, servers, microcomputers, application software and networking and communications equipment. However, we are actively seeking to
  increase the portion of our revenues that are derived from IT services.
Our primary business objective is to become a leading single-source provider of high quality and innovative IT consulting, services and products. With the Merger, we believe we have created a strong, stable
  platform for growth and management depth. Through our strategic partners, we have an expanded array of products and technology solutions to offer our clients.
Merger with Darr
On August 5, 2005, we completed our merger under the Agreement and Plan of Merger dated as of July 14, 2005 (the “Merger Agreement”), by and among Emtec, Inc., a Delaware corporation (“Old
  Emtec”), Emtec Viasub LLC, a Delaware limited liability company and a wholly-owned subsidiary of Old Emtec (“MergerCo”), and Darr Westwood Technology Corporation, a Delaware corporation (“Darr”).
  Pursuant to the terms of the Merger Agreement, Darr merged with and into MergerCo (the “Merger”) and became a part of the consolidated entity that has retained the name Emtec, Inc. ( the “Company”).
The Merger has been accounted for as a capital transaction followed by a recapitalization. Our management concluded that the transaction resulted in a change in control of the Company and that the Merger
  should be accounted for as a reverse acquisition. Accordingly, Darr is deemed to be the acquiring company for financial reporting purposes and its financial statements became our historical financial statements. In
  conjunction with the Merger, we changed our fiscal year end from March 31 to August 31.
Upon completion of the Merger, all of the shares of Darr common stock issued and outstanding immediately prior to the merger were exchanged for 9,528,110 shares of our common stock and the former Darr
  shareholders were issued warrants to purchase an additional 10% of our common stock calculated on a fully diluted basis for an aggregate exercise price of $3,695,752, measured on a post exercise basis.
Overview of Financial Statements Presented Herein
As previously noted, the Merger was treated as an acquisition of Emtec by Darr and a recapitalization of Darr and the registrant. Darr is deemed to be the acquiring company for financial reporting purposes
  and Emtec’s historical financial statements for periods prior to the Merger become those of Darr.
In evaluating our results of operations and financial performance, our management has used combined results for the fiscal year ended August 31, 2005 as a single measurement period. Due to the Merger, we
  believe that comparisons between the eleven months ended August 5, 2005 and either Darr’s results for the period from September 1, 2004 to August 5, 2005 or Emtec’s results for the period from August 6, 2005
  through August 31, 2005 may impede the ability of users of our financial information to understand our operating and cash flow performance. Consequently, in order to enhance an analysis of our operating results
  and cash flows, we have presented our operating results and cash flows on a combined basis for the fiscal year ended August 31, 2005. This combined presentation for the fiscal year ended August 31, 2005 simply
  represents the mathematical addition of the pre-acquisition results of operations of Darr for the period from September 1, 2004 through August 5, 2005 and the results of operations of Emtec, following the Merger,
  for the period from August 6, 2005 through August 31, 2005. The consolidated financial statements for the year ended August 31, 2006 include the accounts and transactions of the post-Merger combined company.
18

Therefore, the financial statements presented in this Report consist of the following financial statements:
1.
    
    
    
    Westwood for the period from September 1, 2003 to April 16, 2004 (Darr Predecessor Period);2.
    
    
    
    Darr (following the Westwood Merger on April 16, 2004) for the period from April 17, 2004 to August 31, 2004 (Darr Successor Period);3.
    
    
    
    Darr for the fiscal year ended August 31, 2005 (including Emtec, following the Merger, for the period from August 6, 2005 to August 31, 2005);4.
    
    
    
    Emtec for the fiscal year ended August 31, 2006 (includes the accounts and transaction of the Company for the period from September 1, 2005 to August 31, 2006).As mentioned above, for the discussion and analysis in this Report we have combined Westwood’s period from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and Darr’s period from April 17,
  2004 to August 31, 2004 (Darr Successor Period) and our period from September 1, 2004 to August 31, 2005 represents the financial statements of Darr for the 2005 fiscal year plus the financial statements of
  Emtec for the period from August 6, 2005 to August 31, 2005.
Results of Operations
Comparison of Years Ended August 31, 2006 and 2005
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our Results of Operations for the fiscal years ended August 31, 2006,
  and 2005. The consolidated financial statements include the accounts and transactions of the Company for the year ended August 31, 2006 and the results of operations for the year ended August 31, 2005
  represents results of operations of Darr for the 2005 fiscal year plus the results of operations of Emtec for the period from August 6, 2005 to August 31, 2005.
EMTEC, INC.CONSOLIDATED STATEMENTS OF INCOMEYears Ended August 31,
2006
    
    2005
    
    Change
    
    %Revenues
    
    
    $
    
    224,511,942
    
    
    
    $
    
    162,632,042
    
    
    
    $
    
    61,879,900
    
    
    
    
    38.0
    %Cost of revenues
    
    
    
    199,382,350
    
    
    
    
    148,587,442
    
    
    
    
    50,794,908
    
    
    
    
    34.2
    %Gross profit
    
    
    
    25,129,592
    
    
    
    
    14,044,600
    
    
    
    
    11,084,992
    
    
    
    
    78.9
    %Percent of revenues
    
    
    
    11.2
    %
    
    
    
    
    8.6
    %Operating expenses:Selling, general, and administrative expenses
    
    
    
    22,098,186
    
    
    
    
    11,858,576
    
    
    
    
    10,239,610
    
    
    
    
    86.3
    %Management feerelated party
    
    
    
    350,000
    
    
    
    
    350,000
    
    
    
    
    
    
    
    
    
    0.0
    %Rent expenserelated party
    
    
    
    355,731
    
    
    
    
    194,190
    
    
    
    
    161,541
    
    
    
    
    83.2
    %Depreciation and amortization
    
    
    
    945,685
    
    
    
    
    174,944
    
    
    
    
    770,741
    
    
    
    
    440.6
    %Total operating expenses
    
    
    
    23,749,602
    
    
    
    
    12,577,710
    
    
    
    
    11,171,892
    
    
    
    
    88.8
    %Pecent of revenues
    
    
    
    10.6
    %
    
    
    
    
    7.7
    %
    
    
    
    
    
    
    0.0
    %Operating income
    
    
    
    1,379,990
    
    
    
    
    1,466,890
    
    
    
    
    (86,900
    )
    
    
    
    
    5.9
    %Percent of revenues
    
    
    
    0.6
    %
    
    
    
    
    0.9
    %Other expense (income):Interest incomeother
    
    
    
    (52,013
    )
    
    
    
    
    (120,520
    )
    
    
    
    
    68,507
    
    
    
    
    56.8
    %Interest expense
    
    
    
    1,064,703
    
    
    
    
    611,479
    
    
    
    
    453,224
    
    
    
    
    74.1
    %Other
    
    
    
    (38,619
    )
    
    
    
    
    (303,604
    )
    
    
    
    
    264,985
    
    
    
    
    N/AIncome before income taxes
    
    
    
    405,919
    
    
    
    
    1,279,535
    
    
    
    
    (873,616
    )
    
    
    
    
    68.3
    %Provision for income taxes
    
    
    
    208,004
    
    
    
    
    452,550
    
    
    
    
    (244,546
    )
    
    
    
    
    54.0
    %Net income
    
    
    $
    
    197,915
    
    
    
    $
    
    826,985
    
    
    
    $
    
    (629,070
    )
    
    
    
    
    76.1
    %Percent of revenues
    
    
    
    0.1
    %
    
    
    
    
    0.5
    %19

Total Revenues
Total revenues increased by 38.0% or $61.88 million to $224.51 million for the year ended August 31, 2006, compared to $162.63 million for the year ended August 31, 2005. This increase is primarily
  attributable to the addition of the revenue generated by Old Emtec to the business. Total additional incremental revenue attributed to Old Emtec approximated $71.71 million for the year ended August 31, 2006.
  Without this incremental revenue that resulted from the acquisition, our total revenue would have decreased by 6.3% or $9.83 million for the year ended August 31, 2006. This decrease is mainly due to a sale of
  IT products to the United States Department of Agriculture (“USDA”) of approximately $21.79 million which occurred during the three months ended May 31, 2005. Without this USDA sale, our total revenue for
  the year ended August 31, 2006 would have increased by $11.96 million. This increase is primarily attributable to an overall increase in the federal government business, excluding the impact of the USDA sale.
Revenues from various commercial, education, state and local clients have increased as a result of the Merger. Our revenues, by client types, are comprised of the following for the years ended:
August 31, 2006
    
    August 31, 2005Departments of the United States Government
    
    
    $
    
    118,167,014
    
    
    
    
    52.6
    %
    
    
    
    $
    
    123,823,906
    
    
    
    
    76.1
    %State and Local Governments
    
    
    
    25,299,178
    
    
    
    
    11.3
    %
    
    
    
    
    17,625,586
    
    
    
    
    10.8
    %Commercial Companies
    
    
    
    51,606,516
    
    
    
    
    23.0
    %
    
    
    
    
    12,338,163
    
    
    
    
    7.6
    %Education and other
    
    
    
    29,439,234
    
    
    
    
    13.1
    %
    
    
    
    
    8,844,387
    
    
    
    
    5.4
    %Total Revenues
    
    
    $
    
    224,511,942
    
    
    
    
    100.0
    %
    
    
    
    $
    
    162,632,042
    
    
    
    
    100.0
    %It is expected that the federal government business will continue to be strong as the company continues to penetrate wider and deeper into various civilian and military agencies. We have broadened the
  number of contracts (multi-year awards) in which we are participating which may increase our total revenues in upcoming years. We are one of nine awardees in a U.S. Army contract which was recently awarded.
  We estimate that total funds allocated to this contract where all nine awardees could participate in bidding process may approximate $5.0 billion over 10 years. Additionally, we are currently bidding on several
  new contracts.
The educational business is expected to be strong during the upcoming year as a result of a Gwinnett County tax initiative to support school district spending passed in November 2006. The passage of this tax
  initiative should substantially increase Gwinnett County’s IT expenditures.
The state and local government business is expected to improve as the tight budget pressures are being loosened.
The commercial sector is also expected to improve as additional relationships have been and are continuing to be developed. There is a solid well-established client base to which to build upon as the company
  expands product and service offerings to existing clients as well as develop new relationships in the sizable New Jersey/New York marketplace.
Gross Profit
Aggregate gross profit increased by 78.9% or $11.08 million to $25.13 million for the year ended August 31, 2006 as compared to $14.04 million for the year ended August 31, 2005. This increase is
  primarily attributable to Old Emtec’s gross profit of $10.49 million for the year ended August 31, 2006, which represented approximately 94.6% of our total increase in gross profit. The remainder of the $595,929
  increase in our gross profit is attributable to favorable price drops and incentives offered by manufacturers as well as our continuous focus on selling higher margin products. Overall gross profit for the year ended
  August 31, 2006 includes a reduction in gross profit of approximately $338,000 due to inventory damage that occurred to a large shipment during the quarter ended February 28, 2006.
Measured as a percentage of revenues, our gross profit margin increased to 11.2 % of total revenues for the year ended August 31, 2006 from 8.6% for the year ended August 31, 2005. This increase is also
  mainly attributable to the Merger. Gross profit margin of the Old Emtec business equaled to 14.4% of Old Emtec total revenues for the year ended August 31, 2006. Without this acquisition, our gross profit
  margin would have increased to 9.5% of total revenues for the year ended August 31, 2006 from 8.5% for the year
20

ended August 31, 2005. This percentage increase is primarily attributable to greater selling efforts, favorable price drops and incentives offered by manufacturers. We cannot expect that price drops and incentives
  are going to repeat in the future.
Factors that may affect gross margins in the future include changes in product margins, rebates and other incentives offered by various manufacturers, changes in technical employee utilization rates, the mix of
  products and services sold, and the decision to aggressively price certain products and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 86.3% or $10.24 million to $22.10 million for the year ended August 31, 2006, compared to $11.86 million for the year ended August 31, 2005. This
  increase is mainly due to the Merger. Total additional incremental selling, general and administrative expenses associated with the Merger approximated $8.87 million for the year ended August 31, 2006. Without
  this acquisition, our selling, general and administrative expenses would have increased by 12.5%, or $1.37 million to $12.39 million for the year ended August 31, 2006. This increase in selling, general and
  administrative expenses is mainly due to the following:
•
    
    
    
    Professional fees increased approximately $675,000 due to compliance costs associated with the SEC and in connection with the Merger; and•
    
    
    
    Compensation and benefits expense increased approximately $900,000 due to a company wide increase in head count associated with our long-term investment in new employees as well as higher
      commission costs associated with higher gross profit.We do not expect professional fees associated with the Merger to continue in future periods. In addition, to improve operational efficiencies within the organization, we have made several operational and
  management changes to our business. We expect to see the impact of these changes in future quarters and we will continue to emphasize operating efficiencies through cost containment strategies, re-engineering
  efforts and improved service delivery techniques, particularly within selling, marketing, general and administrative expenses.
Factors that may in the future have a negative impact on our selling, general and administrative costs include costs associated with marketing and selling activities, compliance costs associated with Securities
  and Exchange Commission rules and increases in our insurance costs.
Management Fee-Related Party
There was no change in the management fee to a related party for the year ended August, 31, 2006 compared to the year ended August 31, 2005. DARR Global Holdings, Inc. (“DARR Global”) is
  management services firm 100% owned by our Chief Executive Officer. DARR Global charges the Company a management fee of $350,000 annually.
Rent Expense-Related Party
Rent Expense-related party increased by 83.2% or $161,541 to $355,731 for the year ended August 31, 2006, compared to $194,190 for the year ended August 31, 2005. The increase in rent expense-related
  party is due to the Merger and the assumption of the lease from GS&T Properties, LLC, a company in which officers of our company are passive investors, owning approximately 20% equity interest. Under the
  term of the lease, we occupy approximately 21,000 square feet of office and warehouse space out of a total of approximately 70,000 square feet in Suwannee, GA. The lease term is for 5 years with monthly base
  rent of $12,500. During the year ended August 31, 2006, we recorded $175,731 in expense under this lease.
We also occupy approximately 43,000 square feet of office and warehouse space in Springfield, New Jersey. This space is leased from Westwood Property Holdings, LLC, in which Keith Grabel, our director
  and an executive officer, Mary Margaret Grabel, spouse of our director, and David Micales, our Vice President of Operations, are members. The lease term is through April 2009 with monthly base rent of $15,000.
  During the year ended August 31, 2006, we recorded $180,000 in expense under this lease.
21

Depreciation and Amortization
Depreciation and Amortization expense increased by 440.6% or $770,741 to $945,685 for the year ended August 31, 2006, compared to $174,944 for the year ended August 31, 2005. This increase is primarily
  attributable to the Merger. Depreciation and amortization expense associated with the Merger accounted approximately for $645,706 of increase. Additionally, we made fixed asset acquisitions of $764,904 during
  the current fiscal year, which increased our depreciation expense. These capital assets acquisitions were primarily for the purchase of computer equipment for internal use, the purchase of software licenses to
  upgrade our accounting systems, leasehold improvements, and for furniture and fixtures.
Intangible assets at August 31, 2006 and 2005 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $648,585 and $68,868, respectively. The assets ascribed
  to customer relationships are being amortized on a straight-line basis over 13-15 years. Amortization expense was $579,717 and $61,598 for each of the years ended August 31, 2006 and 2005, respectively.
Interest expense
Interest expense increased by 74.1% or $453,224 to $1.06 million for the year ended August 31, 2006, compared to $611,479 for the year ended August 31, 2005. This is mainly due to a higher balance on
  our line of credit and a higher interest rate due to an increasing prime rate, and higher days sales outstanding during the period.
Provision for Income Taxes
Income taxes decreased by 54.0% or $244,546 to $208,004 for the year ended August 31, 2006, compared to $452,550 for the year ended August 31, 2005. Income tax expense of $208,004 includes
  approximately $73,000 in estimated income tax expense related to the IRS income tax audit for the prior years recorded during the three months ended February 28, 2006. Without this income tax expense related
  to the income tax audit, our income tax expense would have been approximately $135,004. This decrease is primarily attributable to the 76.1% decrease in income before income taxes in the current year compared
  to the prior year. Effective tax rate for the year ended August 31, 2006, without the income tax expense related to the IRS income tax audit, is 33.3% compared with 35.4% for the year ended August 31, 2005.
  This is mainly due to a lower effective state income tax rate for current year.
22

Comparison of Years Ended August 31, 2005 and 2004
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our Results of Operations for the fiscal years ended August 31, 2005,
  and 2004. For this discussion and analysis we have combined the periods from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and from April 17, 2004 to August 31, 2004 (Darr Successor Period),
  and our period from September 1, 2004 to August 31, 2005 represents the results of operations of Darr for the 2005 fiscal year plus the financial statements of Old Emtec for the period from August 6, 2005 to
  August 31, 2005.
EMTEC, INC.CONSOLIDATED STATEMENTS OF INCOMEYears Ended August 31,
2005
    
    2004
    
    Change
    
    %Revenues
    
    
    $
    
    162,632,042
    
    
    
    $
    
    129,871,323
    
    
    
    $
    
    32,760,719
    
    
    
    
    25.2
    %Cost of revenues
    
    
    
    148,587,442
    
    
    
    
    
    117,214,228
    
    
    
    
    31,373,214
    
    
    
    
    26.8
    %Gross profit
    
    
    
    14,044,600
    
    
    
    
    12,657,095
    
    
    
    
    1,387,505
    
    
    
    
    11.0
    %Percent of revenues
    
    
    
    8.6
    %
    
    
    
    
    9.7
    %Operating expenses:Selling, general, and administrative expenses
    
    
    
    11,858,576
    
    
    
    
    
    10,711,020
    
    
    
    
    1,147,556
    
    
    
    
    10.7
    %Management feerelated party
    
    
    
    350,000
    
    
    
    
    116,664
    
    
    
    
    233,336
    
    
    
    
    200.0
    %Rent expenserelated party
    
    
    
    194,190
    
    
    
    
    
    215,333
    
    
    
    
    (21,143
    )
    
    
    
    
    9.8
    %Depreciation and amortization
    
    
    
    174,944
    
    
    
    
    
    75,005
    
    
    
    
    99,939
    
    
    
    
    133.2
    %Total operating expenses
    
    
    
    12,577,710
    
    
    
    
    11,118,022
    
    
    
    
    1,459,688
    
    
    
    
    13.1
    %Pecent of revenues
    
    
    
    7.7
    %
    
    
    
    
    8.6
    %
    
    
    
    
    
    
    0.0
    %Operating income
    
    
    
    1,466,890
    
    
    
    
    1,539,073
    
    
    
    
    (72,183
    )
    
    
    
    
    4.7
    %Percent of revenues
    
    
    
    0.9
    %
    
    
    
    
    1.2
    %Other expense (income):Forgiveness of debt
    
    
    
    
    
    
    
    
    (405,652
    )
    
    
    
    
    405,652
    
    
    
    
    100.0
    %Interest incomerelated party
    
    
    
    
    
    
    
    
    (21,483
    )
    
    
    
    
    21,483
    
    
    
    
    100.0
    %Interest incomeother
    
    
    
    (120,520
    )
    
    
    
    
    (70,262
    )
    
    
    
    
    (50,258
    )
    
    
    
    
    71.5
    %Interest expense
    
    
    
    611,479
    
    
    
    
    
    257,484
    
    
    
    
    353,995
    
    
    
    
    137.5
    %Other
    
    
    
    (303,604
    )
    
    
    
    
    
    
    
    
    
    (303,604
    )
    
    
    
    
    N/AIncome before income taxes
    
    
    
    1,279,535
    
    
    
    
    1,778,986
    
    
    
    
    (499,451
    )
    
    
    
    
    28.1
    %Provision for income taxes
    
    
    
    452,550
    
    
    
    
    
    770,868
    
    
    
    
    (318,318
    )
    
    
    
    
    41.3
    %Net income
    
    
    $
    
    826,985
    
    
    
    $
    
    1,008,118
    
    
    
    $
    
    (181,133
    )
    
    
    
    
    18.0
    %Percent of revenues
    
    
    
    0.5
    %
    
    
    
    
    0.8
    %Total Revenues
Total revenues, increased by 25.2% or $32.76 million to $162.63 million for the year ended August 31, 2005, compared to $129.87 million for the year ended August 31, 2004. This increase is primarily
  attributable to an increase in the federal government business including a significant sale to a federal government customerthe USDA of approximately $21.79 million which represented approximately 66% of our
  total increase in revenue. Additionally, our revenue increased as a result of the Merger. Revenues associated with the Merger equaled to $6.26 million for the year ended August 31, 2005 which represents
  approximately 19% of the total revenue increase. Other factors which increased revenue include increased service revenue and higher selling efforts.
The federal government business typically experiences increased activity during the months of August through November. We do not expect that significant sales like one discussed above will continue to
  occur in the future periods.
Gross Profit
Aggregate gross profit increased by 11.0% or $1.39 million to $14.04 million for the year ended August 31, 2005, as compared to $12.66 million for the year ended August 31, 2004. This increase is primarily
  attributable to significant sale to a federal government customer, the USDA, discussed above in
23

the revenue section, and the gross profit associated with Old Emtec revenues after the Merger. Gross profits associated with USDA sales approximated $814,000, and gross profit associated with the Merger equaled
  approximately $772,000. Without this one-time sale and the Merger, our aggregate gross profit would have decreased by approximately $200,000. Measured as a percentage of revenues, our gross profit margin
  decreased to 8.6% of total revenues for the year ended August 31, 2005 from 9.7% for the year ended August 31, 2004. Both of these decreases are mainly due to competitive pressures and aggressive pricing
  strategies which lowered our gross margins.
Factors that may affect gross margins in the future include changes in product margins, changes in technical employee utilization rates, the mix of products and services sold, and the decision to aggressively
  price certain products and services.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 10.7% or $1.15 million to $11.86 million for the year ended August 31, 2005, compared to $10.71 million for the year ended August 31, 2004. This
  increase is mainly due to the Merge. Selling, general and administrative expenses associated with the inclusion of the Old Emtec business approximating $857,000. Our increase in head count company-wide and
  the corresponding compensation and benefits expense associated with our long-term investment in new employees also factored into the increase of our selling, general and administrative expenses. Selling, general
  and administrative expenses as a percentage of sales decreased to 7.3% from 8.2%.
Factors that may in the future have a negative impact on our selling, general and administrative costs include costs associated with marketing and selling activities, compliance costs associated with SEC rules
  and insurance markets.
Management Fee-Related Party
Management fee related-party increased by 200% or $233,336 to $350,000 for the year ended August 31, 2005 compared to $116,664 for the year ended August 31, 2004. The increase in the management fee-
  related party is due to a full year of management fees paid to DARR Global Holdings, Inc. as compared with only a partial year of management fees in 2004. DARR Global Holdings, Inc. is a management
  consulting company owned by the Company’s Chief Executive Officer.
Rent Expense-Related Party
Rent Expense-Related Party decreased by 9.8% or $21,143 to $194,190 for the year ended August 31, 2005 compared to $215,333 for the year ended August 31, 2004. The decrease in Rent Expense-Related
  party is due to the decrease in rent for the Springfield, NJ office and warehouse space.
We also occupy approximately 43,000 square feet of office and warehouse space in Springfield, New Jersey. This space is leased from Westwood Property Holdings, LLC, in which Keith Grabel, our director,
  Mary Margaret Grabel, spouse of our director, and David Micales, our Vice President of Operations, are members. The lease term is through April 2009 with monthly base rent of $15,000. During the year ended
  August 31, 2006, we recorded $180,000 in expense under this lease.
In connection with the Merger, we assumed the lease from GS&T Properties, LLC, a company in which officers of our company are passive investors, owning approximately 20% equity interest. Under the term
  of the lease, we occupy approximately 21,000 square feet of office and warehouse space out of a total of approximately 70,000 square feet in Suwannee, GA. The lease term is for 5 years with monthly base rent
  of $12,500. During the year ended August 31, 2005, we recorded $14,190 in expense under this lease.
Depreciation and Amortization
Depreciation and Amortization expense increased by 133.2% or $99,939 to $174,944 for the year ended August 31, 2005 compared to $75,005 for the year ended August 31, 2004. This increase is attributable
  to the Merger. Depreciation and amortization relating to the Old Emtec business accounted approximately for $52,000 of increase. Additionally, we made fixed asset acquisitions of $491,310 during the year ended
  August 31, 2005, these capital assets acquisitions were primarily for the purchase of
24

computer equipment for internal use, purchase of software licenses to upgrade our computer systems, and for furniture and fixtures, which increased our depreciation expense.
On August 5, 2005, we recorded an Intangible asset, ascribed to a customer relationship of $8,378,166 in connection with the Merger. Intangible assets at August 31, 2005 and 2004 consisted of the value
  ascribed to customer relationships of $8,661,712, less accumulated amortization of $68,868 and $283,546 less accumulated amortization of $7,270, respectively. The assets ascribed to customer relationships are
  being amortized on a straight-line basis over 13-15 years. Amortization expense was $61,598 and $7,270 for the periods ended August 31, 2005 and August 31, 2004, respectively. Amortization expense of
  $580,356 is expected to be recorded each year through August 31, 2016, $573,085 for the year ended August 31, 2017, $558,544 for the years ended August 31, 2018 and 2019, and $518,755 for the year ended
  August 31, 2020.
Interest expense
Interest expense increased by 137.5% or $353,995 to $611,479 for the year ended August 31, 2005, compared to $257,484 for the year ended August 31, 2004. This is mainly due to a full year of interest
  expense on notes payable to former stockholders of Westwood, DARR Westwood LLC, and Four Kings Management, LLC, which were associated with the April 2004 acquisition of Westwood by Darr.
Other
Other income of $303,604 recorded on August 31, 2005, was due to the change in the value of the put options issued on August 5, 2005 using a Black-Scholes option pricing model. Under the Black-Scholes
  model, the total value of the put options was $315,104. As of August 31, 2005, the total value of the put options was $11,500.
Provision for Income Taxes
Income taxes decreased by 41.3% or $318,318 to $452,550 for the year ended August 31, 2005, compared to $770,868 for the year ended August 31, 2004. This decrease is primarily attributable to the
  decrease in taxable income. Taxable income decreased by 28.19% or $499,451 to $1.28 million for the year ended August 31, 2005, compared to $1.78 million for the year ended August 31, 2004.
Recently Issued Accounting Standards
In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”,
  (“SFAS No. 154”). SFAS No. 154 changes the requirement for the accounting and reporting of a change in an accounting principle. SFAS No. 154 is effective for accounting changes and correction of errors in
  fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109.” FIN 48 clarifies the accounting for uncertainty in
  income taxes recognized in and enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive model for recognizing, measuring,
  presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of the application of FIN 48 these will be accounted for
  as an adjustment to retained earnings. Additional disclosures about the amounts of such liabilities will be required also. The Company is required to adopt FIN 48 beginning September 1, 2007. Management is
  currently assessing the impact of FIN 48 on consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” which provides a definition of fair value, establishes a framework for
  measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is
25

effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The provisions of SFAS 157 will be applied prospectively.
Liquidity and Capital Resources
Cash and cash equivalents at August 31, 2006 of $917,683 represented a decrease of $103,554 from $1.02 million at August 31, 2005. We are a net borrower; consequently, we believe our cash and cash
  equivalents balance must be viewed along with the available balance on our line of credit. Borrowings under our line of credit at August 31, 2006 decreased to $3.53 million from $4.41 million at August 31,
  2005. This decrease in our line of credit balance is primarily attributable to improved days sales outstanding and open terms offered to us by our suppliers. At August 31, 2006, our net working capital was
  approximately $602,084 less than it was at August 31, 2005.
Since our inception, we have funded our operations primarily from borrowings under our credit facility. On August 5, 2005, our subsidiaries, Emtec, Inc. (“Emtec NJ”) and Westwood Computer Corporation
  (“Westwood” and together with the Emtec NJ, the “Borrower”), entered into a Business Financing Agreement with GE Commercial Distribution Finance Corporation (the “Lender”) pursuant to which the Lender
  has agreed to provide to Borrower an accounts receivable facility (the “Credit Facility”). The Credit Facility provides for aggregate borrowings of the lesser of $35.0 million or 85% of eligible accounts receivable,
  plus 100% of unsold inventory financed by the Lender, minus $3.15 million. The Credit Facility includes certain financial covenants that we must maintain on a quarterly basis, and we are also subject to certain
  mandatory prepayments upon the occurrence of certain events, subject to certain exceptions, set forth in the Business Financing Agreement.
Borrowings under the Credit Facility bear interest at an annual rate equal to the greater of (i) the rate of interest which JP Morgan Chase Bank (or its successor) publicly announces from time to time as its
  prime rate or reference rate or (ii) four percent (4%).
To secure the payment of the obligations under the Credit Facility, the Borrower granted to Lender a security interest in all of Borrower’s interests in certain of its assets, including inventory, equipment,
  fixtures, accounts, chattel paper, instruments, deposit accounts, documents, general intangibles, letter of credits rights, and all judgments, claims and insurance policies.
In connection with the Credit Facility, Emtec NJ and Westwood (together, the “Dealer”) entered into the Agreement for Wholesale Financing with the Lender on August 5, 2005 (the “Wholesale Agreement”).
  The Wholesale Agreement provides for an extension of credit by the Lender to the Dealer from time to time, subject to the maximum aggregate borrowings set forth in the Credit Facility, to purchase inventory
  from approved vendors and for other purposes. The financial terms of any advance by the Lender are not set forth in the Wholesale Agreement because such terms depend upon many variable factors, including
  availability of vendor discounts, payment terms or other incentives and purchase volume. The Wholesale Agreement contains certain customary representations and warranties and events of default, including the
  failure to pay interest, principal or fees, any material inaccuracy of any representation and warranty, bankruptcy and insolvency events.
In addition, the Lender and MRA Systems, Inc. (dba GE Access), one of our trade creditors, entered into an intercreditor agreement in which the Lender agreed to give GE Access a first lien position on all
  future unbilled service maintenance billings and which provide that, as regards to GE Access, all debt obligations to the Lender are accorded priority.
On February 13, 2006, we entered into an addendum to our Credit Facility and Wholesale Agreement with GE CDF (the “Addendum”). This Addendum amended the Credit Facility by increasing our reserve
  amount from $3.15 million to $5.0 million, and we paid a waiver fee of $50,000 for our non-compliance with certain financial covenants as of three months ended November 30, 2005.
On April 10, 2006, we executed a second addendum to our Credit Agreement and Wholesale Agreement (the “Second Addendum”). The second addendum amended the Credit Facility by decreasing our
  reserve amount from $5.0 million to $3.01 million, increasing the time period for eligibility of all U.S. federal government accounts receivable from 90 to 120 days from the date of the invoice, and revised our
  financial covenants from the quarter ending February 28, 2006 through May 31, 2007. All other terms remain unchanged.
26

As of August 31, 2006, we had a $881,459 outstanding balance under the Credit Facility, a $3.25 million outstanding balance, which is included in our accounts payable, plus $788,357 in open approvals
  under the Wholesale Agreement with the Lender. As of August 31, 2006, we had net availability of $14.60 million under the Credit Facility, and $15.47 million under the Wholesale Agreement.
As of August 31, 2006, we determined that we were in compliance with our financial covenants with the Lender.
As of August 31, 2006, we had outstanding balances under our open term credit facilities with our primary trade vendors, including aggregators and manufacturers, of $27.50 million with outstanding principal
  of approximately $13.54 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 material adverse affect our business, result of operations, and financial condition.
Capital expenditures of $764,904 during the year ended August 31, 2006 were primarily for the purchase of computer equipment for internal use, purchase of software licenses to upgrade our accounting
  systems, and furniture and fixtures. We anticipate our capital expenditures for our fiscal year ending August 31, 2007 will be approximately $450,000, of which approximately $250,000 will be for the upgrade of
  our organizational computer system, including the implementation and data conversion costs, and the remaining $200,000 will primarily be for the purchase of computer equipment for internal use.
The following are our long-term contractual obligations for leases, debt and other long term liabilities as of August 31, 2006. Other long-term liabilities consist of accrued severance due to a spouse of a
  former executive and shareholder of Westwood.
Payments Due By Period:Contractual Obligations:
    
    Total
    
    Less than1 year
    
    1-3 years
    
    4-5 years
    
    More than5 yearsLong-term debt obligations
    
    
    $
    
    3,010,218
    
    
    
    $
    
    719,356
    
    
    
    $
    
    2,290,862
    
    
    
    $
    
    
    
    
    
    $
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    
    2,191,837
    
    
    
    
    857,912
    
    
    
    
    1,166,495
    
    
    
    
    167,430
    
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    272,332
    
    
    
    
    133,900
    
    
    
    
    102,000
    
    
    
    
    36,432Total
    
    
    $
    
    5,474,387
    
    
    
    $
    
    1,711,168
    
    
    
    $
    
    3,559,356
    
    
    
    $
    
    203,862
    
    
    
    $
    
    We anticipate that our primary sources of liquidity in fiscal year 2007 will be cash generated from operations, trade vendor credit and cash available to us under our Credit Facility. Our future financial
  performance will depend on our ability to continue to reduce and manage operating expenses as well as our ability to grow revenues. Any loss of clients, whether due to price competition or technological
  advances, will have an adverse affect on our revenues. Our future financial performance could be negatively affected by unforeseen factors and unplanned expenses. See “Forward Looking Statements” and
  “BusinessRisk Factors” discussed in our Annual Report on Form 10-K for the year ended August 31, 2006.
We have no arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources.
We believe that funds generated from operations, trade vendor credit and bank borrowings should be sufficient to meet our current operating cash requirements through the next twelve months. However, there
  can be no assurance that all of the aforementioned sources of cash can be realized.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The methods, estimates, and judgments we use in applying our most critical
  accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined critical accounting policies as policies that involve critical accounting estimates that require
  (i) management to make assumptions that are highly uncertain at the time the estimate is made, and (ii) different estimates that could have been reasonably used for the current period, or changes in the estimates
  that are reasonably likely to occur from period to period, which would have a material impact on
27

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, and valuation of deferred tax assets.
Revenue Recognition
We recognize revenue from the sales of products when risk of loss and title passes which is upon client acceptance.
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 (“SAB”) 104 in recognizing revenue associated with these transactions. We perform software installations, configurations
  and imaging services at our locations prior to the delivery of the product. Some client arrangements include “set-up” services performed at client locations where our personnel perform the routine tasks of
  removing the equipment from boxes, and setting up the equipment at client workstations by plugging in all necessary connections. This service is usually performed the same day as delivery. Revenue is recognized
  on the date of acceptance, except as follows:
•
    
    
    
    In some instances, the “set-up” service is performed after date of delivery. We recognize revenue for the “hardware” component at date of delivery when the amount of revenue allocable to this component
      is not contingent upon the completion of “set-up” services and, therefore, our client has agreed that the transaction is complete as to the “hardware” component. In instances where our client does not accept
      delivery until “set-up” services are completed, we defer all revenue in the transaction until client acceptance occurs.•
    
    
    
    There are occasions when a client requests a transaction on a “bill & hold” basis. We follow the SAB 104 criteria and recognize revenue from these sales prior to date of physical delivery only when all the
      criteria of SAB 104 are met. We do not modify our normal billing and credit terms for these customers. The customer is invoiced at the date of revenue recognition when all of the criteria have been met.We have experienced minimal customer returns. Since all eligible products must be returned to us within 30 days from the date of the invoice, we reduce the product revenue and cost of goods in each
  accounting period based on the actual returns that occurred in the next 30 days after the close of the accounting period.
Service and consulting revenue include time billings based upon billable hours charged to the clients, fixed price short-term projects, hardware maintenance contracts, and manufacturer support service
  contracts. These contracts generally are task specific and do not involve multiple deliverables. Revenues from time billings are recognized as services are delivered. Revenues from short-term fixed price projects
  are recognized using the proportionate performance method by determining the level of service performed based upon the amount of labor cost incurred on the project versus the total labor costs to perform the
  project because this is the most readily reliable measure of output.
Revenue from the sale of warranties and support service contracts where we are responsible for fulfilling the service requirements of the client are 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”).
Revenues from manufacturer support service contracts where the manufacturer is responsible for fulfilling the service requirements of the client are recognized immediately on their contract sale date.
  Manufacturer support service contracts contain cancellation privileges that allow our clients to terminate a contract with 90 days written notice. In this event, the client is entitled to a pro-rated refund based on the
  remaining term of the contract, and we would owe the manufacturer a pro-rated refund of the cost of the contract. However, we have experienced no client cancellations of any significance during our most recent
  3-year history and do not expect cancellations of any significance in the future.
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
28

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.
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 (specific identification) or market. Inventory is entirely finished goods purchased for resale and consists of computer hardware, computer software, computer
  peripherals and related supplies. We provide an inventory reserve for products we determine are obsolete or where salability has deteriorated based on management’s review of products and sales.
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
  in accordance with SFAS 142. The Company 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. Intangible assets that have finite useful lives are amortized over their useful lives.
Intangible assets at August 31, 2006 and August 31, 2005 consisted of the value ascribed to customer relationships. The assets ascribed to customer relationships are being amortized on a straight-line basis
  over 13 to 15 years. Intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with Statement of Financial
  Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated
  undiscounted future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows are less than the carrying amount, the asset is
  considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset.
Rebates
Rebates are recorded in the accompanying consolidated statements of income as a reduction of the cost of revenues in accordance with Emerging Issues Task Force Abstract No. 02-16, Accounting by a
  Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16).
Income Taxes
Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
  recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than the enactment of changes in tax laws or rates. A valuation
  allowance is recognized if, on weight of available evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized.
29

Off-Balance Sheet Arrangements
Under SEC regulations, in certain circumstances, we are required to make certain disclosures regarding the following off-balance sheet arrangements, if material:
•
    
    
    
    Any obligation under certain guarantee contracts;•
    
    
    
    Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;•
    
    
    
    Any obligation under certain derivative instruments; and•
    
    
    
    Any obligation arising out of a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in
      leasing, hedging or research and development services with the Company.We do not have any off-balance sheet arrangements that are required to be disclosed pursuant to these regulations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in trading market risk sensitive instruments and do not purchase hedging instruments or “other than trading” instruments that are likely to expose us to market risk, whether interest rate,
  foreign currency exchange, commodity price or equity price risk. We have issued no debt instruments, entered into no forward or future contracts, purchased no options and entered into no swaps. Our primary
  market risk exposures are those of interest rate fluctuations. A change in interest rates would affect the rate at which we could borrow funds under our revolving credit facility. Our average balance on the line of
  credit during fiscal year August 31, 2006 was approximately $5.2 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 $52,000 annually.
30

Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of DirectorsEmtec, Inc.Trenton, New Jersey
We have audited the consolidated balance sheet of Emtec, Inc. and Subsidiaries (the “Company”) as of August 31, 2006, and the related consolidated statements of income, cash flows and changes in
  stockholders’ equity for the year ended August 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
  based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
  assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
  audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
  reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emtec, Inc. and Subsidiaries as of August 31, 2006, and the results of
  their operations and their cash flows for the year ended August 31, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLPBlue Bell, PennsylvaniaNovember 17, 2006
31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of DirectorsEmtec, Inc.
We have audited the accompanying consolidated balance sheets of Emtec, Inc. as of August 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and changes in stockholders’
  equity, for the year ended August 31, 2005, the period from April 17, 2004 to August 31, 2004 (Successor Period) and the period from September 1, 2003 to April 16, 2004 (Predecessor Period). These financial
  statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of The Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
  assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included
  consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
  the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
  statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
  for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Emtec, Inc at August 31, 2005 and 2004, and the consolidated results of
  its operations and its cash flows for the year ended August 31, 2005, the period from April 17, 2004 to August 31, 2004 (Successor Period) and the period from September 1, 2003 to April 16, 2004 (Predecessor
  Period), in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, PADecember 2, 2005
32

EMTEC, INC.CONSOLIDATED BALANCE SHEETAugust 31, 2006 and 2005
2006
    
    2005AssetsCurrent AssetsCash and cash equivalents
    
    
    $
    
    917,683
    
    
    
    $
    
    1,021,237Receivables:Trade, less allowance for doubtful accounts
    
    
    
    27,424,737
    
    
    
    
    34,541,373Others
    
    
    
    2,478,004
    
    
    
    
    3,385,891Inventories, net
    
    
    
    1,295,364
    
    
    
    
    5,770,590Prepaid expenses
    
    
    
    681,831
    
    
    
    
    433,238Deferred tax assetcurrent
    
    
    
    636,183
    
    
    
    
    603,533Total current assets
    
    
    
    33,433,802
    
    
    
    
    45,755,862Property and equipment, net
    
    
    
    1,316,089
    
    
    
    
    917,159Customer relationships, net
    
    
    
    8,013,127
    
    
    
    
    8,592,844Goodwill
    
    
    
    9,014,055
    
    
    
    
    8,974,610Restricted cash
    
    
    
    150,000
    
    
    
    
    5,650,000Other assets
    
    
    
    97,751
    
    
    
    
    119,443Total assets
    
    
    $
    
    52,024,824
    
    
    
    $
    
    70,009,918Liabilities and Stockholders’ EquityCurrent LiabilitiesLine of credit
    
    
    $
    
    881,459
    
    
    
    $
    
    4,412,526Accounts payabletrade
    
    
    
    23,355,126
    
    
    
    
    29,738,061Accounts payablerelated party
    
    
    
    254,166
    
    
    
    
    133,333Current portion of long term debtrelated party
    
    
    
    719,356
    
    
    
    
    524,874Income taxes payable
    
    
    
    85,732
    
    
    
    
    828,659Accrued liabilities
    
    
    
    3,443,829
    
    
    
    
    4,190,728Due to former stockholders
    
    
    
    631,415
    
    
    
    
    631,415Customer deposits
    
    
    
    693,383
    
    
    
    
    1,268,672Deferred revenue
    
    
    
    1,069,020
    
    
    
    
    1,125,205Total current liabilities
    
    
    
    31,133,486
    
    
    
    
    42,853,473Accrued severance
    
    
    
    272,332
    
    
    
    
    380,356Deferred tax liability
    
    
    
    2,785,606
    
    
    
    
    2,838,298Long term debtrelated party
    
    
    
    2,290,862
    
    
    
    
    3,010,219Total liabilities
    
    
    
    36,482,286
    
    
    
    
    49,082,346Stockholders’ EquityCommon stock $0.01 par value; 25,000,000 shares authorized; 17,249,875 and 17,232,134 shares issued and 14,385,286 and 17,232,134 outstanding at August 31, 2006 and
      2005, respectively
    
    
    
    172,499
    
    
    
    
    172,321Additional paid-in capital
    
    
    
    19,921,699
    
    
    
    
    19,908,779Retained earnings
    
    
    
    1,044,387
    
    
    
    
    846,47221,138,585
    
    
    
    
    20,927,572Less: treasury stock, at cost, 2,864,589 shares
    
    
    
    (5,596,047
    )
    
    
    
    
    Total stockholders’ equity
    
    
    
    15,542,538
    
    
    
    
    20,927,572Total liabilities and stockholders’ equity
    
    
    $
    
    52,024,824
    
    
    
    $
    
    70,009,918The accompanying notes are integral parts of these consolidated financial statements.
33

EMTEC, INC.CONSOLIDATED STATEMENT OF INCOMEPeriods Ended August 31, 2006, 2005 and 2004
Year EndedAugust 31, 2006
    
    Year EndedAugust 31, 2005
    
    Period fromApril 17, 2004to August 31,2004(SuccessorPeriod)
    
    Period fromSeptember 1,2003 toApril 16, 2004(PredecessorPeriod)Revenues
    
    
    $
    
    224,511,942
    
    
    
    $
    
    162,632,042
    
    
    
    $
    
    41,641,604
    
    
    
    $
    
    88,229,719Cost of revenues
    
    
    
    199,382,350
    
    
    
    
    148,587,442
    
    
    
    
    37,617,860
    
    
    
    
    79,596,368Gross profit
    
    
    
    25,129,592
    
    
    
    
    14,044,600
    
    
    
    
    4,023,744
    
    
    
    
    8,633,351Operating expenses:Selling, general, and administrative expenses
    
    
    
    22,098,186
    
    
    
    
    11,858,576
    
    
    
    
    3,418,755
    
    
    
    
    7,292,265Management feerelated party
    
    
    
    350,000
    
    
    
    
    350,000
    
    
    
    
    116,664
    
    
    
    
    Rent expenserelated party
    
    
    
    355,731
    
    
    
    
    194,190
    
    
    
    
    60,000
    
    
    
    
    155,333Depreciation and amortization
    
    
    
    945,685
    
    
    
    
    174,944
    
    
    
    
    23,739
    
    
    
    
    51,266Total operating expenses
    
    
    
    23,749,602
    
    
    
    
    12,577,710
    
    
    
    
    3,619,158
    
    
    
    
    7,498,864Operating income
    
    
    
    1,379,990
    
    
    
    
    1,466,890
    
    
    
    
    404,586
    
    
    
    
    1,134,487Other expense (income):Forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405,652
    )Interest incomerelated party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,483
    )Interest incomeother
    
    
    
    (52,013
    )
    
    
    
    
    (120,520
    )
    
    
    
    
    (25,783
    )
    
    
    
    
    (44,479
    )Interest expense
    
    
    
    1,064,703
    
    
    
    
    611,479
    
    
    
    
    184,665
    
    
    
    
    72,819Other
    
    
    
    (38,619
    )
    
    
    
    
    (303,604
    )
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    
    405,919
    
    
    
    
    1,279,535
    
    
    
    
    245,704
    
    
    
    
    1,533,282Provision for income taxes
    
    
    
    208,004
    
    
    
    
    452,550
    
    
    
    
    123,423
    
    
    
    
    647,445Net income
    
    
    $
    
    197,915
    
    
    
    $
    
    826,985
    
    
    
    $
    
    122,281
    
    
    
    $
    
    885,837Preferred stock dividends
    
    
    
    
    
    
    
    
    (72,794
    )
    
    
    
    
    (30,000
    )
    
    
    
    
    Net income available to common stockholders
    
    
    $
    
    197,915
    
    
    
    $
    
    754,191
    
    
    
    $
    
    92,281
    
    
    
    $
    
    885,837Net income per common shareBasic and Diluted
    
    
    $
    
    0.01
    
    
    
    $
    
    0.08
    
    
    
    $
    
    0.01
    
    
    
    $
    
    0.09Weighted Average Shares OutstandingBasic
    
    
    
    14,671,170
    
    
    
    
    10,075,520
    
    
    
    
    9,528,110
    
    
    
    
    9,528,110Diluted
    
    
    
    14,672,838
    
    
    
    
    10,108,803
    
    
    
    
    9,528,110
    
    
    
    
    9,528,110The accompanying notes are integral parts of these consolidated financial statements.
34

EMTEC, INC.CONSOLIDATED STATEMENT OF CASH FLOWSPeriods Ended August 31, 2006, 2005 and 2004
Year EndedAugust 31,2006
    
    Year EndedAugust 31,2005
    
    Period fromApril 17, 2004 toAugust 31, 2004(SuccessorPeriod)
    
    Period fromSeptember 1,2003 to April 16,2004(PredecessorPeriod)Cash Flows From Operating ActivitiesNet income
    
    
    $
    
    197,915
    
    
    
    $
    
    826,985
    
    
    
    $
    
    122,281
    
    
    
    $
    
    885,837Adjustments to Reconcile Net Income to Net Cash Provided by Operating ActivitiesForgiveness of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405,652
    )Depreciation and amortization
    
    
    
    945,685
    
    
    
    
    196,755
    
    
    
    
    23,739
    
    
    
    
    51,266Deferred income tax (benefit) expense
    
    
    
    (85,342
    )
    
    
    
    
    (147,382
    )
    
    
    
    
    50,578
    
    
    
    
    58,303Put option valuation
    
    
    
    (11,500
    )
    
    
    
    
    (303,604
    )
    
    
    
    
    
    
    
    
    
    Changes In Operating Assets and LiabilitiesReceivables
    
    
    
    8,024,523
    
    
    
    
    (2,118,382
    )
    
    
    
    
    (6,854,567
    )
    
    
    
    
    579,725Inventories
    
    
    
    4,475,226
    
    
    
    
    (3,090,989
    )
    
    
    
    
    (75,838
    )
    
    
    
    
    622,947Prepaid expenses and other assets
    
    
    
    (226,894
    )
    
    
    
    
    (21,380
    )
    
    
    
    
    7,706
    
    
    
    
    (22,063
    )Accounts payable
    
    
    
    (6,262,102
    )
    
    
    
    
    5,875,608
    
    
    
    
    8,707,348
    
    
    
    
    (1,238,723
    )Customer deposits
    
    
    
    (575,289
    )
    
    
    
    
    (43,935
    )
    
    
    
    
    
    
    
    
    
    Income taxes payable
    
    
    
    (742,927
    )
    
    
    
    
    148,501
    
    
    
    
    
    
    
    
    
    Accrued liabilities
    
    
    
    (735,399
    )
    
    
    
    
    1,362,375
    
    
    
    
    (637,962
    )
    
    
    
    
    765,315Deferred compensation
    
    
    
    (108,024
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred revenue
    
    
    
    (56,185
    )
    
    
    
    
    (74,611
    )
    
    
    
    
    16,815
    
    
    
    
    (125,914
    )Net Cash Provided By Operating Activities
    
    
    
    4,839,687
    
    
    
    
    2,609,941
    
    
    
    
    1,360,100
    
    
    
    
    1,171,041Cash Flows From Investing ActivitiesPurchases of property and equipment
    
    
    
    (764,904
    )
    
    
    
    
    (491,310
    )
    
    
    
    
    (147,705
    )
    
    
    
    
    (45,616
    )Acquisition of businesses, net of cash acquired
    
    
    
    (39,445
    )
    
    
    
    
    (678,875
    )
    
    
    
    
    (4,917,499
    )
    
    
    
    
    Net Cash Provided By (Used In) Investing Activities
    
    
    
    (804,349
    )
    
    
    
    
    (1,170,185
    )
    
    
    
    
    (5,065,204
    )
    
    
    
    
    (45,616
    )Cash Flows From Financing ActivitiesNet increase (decrease) in line of credit
    
    
    
    (3,531,067
    )
    
    
    
    
    4,054,524
    
    
    
    
    299,250
    
    
    
    
    (7,121,955
    )Proceeds from issuance of common stock
    
    
    
    13,098
    
    
    
    
    16,671
    
    
    
    
    625,000
    
    
    
    
    Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    
    Repayment of amount due to former stockholders
    
    
    
    
    
    
    
    
    (33,152
    )
    
    
    
    
    
    
    
    
    
    Decrease (increase) in restricted cash
    
    
    
    5,500,000
    
    
    
    
    (5,350,000
    )
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    (5,596,047
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    
    (524,875
    )
    
    
    
    
    (322,479
    )
    
    
    
    
    
    
    
    
    
    Net Cash (Used In) Provided By Financing Activities
    
    
    
    (4,138,891
    )
    
    
    
    
    (1,634,436
    )
    
    
    
    
    3,424,250
    
    
    
    
    (7,121,955
    )Net decrease in Cash and Cash Equivalents
    
    
    
    (103,554
    )
    
    
    
    
    (194,680
    )
    
    
    
    
    (280,854
    )
    
    
    
    
    (5,996,530
    )Beginning Cash and Cash Equivalents
    
    
    
    1,021,237
    
    
    
    
    1,215,917
    
    
    
    
    1,496,771
    
    
    
    
    7,493,301Ending Cash and Cash Equivalents
    
    
    $
    
    917,683
    
    
    
    $
    
    1,021,237
    
    
    
    $
    
    1,215,917
    
    
    
    $
    
    1,496,771Supplemental Disclosure of Cash Flow InformationCash paid during the period for:Income taxes
    
    
    $
    
    1,152,865
    
    
    
    $
    
    417,056
    
    
    
    $
    
    433,000
    
    
    
    $
    
    345,000Interest
    
    
    
    755,618
    
    
    
    
    355,474
    
    
    
    
    52,500
    
    
    
    
    28,000The accompanying notes are integral parts of these consolidated financial statements.
35

EMTEC, INC.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Preferred Stock
    
    Common Stock
    
    AdditionalPaid-inCapital
    
    RetainedEarnings
    
    TreasuryStock, atat Cost
    
    TotalStockholders’EquityShares
    
    Amount
    
    Shares
    
    AmountPredecessor periodBalance at August 31, 2003
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    9,528,110
    
    
    
    $
    
    95,281
    
    
    
    $
    
    771,680
    
    
    
    $
    
    4,131,729
    
    
    
    $
    
    (15,437
    )
    
    
    
    $
    
    4,983,253Capital contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    903,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    903,811Noncash distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (399,587
    )
    
    
    
    
    
    
    
    
    
    (399,587
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    885,837
    
    
    
    
    
    
    
    
    
    885,837Balance at April 16, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,528,110
    
    
    
    $
    
    95,281
    
    
    
    $
    
    1,675,491
    
    
    
    $
    
    4,617,979
    
    
    
    $
    
    (15,437
    )
    
    
    
    $
    
    6,373,314Successor periodBalance at April 17, 2004
    
    
    
    1,000
    
    
    
    
    10
    
    
    
    
    9,528,110
    
    
    
    
    95,281
    
    
    
    
    1,529,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,281
    
    
    
    
    
    
    
    
    
    122,281Balance at August 31, 2004
    
    
    
    1,000
    
    
    
    $
    
    10
    
    
    
    
    9,528,110
    
    
    
    $
    
    95,281
    
    
    
    $
    
    1,529,709
    
    
    
    $
    
    122,281
    
    
    
    $
    
    
    
    
    
    $
    
    1,747,281Common stock deemed to be issued in reverse merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,676,024
    
    
    
    
    76,760
    
    
    
    
    19,362,670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,439,430Dividends accrued on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (102,794
    )
    
    
    
    
    
    
    
    
    
    (102,794
    )Conversion of preferred stock into debt
    
    
    
    (1,000
    )
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (999,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000,000
    )Common stock issued upon exercise of optionspost merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000
    
    
    
    
    280
    
    
    
    
    16,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,670Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    826,985
    
    
    
    
    
    
    
    
    
    826,985Balance at August 31, 2005
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    17,232,134
    
    
    
    $
    
    172,321
    
    
    
    $
    
    19,908,779
    
    
    
    $
    
    846,472
    
    
    
    $
    
    
    
    
    
    $
    
    20,927,572Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,596,047
    )
    
    
    
    
    (5,596,047
    )Common stock issued upon exercise of optionspost merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,741
    
    
    
    
    178
    
    
    
    
    12,920
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,098Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,915
    
    
    
    
    
    
    
    
    
    197,915Balance at August 31, 2006
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    17,249,875
    
    
    
    $
    
    172,499
    
    
    
    $
    
    19,921,699
    
    
    
    $
    
    1,044,387
    
    
    
    $
    
    (5,596,047
    )
    
    
    
    $
    
    15,542,538The accompanying notes are integral parts of these consolidated financial statements.
36

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAugust 31, 2006
1. Organization
Business
On August 5, 2005, Emtec, Inc. (Old Emtec) completed a merger with Darr Westwood Technology Corporation (Darr) pursuant to which the two companies merged and now operate as a consolidated entity
  that has retained the name Emtec, Inc. (the Company or Emtec) (the August 5, 2005 merger).Management concluded that the transaction resulted in a change in control of the Company and that the transaction
  should be accounted for as a reverse merger, whereby Darr was considered the accounting acquirer of Old Emtec for financial reporting purposes. In what was regarded as a recapitalization, the historical
  stockholders’ equity of Darr, the accounting acquirer, prior to the merger, was retroactively restated for the equivalent number of shares received in the merger after giving effect to any difference in the par value
  of Old Emtec’s and Darr’s stock with an offset to paid-in capital. Retained earnings of Darr are carried forward after the merger. Operations prior to the merger are those of Darr. Earnings per share for periods
  prior to the merger were restated to reflect the equivalent number of shares.
Accordingly, the historical financial statements of Emtec are considered to be those of Darr for all periods presented. The consolidated financial statements presented in this report consist of following financial
  statements:
1. Emtec for the year ended August 31, 2006 includes the accounts and transactions of the combined company for the period from September 1, 2005 to August 31, 2006;
2. Darr for the year ended August 31, 2005 (includes accounts and transactions of Emtec for the period from August 6, 2005 to August 31, 2005);
3. Darr (following the Westwood Merger on April 16, 2004) for the period from April 17, 2004 to August 31, 2004 (Darr Successor Period);
4. Westwood for the period from September 1, 2003 to April 16, 2004 (the Darr Predecessor Period).
The notes to the consolidated financial statements refer to the following defined periods ended: August 31, 2006, August 31, 2005, August 31, 2004, and April 16, 2004.
The Company is an information technology company, providing consulting, services and products to commercial, federal, education, state and local verticals. The Company’s areas of specific practices include
  communications, data management, enterprise computing, managed services, storage and data center planning and development. The Company’s client base is comprised of departments of the United States Federal
  Government, U.S. state and local governments, schools and commercial businesses throughout the United States. The most significant portion of the Company’s revenue is derived from activities as a reseller of
  Information Technology (“IT”) products, such as workstations, servers, microcomputers, and application software and networking and communications equipment.
The Company considers all of its operating activity to be generated from a single operating segment.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Emtec, Inc. (New Jersey Corporation), Emtec Viasub LLC, and Emtec Viasub’s wholly owned
  subsidiary Westwood Computer Corporation (“Westwood”) and Westwood’s wholly owned subsidiary, Westwood Solutions LLC. Significant intercompany account balances and transactions have been eliminated in
  consolidation.
37

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period, including, but not limited to, receivable valuations, impairment of
  goodwill and other long lived assets, and income taxes. Management’s estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to
  be reasonable under the circumstances. The Company reviews these matters and reflects changes in estimates as appropriate. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years balances in order to conform to current presentations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company typically maintains cash at major financial institutions. At times
  throughout the year, bank account balances exceed FDIC insurance limits, which are up to $100,000 per account.
The Company has restricted cash from time to time during the year. The Company recorded restricted cash of $150,000 and $5,650,000 at August 31, 2006 and 2005, respectively. Restricted cash of $150,000
  at August 31, 2006 and 2005 is to obtain a letter of credit required as a security deposit for a real estate lease and $5,500,000 at August 31, 2005 represents cash earmarked to fund a self tender offer that was
  initiated on September 7, 2005 in connection with the merger. At August 31, 2005 cash that has not been released by the finance company totaled to $476,290.
Concentration of Credit Risk and Significant Customers
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 Periods EndedAugust 31, 2006
    
    August 31, 2005
    
    August 31, 2004
    
    April 16, 2004Departments of theUnited States Government
    
    
    $
    
    118,167,014
    
    
    
    
    52.6
    %
    
    
    
    $
    
    123,823,906
    
    
    
    
    76.1
    %
    
    
    
    $
    
    31,463,023
    
    
    
    
    75.6
    %
    
    
    
    $
    
    66,663,466
    
    
    
    
    75.6
    %State and Local Governments
    
    
    
    25,299,178
    
    
    
    
    11.3
    %
    
    
    
    
    17,625,586
    
    
    
    
    10.8
    %
    
    
    
    
    3,571,827
    
    
    
    
    8.6
    %
    
    
    
    
    7,567,943
    
    
    
    
    8.6
    %Commercial Companies
    
    
    
    51,606,516
    
    
    
    
    23.0
    %
    
    
    
    
    12,338,163
    
    
    
    
    7.6
    %
    
    
    
    
    4,580,576
    
    
    
    
    11.0
    %
    
    
    
    
    9,705,269
    
    
    
    
    11.0
    %Education and other
    
    
    
    29,439,234
    
    
    
    
    13.1
    %
    
    
    
    
    8,844,387
    
    
    
    
    5.4
    %
    
    
    
    
    2,026,178
    
    
    
    
    4.9
    %
    
    
    
    
    4,293,041
    
    
    
    
    4.9
    %Total Revenues
    
    
    $
    
    224,511,942
    
    
    
    
    100.0
    %
    
    
    
    $
    
    162,632,042
    
    
    
    
    100.0
    %
    
    
    
    $
    
    41,641,604
    
    
    
    
    100.0
    %
    
    
    
    $
    
    88,229,719
    
    
    
    
    100.0
    %The Company does not require collateral or other security to support credit sales but provides an allowance for doubtful accounts based on historical experience and specifically identified risks. Trade
  receivable are considered delinquent when payment is not received within standard terms of sale and are charged off against the allowance for doubtful accounts when management determines that recovery is
  unlikely and the Company ceases its collection efforts.
38

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and management’s evaluation of periodic aging of the accounts. The trade
  account receivables consist of the following:
August 31,2006
    
    2005Trade receivables
    
    
    $
    
    27,541,825
    
    
    
    $
    
    34,766,373Allowance for doubtful accounts
    
    
    
    (117,088
    )
    
    
    
    
    (225,000
    )Trade receivables, net
    
    
    $
    
    27,424,737
    
    
    
    $
    
    34,541,373Fair Value of Financial Instruments
The carrying amounts of accounts receivable, other receivables, accounts payable, accrued expenses and customer deposits approximate fair value because of their short-term nature. The carrying amount of the
  line of credit and long-term debt approximates their fair value because the interest rates reflect rates the Company would be able to obtain on debt with similar terms and conditions.
Revenue Recognition
The Company recognizes revenue from the sales of products when risk of loss and title passes which is upon customer acceptance.
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. The Company follows the criteria contained in EITF 00-21 and SAB 104 in recognizing revenue associated with these transactions. The Company performs software installations, configurations and
  imaging services at its locations prior to the delivery of the product. Some customer arrangements include “set-up” services performed at customer locations where the Company’s personnel perform the routine
  tasks of removing the equipment from boxes, and setting up the equipment at customer 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. The Company recognizes 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, the Company’s customer has agreed that the transaction is complete as to the “hardware” component. In instances where
      the Company’s customer does not accept delivery until “set-up” services are completed, the Company defers all revenue in the transaction until customer acceptance occurs.•
    
    
    
    There are occasions when a customer requests a transaction on a “bill & hold” basis. The Company follows the SAB 104 criteria and recognizes revenue from these sales prior to date of physical delivery only
      when all the criteria of SAB 104 are met. At August 31, 2006 and 2005, accounts receivable related to bill and hold sales totaled $144,369, and $221,255, respectively. Total revenues from bill and hold
      sales were $835,870 and $768,726 with a gross profit of $121,632 and $86,860 which was included in the results of operations for the year ended August 31, 2006, and 2005, respectively. The Company
      does not modify its normal billing and credit terms for these customers. The customer is invoiced at the date of revenue recognition when all of the criteria have been met.The Company has experienced minimal customer returns. Since all eligible projects must be returned to the Company with 30 days from the date of the invoice, the Company reduces the product revenue and
  cost of goods in each accounting period based on the actual returns that occurred in the next 30 days after the close of the accounting period.
Service and consulting revenue include time billings based upon billable hours charged to the customers, fixed price short-term projects, hardware maintenance contracts, and manufacturer support service
39

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
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 proportional 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.
Revenue from the sale of warranties and support service contracts where the Company is responsible for fulfilling the service requirements of the client are 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).
Revenues from manufacturer support service contracts where the manufacturer is responsible for fulfilling the service requirements of the customer are recognized immediately on their contact sale date.
  Manufacturer support service contracts contain cancellation privileges that allow our customers’ to terminate a contract with 90 days written notice. In this event, the customer 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, the Company has experienced no customer cancellations of any significance
  during our most recent three-year history and do not expect cancellations of any significance in the future.
The Company may also enter into sales arrangements with customers that contain multiple elements. The Company recognizes 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.
Rebates
Rebates received on products purchased are recorded in the accompanying consolidated statements of income as a reduction of the cost of revenues in accordance with Emerging Issues Task Force Abstract
  No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16). At August 31, 2006 and August 31, 2005, approximately $1,946,469 and $2,117,290,
  respectively, of rebates receivable were recorded in accounts-receivable-other in the accompanying consolidated balance sheets.
Inventory
Inventory is stated at the lower of average cost (specific identification) or market. Inventory is entirely finished goods purchased for resale and consists of computer hardware, computer software, computer
  peripherals and related supplies. The Company provides an inventory reserve for products it determines are obsolete or where salability has deteriorated based on managements review of products and sales.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets, which generally are three to five years.
  Maintenance and repair costs are charged to expense as incurred. The cost and accumulated depreciation relating to property and equipment retired or otherwise disposed of are eliminated from the accounts and
  any resulting gains or losses are credited or charged to income.
Goodwill
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired companies. Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible
  Assets” and as a result, goodwill is not amortized but tested for impairment annually or more
40

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
frequently if events or changes in circumstances indicate that the asset might be impaired. The Company 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.
Changes in the carrying amounts of goodwill for the year ended August 31, 2006 and 2005 are as follows:
2006
    
    2005Balance, beginning
    
    
    $
    
    8,974,610
    
    
    
    $
    
    Goodwill acquired during the year
    
    
    
    
    
    
    
    
    8,974,610Adjustment to previously recorded purchase price
    
    
    
    39,445
    
    
    
    
    Balance, ending
    
    
    $
    
    9,014,055
    
    
    
    $
    
    8,974,610For the year ended August 31, 2006, the Company determined that segment reporting of its business activities is not required under SFAS 131 due to the similarity in economic and business characteristics of
  its operating segments that allow for aggregation as one business unit. Therefore, the entire Company is considered one reporting unit for purposes of impairment testing under SFAS 142. The Company performed
  an impairment test as of June 1, 2006, based on a market approach that uses our market capitalization at that date as the fair value of the Company. Under this method, we compare the fair value of the reporting
  unit to its carrying value inclusive of goodwill. The fair value of the Company exceeded the carrying value, thus the Company determined that there was no impairment.
Identifiable Intangible Asset
On August 5, 2005, the Company allocated $8,378,166 of the purchase price associated with the acquisition of Old Emtec to customer relationships. Aggregate customer relationships at August 31, 2006 and
  2005 amounted to $8,661,712 less accumulated amortization of $648,585 and $68,868, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13-15 years.
2006
    
    2005Gross carrying amount
    
    
    $
    
    8,661,712
    
    
    
    $
    
    8,661,712Less accumulated amortization
    
    
    
    648,585
    
    
    
    
    68,868Balance, ending
    
    
    $
    
    8,013,127
    
    
    
    $
    
    8,592,844Amortization expense was $579,717, $61,598 and $7,270 for the periods ended August 31, 2006, 2005 and 2004, respectively. Amortization expense of $580,356 is expected to be recorded each year through
  August 31, 2016, $573,085 for the year ended August 31, 2017, $558,544 for the years ended August 31, 2018, and 2019, and $518,755 for the year ended August 31, 2020.
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 Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of long-lived assets is assessed by
  a comparison of the carrying amount to the estimated undiscounted future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows
  are less than the carrying amount, the asset is considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $904,886, $551,065, $200,690, and $217,557 for the periods ending August 31, 2006, August 31, 2005, August 31, 2004 and April 16,
  2004, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations. We receive marketing development funds from various manufacturers which are also
  included in selling, general and administrative expense.
41

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
Stock-Based Compensation
Effective September 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”), “Share-Based Payment,” using the modified prospective transition method. Under
  the modified prospective transition method, the Company is required to recognize compensation cost for 1) all share-based payments granted prior to, but not yet vested as of, September 1, 2005 based on the grant date
  fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards 123; and 2) for all share-based payments granted on or after September 1, 2005 based on the grant date
  fair value estimated in accordance with SFAS 123(R). In accordance with the modified prospective method, the Company has not restated prior period results.
The Company did not grant any share-based compensation awards during the year ended August 31, 2006 and all outstanding stock options as of September 1, 2005 were fully vested, thus no compensation
  expense was recognized.
Income Taxes
The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 requires the recognition of deferred tax
  liabilities and assets for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.
Earnings Per Share
Basic earnings per share amounts are computed by dividing net income available to common stockholders (the numerator) by the weighted average shares outstanding (the denominator), during the period.
  Shares issued during the period are weighted for the portion of the period that they were outstanding.
Diluted earnings per share amounts are similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been
  outstanding if dilutive options and warrants had been exercised. The assumed conversion of options and warrants resulted in 1,669 and 33,284 additional dilutive shares for the years ended August 31, 2006 and
  2005, respectively. Outstanding stock warrants to purchase 1,598,365 and 1,914,682 common shares as of August 31, 2006 and 2005, respectively, were not included in the computation of diluted earnings per share
  for the years ended August 31, 2006 and 2005 because the exercise price was greater than the average market price of the Company’s common shares.
Recently Issued Accounting Standards
In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”,
  (“SFAS No. 154”). SFAS No. 154 changes the requirement for the accounting and reporting of a change in an accounting principle. SFAS No. 154 is effective for accounting changes and correction of errors in
  fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109.” FIN 48 clarifies the accounting for uncertainty in
  income taxes recognized in and enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive model for recognizing, measuring,
  presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of the application of FIN 48 these will be accounted for
  as an adjustment to retained earnings. Additional disclosures about the amounts of such liabilities will be required also. The Company is required to adopt FIN 48 beginning September 1, 2007.
42

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
Management is currently assessing the impact of FIN 48 on consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” which provides a definition of fair value, establishes a framework for
  measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
  within those years. The provisions of SFAS 157 will be applied prospectively.
3. Acquisition
On August 5, 2005, Old Emtec and Darr completed a transaction pursuant to which the two companies merged and will operate as a new consolidated entity that retains the name Emtec, Inc. Under the terms
  of the merger agreement all shares Darr common stock that were issued and outstanding immediately prior to the merger were exchanged for 9,528,110 shares of Old Emtec’s common stock plus warrants to
  purchase an additional 10% of the Company, measured on a post exercise basis. Immediately following the merger, Darr’s stockholders owned approximately 55.7% of the outstanding shares of the Company’s
  common stock. In addition, as a condition of the transaction, the Company was required to initiate a self tender offer to repurchase issued and outstanding shares of the Company for an aggregate purchase price up
  to $5,500,000 at a fixed price of $1.92 per share.
Management concluded that the transaction resulted in a change in control of the Company and that the transaction should be accounted for as a reverse merger, whereby Darr is considered the accounting
  acquirer and the purchase price is allocated to the net tangible and intangible assets of Old Emtec (hereinafter net assets) based on their underlying fair values.
The aggregate purchase price was $20,275,670 based on the fair value of the consideration, which consisted of: $19,266,820 for 7,676,024 shares of common stock of Old Emtec deemed to be issued at $2.51
  per share, $172,612 for stock options deemed to be issued, $315,104 for put warrants deemed to be issued under a self tender offer and $521,134 of acquisition costs incurred by Darr. The Company accounted for
  the acquisition under the purchase method, whereby, amounts were assigned to assets acquired and liabilities assumed based on their respective fair values, on the date of merger. Management determined the fair
  value of Old Emtec’s identifiable net assets on August 5, 2005 was $11,458,800, which resulted in an excess purchase price over fair value of net assets acquired of $8,816,870, which was recognized as goodwill.
The allocation of purchase price by significant component is as follows:
Accounts and other receivables
    
    
    $
    
    16,884,901Inventories
    
    
    
    2,155,339Deferred tax assetcurrent
    
    
    
    267,574Prepaid expenses
    
    
    
    354,260Property and equipment
    
    
    
    210,770Customer relationships
    
    
    
    8,378,166Other assets
    
    
    
    356,651Accounts payable
    
    
    
    (9,702,715
    )Other current liabilities
    
    
    
    (4,469,849
    )Deferred tax liabilities
    
    
    
    (2,976,297
    )Fair value of net assets acquired
    
    
    $
    
    11,458,800Purchase price
    
    
    
    20,275,670Excess purchase price
    
    
    $
    
    8,816,870The value of the deemed put warrants issued was estimated on the date of grant (August 5, 2005) using a Black-Scholes option pricing model. Under the Black-Scholes model, the total value of the put
43

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
options was $315,104. Key assumptions used in the model included: exercise price$1.92 per share, stock price$2.15 per share, expected volatility of 0.869; risk free rate of 4.5% and dividend yield of 0.0%. At
  August 31, 2005, the value of the put options was estimated to be $11,500 and was determined based on the same key assumptions with a stock price of $2.40 per share. In connection with the change in value,
  the Company recorded other income of $303,600 in the consolidated statement of income. The deemed put warrants expired in October 2005 upon completion of the Company’s self tender offer described further
  in Note 18.
On April 16, 2004, the Darr purchased substantially all of the net assets of Westwood for $6,697,816. Prior to the acquisition, the Company had no operating history. The acquisition was accounted for under
  the purchase method of accounting and allowed the Company to enter into the computer and peripheral sales and service industry. The accompanying financial statements present the results of operations for the
  period from September 1, 2003 to April 16, 2004 under the Predecessor’s basis of accounting (Predecessor Period) and for the period from April 17, 2004 to August 31, 2004 under the Company’s basis of
  accounting (Successor Period). The purchase price consisted of cash of $5,245,222, assumed notes payable of $1,254,778 and related acquisition costs of $197,816.
The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, on the date of purchase, as follows:
Current assets
    
    
    $
    
    14,152,360Customer relationships
    
    
    
    283,546Property and equipment
    
    
    
    188,420Deferred tax assets
    
    
    
    377,154Other assets
    
    
    
    58,038Current liabilities
    
    
    
    (7,853,970
    )Accrued severance
    
    
    
    (507,732
    )Net assets acquired
    
    
    $
    
    6,697,816On March 1, 2005, Darr acquired selected assets of Proven Technology LLC, a provider of data storage solutions including hardware, software and support services for $162,610. The acquisition was accounted
  for under the purchase method of accounting and allowed the Company to enter into the data storage market. The purchase price was allocated to assets acquired, which consisted of property and equipment of
  $4,871 based on their respective fair values on the date of purchase. There were no liabilities assumed in the transaction and the excess of purchase price over the estimated fair value of assets acquired totaled
  $157,739 and is recorded as goodwill.
Unaudited pro forma condensed results of operations for the year ended August 31, 2005 and the twelve month (predecessor and successor combined) period ended August 31, 2004 are presented as if the
  August 5, 2005 merger and the March 1, 2005 asset acquisition had been completed at the beginning of each year as follows:
2005
    
    2004Net revenues
    
    
    $
    
    267,658,142
    
    
    
    $
    
    235,794,558Gross profit
    
    
    
    29,839,291
    
    
    
    
    28,664,004Income from continuing operations
    
    
    $
    
    1,984,942
    
    
    
    $
    
    892,829Income from continuing operations per share(basic and diluted)
    
    
    $
    
    0.12
    
    
    
    $
    
    0.05The pro forma condensed results of operations for the twelve month period ended August 31, 2004 include a nonrecurring gain of $405,652 recorded by the accounting acquirer.
44

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
4. Property and Equipment
Property and equipment consisted of the following at August 31:
August 31, 2006
    
    August 31, 2005
    
    Estimated LifeIn YearsLeasehold improvements
    
    
    $
    
    310,562
    
    
    
    $
    
    197,903
    
    
    4.67Computer equipment
    
    
    $
    
    797,246
    
    
    
    $
    
    572,728
    
    
    3 to 5Furniture and fixtures
    
    
    $
    
    123,194
    
    
    
    $
    
    31,156
    
    
    3 to 5Automobiles
    
    
    $
    
    69,062
    
    
    
    $
    
    72,956
    
    
    3 to 5Software
    
    
    $
    
    508,094
    
    
    
    $
    
    172,410
    
    
    3 to 5$
    
    1,808,159
    
    
    
    $
    
    1,047,153Less accumulated depreciation
    
    
    $
    
    (492,070
    )
    
    
    
    $
    
    (129,994
    )Property and Equipment, net
    
    
    $
    
    1,316,089
    
    
    
    $
    
    917,159Depreciation expense was $365,968, $113,525, $16,469, and $51,266 for the periods ended, August 31, 2006, August 31, 2005, August 31, 2004 and April 16, 2004, respectively.
5. Line of Credit
On August 5, 2005, the Company entered into a credit facility under two agreements with GE Commercial Distribution Finance Corporation (the “Lender”). The credit facility finances purchases from specified
  vendors, as defined, and allows for borrowings based on a percentage of eligible accounts receivable, as defined. Borrowings under both agreements are limited to an aggregate borrowing of the lesser of
  $35,000,000 or 85% of eligible accounts receivable, plus 100% of unsold inventory financed by the Lender, minus a $3.15 million reserve. Borrowings under both agreements bear interest at the greater of the
  prime rate as published by JP Morgan Chase Bank or 4.0%. The underlying agreements allow for an increased borrowing base during periods of high seasonal activity. On November 22, 2005, the Lender increased
  the permitted aggregate borrowings under the Company’s credit facility from $35.0 million to $48.0 million. This temporary increase was available to the Company through December 15, 2005.
The credit facility is secured by substantially all of the Company’s assets, and the underlying agreements contain certain restrictive covenants that limit dividends to stockholders and require the Company to
  meet defined financial covenants. In addition, the credit facility requires that the Company maintain a lock-box for all cash receipts related to trade accounts receivable, from which the financing company releases
  funds to the Company for operations pursuant to terms identified in the underlying agreements.
On February 13, 2006, the Company entered into an addendum to its credit facility with the Lender. This addendum amended the credit facility by increasing the reserve amount to $5.0 million and the
  Company paid a waiver fee of $50,000 for its non-compliance with certain financial covenants as of November 30, 2005.
On April 10, 2006, the Company entered into an addendum to its credit facility with the Lender. This addendum amended the Credit Facility by decreasing the reserve amount from $5.0 million to $3.0
  million, increasing the time period for eligibility of all U.S. federal government accounts receivable from 90 to 120 days from the date of the invoice, and revised the financial covenants from the quarter ended
  February 28, 2006 through May 31, 2007. All other terms remain unchanged.
The Company had $881,459 and $4,412,526 outstanding balances under the accounts receivable credit facility, and $3.25 million and $10.95 million (included in the Company’s accounts payable) outstanding
  balances plus $788,357 and $2.28 million in open approvals under the floor plan credit facility with Lender at August 31, 2006 and 2005, respectively. Net availability of $14.60 million and $11.16 million was
  available under the accounts receivable credit facility, and $15.47 million and $6.20 million was available under the floor plan credit facility as of August 31, 2006 and 2005, respectively.
45

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
6. Commitments and Contingencies
The Company leases its operating facilities, certain sales offices and transportation equipment under noncancelable operating lease agreements that expire on various dates through August 31, 2010. Rent expense
  was $857,121, $385,990, $118,958 and $222,329 for the periods ending August 31, 2006, August 31, 2005, August 31, 2004, and April 16, 2004, respectively, and is recorded in general and administrative expenses and
  in rent expenserelated party on the consolidated statements of income.
The following are our contractual obligations associated with lease commitments. We lease warehouse and office facilities, vehicles and certain office equipment under noncancellable operating leases. Future
  minimum lease payments under such leases are as follows:
Fiscal Years2007
    
    
    $
    
    857,9122008
    
    
    
    735,0182009
    
    
    
    431,4762010
    
    
    
    167,1722011
    
    
    
    258Total
    
    
    $
    
    2,191,836The Company is occasionally involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business. The Company believes that any liability or loss associated with such
  matters, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations.
In March 2002, a lawsuit was filed against the Company by a competitor seeking damages of an unspecified amount. The competitor is alleging that the Company illegally interfered with customer
  relationships of the competitor. At this time, the outcome of this litigation cannot be determined. There has been no change to this litigation matter in the last twelve months. The lawsuit is still in the discovery
  phase.
At March 16, 2005, Old Emtec sold its 5.49% working interest in the Roosevelt Hot Springs geothermal unit to Energy Minerals, Inc. (“buyer”). As part of the transaction, the buyer assumed the remaining
  liability under the geothermal steam purchase agreement with Pacificorp (d/b/a Utah Power & Light Company). Under the 30-year agreement executed in 1993, a $1 million prepayment was received by Old Emtec
  from Pacificorp. The agreement gives Pacificorp the right to recover a pro-rata portion of their original $1 million pre-payment should the geothermal unit fail to produce steam at levels specified under the
  agreement. Old Emtec recorded the pre-payment as deferred revenue and was amortizing the amount as earned revenue over the 30-year term of the steam purchase agreement. Energy Minerals, Inc. has been
  assigned rights to the steam purchase agreement with Pacificorp and assumed the remaining $672,123 deferred revenue liability as of March 16, 2005. However, should the geothermal unit fail to produce steam at
  levels specified under the agreement during the remaining 30 year term of the agreement, PacifiCorp could potentially make a claim against the Company as a former owner, if the current ownership of the
  geothermal unit failed to satisfy Pacificorp’s claims. The Company believes that the probability of this occurrence is remote due to the strong production and operating history of the geothermal unit.
During the fiscal 2006 year, Westwood was audited by the IRS. The IRS audited the last two predecessor tax years ended April 16, 2004. With one exception, all tax matters identified by the IRS have been
  settled with appropriate adjustments recorded in the current tax expense for the year ended August 31, 2006. The one unsettled matter currently involves a disagreement with the IRS over the valuation of real
  property sold by Westwood to a related party during Westwood’s 2003 fiscal year. The IRS has initially asserted that the Company’s property valuation and resulting taxable gain was understated by $1.5 million.
  Discussions with the IRS auditor are continuing, however, the Company believes that it has adequately supported the valuation of the transaction and reported the appropriate income taxes.
46

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
7. Accrued Severance
The Company was counterparty to deferred compensation arrangements with a spouse (as beneficiary) of a former officer and a former stockholder of Westwood during the periods ended April 16, 2004 and
  August 31, 2003. Commensurate with the acquisition of Westwood on April 16, 2004, the arrangement with the spouse was forfeited in exchange for a separation agreement. The agreement provides quarterly
  severance payments to the beneficiary of $22,000 to $33,900 through February 2009. In connection with the exchange, the Company recorded forgiveness of debt of $405,652 for the difference between the
  estimated present value of future cash flows and the forfeited deferred compensation arrangement and the separation agreement during the period ended April 16, 2004. The Company’s liability at August 31, 2006
  and 2005 was $272,332 and $380,356, respectively for the separation agreement. The deferred compensation arrangement between the Company and former stockholder of Westwood was forfeited without
  recompense. In connection with this forfeiture, the Company recorded a contribution to capital of $1,507,181, net of income tax effect, during the period ended April 16, 2004.
8. Long-Term Debt
The Company’s long-term debt at August 31, consists of the following:
2006
    
    20055% junior subordinated notes payable to former stockholders of Westwood
    
    
    $
    
    219,586
    
    
    
    $
    
    313,695$8% junior subordinated notes payable to former stockholders of Westwood
    
    
    
    313,694
    
    
    
    
    627,3898% junior subordinated notes payable to Darr Westwood LLC, a related entity
    
    
    
    1,102,794
    
    
    
    
    1,102,794Subordinate note payable to Darr Westwood LLC, a related entity
    
    
    
    750,000
    
    
    
    
    750,000Subordinate note payable to Four Kings Management
    
    
    
    606,000
    
    
    
    
    714,000GMAC Note
    
    
    
    18,144
    
    
    
    
    27,215Total debt
    
    
    
    3,010,218
    
    
    
    
    3,535,093Less current portion
    
    
    
    (719,356
    )
    
    
    
    
    (524,874
    )Long-term debt, net of current portion
    
    
    $
    
    2,290,862
    
    
    
    $
    
    3,010,219The 5% junior subordinated notes payable to the former stockholders of Westwood requires annual principal payments of $94,108 plus accrued interest in April 2007. Annual principal payments of $62,739
  plus accrued interest are due in April 2008 and April 2009.
The 8% junior subordinated notes payable to the former stockholders of Westwood require principal payments of $156,847 plus accrued interest due semiannually commencing October 2004.
The 8% junior notes payable to Darr Westwood LLC is due in April 2009 with accrued interest payable annually in August of 2008 and annually thereafter. These notes were issued in exchange for 1,000
  shares outstanding of series A redeemable preferred stock of Darr in conjunction with the August 5, 2005 merger. Interest expense was $89,449 and $6,372 for the periods ended August 31, 2006 and August 31,
  2005, respectively, all of which is accrued at the end of each respective period.
The subordinated note payable to Darr Westwood LLC bears interest at a rate equal to the prime rate, as published in the Wall Street Journal, plus 4%, not to exceed 10%. Annual principal payments are due
  in April 2007 ($194,482), April 2008 ($323,859) and April 2009 ($231,659). Accrued interest is payable annually beginning in March 2007 through April 2009. The Company is obligated under this note to pay
  additional interest in the form of a fee based on achieving certain levels of revenue, as defined. The fee, if any, is limited to $120,000 per year and is payable in March 2008 and April 2009. Interest expense was
  $191,931, $202,870 and $69,879 for the periods ended August 31, 2006, August 31, 2005 and August 31, 2004, respectively, all of which is accrued at the end of each respective period.
47

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
The subordinated note payable to Four Kings Management, LLC (Four Kings) bears interest at a rate equal to the prime rate, as published in the Wall Street Journal, plus 4%, not to exceed 10%. Interest is
  payable monthly. Monthly principal payments of $9,000 began in May 2005 and continue through March 2009. The remaining balance plus accrued interest is due in April 2009. The Company is obligated under
  this note to pay additional interest in the form of a fee based on achieving certain levels of revenue, as defined. The fee, if any, is payable quarterly and is limited to $120,000 per year. Officers of Westwood own
  membership interests in Four Kings. Interest expense was $182,786, $202,203 and $69,879 for the periods ended August 31, 2006, August 31, 2005 and 2004, respectively, of which $25,254, $32,198 and $27,217
  is accrued at the end of the respective period.
Principal maturities of long-term debt at August 31, 2006 are as follows $719,356, $503,670 and $1,787,192 for the respective years ended August 31, 2007 through August 31, 2009.
9. Income Taxes
Income tax expense (benefit) for the periods ended August 31, 2006, August 31, 2005, August 31, 2004, and April 16, 2004 consists of the following:
Year EndedAugust 31, 2006
    
    Year EndedAugust 31, 2005
    
    SuccessorPeriod
    
    PredecessorPeriodCurrent provision:Federal
    
    
    $
    
    395,102
    
    
    
    $
    
    499,144
    
    
    
    $
    
    56,208
    
    
    
    $
    
    454,620State
    
    
    $
    
    (101,757
    )
    
    
    
    
    136,284
    
    
    
    
    16,637
    
    
    
    
    134,522293,345
    
    
    
    
    635,428
    
    
    
    
    72,845
    
    
    
    
    589,142Deferred provision (benefit):Federal
    
    
    
    (77,628
    )
    
    
    
    
    (141,485
    )
    
    
    
    
    39,029
    
    
    
    
    45,019State
    
    
    
    (7,713
    )
    
    
    
    
    (41,393
    )
    
    
    
    
    11,549
    
    
    
    
    13,284(85,341
    )
    
    
    
    
    (182,878
    )
    
    
    
    
    50,578
    
    
    
    
    58,303$
    
    208,004
    
    
    
    $
    
    452,550
    
    
    
    $
    
    123,423
    
    
    
    $
    
    647,445A reconciliation of the federal statutory provision to the provision for financial reporting purposes is as follows:
Year EndedAugust 31, 2006
    
    Year EndedAugust 31, 2005
    
    SuccessorPeriod
    
    PredecessorPeriodStatutory federal tax provision
    
    
    $
    
    138,010
    
    
    
    $
    
    435,043
    
    
    
    $
    
    83,539
    
    
    
    $
    
    521,316State income taxes net of federal
    
    
    
    30,484
    
    
    
    
    69,696
    
    
    
    
    14,823
    
    
    
    
    92,503Fair value adjustment of deemed put warrants
    
    
    
    
    
    
    
    
    (103,225
    )
    
    
    
    
    
    
    
    
    
    Federal tax assesment related to IRS audit
    
    
    
    72,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other permanent difference
    
    
    
    (33,453
    )
    
    
    
    
    51,036
    
    
    
    
    25,061
    
    
    
    
    33,626Provision for income taxes
    
    
    $
    
    208,004
    
    
    
    $
    
    452,550
    
    
    
    $
    
    123,423
    
    
    
    $
    
    647,44548

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
The tax effects of temporary differences that give rise to significant portions net of deferred tax assets and deferred tax liabilities at August 31, 2006 and 2005 are as follows:
2006
    
    2005Deferred
        tax assets:Trade
        receivables
    
    
    $
    
    171,329
    
    
    
    $
    
    249,595Inventories
    
    
    
    185,080
    
    
    
    
    358,996Accrued
        liabilities
    
    
    
    382,580
    
    
    
    
    453,665Deferred
        Revenue
    
    
    
    113,036Goodwill
    
    
    
    64,001
    
    
    
    
    74,998Property
        and equipment
    
    
    
    42,071
    
    
    
    
    44,113$
    
    958,097
    
    
    
    $
    
    1,181,367Deferred
        tax liabilities:Customer
        Relationships
    
    
    $
    
    (3,107,521
    )
    
    
    
    $
    
    (3,330,347
    )Deferred
        revenue
    
    
    
    
    
    
    
    
    (85,785
    )$
    
    (3,107,521
    )
    
    
    
    $
    
    (3,416,132
    )Net
        deferred tax (liability) asset
    
    
    $
    
    (2,149,423
    )
    
    
    
    $
    
    (2,234,765
    )10. Retirement Plan
The Company’s wholly-owned subsidiary, Emtec, Inc. (NJ corp.) sponsors a 401(k) plan for all employees who are at least 20 years of age with at least 6 months of service. Eligible employees may contribute
  2% to 15% of their annual compensation to the plan. The Company matches 25% of the first 6% of employee plan contributions and could contribute additional amounts at its discretion. Participants are vested
  20% for each year of service and are fully vested after 5 years. The Company adopted the provisions of this plan in conjunction with the August 5, 2005 merger.
The Company’s wholly-owned subsidiary, Westwood maintains a defined contribution 401(k) pension plan. Contributions are based on up to 1% of each covered employees salary.
The Company’s 401(K) match expense totaled $125,251, $50,448, $13,317, and 19,333 for the periods ending August 31, 2006, August 31, 2005, August 31, 2004 and April 16, 2004, respectively. The
  expense is included in selling, general and administrative expenses in the consolidated statements of income.
11. Stock Options and Warrants
The Company’s 2006 Stock-Based Incentive Compensation Plan (the “2006 Plan”) was approved by the stockholders on May 8, 2006. The 2006 Plan authorizes the granting of stock options to directors and
  eligible employees. The Company has reserved 1,400,000 shares of its common stock for issuance under the 2006 Plan at prices not less than 100% of the fair value of the Company’s common stock on the date
  of grant (110% in the case of shareholders owning more than 10% of the Company’s common stock). Options under the 2006 Plan typically may terminate after 10 years and may vest over a four year period. No
  options were granted or exercised during the year ended August 31, 2006.
The Company’s 1996 Stock Option Plan (amended in 1999) (the “1996 Plan”) authorizes the granting of stock options to directors and eligible employees. The Company has reserved 1,000,000 shares of its
  common stock for issuance under the 1996 Plan at prices not less than 100% of the fair value of the Company’s common stock on the date of grant (110% in the case of shareholders owning more than 10% of
  the Company’s common stock). Options under the 1996 Plan typically terminate after 5 years and vest
49

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
over a four year period. Options were issued by Old Emtec prior to August 5, 2005 and no other options have been issued by the Company. No additional options were granted during the year ended August 31,
  2006. Option activity is summarized as follows:
For the Year Ended August 31, 2006Options OutstandingSeptember 1, 2005
    
    
    
    92,453Options Granted
    
    
    
    Options Exercised
    
    
    
    17,741Options Forfeited or Expired
    
    
    
    72,712Options OutstandingAugust 31, 2006
    
    
    
    2,000Options outstanding and exercisable at August 31, 2006 totaled 2,000 and their weighted-average exercise price is $0.29.
Effective September 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”), “Share-Based Payment,” using the modified prospective transition method.
  Under the modified prospective transition method, the Company is required to recognize compensation cost for 1) all share-based payments granted prior to, but not yet vested as of, September 1, 2005 based on
  the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards 123; and 2) for all share-based payments granted on or after September 1, 2005 based
  on the grant date fair value estimated in accordance with SFAS 123(R). In accordance with the modified prospective method, the Company has not restated prior period results.
The Company did not grant any share-based compensation awards during the year ended August 31, 2006 and all outstanding stock options as of September 1, 2005 were fully vested, thus no compensation
  expense was recognized.
In connection with the Merger, stock warrants were issued to the former Darr shareholders that evidence the obligation of the Company to issue a variable number of shares, in the aggregate, equal to 10% of
  the total issued and outstanding shares of the Company’s common stock, measured on a post exercise basis, at any date during the 5 year term of the warrants, which ends August 5, 2010. The aggregate exercise
  price of these warrants is fixed at $3,695,752. 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
  1,598,365 and 1,914,682 shares with an exercise price of $2.31 and $1.93 per share as of August 31, 2006 and August 31, 2005, respectively. The outstanding stock warrants were anti-dilutive for the year ended
  August 31, 2006 and 2005 because the exercise price was greater than the average market price of the Company’s common shares.
12. Equity
In connection with the August 5, 2005 merger, the 500 aggregate shares of outstanding Darr class A and B common stock were exchanged for 9,528,110 shares of the Company’s common stock. The
  accompanying consolidated financial statements reflect the retroactive effects of the recapitalization.
Concurrent with the purchase of Westwood, Darr authorized 5,000 shares and issued 1,000 shares of series A redeemable preferred stock for $1,000,000. Series A redeemable preferred stock was senior to all
  securities outstanding. The holders of series A redeemable preferred stock were entitled to dividends at a rate of 8% per annum. Dividends were cumulative and were due and payable after April 2008. The series
  A redeemable preferred stock had no voting rights and was redeemable at the option of the Company commencing April 17, 2009 at 100% of its liquidation value. The liquidation value of series A redeemable
  preferred stock was equal to $1,000 per share plus accumulated but unpaid dividends. The outstanding shares of series A redeemable preferred stock were exchanged for notes payable in connection with the August
  5, 2005 acquisition: total notes payable issued was $1,102,794, which represented the liquidation value of preferred stock on that date.
50

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
13. Supplemental Cash Flow Information
Supplemental noncash investing and financing activities for the periods ended August 31, 2006, August 31, 2005, August 31, 2004 and April 16, 2004 were as follows:
Capital contribution:The deferred compensation arrangement between the Company and former stockholder of Westwood was forfeited without recompense. In connection with this forfeiture, the Company
  recorded a contribution to capital of $1,507,181, net of income tax effect, during the period ended April 16, 2004.
Issuance of long-term debt:Issuance of long-term debt with a face value of $1,102,794 at an 8% annual rate to former preferred stockholders in full redemption of preferred stock previously issued by Darr
  at April 16, 2004.
14. Related Party Transactions
During the period ended April 16, 2004, the Company held a note receivable from a company controlled by former stockholders of Westwood which was repaid through periodic payments. The note receivable
  was distributed to the former stockholders of Westwood through a dividend on April 16, 2004. Interest income recorded on this note for the period ended April 16, 2004 totaled $21,483.
The Company accrues a monthly management fee of approximately $29,166 per the management services agreement between DARR Global Holdings, Inc. and Westwood Computer Corporation, dated April 16,
  2004. DARR Global Holdings, Inc. is a management consulting company 100% owned by the Company’s Chief Executive Officer. For each of the periods ended August 31, 2006, August 31, 2005 and August 31,
  2004, the Company recorded $350,000, $350,000 and $116,664, respectively for this management fee in the accompanying consolidated statements of operations. At August 31, 2006, and August 31, 2005,
  $254,166 and $133,333 of the fee is included in accounts payablerelated party.
One of the Company’s facilities is leased under a non-cancelable operating lease agreement with an entity that is owned by officers of the Company. Rent expense recorded for the period ended August 31,
  2006, August 31, 2005, August 31, 2004, and April 16, 2004 totaled $180,000, $180,000, $60,000, and $155,333, respectively. The facilities consist of office and warehouse space totaling 43,000 square feet,
  located in Springfield, New Jersey. Management believes the lease payments are at or below market rate for similar facilities.
The Company is occupying approximately 21,000 square feet of office and warehouse space in a 70,000 square foot building. This space is leased from GS&T Properties, LLC, in which certain officers of the
  Company are passive investors, owning approximately 20% equity interest. The lease term is for 5 years with monthly base rent of $12,500. During the period ended August 31, 2006 and August 31, 2005, the
  Company recorded expense under this lease totaling $175,731 and $14,190, respectively. The lease commenced on November 30, 2004 with Old Emtec, and thus there was no related party recorded prior to the
  Merger.
15. Accrued Liabilities
Accrued liabilities consisted of the following:
August 31, 2006
    
    August 31, 2005Accrued payroll
    
    
    $
    
    873,248
    
    
    
    $
    
    1,042,864Accrued commissions
    
    
    
    637,771
    
    
    
    
    511,858Accrued state sales taxes
    
    
    
    211,710
    
    
    
    
    366,432Accrued third party service fees
    
    
    
    130,933
    
    
    
    
    627,526Other accrued expenses
    
    
    
    1,590,167
    
    
    
    
    1,642,048$
    
    3,443,829
    
    
    
    $
    
    4,190,72851

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
16. Quarterly Financial Information(Unaudited)
Period Ended August 31, 2006FirstQuarter
    
    SecondQuarter
    
    ThirdQuarter
    
    FourthQuarter
    
    Fiscal2006Revenue
    
    
    $
    
    84,780,685
    
    
    
    $
    
    41,419,415
    
    
    
    $
    
    49,962,609
    
    
    
    $
    
    48,349,233
    
    
    
    $
    
    224,511,942Gross Profit
    
    
    
    8,222,167
    
    
    
    
    5,121,865
    
    
    
    
    5,697,653
    
    
    
    
    6,087,907
    
    
    
    
    25,129,592Net Income (Loss)
    
    
    $
    
    416,040
    
    
    
    $
    
    (388,536
    )
    
    
    
    $
    
    (63,345
    )
    
    
    
    $
    
    233,756
    
    
    
    $
    
    197,915Net Income (Loss) per share:Basic and Diluted
    
    
    $
    
    0.03
    
    
    
    $
    
    (0.03
    )
    
    
    
    $
    
    0.00
    
    
    
    $
    
    0.02
    
    
    
    $
    
    0.01Period Ended August 31, 2005FirstQuarter
    
    SecondQuarter
    
    ThirdQuarter
    
    FourthQuarter
    
    Fiscal2006Revenue
    
    
    $
    
    45,528,612
    
    
    
    $
    
    44,821,474
    
    
    
    $
    
    29,886,005
    
    
    
    $
    
    42,395,951
    
    
    
    $
    
    162,632,042Gross Profit
    
    
    
    3,753,505
    
    
    
    
    3,376,432
    
    
    
    
    3,069,503
    
    
    
    
    3,845,160
    
    
    
    
    14,044,600Net Income
    
    
    $
    
    472,111
    
    
    
    $
    
    225,824
    
    
    
    $
    
    62,726
    
    
    
    $
    
    66,324
    
    
    
    $
    
    826,985Net Income per share:Basic and Diluted
    
    
    $
    
    0.05
    
    
    
    $
    
    0.02
    
    
    
    $
    
    0.01
    
    
    
    $
    
    0.01
    
    
    
    $
    
    0.0817. Allowance for Doubtful Accounts
The following table provides information regarding accounts receivable allowance for doubtful accounts activity for the periods ended August 31, 2006, August 31, 2005, August 31, 2004 and April 16, 2004:
ReceivableAllowanceBalance, August 31, 2003
    
    
    $
    
    200,000Charged to costs and expenses
    
    
    
    25,000Write-offs
    
    
    
    Balance, April 16, 2004
    
    
    $
    
    225,000Charged to costs and expenses
    
    
    
    Write-offs
    
    
    
    Balance, August 31, 2004
    
    
    $
    
    225,000Charged to costs and expenses
    
    
    
    Write-offs
    
    
    
    Balance, August 31, 2005
    
    
    $
    
    225,000Charged to costs and expenses
    
    
    
    92,669Write-offs
    
    
    
    (200,581
    )Balance, August 31, 2006
    
    
    $
    
    117,08818. Treasury Stock
Pursuant to the Merger, the Company initiated a self tender offer on September 7, 2005. When the self tender offer closed on October 4, 2005, 4,984,185 shares had been properly tendered and not withdrawn.
  Because the number of shares of common stock tendered exceeded the number of shares that the Company offered to purchase, 57.473 percent of the shares that were tendered were repurchased by the Company.
  The Company funded the payment for the 2,864,589 shares of common stock validly tendered and accepted under the self tender offer from borrowings of $5.5 million under its revolving credit facility made prior
  to
52

EMTEC, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)August 31, 2006
August 31, 2005. Treasury stock of $5,596,047 was recorded during the quarter ended November 30, 2005 as follows:
Self tender offer*
    
    
    $
    
    5,500,000Add: legal and transaction costs incurred
    
    
    
    96,047Treasury stock
    
    
    $
    
    5,596,047

*
    
    
    
    Purchased 2,864,589 shares @ $1.92 per share18. Subsequent Events
On October 19, 2006, the Board of Directors of the Company approved the grant of nonqualified stock options to each of its two non-employee directors, Gregory Chandler and Robert Mannarino, pursuant to
  the Company’s 2006 Stock-Based Incentive Compensation Plan. Each grant provides the non-employee director with the option to purchase 20,000 shares of the Company’s common stock. The option price is
  $1.22, the fair market value of the stock on the date of grant. The options are exercisable immediately and expire on October 19, 2016.
On November 3, 2006, the Board of Directors of the Company approved the grant of restricted stock to the individuals set forth in the table below, pursuant to the Company’s 2006 Stock-Based Incentive
  Compensation Plan.
Name
    
    Restricted SharesDinesh Desai, Chairman,Chief ExecutiveOfficer and President
    
    
    
    114,919Brian McAdams, Director and Vice Chairman
    
    
    
    80,645Stephen Donnelly, Chief Financial Officer
    
    
    
    43,548The shares of restricted stock vest in 25% increments over four years from the date of grant, provided that the recipient remains employed by the Company.
On November 3, 2006, the Board of Directors of the Company also approved the grant of non-qualified stock options under the Equity Plan to two non-employee directors in the amounts set forth in the table
  below. The options are immediately exercisable and expire on November 6, 2016. The options were granted on November 6, 2006 with an exercise price equal to the fair market value of the underlying stock on
  November 6, 2006, as set forth below.
Name
    
    Number of Sharesunderlying Options
    
    Exercise Price(per share)Robert Mannarino, Non-employee director
    
    
    
    10,000
    
    
    
    $
    
    1.24Greg Chandler, Non-employee director
    
    
    
    20,000
    
    
    
    $
    
    1.2453

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
On March 29, 2006, the Company dismissed Ernst & Young LLP (“EY”) as the Company’s independent registered public accounting firm. The Company’s board of directors, also functioning as the audit
  committee, unanimously approved the dismissal of EY.
EY’s reports on the Company’s financial statements for each of our two fiscal years ended August 31, 2005 and 2004, respectively (collectively, the “Prior Fiscal Years”), contained no adverse opinion or
  disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements (“Disagreements”) between the Company and EY during either (i) the Prior Fiscal Years, or (ii) the period September 1, 2005 through March 29, 2006 (the “Interim Period”) on
  any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of EY, would have caused EY to make reference to the
  subject matter of the Disagreements in connection with its reports for the Prior Fiscal Years.
There were no “reportable events,” as such term is defined in Item 304(a)(1)(v) of Regulation S-K, during either (i) the Prior Fiscal Years or (ii) the Interim Period.
Effective March 29, 2006, the Company’s board of directors, also functioning as the audit committee, approved McGladrey & Pullen LLP (“McGladrey”) as the Company’s independent registered public
  accounting firm. The Company did not consult with McGladrey during (i) either the Prior Fiscal Years or the Interim Period with respect to (i) either the application of accounting principles to a specified
  transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was either the subject of a Disagreement or a Reportable Event.
Prior to the engagement of McGladrey by the Company on March 29, 2006, the Company did not consult with McGladrey regarding any of the matters described in Item 304(a)(2)(i) or 304(a)(2)(ii) of
  Regulation S-K.
Item 9A. 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 13(a)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of August 31, 2006. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
  concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed,
  summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. 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
  August 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not Applicable.
54

PART III
Item 10. Directors and Executive Officers of the Registrant
Information appearing in the Company’s Notice of Annual Meeting of Stockholders and Proxy Statement for the 2007 annual meeting of stockholders (the “2007 Proxy Statement”) including information under
  “Election of Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934,” is incorporated herein by reference. The Company will file the 2007 Proxy Statement with the Commission
  pursuant to Regulation 14A within 120 days after the close of the fiscal year.
Information with respect to Executive Officers of the Company appears in Part I of this report.
The Company has adopted a Code of Ethics in its current form in July 2004, applicable to all of its employees, including its Principal Executive Officer, Principal Financial Officer and Principal Accounting
  Officer, as well as the members of its Board. The Code of Ethics seeks to ensure compliance with all applicable laws and to maintain the highest standards of ethical conduct. The Code of Ethics sets out basic
  principles and methodology to help guide all of our officers, directors and employees in the attainment of this common goal.
Item 11. Executive Compensation
Information contained in the 2007 Proxy Statement, including information appearing under “Executive Compensation” in the 2007 Proxy Statement, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information contained in the 2007 Proxy Statement, including information appearing under “Stock Ownership” in the 2007 Proxy Statement, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information contained in the 2007 Proxy Statement, including information appearing under “Certain Relationships and Related Transactions” in the 2007 Proxy Statement, is incorporated herein by reference.
Item 14. Principal Accountants Fees and Services
Information contained in the 2007 Proxy Statement, including information appearing under “Ratification of Independent Public Accountants” in the 2007 Proxy Statement, is incorporated herein by reference.
55

PART IV
(a) Financial Statement
None.
(b) Financial Statement Schedules
None.
(c) Exhibits:
ExhibitNo.
    
    
    
    Description2.1
    
    
    
    Agreement and Plan of Merger and Reorganization, dated as of December 14, 2000, between Registrant, then known as American Geological Enterprises, Inc., and Emtec, Inc.(1)2.2
    
    
    
    Agreement and Plan of Merger, dated as of March 15, 2004, by and among DARR Westwood Technology Corporation, DARR Westwood Acquisition Corporation, the Shareholders of Westwood
      Computer Corporation Named, Westwood Computer Corporation, and Keith Grabel, as Shareholder’s Agent.(18)2.3
    
    
    
    Agreement and Plan of Merger, dated as of July 14, 2005, by and among the Registrant, Emtec Viasub LLC, and Darr Westwood Technology Corporation.(14)3.1
    
    
    
    Certificate of Incorporation, as amended.(2)3.2
    
    
    
    Amended and Restated Bylaws.(2)4.1
    
    
    
    Certificate evidencing shares of common stock.(2)10.1
    
    
    
    Resale Agreement, dated September 29, 1997, between Registrant and Ingram Micro, Inc.(2)10.2
    
    
    
    Volume Purchase Agreement, dated January 28, 1998, between Registrant and Tech Data Corporation.(2)10.3
    
    
    
    1996 Stock Option Plan, as amended in 1999.(2)10.4
    
    
    
    U.S. Systems Integrator Agreement, dated December 22, 1999, between Cisco System, Inc. and Registrant.(3)10.5
    
    
    
    Sun Microsystem, Inc. Channel Agreement, dated February 1, 2000, between Sun Microsystems, Inc. and Registrant.(5)10.6
    
    
    
    IBM Business Partner Agreement, dated May 31, 2000, between International Business Machines Corporation and Registrant.(3)10.7
    
    
    
    Microsoft Certified Partner Agreement, dated December 20, 2000, between Microsoft and Registrant.(3)10.8
    
    
    
    Letter Agreement, dated April 24, 2001, between Novell Inc. and Registrant.(3)10.9
    
    
    
    Citrix Solutions Network Gold Renewal Membership Agreement, dated April 30, 2001, between Citrix Systems, Inc. and Registrant.(3)10.10
    
    
    
    Asset Acquisition Agreement, dated December 5, 2001, by and between Devise Associates, Inc. and Registrant.(4)10.11
    
    
    
    Lease Agreement, dated January 9, 2002, between Registrant and Vandergrand Properties Co., L.P., for New York, New York facility.(8)10.12
    
    
    
    Lease Agreement, dated March 1, 2002, between Registrant and G. F. Florida Operating Alpha, Inc., for Jacksonville, Florida facility.(8)10.13
    
    
    
    Asset Acquisition Agreement, dated August 12, 2002, by and between Acentra Technologies, Inc. and Registrant.(6)10.14
    
    
    
    Remarketer/Integrator Agreement, dated August 15, 2002, between Dell Marketing L.P. and Registrant.(6)10.15
    
    
    
    Asset Acquisition Agreement, dated August 31, 2002, by and between Turnkey Computer Systems, Inc. and Registrant.(7)10.16
    
    
    
    Lease Agreement, dated April 21, 2003, between V-Sullyfield Properties II LLC and Westwood Computer Corporation, for Chantilly, Virginia facility.(18)56

ExhibitNo.
    
    
    
    Description10.17
    
    
    
    Lease Agreement, dated July 1, 2003, between Westwood Property Holdings LLC and Westwood Computer Corporation, for Springfield, New Jersey facility.(18)10.18
    
    
    
    Amendment to Lease Agreement, dated July 14, 2003, between V-Sullyfield Properties II LLC and Westwood Computer Corporation, for Chantilly, Virginia facility.(18)10.19
    
    
    
    Management Services Agreement, dated April 16, 2004, by and between DARR Global Holdings, Inc., and Westwood Computer Corporation.(18)10.20
    
    
    
    Employment Agreement, dated as of April 16, 2004, by and between Keith Grabel and Westwood Computer Corporation.(18)10.21
    
    
    
    Employment Agreement, dated as of April 16, 2004, by and between Mary Margaret Grabel and Westwood Computer Corporation.(18)10.22
    
    
    
    Separation Agreement, dated April 16, 2004, between Westwood Computer Corporation and Joyce Tischler.(18)10.23
    
    
    
    Subordinated Note, dated April 16, 2004, in the amount of $750,000, made by DARR Westwood Acquisition Corporation in favor of DARR Westwood LLC.(17)10.24
    
    
    
    Subordinated Note, dated April 16, 2004, in the amount of $750,000, made by DARR Westwood Acquisition Corporation in favor of Four Kings Management LLC.(17)10.25
    
    
    
    5% Junior Subordinated Note, dated April 16, 2004, in the amount of $7,771.63, made by Westwood Computer Corporation in favor of Michael John Grabel.(18)10.26
    
    
    
    5% Junior Subordinated Note, dated April 16, 2004, in the amount of $12,588.89, made by Westwood Computer Corporation in favor of Megan Patricia Grabel.(18)10.27
    
    
    
    5% Junior Subordinated Note, dated April 16, 2004, in the amount of $132,183.32, made by Westwood Computer Corporation in favor of Mary Margaret Grabel.(18)10.28
    
    
    
    5% Junior Subordinated Note, dated April 16, 2004, in the amount of $161,151.16, made by Westwood Computer Corporation in favor of Keith Grabel.(17)10.29
    
    
    
    8% Junior Subordinated Note, dated April 16, 2004, in the amount of $23,314.84, made by Westwood Computer Corporation in favor of Michael John Grabel.(18)10.30
    
    
    
    8% Junior Subordinated Note, dated April 16, 2004, in the amount of $37,766.58, made by Westwood Computer Corporation in favor of Megan Patricia Grabel.(18)10.31
    
    
    
    8% Junior Subordinated Note, dated April 16, 2004, in the amount of $396,549.13, made by Westwood Computer Corporation in favor of Mary Margaret Grabel.(18)10.32
    
    
    
    8% Junior Subordinated Note, dated April 16, 2004, in the amount of $483,452.45, made by Westwood Computer Corporation in favor of Keith Grabel.(17)10.33
    
    
    
    First Amendment to Lease Agreement, dated April 16, 2004, between Westwood Property Holdings LLC and Westwood Computer Corporation, for Springfield, New Jersey facility.(18)10.34
    
    
    
    Lease Agreement, dated June 1, 2004, between Registrant and Hamilton Transit Corporate Center, for office space in Trenton, New Jersey.(10)10.35
    
    
    
    Lease Agreement, dated September 2, 2004, between Registrant and GS&T Properties, LLC, for Suwanee, Georgia facility.(11)10.36
    
    
    
    Sublease Agreement, dated November 24, 2004, between Registrant and vFinance, Inc., for office space in New York, New York.(11)10.37
    
    
    
    2006 Stock Based Incentive Compensation Plan (21)10.38
    
    
    
    Revocable License Agreement, dated June 1, 2005, between A.M. Property Holding Corporation and Westwood Computer Corporation, for New York, New York facility.(18)10.39
    
    
    
    Employment Agreement, dated as of July 14, 2005, between Registrant and John Howlett.(14)10.40
    
    
    
    Employment Agreement, dated as of July 14, 2005, between Registrant and Ronald Seitz.(14)10.41
    
    
    
    Form of Guaranty issued by Registrant in favor of Four Kings Management LLC, Keith Grabel, Mary Margaret Grabel, Megan Patricia Grabel, Michael John Grabel, Darr Westwood LLC, and Joyce
      Tischler, dated September, 2005.(18)57

ExhibitNo.
    
    
    
    Description10.42
    
    
    
    Business Financing Agreement, dated August 5, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of Registrant.(15)10.43
    
    
    
    Agreement for Wholesales Financing, dated August 5, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of Registrant.(15)10.44
    
    
    
    Addendum to Agreement for Wholesales Financing and Business Financing Agreement, dated August 5, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of
      Registrant.(15)10.45
    
    
    
    Common Stock Purchase Warrant between Registrant and DARR Westwood LLC, dated August 5, 2005.(16)10.46
    
    
    
    Common Stock Purchase Warrant between Registrant and Margaret Grabel, dated August 5, 2005.(16)10.47
    
    
    
    8% Subordinated Promissory Note, dated August 5, 2005, issued by Darr Westwood Technology Corporation in favor of Darr Westwood LLC.(17)10.48
    
    
    
    Assignment of State of New Jersey Contract from Acentra Technologies, Inc. to Registrant.(6)10.49
    
    
    
    Employment Agreement, dated as of June 21, 2006, between the Registrant and Brian McAdams. (19)10.50
    
    
    
    Addendum to Business Financing Agreement and Agreement for Wholesale Financing, dated February 13, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of
      Registrant. (20)10.51
    
    
    
    Addendum to Business Financing Agreement and Agreement for Wholesale Financing, dated April 10, 2006, by and between GE Commercial Distribution Finance Corporation and subsidiaries of
      Registrant. (20)10.52
    
    
    
    Form of Stock Option Agreements issued under the 2006 Plan between the Registrant and Gregory Chandler and Robert Mannarino dated October 19, 200614.1
    
    
    
    Code of Ethics.(10)21.1
    
    
    
    List of Subsidiaries.(18)23.1
    
    
    
    Consent of a Registered Public Accounting Firm23.2
    
    
    
    Consent of a Registered Public Accounting Firm31.1
    
    
    
    Certification of Dinesh R. Desai, Principal Executive Officer of Registrant, dated November 29, 2006. Rule 13a-14(a)/15 d-14(a).31.2
    
    
    
    Certification of Stephen C. Donnelly, Principal Financial Officer of Registrant, dated November 29, 2006. Rule 13a-14(a)/15 d-14(a).32.1
    
    
    
    Certificate of Dinesh R. Desai, Principal Executive Officer of Registrant, dated November 29, 2006. Section 1350.32.2
    
    
    
    Certificate of Stephen C. Donnelly, Principal Financial Officer of Registrant, dated November 29, 2006. Section 1350.

(1)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated January 17, 2001, filed on January 31, 2001, and incorporated herein by reference.(2)
    
    
    
    Previously filed as an exhibit to Registrant’s Registration Statement on Form 10, filed on May 21,b2001, and incorporated herein by reference.(3)
    
    
    
    Previously filed as an exhibit to Amendment No. 1 to Registration Statement on Form 10, filed on July 12, and incorporated herein by reference.(4)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated December 5, 2001, filed on December 20, 2001, and incorporated herein by reference.(5)
    
    
    
    Previously filed as an exhibit to Registrant’s Form 10-K dated March 31, 2001, filed on July 12, 2001, and incorporated herein by reference.58

(6)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated August 12, 2002, filed on August 26, 2002, and incorporated herein by reference.(7)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated August 31, 2002, filed on September 13, 2002, and incorporated herein by reference.(8)
    
    
    
    Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2002, filed on June 30, 2002, and incorporated herein by reference.(9)
    
    
    
    Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2003, filed on July 15, 2003, and incorporated herein by reference.(10)
    
    
    
    Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2004, filed on July 14, 2004, and incorporated herein by reference.(11)
    
    
    
    Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2005, filed on July 14, 2005, and incorporated herein by reference.(12)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated November 21, 2001, filed on November 26, 2001, and incorporated herein by reference.(13)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated December 10, 2004, filed on December 14, 2004, and incorporated herein by reference.(14)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated July 14, 2005, filed on July 20, 2005, and incorporated herein by reference.(15)
    
    
    
    Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, dated June 30, 2005, filed on August 19, 2005, and incorporated herein by reference.(16)
    
    
    
    Previously filed as an exhibit to Registrant’s Tender Offer Statement on Form SC TO-I, filed September 7, 2005, and incorporated herein by reference.(17)
    
    
    
    Previously filed as an exhibit to Amendment to Registrant’s Tender Offer Statement on Form SC TO-I/A, filed September 22, 2005, and incorporated herein by reference.(18)
    
    
    
    Previously filed as an exhibit to Registrant’s Form 10-K, dated August 31, 2005, filed on December 14, 2005, and incorporated herein by reference.(19)
    
    
    
    Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated June 21, 2006, filed on June 26, 2006, and incorporated herein by reference.(20)
    
    
    
    Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, dated February 28, 2006, filed on April 14, 2006, and incorporated herein by reference.(21)
    
    
    
    Previously filed as an exhibit to Registrant’s Definitive Proxy Statement on Schedule 14A, filed on April 20, 2006, and incorporated herein by reference.59

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: November 30, 2006
EMTEC, INC.
By:
    
    /s/ DINESHR. DESAI
    
    Dinesh R. DesaiChairman, Chief Executive Officer and PresidentPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
    
    Title
    
    Date/s/ DINESHR. DESAI
    
    Dinesh R. Desai
    
    Chairman, Chief Executive Officer and President
    
    November 30, 2006/s/ BRIANMCADAMS
    
    Brian McAdams
    
    Vice Chairman, Director
    
    November 30, 2006/s/ STEPHENC. DONNELLY
    
    Stephen C. Donnelly
    
    Chief Financial Officer(Principal Financial Officer)
    
    November 30, 2006/s/ KEITHGRABEL
    
    Keith Grabel
    
    Director, President Sales and Marketing
    
    November 30, 2006/s/ RONALDA. SEITZ
    
    Ronald A. Seitz
    
    President, Emtec Operations
    
    November 30, 2006/s/ SAMBHATT
    
    Sam Bhatt
    
    Chief Accounting Officer(Principal Accounting Officer)
    
    November 30, 2006/s/ GREGORYCHANDLER
    
    Gregory Chandler
    
    Director
    
    November 30, 2006/s/ ROBERTMANNARINO
    
    Robert Mannarino
    
    Director
    
    November 30, 200660