Encompass Group Affiliates (ECGA) 10-Q 2009 Q1 Quarterly report

U.S. Securities And Exchange Commission

Washington, D.C. 20549

Form 10-Q

(check one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE EXCHANGE ACT OF 1934

Commission File Number 000-30486

Encompass Group Affiliates, Inc.

(Exact name of registrant as specified in its charter)

Florida

(State or other jurisdiction

of incorporation or organization)

65-0738251

(IRS Employer Identification No.)

420 Lexington Avenue, New York, NY 10170

(Address of principal executive offices)

(646)-227-1600

(Issuer’s telephone number)

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

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

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

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company  x

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

Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at May 8, 2009
Common Stock, no par value per share	13,286,151,226 shares

Encompass Group Affiliates, Inc.

Index To Form 10-Q

Part I - Financial Information (Dollars in thousands, except share data)

Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets As Of March 31, 2009 (Unaudited) And June 30, 2008		2
	Condensed Consolidated Statements Of Operations (Unaudited) For The Three And Nine Months Ended March 31, 2009 And 2008
	Condensed Consolidated Statement Of Stockholders’ Equity (Unaudited) For The Nine Months Ended March 31, 2009		4
	Condensed Consolidated Statements Of Cash Flows (Unaudited) For The Nine Months Ended March 31, 2009 And 2008		5
	Notes To Condensed Consolidated Financial Statements (Unaudited) As Of March 31, 2009		6
Item 2.	Management’s Discussion And Analysis of Financial Condition And Results of Operations		21
Item 3.	Quantitative And Qualitative Disclosures About Market Risk		30
Item 4T.	Controls And Procedures		30
Part II - Other Information			31
Item 1.	Legal Proceedings		31
Item 2.	Unregistered  Sales of Equity Securities And Use Of Proceeds		31
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Submission of Matters To A Vote Of Security Holders		31
Item 5.	Other Information		32
Item 6.	Exhibits		33

As used herein, the terms the “Company,” “Encompass Group Affiliates.,” ”Encompass,” “we,” “us” or “our” refer to Encompass Group Affiliates, Inc. , a Florida corporation.

i

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in the "Management’s Discussion and Analysis or Plan of Operation" and elsewhere in this quarterly report constitute "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act")) relating to us and our business, which represent our current expectations or beliefs including, but not limited to, statements concerning our operations, performance, financial condition and growth.  All statements, other than statements of historical facts, included in this quarterly report  that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections, future capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth of our businesses and operations are forward-looking statements.  Without limiting the generality of the foregoing, words such as "may,” “believes,” ”expects,” "anticipates,” "could,” "estimates,” “grow,” “plan,” "continue," “will,” “seek,” “scheduled,” “goal” or “future” or the negative or other comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, our ability to continue our growth strategy and competition, certain of which are beyond our control.  Any or all of our forward-looking statements may turn out to be wrong.  They may be affected by inaccurate assumptions that we might make or by known or unknown risks or uncertainties.   Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Because of the risks and uncertainties associated with forward-looking statements, you should not place undo reliance on them.  Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Compliance with Smaller Reporting Company Disclosure Requirements

Encompass has determined that it qualifies as a “smaller reporting company” as defined in Rule 12-b2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that it will take advantage of the Securities and Exchange Commission’s recently adopted rules permitting a smaller reporting company to comply with scaled disclosure requirements for smaller reporting companies on an item-by-item basis. The Company has elected to comply with the scaled disclosure requirements for smaller reporting companies with respect to Part I, Item 3 – Quantitative and Qualitative Disclosures About Market Risk, which is not applicable to smaller reporting companies.

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

Part I  - Financial Information

Item 1. – Financial Statements

	March 31, 2009			June 30, 2008
	(Unaudited)			(Note 2)
ASSETS
Current Assets
Cash and cash equivalents	$	7,421		$	4,008
Restricted cash		1,507			394
Accounts receivable, net of allowance for doubtful accounts of $602 and $74, respectively		10,384			5,908
Inventory		11,539			3,806
Replacement parts and equipment		491			655
Due from vendors		2,068			1,103
Deferred tax asset		350			1,100
Prepaid expenses and other current assets		2,071			870
Total Current Assets		35,831			17,844
Property and equipment, net		1,269			550
Other Assets
Intangible assets, net		13,642			9,610
Goodwill		20,627			14,075
Deferred tax asset		3,400			3,400
Other assets		1,796			1,133
Total Other Assets		39,465			28,218
TOTAL ASSETS	$	76,565		$	46,612
LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES
Current Liabilities
Accounts payable and accrued expenses	$	15,122		$	8,450
Escrow liability		1,507			394
Notes payable and capitalized lease obligation, current portion		1,613			541
Total Current Liabilities		18,242			9,385
Long-Term Liabilities
Notes payable and capitalized lease obligation, less current portion		37,157			24,759
Deferred tax liability		1,885			—
Other		236			—
Series E preferred stock		4,881			—
Total Long-Term Liabilities		44,159			24,759
TOTAL LIABILITIES		62,401			34,144
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 25,000 authorized, 2,000 shares issued and outstanding at March 31, 2009 and June 30, 2008:
Series C convertible preferred stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (liquidation value of $7,524 and $6,957 at March 31, 2009 and June 30, 2008, respectively)		—			—
Series D convertible preferred stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (liquidation value of $757 and $700 at March 31, 2009 and June 30, 2008, respectively)		—			—
Common stock, no par value, 230,000,000,000 shares authorized, 13,286,151,000  and 13,489,918,000 shares issued and outstanding at March 31, 2009 and June 30, 2008, respectively		36,161			35,350
Additional paid-in capital		8,627			8,347
Accumulated deficit		(30,624	)		(31,229	)
Total Stockholders' Equity		14,164			12,468
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	76,565		$	46,612

See accompanying notes to unaudited condensed consolidated financial statements

2

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(Dollars in thousands, except per share data)

	For The Three Months Ended						For The Nine Months Ended
	March 31,						March 31,
	2009			2008			2009			2008
NET SALES	$	27,148		$	19,474		$	84,694		$	45,107
COST OF SALES		19,946			15,387			63,802			35,391
GROSS PROFIT		7,202			4,087			20,892			9,716
OPERATING EXPENSES
Depreciation and amortization		582			317			1,538			906
Selling, general and administrative expenses		4,652			2,603			13,735			7,307
TOTAL OPERATING EXPENSES		5,234			2,920			15,273			8,213
Income from operations		1,968			1,167			5,619			1,503
OTHER INCOME (EXPENSE)
Other income, net		64			—			142			74
Interest expense, net		(1,593	)		(804	)		(4,536	)		(2,013	)
		(1,529	)		(804	)		(4,394	)		(1,939	)
INCOME (LOSS) BEFORE INCOME TAXES		439			363			1,225			(436	)
Income taxes		250			—			620			—
NET INCOME (LOSS)		189			363			605			(436	)
Deemed dividend on preferred stock		—			—			—			(820	)
Cumulative dividend on preferred stock		(208	)		—			(624	)		—
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS	$	(19	)	$	363		$	(19	)	$	(1,256	)
Basic net income (loss) per share	$	—		$	-		$	—		$	-
Basic weighted average number of shares outstanding		16,019,485,000			4,997,712,000			15,882,198,000			4,997,712,000
Diluted net income (loss) per share	$	—		$	-		$	—		$	-
Diluted weighted average number of shares outstanding		16,019,485,000			123,921,293,000			15,882,198,000			4,997,712,000

See accompanying notes to unaudited condensed consolidated financial statements

3

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands)

	PREFERRED STOCK				COMMON STOCK						ADDITIONAL PAID IN		ACCUMULATED
	SHARES		AMOUNT		SHARES			AMOUNT			CAPITAL		DEFICIT			TOTAL
BALANCE AT JULY 1, 2008		2,000	$	—		13,489,918,000		$	35,350		$	8,347	$	(31,229	)	$	12,468
Issuance of common stock		—		—		2,796,233,000			1,119			—		—			1,119
Redemption of common stock						(3,000,000,000	)		(308	)							(308	)
Stock-based compensation		—		—		—			—			280		—			280
Net income for the period		—		—		—			—			—		605			605
BALANCE AT MARCH 31, 2009		2,000	$	—		13,286,151,000		$	36,161		$	8,627	$	(30,624	)	$	14,164

See accompanying notes to unaudited condensed consolidated financial statements

4

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollars in thousands)

	For the Nine Months Ended
	March 31,
	2009			2008
CASH FLOWS USED IN OPERATIONS:
Net income (loss)	$	605		$	(436	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization		1,669			906
Allowance for doubtful accounts		418			18
Stock-based compensation		280			591
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable		(3,339	)		(979	)
Inventory		(5,978	)		(267	)
Replacement parts and equipment		165			(308	)
Credits due from vendors		(670	)		(342	)
Prepaid expense and other current assets		(591	)		(64	)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses		5,225			(548	)
Net cash used in operating activities		(2,216	)		(1,429	)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of business, net of cash acquired		(8,296	)		(22,321	)
Acquisition costs		(865	)		(2,769	)
Purchase of property and equipment		(771	)		(161	)
Increase in other assets		(284	)		(33	)
Net cash used in investing activities		(10,216	)		(25,284	)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Principal payments on notes payable and capitalized lease		(742	)		(891	)
Proceeds from sale of preferred stock		4,167			6,300
Redemption of common stock		(308	)		—
Proceeds from sale of senior and subordinated notes		13,000			24,039
Increase in deferred financing fees		(272	)		(901	)
Net cash provided by financing activities		15,845			28,547
Net increase in cash and cash equivalents		3,413			1,834
Cash and cash equivalents at beginning of period		4,008			844
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,421		$	2,678

See accompanying notes to unaudited condensed consolidated financial statements

5

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

NOTE 1. ORGANIZATION AND BUSINESS

Encompass Group Affiliates, Inc., a Florida corporation ("we," "us," "our," “Encompass” or the "Company"), is a public company specializing in the technology aftermarket service and supply chain known as reverse logistics.  Our wholly-owned subsidiary and principal operating unit, Encompass Parts Distribution, Inc. ("Encompass Parts"), acquires and operates businesses that provide parts procurement and distribution services, depot repair of consumer electronics, computers and peripheral equipment, de-manufacturing and reclamation services for flat panel display products,  returns management services and anticipates providing end-of-life cycle services for all such products.

We are the nation’s largest distributor of consumer electronics parts and a market leader in reverse logistics for the electronics industry by consolidating a core group of highly synergistic companies to provide original equipment manufacturers (“OEMs”), retailers, third party administrators (“TPAs”) and end-users with single-source, integrated life cycle reverse logistic management services for technology products.  We have chosen to address the overall market from both the end-user driven product support and repair industry and from the manufacturer-driven e-Waste recovery industry.  While these two industries have different characteristics, they have significant back-end operational synergies.  We are focused on becoming a full-service provider of repair, refurbishment, parts distribution and end-of-life cycle services in the computer peripheral and consumer electronics markets, among others, including e-waste recovery and/or recycling.  We intend to continue to acquire businesses that either repair and refurbish equipment or distribute parts typically used in the repair and refurbishment process, as well as those that provide e-Waste recovery services. We intend to provide single source life cycle professional management services for technology products to businesses and consumers in the North American market initially, and then on a more worldwide basis.

On August 17, 2007, Encompass Parts completed the acquisition of Vance Baldwin, Inc. (“Vance Baldwin”), d/b/a Vance Baldwin Electronics, an OEM parts distributor that has been a leader in the industry for over fifty years.  Vance Baldwin has operations in southern Florida and suburban Atlanta and distributes tens of thousands of different parts (i.e., SKU’s) ranging from consumer electronics, computers, printers, appliances and office supplies carried in stock or special ordered from the five million parts that it has access to for distribution.  In addition, Vance Baldwin provides service aids and industrial products such as cable, tools, test equipment, cleaners and other installation equipment.

On July 14, 2008, Vance Baldwin entered into an agreement with Philips Consumer Lifestyle North America (“Philips”), a division of Philips Electronics North America Corporation.  Under the terms of the agreement, Vance Baldwin, as single primary authorized distributor, will assume the management and execution responsibilities for operational and order fulfillment of the replacement parts business for Philips’ digital flat panel display products.  In this role the Company sells replacement parts to independent service centers as well as other parts distributors with whom it competes.  Under the terms of this agreement, the Company purchased approximately $4,200 of inventory directly from Philips.

On August 1, 2008, Encompass Parts completed the acquisition of Tritronics, Inc., (“Tritronics”) an OEM parts distributor that has been in business since 1975 and has operations in suburban Baltimore and Miami.  Tritronics similarly distributes tens of thousands of different parts (i.e., SKU’s) ranging from consumer electronics, computers, printers, appliances and office supplies carried in stock or special ordered from the five million parts that it has access to for distribution.  In addition, as with Vance Baldwin, Tritronics also provides service aids and industrial products such as cable, tools, test equipment, cleaners and other installation equipment.   Tritronics is a distributor of replacement parts in the U.S. for substantially all of the major OEM manufacturers, with a particularly strong market presence selling to the extensive network of independent service centers that operate nationwide.

In addition, Encompass Parts has, since June 2004, owned Cyber-Test, Inc., a Delaware corporation ("Cyber-Test").  Cyber-Test, dba Encompass Service Solution, Inc. ("Encompass Service"), a depot repair and refurbishment company based in Florida, operates as an independent service organization with the expertise to provide board-level repair of technical products to third-party warranty companies, OEMs, national retailers and national office equipment dealers. Service options include advance exchange, depot repair, call center support, parts supply and warranty management.  Encompass Service's technical competency extends from office equipment and fax machines to printers, scanners, laptop computers, monitors, multi-function units and high-end consumer electronics such as GPS devices, PDAs and digital cameras and de-manufacturing and reclamation services for flat-panel display products. Services are delivered nationwide through proprietary systems that feature real-time electronic data interchange (“EDI”), flexible analysis tools and repair tracking.

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ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

 Interim Financial Statements

The condensed consolidated financial statements as of and for the three and nine months ended March 31, 2009 and 2008 are unaudited but in the opinion of management include all adjustments consisting of normal accruals necessary for a fair presentation of financial position and the comparative results of operations and cash flows.  Results of operations for interim periods are not necessarily indicative of those to be achieved or expected for the entire year.  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2008.   The June 30, 2008 consolidated balance sheet has been derived from the audited financial statements as of that date.

Principles of Consolidation

The condensed consolidated financial statements include the Company and all of its wholly-owned subsidiaries.  The Company consolidates all majority-owned and controlled subsidiaries.  All significant intercompany transactions have been eliminated in consolidation.

 Use of Estimates

The preparation of the condensed consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period.  Accordingly, actual results could vary from those estimates.

Allowance for Doubtful Accounts

We make judgments as to our ability to collect outstanding trade receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.

Inventory, Replacement Parts and Equipment

Inventory of OEM parts purchased for resale within the reverse logistics industry, which consists solely of finished goods, is valued at the lower of cost (average cost basis) or market.

Replacement parts and equipment consist primarily of repair parts, as well as consumable supplies for resale and used machines that are held for resale, that are stated at the lower of weighted average cost or market.  The weighted average cost of replacement parts and equipment approximates the first-in, first-out (“FIFO”) method.

Management performs periodic assessments to determine the existence of obsolete, slow-moving inventory and non-usable replacement parts and equipment and records necessary provisions to reduce such inventory and replacement parts and equipment to net realizable value.

Core Charges

The vendors of products distributed by the Company frequently add a "core charge" to the cost of individual replacement parts that the Company distributes as a means of encouraging the return of certain replaced components, most frequently circuit boards, which are defective.  These defective, replaced components are ultimately repaired and re-enter the distribution channel.

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ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

Core charges borne by the Company associated with goods in inventory are not included in inventory as cost, but are classified separately in prepaid expenses and other current assets in the condensed consolidated balance sheets.  Core charges associated with goods in inventory in the amount of $1,776 and $749 are included in prepaid expenses and other current assets as of March 31, 2009 and June 30, 2008, respectively.

Customers either receive a credit for cores when returned, or are obligated to pay the billed core charge in the event a core is not returned.  This payment effectively compensates the Company for the core charge it is obligated to pay vendors.  Upon shipping a returned core to a vendor, the Company records an asset for the amount due from the vendor.

 Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation.  When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in operations.  Assets are depreciated using the straight-line method based on the following estimated useful lives:

Machinery and equipment	3 to 7 years
Furniture and fixtures	5 to 7 years
Leasehold improvements	Estimated useful life or length of the lease, whichever is shorter

The Company leases certain equipment and software under agreements that are classified as capital leases and are included in the accompanying condensed consolidated balance sheet under property and equipment.  Amortization of equipment held under capital leases is included in depreciation expense.Maintenance and repairs are charged to expense when incurred.

 Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”), the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values.  The excess purchase price over those fair values is recorded as “Goodwill”.   Historically, in accordance with SFAS No. 141, the Company has included transaction costs such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs as part of the purchase price of its acquisitions.  As described below in “Recent Accounting Pronouncements”, effective July 1, 2009, the Company will be required to expense such costs as incurred.  At March 31, 2009, the Company had $983 of capitalized transaction costs which it may write off in the quarter ending June 30, 2009 in the event the acquisitions to which such costs pertain do not close on or before June 30, 2009.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), purchased intangibles with finite lives are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  The Company amortizes such intangible assets on a straight-line basis over their respective useful lives.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill and purchased intangibles with indefinite lives are not amortized, but are reviewed periodically for impairment.

 Revenue Recognition

The Company recognizes revenue upon delivery of goods to a common carrier for delivery to the customer, at which point title passes, at a sales price that is fixed and determinable and collectability is reasonably assured.  Provisions for product returns and core returns are accounted for as sales reductions in determining sales in the same period that the related sales are recorded.  The Company also recognizes revenue from the sale of refurbished computer equipment and related products upon delivery of goods to a common carrier for delivery to the customer.  Revenue for the repair of customer-owned equipment is recognized upon completion of the repair.  The Company assumes the risk of loss due to damage or loss of refurbished products during shipment and is reimbursed by the common carriers for shipping damage and lost products.

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ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

Shipping and Handling Costs

The Company includes shipping costs in cost of sales in the condensed consolidated statement of operations.  Total shipping costs included in cost of sales for the nine and three months ended March 31, 2009 were $5,860 and $1,930 and for the nine and three months ended March 31, 2008 were $3,407 and $1,492, respectively.

Net Income (Loss) Per Share

Net income (loss) per share is computed in accordance with SFAS No. 128, “Earnings Per Share.”  Basic net income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted net income per share is based upon the addition of the effect of common stock equivalents (convertible preferred stock and convertible notes payable, potentially dilutive stock options and warrants) to the denominator of the basic net income per share calculation using the treasury stock method for stock options and warrants and the “if converted” method for convertible securities, if their effect is dilutive.

	Three months endedMarch 31, 2008
	Income		Shares		Per Share Amount
Basic EPS
Net income available to common stockholders	$	363		4,997,712,000	$	—
Effect of Dilutive Securities
Convertible preferred stock		208		116,913,338,000
Convertible notes		21		2,010,243,000
Diluted EPS
Net income available to common stockholders	$	592		123,921,293,000	$	—

For the three months ended March 31, 2009 and nine months ended March 31, 2009 and 2008, potentially dilutive securities that could have been issued were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.  Potentially dilutive securities for the three and nine months ended March 31, 2009 amounted to 110,551,374,000 common shares.  Potentially dilutive securities for the nine months ended March 31, 2008 amounted to 118,923,581,000 common shares.

 Concentration of Sales and Credit Risk

Sales to two customers in each period accounted for approximately 14.0% and 9.9% of consolidated sales for the three months ended March 31, 2009, and approximately 25.8% and 10.0% of consolidated sales for the three months ended March 31, 2008.   Sales to two customers in each period accounted for approximately 12.5% and 9.8% of consolidated sales for the nine months ended March 31, 2009, and approximately 24.5% and 9.6% of consolidated sales for the nine months ended March 31, 2008.

We have certain financial instruments that potentially subject us to significant concentrations of credit risk which consist principally of cash and cash equivalents and accounts receivable.  We maintain cash and cash equivalents in short-term money market accounts with high quality financial institutions and in short-term, investment grade commercial paper.  Deposits held with banks may exceed the amount of insurance provided on such deposits.  Generally, these deposits may be redeemed upon demand and therefore bear minimal risk. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

9

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

Cash, Cash Equivalents and Restricted Cash

The Company considers all short-term investments with a maturity date of three months or less when acquired to be cash equivalents.  Cash equivalents include commercial paper, money market funds and certain certificates of deposit.

Restricted cash consists of funds representing a portion of the purchase price that is held in escrow in connection with the acquisitions described in Note 3 to satisfy possible indemnification obligations.

  Stock Based Compensation

The fair value of stock option grants is calculated using the Black-Scholes Option Pricing Model.  The exercise price of stock options granted is equal to or greater than fair market value at the date of grant as determined by the closing price per share.  The Company recognizes compensation on a straight-line basis over the period of vesting.

The Company determines the value of grants of restricted common stock to employees and others based on the closing price per share at the date of grant and amortizes the cost as compensation expense on a straight-line basis over the period which services are to be performed or the period of vesting.

Deferred Finance Costs

Costs associated with the Company’s debt obligations are capitalized and amortized using the interest method over the life of the related debt obligation.  As of March 31, 2009 and June 30, 2008, $682 and $390, respectively, of such costs were capitalized, or $482 and $347, respectively, net of amortization.

Classification of Preferred Stock

In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”) a company is required to classify preferred stock as a liability rather than as a component of stockholders’ equity if there is an unconditional obligation requiring the issuer to redeem it at a specified or determinable date (or dates) or upon the occurrence of an event that is certain to occur.  The Series E Certificate of Designation provides for the redemption of all outstanding shares of Series E Preferred Stock upon, among other events, any refinancing or repayment in full, redemption or other discharge or satisfaction in full of the Senior Notes and Series A and Series B Senior Subordinated Notes (Note 5).  As of March 31, 2009, the Company was required to classify its Series E Preferred Stock as a liability rather than as a component of stockholders’ equity for this reason, however remote.   Dividends in the amount of $277 and $714 were earned but not paid in the three and nine month periods ended March 31, 2009, respectively.  Dividends on the Series E Preferred Stock are included in interest expense since the issue is classified as a liability rather than equity, with the related liability included in the preferred stock redemption balance included in long-term liabilities as of March 31, 2009.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes".  Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance has been used to offset the recognition of a portion of deferred tax assets arising from net operating loss carryforwards due to the uncertainty of future realization.  The use of any tax loss carryforward benefits is also limited as a result of changes in control of the Company.

10

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

The amount of income taxes a Company pays is subject to periodic audits by federal and state tax authorities and these audits may result in proposed deficiency assessments.   In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”) which clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with SFAS No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense.  The Company defines the federal jurisdiction as well as various multi-state jurisdictions as “major” jurisdictions (within the meaning of FIN 48).

Recent Accounting Pronouncements

The Company adopted the provisions of SFAS No. 157 – Fair Value Measurements for its financial assets and liabilities for which it has recognized or disclosed at fair value on a recurring basis effective July 1, 2008. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB No. 157,” which delays the effective date for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, except for items that are measured at fair value in the financial statements on a recurring basis (at least annually).  As provided by FSP No. 157-2, the Company has elected to defer the adoption of SFAS No. 157 for certain of its non-financial assets and non-financial liabilities, primarily goodwill and non amortizable intangible assets, until July 1, 2009.  Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

 In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.”  This Standard allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings.  SFAS No. 159 is effective beginning after November 15, 2008.  Management does not expect this pronouncement will have a material impact on the financial statements of the Company.

The FASB has issued SFAS No. 141 (R), “Business Combinations”. This statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (which Statement No. 141 called the “purchase method”) be used, and applies to all business entities, including mutual entities that previously used the pooling of interest method of accounting for some business combinations.  SFAS No. 141 (R) requires that typical transaction costs such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs be expensed as incurred and no longer be effectively accounted for as part of excess purchase price and intangible assets. The statement is effective for transactions within the annual reporting period beginning on or after December 15, 2008; accordingly, management is evaluating the impact this new standard will have on the Company’s financial position and results of operations, including the prospective write off of capitalized transaction costs included in other non-current assets associated with potential acquisitions in process. At March 31, 2009, such capitalized transaction costs amount to $982,000.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” to amend the provisions SFAS No. 141 (R) for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141 (R) and instead carries forward most of the provisions in SFAS No. 141 for acquired contingencies.  (FSP) No. FAS141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management is currently evaluating the impact of this new standard, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

The FASB has issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements.” This statement changes the way the consolidated income statement is presented when non-controlling interests are present. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest, and is effective for periods beginning on or after December 15, 2008. Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

11

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

In April 2008, the FASB issued Final FASB Staff Position (FSP) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”.  The guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”, and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), Business Combinations, and other guidance under accounting principles generally accepted in the United States of America.  FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is prohibited.   Paragraph 11(d) of SFAS No. 142 requires entities to base assumptions for determining the useful life of a recognized intangible asset on the legal, regulatory, or contractual provisions that permit extending the asset’s useful life without appreciably adding to its cost.  FSP No. FAS 142-3, requires that an entity must consider its own experience with similar arrangements in developing its assumptions.  If an entity has had no similar arrangements, then it should consider the assumptions other market participants use.  Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (”SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with generally accepted accounting principles (“GAAP”). The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.

On June 16, 2008, the FASB issued final Staff Position ("FSP") No. EITF 03-6-1, "Determining Whether  Instruments Granted in Share-Based Payment Transactions Are Participating Securities", to address the question of  whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008.  Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

NOTE 3.  ACQUISITION

 On August 1, 2008, the Company acquired all of the outstanding equity interests in Tritronics, Inc., a privately-held Maryland C corporation engaged in the distribution of replacement parts and accessories for consumer electronics products (“Tritronics”).  Management believes that the business and operations of Tritronics, which has its headquarters and principal facility in Abingdon, Maryland and a second facility in Miami, Florida, will complement the business and operations offered by the Company’s two current operating subsidiaries, Cyber-Test and Vance Baldwin Electronics.  Tritronics net sales for the fiscal year ended April 30, 2008 amounted to $21,983.

Consideration consisted of the following: (i) $9,000 in cash less seller transaction expenses and certain indebtedness, $1,500 of which was placed in a escrow account to satisfy any indemnification obligations under the Tritronics Purchase Agreement, (ii) a subordinated promissory note in the amount of $1,000 (the “Tritronics Note”) and (iii) 2,796,232,989 shares of the Company’s common stock (the “Acquisition”) for an aggregate purchase price of $11,068, before transaction costs.  The Tritronics Note accrues interest at the rate of 7% per annum, payable semi-annually, in arrears, on each January 31 and July 31. The outstanding principal balance under the Tritronics Note and any accrued but unpaid interest thereon is due and payable on August 1, 2014 (subject to extension under certain circumstances if the Company’s senior indebtedness is not paid in full as of August 1, 2014).

The purchase price of the acquisition is set forth below:

Cash paid to seller	$	8,949
Issuance of common stock to seller		1,119
Issuance of convertible note to seller		1,000
Total consideration paid to seller		11,068
Additional cash paid for transaction costs		865
Total purchase price		11,933
Less: noncash item of issuance of common stock		(1,119	)
Less: noncash item of note issued to seller		(1,000	)
Less: cash acquired in the acquisition		(653	)
Net cash paid for acquisition	$	9,161

12

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

The allocation of the purchase price consideration paid at closing to the assets acquired and liabilities assumed is based upon an appraisal of the fair market value of the acquired assets and liabilities assumed in accordance with FAS 141.  The business acquired is a recognized leader in its industry, has had long-term relationships with its major vendors and customers, a history of increasing sales and earnings, and introduces a number of favorable strategic opportunities to the Company; accordingly, the Company believes that the excess of purchase price over net assets acquired is justified.

The allocation of the fair value of the assets acquired and liabilities assumed is set forth below:

Assets acquired:
Current assets	$	4,360
Property and equipment		248
Long-term assets		17
Total assets acquired		4,625
Liabilities assumed:
Current liabilities		2,352
Deferred tax liability		2,016
Non-current liabilities		47
Total liabilities assumed		4,415
Net tangible assets acquired		210
Costs in excess of net tangible assets acquired, recorded goodwill ($6,553) and intangible assets ($5,170)		11,723
Total fair value of net identifiable assets acquired and goodwill	$	11,933

Intangible assets principally consist of customer lists which are being amortized on a straight-line basis over a ten year period.  Goodwill and intangible assets will not be deductible for income tax purposes.

The Company’s condensed consolidated financial statements for the three and nine months ended March 31, 2009 include Tritronics’ results of operations from August 1, 2008.

The following unaudited pro forma financial information presents the results of operations of the Company as if the acquisition had occurred at the beginning of fiscal 2009 and fiscal 2008.  Adjustments to the consolidated financial information related to the acquisitions that affect the results of operations include the interest expense associated with the debt issued in conjunction with the acquisitions, amortization of the fair value of intangible assets and deferred debt financing costs and stock-based compensation.  This pro forma information does not purport to be indicative of what would have occurred had the acquisitions occurred as of July 1, 2008 and 2007 or of results of operations that may occur in the future.

	For the three  months ended			For the nine months ended
	March 31,			March 31,
	2008			2009		2008
Net sales	$	25,325		$	86,584	$	67,825
Operating income		2,286			5,758		3,817
Net loss available to common stockholders		(250	)		62		(3,482	)
Basic and diluted net loss per share	$	0.00		$	0.00	$	0.00

13

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

NOTE 4.           GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consisted of the following:

	March 31, 2009			June 30, 2008
Goodwill	$	20,627		$	14,075
Intangible assets, primarily consisting of customer relationships	$	15,750		$	10,580
Less accumulated amortization		(2,108	)		(970	)
Total net intangible assets	$	13,642		$	9,610

Amortization expense for intangible assets, which are being amortized over 10 years based on the straight-line method (which approximates the period in which the economic benefits of the assets are consumed), amounted to $419 and $265 for the three months ended March 31, 2009 and 2008, respectively.  For the nine months ended March 31, 2009 and 2008 this expense was $1,138 and $705 respectively

 Based on the carrying value of intangible assets as of March 31, 2009, amortization expense for the next five fiscal years will amount to the following:

For the year ending June 30, 2009	$	1,575
June 30, 2010	$	1,575
June 30, 2011	$	1,575
June 30, 2012	$	1,575
June 30, 2013	$	1,575

NOTE 5.           NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Notes payable and capital lease obligations consisted of the following at March 31, 2009 and June 30, 2008:

	March 31,			June 30,
	2009			2008
Senior Notes, net	$	11,507		$	12,156
Series A and Series B Senior Subordinated Notes, net		24,614			11,552
Convertible notes		1,206			1,206
Unsecured note payable		1,000			—
Secured note payable		77			—
Note payable to officer		310			310
Capitalized leases		56			76
Total notes payable and capital lease obligations		38,770			25,300
Less: current portion		(1,613	)		(541	)
Long-term notes payable and capital lease obligations	$	37,157		$	24,759

In connection with the acquisition of Tritronics on August 1, 2008, the Company amended and restated the Note Purchase Agreement entered into on August 17, 2007 (the “Amended and Restated Note Purchase Agreement”) with Sankaty Advisors, LLC (“Sankaty”).  Pursuant to the Note Purchase Agreement, the Company previously issued $12,690 in aggregate principal amount of its Senior Notes for an aggregate purchase price of $12,500 and $10,714 in aggregate principal amount of Series A senior subordinated notes for an aggregate purchase price of $10,500 (the “Series A Subordinated Notes”).  Pursuant to the Amended and Restated Note Purchase Agreement, the Company issued an additional $13,265 in aggregate principal amount of its Series B senior subordinated notes for an aggregate purchase price of $13,000 (the “Series B Subordinated Notes” and, collectively with the Series A Subordinated Notes, the “Subordinated Notes”).  Certain affiliates of Sankaty Advisors, LLC are holders of the Company’s Series C and Series E Preferred Stock.

14

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

With regards to the Senior Notes, the terms of the Amended and Restated Note Purchase Agreement are substantially similar to those in the August 17, 2007 Note Purchase Agreement.

The Series B Subordinated Notes have an additional 2% prepayment penalty compared to the Series A Subordinated Notes through maturity.  In certain circumstances in which Note Purchasers are not provided with rights of first refusal and rights of first offer (as described below), including in connection with a prepayment of the Series A Subordinated Notes within 18 months of August 17, 2007 that occurs in connection with a purchase of a potential acquisition target, the Subordinated Notes may also be subject to a 10% redemption premium.  The Company may issue up to an additional $500 in Series A Subordinated Notes if it meets a certain financial covenant tests and other conditions on or before July 31, 2010.

If, on August 1, 2009, the Senior Notes and Subordinated Notes have not been repaid or refinanced and the debt to EBITDA leverage ratio for the twelve months prior to August 1, 2009 exceeds 3.50:1, the Note Purchasers will be entitled to receive warrants, for no or nominal additional consideration, to purchase 3.5% of the shares of the Company’s outstanding common stock on a fully diluted basis.  If, on each of February 1, 2010 and August 1, 2010, the Senior Notes and Subordinated Notes have not been repaid or refinanced and the debt to EBITDA leverage ratio for the twelve month period prior to February 1, 2010 or August 1, 2010, as applicable, exceeds 3.50:1, the Note Purchasers will be entitled to receive on each such date, for no or nominal additional consideration, warrants to purchase 5.5% and 7.5% (in each case minus the percentage of warrants previously issued to the Note Purchasers pursuant to this provision) of the shares of the Company’s outstanding common stock on a fully diluted basis (the “Warrants”) on each such date.  The Warrants expire on the first anniversary of their issuance, have antidilution protections and benefit from other customary protections.

Under the terms of the Senior Notes and the Subordinated Notes, the Company is permitted to incur purchase money secured indebtedness to suppliers of up to certain agreed amounts. The Company is not permitted to pay any dividends or distributions, and is not permitted to redeem any capital stock.

Under certain circumstances, holders of the Senior Notes and the Subordinated Notes have a right of first refusal and first offer to purchase debt securities and certain types of preferred stock in connection with the financing of additional acquisitions by the Company.

On January 12, 2009, the Company and Sankaty Advisors, LLC entered into Amendment No. 1 to the Amended and Restated Note Purchase Agreement which incorporated a minimum payment of $1 million for the fiscal year ending June 30, 2009 under an annual sweep of excess cash flow, as defined, and increased the amount of permitted annual capital expenditures.

As described in Note 6, on March 20, 2009 the Company entered into an Equity Repurchase Waiver Agreement with Sankaty whereby it agreed to a prepayment of Senior Notes in the principal amount of $300.

NOTE 6.                      PREFERRED AND COMMON STOCK

In August 2008, in connection with the financing of the Tritronics acquisition, the Company sold 1,000 shares of its newly designated Series E Preferred Stock, having a par value of $0.01 per share (“Series E Preferred”), for an aggregate purchase price of $4,167, net proceeds of $4,036 after related transaction costs of $131, to the holders of Series C Preferred pursuant to a Purchase Agreement (the “Series E Purchase Agreement”). The Company used the proceeds from the sale of the Series E Preferred Stock, in conjunction with the debt proceeds described above, to fund the acquisition of Tritronics and for working capital needs related to an agreement entered into with Philips Consumer Lifestyle North America as described on the Company's Form 8-K filed with the SEC on July 18, 2008.

The holders of Series E Preferred have agreed that in the event that (i) the Board of Directors of the Company, (ii) an independent committee comprised of disinterested members of the Board of Directors of the Company and (iii) a majority of the holders of the Series E Preferred agree to convert or redeem or refinance the Series E Preferred, then each holder of the Series E Preferred shall enter into such transaction.

15

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

The Series E Preferred ranks senior to the common stock and all other currently designated series of preferred stock of the Company.  Dividends shall accrue cumulatively on a daily basis on the Series E Base Amount (as defined below) for each share of Series E Preferred at a rate per annum of 20% until February 28, 2010 and 30% thereafter.  Dividends shall accrue from the date of issuance through the date of redemption, liquidation, dissolution or winding up of the Company.  The Series E Preferred is not convertible into the Company’s common stock.  So long as any shares of Series E Preferred are outstanding, no dividends may be paid or distributions made on the common stock or any class of preferred stock ranking junior to the Series E Preferred (collectively, “Junior Stock”) until all accrued but unpaid dividends, if any, on the Series E Preferred have been paid, unless:

· the Company obtains the written consent of the holders of a majority of the outstanding shares of the Series E Preferred; or

· the Company is a party to an agreement with any officer, employee or director of the Company pursuant to which the Company is entitled or required to repurchase shares of common stock or any preferred stock (or options therefore) from such officer, employee or director.

At the option of the board of directors, the Company may, at any time, redeem all but not less than all of the Series E Preferred by paying to the holders of the Series E Preferred in cash an amount equal to the Series E Redemption Value.  In addition, the Company must redeem all of the outstanding Series E Preferred upon the (i) consolidation or merger of the Company with or into any other person or entity in which less than a majority of the outstanding voting power of the surviving entity is held by persons who were shareholders of the Company prior to the event or (ii) refinancing, repayment, redemption or other discharge in full of the Company’s senior notes and subordinated notes issued pursuant to the Amended and Restated Note Purchase Agreement which the Company entered into in connection with the Acquisition (each a “Mandatory Redemption Event”).  Upon a Mandatory Redemption Event, the holders of the Series E Preferred will be entitled to be paid the Series E Redemption Value. Holders of the Series E Preferred have priority in respect of any payment or distribution of the assets of the Company, or proceeds therefrom, to the holders of shares of any Junior Stock.

The “Series E Redemption Value” means a payment per share equal to (i) $4,167 per share (the “Series E Base Amount”) plus all accrued and unpaid dividends thereon multiplied by (ii) the Redemption Percentage.  The “Redemption Percentage” shall be (i) 100% until July 31, 2009, (ii) 105% from August 1, 2009 until February 28, 2010 and (iii) 110% from March 1, 2010 until July 31, 2010. The Redemption Percentage shall increase by another 5% each March 1 and August 1 thereafter.  By way of example, the Redemption Percentage will increase to be 115% on August 1, 2010 and 120% on March 1, 2011.

The holders of Series E Preferred are not entitled to any voting rights.  However, the consent of the holders of at least a majority of the outstanding shares of Series E Preferred, voting as a class, will be required for certain corporate actions, as defined.

On August 1, 2008, the Company and the holders of Series C Preferred entered into Amendment No. 1 to the Stockholder Agreement, dated August 17, 2007 (the “Amended Series C Stockholder Agreement”) originally entered into between such parties.  Pursuant to the amendment, the shares of Series E Preferred issued to holders of Series C Preferred are subject to the Series C Stockholder Agreement, including for purposes of transfer restrictions as well as co-sale rights on sales of preferred stock by the major Series C Preferred Stockholder in favor of the other Series C Stockholders.  The Series C Stockholder Agreement was also amended to provide that the Company may not agree to an Exchange Transaction (as defined therein) without the prior written consent of the major Series C Preferred Stockholder and the prior written consent of holders of a majority of the outstanding shares of Series C Preferred held by the other Series C Stockholders.

On March 23, 2009, the Company acquired 3,000,000,000 shares of its common stock from an institutional stockholder for a price of $308 including expenses.  Under Florida law, such shares are deemed to be immediately canceled and, accordingly, are excluded from the total of issued and outstanding shares of common stock at March 31, 2009.   In connection with this transaction, on March 20, 2009 the Company entered into an Equity Repurchase Waiver Agreement with Sankaty whereby it agreed to a prepayment of its Senior Notes in the principal amount of $300 in exchange for a waiver of a provision of the Amended and Restated Note Purchase Agreement otherwise prohibiting such purchase.  Such prepayment occurred prior to the March 31, 2009 balance sheet date.

16

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

NOTE 7.                      COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company has been, and may in the future be involved as, a party to various legal proceedings, which are incidental to the ordinary course of its business.  Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters.  In the opinion of management, as of March 31, 2009, there were no threatened or pending legal matters that would have a material impact on the Company's consolidated results of operations, financial position or cash flows.

  Lease Obligations

On August 1, 2008, in connection with a distribution agreement entered into with a major producer of digital flat panel display products, the Company entered into a new lease for a 50,900 square foot office/warehouse facility in the greater Atlanta area for a term expiring on October 10, 2013.   On December 1, 2008, the Company entered into a First Amendment to such lease for the remainder of the building for an additional 100,300 square feet of similar office/warehouse space for a term expiring on May 14, 2014.  In connection therewith, the lease term on the initial 50,900 square feet was extended to May 14, 2014. In addition, on January 30, 2009, the Company entered into a new lease for a 38,400 square foot office/warehouse facility in North Las Vegas for a term expiring on March 31, 2012.  Rent expense for three and nine months ending March 31, 2009 was $535 and $1,120, respectively, and for three and nine months ending March 31, 2008 was $187 and $525, respectively.

Future minimum aggregate lease payments are approximately as follows:

For the fiscal year ending June 30, 2009	$	1,087
June 30, 2010		1,751
June 30, 2011		1,481
June 30, 2012		949
June 30, 2013		776
Thereafter		531
Total	$	6,575

NOTE 8.                      STOCK-BASED COMPENSATION

The Black-Scholes Option Pricing Model (which models the value over time of financial instruments) was used to estimate the fair value of the options at an assumed measurement date. The Black-Scholes Option Pricing Model uses several assumptions to value an option, including the following:

Expected Dividend Yield—because we do not currently pay dividends, our expected dividend yield is zero.

17

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

Expected Volatility in Stock Price—reflects the historical change in our stock price over the expected term of the   stock option.

Risk-free Interest Rate—reflects the average rate on a United States Treasury bond with maturity equal to the expected term of the option.

Expected Life of Stock Awards—reflects the simplified method to calculate an expected life based on the midpoint between the vesting date and the end of the contractual term of the stock award.

The weighted-average assumptions used in the option pricing model for stock option grants were as follows:

	Three and Nine Months Ended
	March 31, 2009			March 31, 2008
Expected Volatility in Stock Price		31.1	%		25.7	%
Risk-Free Interest Rate		4.39	%		4.39	%
Expected Life of Stock Awards—Years		6			6
Weighted Average Fair Value at Grant Date	$	.0006		$	.0007

The following table summarizes stock option activity for the nine months ended March 31, 2009:

	Shares		Weighted Average Exercise Price
Outstanding at June 30, 2008		9,525,409,000	$	0.00075
Granted		1,398,116,000	$	0.00075
Exercised		—		—
Canceled or expired		—		—
Outstanding at March 31, 2009		10,923,525,000	$	0.00075
Exercisable at March 31, 2009		4,716,778,000	$	0.00075
Expected to vest		6,206,747,000	$	0.00075

Stock-based compensation expense for the nine months ended March 31, 2009 and 2008 amounted to $280 and $591, respectively.   As of March 31, 2009, the aggregate intrinsic value of options outstanding and options exercisable was $0 as the Company’s market price of common stock was less than the exercise price for all options.

NOTE 9.                      INCOME TAXES

The Company periodically assesses its ability to realize our deferred tax assets by considering whether it is more likely than not that some portion or all of deferred tax assets will be realized.  Several factors are evaluated, including the amount and timing of the scheduled expiration and reversals of net operating loss carry forwards (NOLs) and deferred tax items, respectively, as well as potential generation of future taxable income over the periods for which the NOLs are applicable.  Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Although the Company believes the expectations reflected in these estimates are based upon reasonable assumptions, there can be no assurance that actual results will not differ materially from these expectations.   As of June 30, 2008, the Company re-evaluated its fully reserved deferred tax asset balance and determined that $4,500 should be recognized.  Accordingly, an income tax benefit of $4,500 was recognized as a result of an adjustment to the deferred tax asset and related valuation allowance based on an analysis of realizability as described above.

For the three and nine months ended March 31, 2009, the Company recorded an income tax provision of $250 and $620, respectively, based on an estimated effective tax rate for fiscal 2009 of 50.5% of pretax income, which resulted in a reduction of the net deferred tax asset of an equivalent amount.  The Company’s effective tax rate exceeds statutory rates since (i) the intangible asset and goodwill recorded in connection with the Tritronics acquisition are not deductible for tax purposes and (ii) the dividend on the Series E preferred stock classified as interest expense for book purposes under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” may not be deductible for tax purposes.

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ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

The Company did not record a provision or benefit for income taxes for the three and nine months ended March 31, 2008 as the Company realized a net loss for the period.  The Company recorded a valuation allowance for its net deferred tax assets, including its federal and state net operating loss, for the period ended March 31, 2008; accordingly, there was no tax benefit recorded relating to the increase in deferred tax assets in that period.

The Company has total net operating loss carryforwards (NOL) available to offset future federal taxable income of approximately $32,000 expiring in the fiscal years from 2016 through 2027, and also has approximately $200 of capital loss carryforwards, expiring in fiscal 2010 that could be used to offset future federal taxable income.  A capital loss carryforward of approximately $3,800 incurred in fiscal year June 30, 2003 expired unused within the statutory five year period.   The Company also had NOLs available for various state jurisdictions that will expire from fiscal year 2019 through 2028.   Due to the August 17, 2007 recapitalization and change in control, the Company is subject to an annual Section 382 limitation regarding its loss carryforward that can be utilized to offset taxable income.

The Company made a Section 338(h)(10) election for tax purposes to treat the acquisition of Vance Baldwin as an asset purchase; accordingly, purchased goodwill and other intangible assets will be deductible for tax purposes for an annual tax deduction of approximately $1.0 million.

NOTE 10.                      SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following are the payments made during the nine months ended March 31, 2009 and 2008 for income taxes and interest:

	2009		2008
Income taxes	$	25	$	24
Interest	$	3,248	$	1,356

Nine Months Ended March 31, 2009:

(1) In connection with the Tritronics acquisition transaction, the Company issued: (i) a noncash unsecured note of $1,000 to the stockholder of Tritronics as part of the purchase price and  (ii) 2,796,233,000 shares of common stock with a value of $1,119 to the stockholder of Tritronics as part of the purchase price.

(2) In connection with the debt financing for the acquisition of Tritronics, the Company incurred Original Issue Discounts of $265 on Series B Senior Subordinated Notes.

(3) The Company purchased from a stockholder 3,000,000,000 shares of its common stock for the amount of $308.  Such shares are considered retired under Florida law and are reflected as a reduction of shares of common stock issued and outstanding.

Nine Months Ended March 31, 2008:

(1) 80,000,000 shares of the Company’s common stock which were to be issued to certain officers of the Company pursuant to their employment contracts with the Company which were subsequently issued upon stockholder approval of an increase in the number of authorized shares.

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ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009

(UNAUDITED)

(Dollars in thousands, except per share data)

(2) In connection with the recapitalization and Vance Baldwin acquisition transactions, the Company issued: (i) a non-cash unsecured note of $310 to an officer in settlement of outstanding obligations, (ii) a noncash unsecured convertible note of $206 to a creditor in settlement of outstanding obligations, (iii) a noncash unsecured convertible note of $1,000 to the stockholder of Vance Baldwin as part of the purchase price, (iv) Series A-2 convertible preferred stock in exchange for all outstanding shares of Series A, Series A-1 and Series B convertible preferred stock, resulting in a deemed dividend of $820 attributable to Series A-2 having a fair market value higher than the carrying value of the exchanged issues, (v) Series D convertible preferred stock of $198 to the stockholder of Vance Baldwin as part of the purchase price, and (vi) Series D convertible preferred stock of $436 in satisfaction of an assumed obligation of Vance Baldwin.

(3) In connection with the recapitalization and Vance Baldwin acquisition transactions, the Company incurred Original Issue Discounts of $190 on Senior Notes and $234 on Senior A Subordinated Notes.

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes and the other financial information appearing elsewhere in this report.  In addition to historical information, the following discussion and other parts of this quarterly report contain words such as “may,” "estimates," "expects," "anticipates," "believes," “plan,” "grow," "will," “could,” "seek," “continue,” “future,” “goal,” “scheduled” and other similar expressions that are intended to identify forward-looking information that involves risks and uncertainties.  In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements.  Actual results and outcomes could differ materially as a result of important factors including, among other things, general economic conditions, the Company's ability to renew or replace key supply and credit agreements, fluctuations in operating results, committed backlog, public market and trading issues, risks associated with dependence on key personnel, competitive market conditions in the Company's existing lines of business and technological obsolescence, as well as other risks and uncertainties.  See “Risk Factors” below.

General

We are a New York-based company specializing in the technology aftermarket service and supply chain, known as reverse logistics.  Our strategy is to acquire and operate businesses that provide parts procurement and distribution services, depot repair of consumer electronics, computers and peripheral equipment, de-manufacturing and reclamation services for flat panel display products, returns management services and we anticipate providing end-of-life cycle services for all such products.

We are the nation’s largest distributor of consumer electronics parts and a market leader in reverse logistics for the electronics industry by consolidating a core group of highly synergistic companies to provide original equipment manufacturers (“OEMs”), retailers, third party administrators (“TPAs”) and end-users with single-source, integrated life cycle reverse logistic management services for technology products.

Encompass owns Vance Baldwin, Inc., Tritronics, Inc. and Cyber-Test, Inc., which engage in the distribution of replacement parts for electronic equipment and the repair of such equipment.  Vance Baldwin is headquartered in Ft. Lauderdale, FL, with two warehouse facilities located in Lawrenceville, Georgia and one facility in Las Vegas, Nevada; Tritronics is headquartered in Abington, MD, near Baltimore, MD, with its warehouse facilities located in Abington and Miami, FL; and Cyber-Test’s headquarters and operating facilities are based in Longwood, Fl, near Orlando, FL.  The Company operates as one segment in the reverse logistics industry serving the electronics industry.

Critical Accounting Policies, Estimates and Judgments

The Company’s significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements included above in Item 1 – Financial Statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions to apply certain of these critical accounting policies.  Actual results may differ from estimates.  Critical accounting policies requiring the use of estimates and assumptions include the following:

Interim Financial Statements

The condensed consolidated financial statements as of and for the three and nine months ended March 31, 2009 and 2008 are unaudited but in the opinion of management include all adjustments consisting of normal accruals necessary for a fair presentation of financial position and the comparative results of operations and cash flows.  Results of operations for interim periods are not necessarily indicative of those to be achieved or expected for the entire year.  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”), have been condensed or omitted.  These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2008.   The June 30, 2008 balance sheet has been derived from the audited financial statements as of that date.

Principles of Consolidation

The condensed consolidated financial statements include the Company and all of its wholly-owned subsidiaries.  The Company consolidates all majority-owned and controlled subsidiaries.  All significant intercompany transactions have been eliminated in consolidation.

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Use of Estimates

The preparation of the condensed consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period.  Accordingly, actual results could vary from those estimates.

Inventory, Replacement Parts and Equipment

Inventory of OEM parts purchased for resale within the reverse logistics industry, which consists solely of finished goods, is valued at the lower of cost (average costs basis) or market.

Replacement parts and equipment consist primarily of repair parts, as well as consumable supplies for resale and used machines that are held for resale, that are stated at the lower of weighted average cost or market.  The weighted average cost of replacement parts and equipment approximates the first-in, first-out (“FIFO”) method.

Management performs periodic assessments to determine the existence of obsolete, slow-moving inventory and non-usable replacement parts and equipment and records necessary provisions to reduce such inventory and replacement parts and equipment to net realizable value.

Core Charges

The vendors of products distributed by the Company frequently add a "core charge" to the cost of individual replacement parts that the Company distributes as a means of encouraging the return of certain replaced components, most frequently circuit boards, which are defective.  These defective, replaced components are ultimately repaired and re-enter the distribution channel.

Core charges borne by the Company associated with goods in inventory are not included in inventory as cost, but are classified separately in prepaid expenses and other current assets.  Customers either receive a credit for cores when returned, or are obligated to pay the billed core charge in the event a core is not returned.  This payment effectively compensates the Company for the core charge it is obligated to pay vendors.

Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”), the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values.  The excess purchase price over those fair values is recorded as “Goodwill”.   Historically, in accordance with SFAS No. 141, the Company has included transaction costs such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs as part of the purchase price of its acquisitions.  As described below in “Recent Accounting Pronouncements”, effective July 1, 2009, the Company will be required to expense such costs as incurred.  At March 31, 2009, the Company had $983 of capitalized transaction costs which it may write off in the quarter ending June 30, 2009 in the event the acquisitions to which such costs pertain do not close on or before June 30, 2009.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), purchased intangibles with finite lives are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  The Company amortizes such intangible assets on a straight-line basis over their respective useful lives.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill and purchased intangibles with indefinite lives are not amortized, but are reviewed periodically for impairment.

Revenue Recognition

The Company recognizes revenue upon delivery of goods to a common carrier for delivery to the customer, at which point title passes, at a sales price that is fixed and determinable and collectability is reasonably assured.  Provisions for product returns and core returns are accounted for as sales reductions in determining sales in the same period that the related sales are recorded.  The Company also recognizes revenue from the sale of refurbished computer equipment and related products upon delivery of goods to a common carrier for delivery to the customer.  Revenue for the repair of customer-owned equipment is recognized upon completion of the repair.  The Company assumes the risk of loss due to damage or loss of refurbished products during shipment and is reimbursed by the common carriers for shipping damage and lost products.

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Stock Based Compensation

The fair value of stock option grants is calculated using the Black-Scholes Option Pricing Model.  The exercise price of stock options granted is equal to or greater than fair market value at the date of grant as determined by the closing price per share.  The Company recognizes compensation on a straight-line basis over the period of vesting.

The Company determines the value of grants of restricted common stock to employees and others based on the closing price per share at the date of grant and amortizes the cost as compensation expense on a straight-line basis over the period which services are to be performed or the period of vesting.

Classification of Preferred Stock

In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”) a company is required to classify preferred stock as a liability rather than as a component of stockholders’ equity if there is an unconditional obligation requiring the issuer to redeem it at a specified or determinable date (or dates) or upon the occurrence of an event that is certain to occur.  The Series E Certificate of Designation provides for the redemption of all outstanding shares of Series E Preferred Stock upon, among other events, any refinancing, repayment, redemption or other discharge or satisfaction in full of certain indebtedness of the Company.  As of March 31, 2009, the Company was required to classify its Series E Preferred Stock as a liability rather than as a component of stockholders’ equity for this reason, however remote.   Dividends in the amount of $277 and $715 were earned but not paid in the three and nine month periods ended March 31, 2009, respectively.  Dividends on the Series E Preferred Stock are included in interest expense since the issue is classified as a liability rather than equity, with the related liability included in the preferred stock redemption balance included in long-term liabilities as of March 31, 2009.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes".  Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance has been used to offset the recognition of a portion of deferred tax assets arising from net operating loss carryforwards due to the uncertainty of future realization.  The use of a portion of tax loss carryforward benefits is also limited as a result of changes in control of the Company.

The amount of income taxes a Company pays is subject to periodic audits by federal and state tax authorities and these audits may result in proposed deficiency assessments.   In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”) which clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with SFAS No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense.  The Company defines the federal jurisdiction as well as various multi-state jurisdictions as “major” jurisdictions (within the meaning of FIN 48).

Recent Accounting Pronouncements

The Company adopted the provisions of SFAS No. 157 – Fair Value Measurements for its financial assets and liabilities for which it has recognized or disclosed at fair value on a recurring basis effective July 1, 2008. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB No. 157,” which delays the effective date for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, except for items that are measured at fair value in the financial statements on a recurring basis (at least annually).  As provided by FSP No. 157-2, the Company has elected to defer the adoption of SFAS No. 157 for certain of its non-financial assets and non-financial liabilities, primarily goodwill and non amortizable intangible assets, until July 1, 2009.  Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.”  This Standard allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings.  SFAS No. 159 is effective beginning after November 15, 2008.  Management does not expect this pronouncement will have a material impact on the financial statements of the Company.

The FASB has issued Statement No. 141(R), “Business Combinations”. This statement retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting (which Statement No. 141 called the “purchase method”) be used, and applies to all business entities, including mutual entities that previously used the pooling of interest method of accounting for some business combinations.  SFAS No. 141 (R) requires that typical transaction costs such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs be expensed as incurred and no longer be effectively accounted for as part of excess purchase price and intangible assets. The statement is effective for transactions within the annual reporting period beginning on or after December 15, 2008; accordingly, management is evaluating the impact this new standard will have on the Company’s financial position and results of operations, including the prospective write off of capitalized transaction costs included in other non-current assets associated with potential acquisitions in process. At March 31, 2009, such capitalized transaction costs amount to $983,000.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” to amend the provisions SFAS No. 141 (R) for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141 (R) and instead carries forward most of the provisions in SFAS No. 141 for acquired contingencies. FSP No. FAS141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management is currently evaluating the impact of this new standard, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

The FASB has issued Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements.” This statement changes the way the consolidated income statement is presented when non-controlling interests are present. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest, and is effective for periods beginning on or after December 15, 2008. Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”.  The guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”, and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), Business Combinations, and other guidance under accounting principles generally accepted in the United States of America.  FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is prohibited.   Paragraph 11(d) of SFAS No. 142 requires entities to base assumptions for determining the useful life of a recognized intangible asset on the legal, regulatory, or contractual provisions that permit extending the asset’s useful life without appreciably adding to its cost.  FSP No. FAS 142-3, requires that an entity must consider its own experience with similar arrangements in developing its assumptions.  If an entity has had no similar arrangements, then it should consider the assumptions other market participants use.  Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (”SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.

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On June 16, 2008, the FASB issued final Staff Position ("FSP") No. EITF 03-6-1, "Determining Whether  Instruments Granted in Share-Based Payment Transactions Are Participating Securities", to address the question of  whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008.  Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

Financial Condition

We believe that our present and future sales levels will, notwithstanding current poor economic conditions, generate cash flows that will be sufficient to fund our operating working capital needs, as well as capital expenditures and quarterly interest and principal payments that are required under our debt facility.  We have implemented and continue to implement internal growth initiatives to expand our sales levels, increase profitability, and to seek significant future business acquisitions, the latter which will likely require additional borrowings and, in all likelihood, additional equity.  Our debt agreement requires an annual sweep of excess cash flow (as defined therein), which may limit our ability to use operating cash flow to fund acquisitions.

RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2009 TO THE THREE MONTHS ENDED MARCH 31, 2008

Summary of Results of Operations

Net sales for the three months ended March 31, 2009 were $27,148 as compared to net sales of $19,474 for the three months ended March 31, 2008, an increase of $7,674 or 39.4%, primarily attributable to the acquisition of Tritronics.  Further, gross profit increased to $7,202 in the current period from $4,087 in the earlier period as a result of the acquisitions.   The Company recorded net income of $189 in the three months ended March 31, 2009 compared to net income of $363 for the three months ended March 31, 2008, a decrease of $174.  The current period included net interest expense of $1,593, income tax expense of $250 and noncash items including depreciation and amortization expense of $582 and stock-based compensation expense of $86, all of which aggregate $2,511; in the prior year period such expenses amounted to an aggregate of  $1,205.

The following table sets forth certain selected financial data as a percentage of sales for the three months ended March 31, 2009 and 2008:

	2009			2008
Net sales		100.0	%		100.0	%
Cost of sales		73.5			79.0
Gross margin		26.5			21.0
Operating expenses		19.3			15.0
Income from operations before other expense		7.2			6.0
Other expenses		(5.6	)		(4.1	)
Income (loss) before taxes		1.6			1.9
Income tax expense		(.9	)		—
Net income (loss)		0.7	%		1.9	%

Net Sales

Net sales for the three months ended March 31, 2009 amounted to $27,148 as compared to net sales of $19,474 for the three months ended March 31, 2008, an increase of $7,674, or 39.4%.  The increase in net sales was principally due to (i) for Vance Baldwin, the effect of new customer additions and a distribution agreement entered into with a major producer of digital flat panel display products and (ii) for Tritronics, the inclusion of Tritronics’ net sales in the three month period ended March 31, 2009, compared to $0 in the three months ended March 31, 2008.

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Cost of Sales and Gross Profit

Cost of sales totaled $19,946 for the three months ended March 31, 2009, as compared to $15,387 for the three months ended March 31, 2008, an increase of $4,559 or 29.6%.  Gross profit increased to $7,202 for the three months ended March 31, 2009 as compared to $4,087 for the three months ended March 31, 2008, with gross margin increasing to 26.5% from 21.0% for the comparable period in the prior year.

The increase in cost of sales and gross profit and improvement in gross margin were primarily due to new customer additions and a distribution agreement entered into by Vance Baldwin, as well as due to the inclusion of Tritronics in the current period following its acquisition as described above.

Operating Expenses

Total operating expenses for the three months ended March 31, 2009 and 2008 were $5,234 and $2,920 respectively, representing an increase of $2,314, or 79.2%.  The net change was primarily attributable to an increase of $2,049 in selling, general and administrative expenses for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. This increase was due to the inclusion of expenses of Tritronics following its acquisition as described above and increased expenses incurred by Vance Baldwin and Cyber-Test in line with their growth in sales volume.

Depreciation and amortization for the three months ended March 31, 2009 amounted to $582 compared to $317 for the three months ended March 31, 2008.  The increase is attributable to higher expense for amortization of intangible assets resulting from the acquisition of Tritronics.

Selling, general and administrative expenses increased to $4,652 for the three months ended March 31, 2009 from $2,603 for the three months ended March 31, 2008, for an increase of $2,049, or 78.7%, principally due to the increase in expenses incurred by Vance Baldwin and Cyber-Test in line with their growth in sales volume and the inclusion of Tritronics as described above.

Other Income (Expense)

Other expense amounted to $1,530 for the three months ended March 31, 2009, compared to $804 for the three months ended March 31, 2008.  Interest expense, net, for the three months ended March 31, 2009 was $1,593 compared to $804 for the three months ended March 31, 2008, an increase of $789 due to interest on higher average amounts of subordinated and unsecured convertible debt financing entered into in connection with the acquisition of Tritronics as described above, and an increase in interest expense recorded for the dividend on the Series E Preferred Stock (that is required to be classified as a liability) and to amortize additional deferred financing costs incurred in connection with such debt.

RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2009 TO THE NINE MONTHS ENDED MARCH 31, 2008

Summary of Results of Operations

Net sales for the nine months ended March 31, 2009 were $84,694 as compared to net sales of $45,107 for the nine months ended March 31, 2008, an increase of $39,587, or 87.7%, primarily attributable to the acquisitions of Vance Baldwin and Tritronics.  Further, gross profit increased to $20,892 in the current period from $9,716 in the earlier period principally as a result of the acquisitions.   The Company recorded net income of $605 in the nine months ended March 31, 2009 compared to a net loss of $436 for the nine months ended March 31, 2008, a favorable change of $1,041.  The current period included net interest expense of $4,536,  income tax expense of $620 and noncash items including depreciation and amortization expense of $1,538 and stock-based compensation expense of $280 all of which aggregate $6,974; in the prior year period such expenses amounted to an aggregate of  $3,510.

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The following table sets forth certain selected financial data as a percentage of sales for the nine months ended March 31, 2009 and 2008:

	2009			2008
Net sales		100.0	%		100.0	%
Cost of sales		75.3			78.5
Gross margin		24.7			21.5
Operating expenses		18.0			18.2
Income from operations before other expense		6.7			3.3
Other expenses		(5.2	)		(4.3	)
Income (loss) before taxes		1.5			(1.0	)
Income tax expense		(.8	)		—
Net income (loss)		0.7	%		(1.0	)%

Net Sales

Net sales for the nine months ended March 31, 2009 amounted to $84,694 as compared to net sales of $45,107 for the nine months ended March 31, 2008, an increase of $39,587 or 87.7%.  The increase in net sales was principally due to (i) for Vance Baldwin, inclusion of Vance Baldwin’s net sales for the full nine month period ended March 31, 2009 compared to the period from August 17, 2007, the date of its acquisition, through March 31, 2008, the effect of new customer additions and a distribution agreement entered into with a major producer of digital flat panel display products and (ii) for Tritronics, the inclusion of Tritronics’ net sales in the nine month period ended March 31, 2009 since August 1, 2008, the date of its acquisition, compared to $0 in the nine months ended March 31, 2008.

Cost of Sales and Gross Profit

Cost of sales totaled $63,802 for the nine months ended March 31, 2009, as compared to $35,391 for the nine months ended March 31, 2008, an increase of $28,411, or 80.2%.  Gross profit increased to $20,892 for the nine months ended March 31, 2009 as compared to $9,716 for the nine months ended March 31, 2008, with gross margin increasing to 24.7% from 21.5% for the comparable period in the prior year.

The increase in cost of sales and gross profit and improvement in gross margin were primarily due to the inclusion of Vance Baldwin and Tritronics in the current period following their acquisitions as described above, as well as from the current year increase in sales recorded by Vance Baldwin for the reasons described above.

Operating Expenses

Total operating expenses for the nine months ended March 31, 2009 and 2008 were $15,273 and $8,213, respectively, representing an increase of $7,060, or 85.9%.  The net change was primarily attributable to an increase of $6,428 selling, general and administrative expenses for the nine months ended March 31, 2009 as compared to the nine months ended March 31, 2008. This increase was primarily due to the inclusion of expenses of Vance Baldwin and Tritronics for nine and eight months in the current period, respectively, and for seven and a half and zero months in the earlier period, respectively, following their acquisitions as described above, and increased expenses incurred by Vance Baldwin and Cyber-Test in line with their growth in sales volume.

Depreciation and amortization for the nine months ended March 31, 2009 amounted to $1,538 compared to $906 for the nine months ended March 31, 2008.  The increase is attributable to higher amortization expense associated with intangible assets.  The increase is attributable to higher expense for amortization of intangible assets resulting from the acquisition of Tritronics.

Selling, general and administrative expenses increased to $13,735 for the nine months ended March 31, 2009 from $7,307 for the nine months ended March 31, 2008, for an increase of $6,428, or 87.9%, principally due to the inclusion of Vance Baldwin and Tritronics as described above, offset by a decrease in stock-based compensation expense associated with stock option grants made by the Company contemporaneously with the closing of the recapitalization and acquisition of Vance Baldwin in August 2007.   The amount expensed for stock-based compensation in the nine months ended March 31, 2008 was substantially greater than the expense that will be recorded in succeeding periods, including the nine months ended March 31, 2009, for this option grant since a substantial portion of the options granted in that period vested immediately.

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Other Income (Expense)

Other expense amounted to $4,394 for the nine months ended March 31, 2009, compared to $1,939 for the nine months ended March 31, 2008.  Interest expense, net, for the nine months ended March 31, 2009 was $4,536 compared to $2,013 for the nine months ended March 31, 2008, an increase of $2,523 due to interest on higher average amounts of senior and subordinated debt financing entered into in connection with the recapitalization and acquisitions of Vance Baldwin and Tritronics as described above, and an increase in interest expense recorded for the dividend on the Series E Preferred Stock (that is required to be classified as a liability) and to amortize additional deferred financing costs incurred in connection with such debt.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2009, the Company had cash and cash equivalents of $7,421 available to meet its working capital and operational needs.   We believe that our present and future sales levels will, for the foreseeable future, generate cash flows that, together with the $0.5 million in available borrowing capacity under our senior subordinated debt facility, will be sufficient to fund our operating working capital needs, as well as capital expenditures and quarterly interest and principal payments that are required under our debt facility.  We intend to seek significant business acquisitions in the future which will likely require additional borrowings and, in all likelihood, additional equity.  Our debt agreement requires an annual sweep of excess cash flow, as defined, which may limit our ability to use operating cash flow to fund acquisitions.  For the fiscal year ending June 30, 2009, there is a $1,000 minimum cash flow sweep.

Net Cash Used In Operating Activities

Net cash used in operating activities of $2,216 for the nine months ended March 31, 2009 was principally due to increases in accounts receivable and inventory of $3,339 and $5,978, respectively, attributable to the growth in the business, partially offset by net income of $605 and an increase in accounts payable and accrued expenses of $5,225, also attributable to the growth in the business.

Net cash used in operating activities of $1,429 for the nine months ended March 31, 2008 was principally due to the loss from operations of $436 increases in accounts receivable of $979 and inventory of $267 attributable to the growth in the business, decreases in accounts payable and accrued expenses of $548 attributable to the recapitalization that liquidated substantially all of the Company’s liabilities, offset by non-cash expenses of $1,515.

Net Cash Used In Investing Activities

Net cash used in investing activities of $10,216 for the nine months ended March 31, 2009 was attributable to the acquisition of Tritronics for $8,296, net of cash acquired, plus related transaction costs in the amount of $865, as well as purchases of property and equipment for $771.  Purchases of property and equipment were higher than is typically the case due to the Company leasing two additional warehouses in the current period and the associated need to install racks, conveyor systems and computer hardware.

Net cash used in investing activities of $25,284 for the nine months ended March 31, 2008 was attributable almost entirely to the acquisition of Vance Baldwin for $22,321, net of cash acquired, plus related transaction costs of $2,769.

Net Cash Provided By Financing Activities

Net cash provided by financing activities of $15,845 for the nine months ended March 31, 2009 was attributable to proceeds of $4,167 and $13,000 from the sale of Series E Preferred Stock and senior and subordinated notes, respectively, in connection with the acquisition of Tritronics and the Philips transactions, offset by principal on notes payable and capital lease payments of $742.  Financing costs of $272 were incurred in connection with the debt issuance.   In addition, the Company acquired 3 billion shares of common stock from a stockholder for $308, including expenses, and agreed to a prepayment of its Senior Notes in the principal amount of $300 in connection therewith.

Net cash provided by financing activities of $28,547 for the nine months ended March 31, 2008 was attributable to proceeds of $6,300 and $24,039 from the sale of Series C Preferred Stock and senior and subordinated notes, respectively, in connection with the recapitalization and the acquisition of Vance Baldwin, offset by principal payments of $891 primarily to repay all notes payable outstanding at closing, as well as periodic principal and capital lease repayments.  In addition, financing costs of $901 were incurred in connection with the debt issuance.

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Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.  The Company does not have any non-consolidated special purpose entities.

RISKS FACTORS

Unless so noted, there has been no material change in the information provided in Item 1A of Form 10-K Annual Report for the year ended June 30, 2008, a listing of which is provided below:

· We Will Need Additional Capital to Achieve Our Business Plans.

· Making And Integrating Acquisitions Could Impair The Company’s Operating Results.

· To Service Our Indebtedness, We Will Require A Significant Amount Of Cash; Our Ability To Generate Cash Depends On Many Factors Beyond Our Control.

· New Equity Financing Could Dilute Current Stockholders.

· The Loss Of Any One Of Our Key Customers Could Have A Material Adverse Effect On Our Business.

In November 2008, Circuit City Stores, Inc., a chain of consumer electronic product stores and a significant customer of the Company, filed for reorganization under Chapter 11 of the US Bankruptcy Code.  The Company made acceptable financial arrangements with Circuit City for the post-filing period and, resumed accepting purchase orders from and shipping to this customer until January 16, 2009, at which date Circuit City announced that it would cease operations and liquidate its assets. The Company has increased its allowance for doubtful accounts with respect to amounts owed to it as of the date of the bankruptcy filing and believes that such amount is adequate and will not need to be increased.

· Our Business Could Suffer If There Is A Prolonged Economic Downturn.

· Fluctuations In The Price Or Availability Of Office Equipment Parts And Computer Peripheral Products Could Materially Adversely Affect Us.

· We Could Be Materially Affected By Turnover Among Our Service Qualified Technical and Other Personnel.

· We Could Fail To Attract Or Retain Key Personnel.

· The Company’s Issuances Of Preferred Stock Has Significantly Diluted the Equity Ownership Of Our Stockholders and the Future Conversion Of Our Outstanding Preferred Stock Will Also Cause Significant Dilution to our Existing Stockholders.

· The Price of Our Common Stock May Be Affected By A Limited Trading Volume And May Fluctuate Significantly and May Not Reflect the Actual Value of Our Business.

· Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult For Investors To Sell Their Shares Due To Suitability Requirements.

· The Holders Of Preferred Stock Are Entitled To Rights And Preferences That Are Significantly Greater Than The Rights And Preferences Of The Holders Of Our Common Stock, Including Preferential Payments Upon A Sale Or Liquidation Of The Company.

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· Certain Private Stockholders, Such As ACT-DE, LLC And Some Of Our Directors And Officers, Control A Substantial Interest In The Company And Thus May Influence Certain Actions, Including Actions Requiring A Shareholder Vote.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

As a smaller reporting company, we have elected scaled disclosure reporting obligations and therefore are not required to provide the information in this Item 3.

Item 4t.  Controls And Procedures

(A)  Evaluation Of Disclosure Controls And Procedures

Prior to the filing of this Report on Form 10-Q, an evaluation was performed under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the CEO and CFO have concluded that, as of March 31, 2009, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure. 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 its stated goals under all potential future conditions, regardless of how remote.

(B)  Changes In Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting  (as defined in Section 13a-15(f) or 15d-15(f) of the Exchange Act) during our fiscal quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 2.  Unregistered Sales of equity Securities And Use Of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 January 1, 2009 – January 31, 2009		-		-		-		-
Month #2 (February 1, 2009 – February 28, 2009)		-		-		-		-
Month #3 March 1, 2009 – March 31, 2009	3,000,000,000 shares of common stock (1)		$.0001 per Share			-		-
Total	3,000,000,000 shares of common stock (1)			-		-		-

(1) On March 23, 2009, in a privately negotiated transaction, the Company purchased 3,000,000,000 shares of its outstanding common stock, no par value per share from YA Global Investments, L.P., at a purchase price per share of $.0001, pursuant to a Stock Purchase Agreement dated March 23, 2009.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission Of Matters To A Vote Of Security Holders

None.

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Item 5. Other Information  (in thousands, except share amounts)

On January 12, 2009, the Company and Sankaty Advisors, LLC entered into Amendment No. 1 to the Amended and Restated Note Purchase Agreement, dated as of August 1, 2008, by and among Encompass Group Affiliates, Inc., a Delaware corporation as Issuer, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC.  Amendment No.1 incorporated a minimum payment of $1,000 for the fiscal year ending June 30, 2009 under an annual sweep of excess cash flow (as defined in the Amendment and Restated Note Purchase Agreement) and increased the amount of permitted annual capital expenditures.  A copy of Amendment No. 1 is attached hereto as Exhibit 4.5.5.  The Company’s prior transactions with Sankaty Advisors, LLC are described in Note 5 in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 – Financial Statements of this Quarterly Report on Form 10-Q, which disclosures are incorporated herein by reference.

On March 23, 2009, the Company acquired 3,000,000,000 shares of common stock from an institutional stockholder for a price of $300.  In connection with this transaction, on March 20, 2009 the Company and Guarantors entered into an Equity Repurchase Waiver Agreement with Sankaty whereby it agreed to a prepayment of Senior Notes in the principal amount of $300 in exchange for a waiver of a provision of the Amended and Restated Note Purchase Agreement otherwise prohibiting such purchase.

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Item 6. Exhibits

Exhibit No.	Description	Location (1)
2.1	Asset Purchase Agreement dated May 27, 2004, by and between Cyber-Test, Inc., a Delaware corporation, and Cyber-Test, Inc., a Florida corporation.	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June18, 2004
2.2	Stock Purchase Agreement entered into by and between Encompass Group Affiliates, Inc. and Fred V. Baldwin, dated as of August 17, 2007	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
2.3	Stock Purchase Agreement entered into by and between Encompass Group Affiliates, Inc., a Florida corporation, Encompass Group Affiliates, Inc., a Delaware corporation, Tritronics, Inc., Tritronics, LLC and the members of Tritronics, LLC listed on Schedule 2 thereto, dated as of August 1, 2008	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
3(i)(a)	Restated Articles of Incorporation of Advanced Communications Technologies, Inc.	Incorporated by reference to Exhibit 3(i) to the Company’s Annual Report on Form 10-KSB filed with the SEC on September 28, 2007
3(i)(b)	Articles of Amendment to the Articles of Incorporation of Advanced Communications Technologies, Inc. filed with the Secretary of State of Florida on May 6, 2008	Incorporated by reference to Exhibit 3(i)(b) to the Company’s Annual Report on Form 10-KSB filed with the SEC on September 28, 2007
3(i)(c)	Articles of Amendment to the Articles of Incorporation of Advanced Communications Technologies, Inc. filed with the Secretary of State of Florida on August 1, 2008	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
3(ii)	Amended Bylaws of Advanced Communications Technologies, Inc.	Incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
4.1	Form of Exchange Agreement, dated June 24, 2004, by and among Advanced Communications Technologies, Inc. and certain debenture holders of Hy-Tech Technology Group, Inc.	Incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-KSB filed with the SEC on November 3, 2004
4.2	Form of Convertible Promissory Note issued in connection with Exhibit 2.2	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

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4.3.1	Note Purchase Agreement, dated as of August 17, 2007, by and among Encompass Group Affiliates, Inc. as Issuer, and Advanced Communications Technologies, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
4.3.2	Form of Senior Note issued in connection with Exhibit 4.3.1	Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
4.3.3	Form of Subordinated Note issued in connection with Exhibit 4.3.1	Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
4.3.4	First Lien Pledge and Security Agreement, dated as of August 17, 2007, between Encompass Group Affiliates, Inc., Advanced Communications Technologies, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
4.3.5	Second Lien Pledge and Security Agreement , dated August 17, 2007, between Encompass Group Affiliates, Inc., Advanced Communications Technologies, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007
4.34	Form of Subordinated Promissory Note issued in connection with Exhibit 2.3	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
4.5.1	Amended and Restated Note Purchase Agreement, dated as of August 1, 2008, by and among Encompass Group Affiliates, Inc., a Delaware corporation as Issuer, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC.	Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

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4.5.2	Form of Series B Subordinated Note issued in connection with Exhibit 4.5.1.	Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
4.5.3	Amended and Restated First Lien Pledge and Security Agreement, dated as of August 1, 2008, between Encompass Group Affiliates, Inc., a Delaware corporation, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
4.5.4	Amended and Restated Second Lien Pledge and Security Agreement, dated August 1, 2008, between Encompass Group Affiliates, Inc., a Delaware corporation, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC.	Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
4.5.5	Amendment No. 1 to the Amended and Restated Note Purchase Agreement, dated as of August 1, 2008, by and among Encompass Group Affiliates, Inc., a Delaware corporation as Issuer, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC, dated January 12, 2009.	Incorporated by reference to Exhibit 4.5.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 13, 2009
10.1	Stock Purchase Agreement entered into by and among Encompass Group Affiliates, Inc., ACT-DE, LLC and the persons and entities identified on Schedule 1 thereto, dated August 1, 2008.	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
10.2	Amendment No. 1 to Stockholder Agreement, among Encompass Group Affiliates, Inc., ACT-DE, LLC, and the persons and entities identified on Schedule 1 thereto, dated August 1, 2008.	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008
10.3	Spare Parts Agreement between Vance Baldwin Electronics, a wholly-owned subsidiary of Encompass Group Affiliates, Inc. and Philips Consumer Lifestyle North America, a division of Philips Electronics North America Corporation, dated July 14, 2008.	Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed with the SEC on October 14, 2008 (subject to confidential treatment request)

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10.4	Stock Purchase Agreement with YA Global Investments, L.P, dated March 23. 2009.	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2009
10.3	Equity Repurchase Waiver Agreement with Sankaty Advisors LLC, dated March 20, 2009.	Filed herewith
31.1	Certification by Chief Executive Officer pursuant to Sarbanes–Oxley Section 302	Filed herewith
31.2	Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 302	Filed herewith
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350	Filed herewith
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith

(1) In the case of incorporation by reference to documents filed by the Company under the Exchange Act, the Company’s file number under the Exchange Act is 000-30486.

Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Encompass Group Affiliates, Inc.
By:	/s/ Wayne I. Danson
Name:	Wayne I. Danson
Title:	President, Chief Executive Officer (Principal Executive Officer) and Director
Date:	May 12, 2009
By:	/s/ John E. Donahue
Name:	John E. Donahue
Title:	Vice President and Chief Financial Officer (Principal Accounting Officer)
Date:	May 12, 2009

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