Emtec 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended February 28, 2009

Commission file number: 0-32789

EMTEC, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of incorporation or organization)	87-0273300 (I.R.S. Employer Identification No.)
525 Lincoln Drive 5 Greentree Center, Suite 117 Marlton, New Jersey 08053 (Address of principal executive offices, including zip code)

(856) 552-4204

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o 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 o No x

As of April 13, 2009, there were outstanding 15,084,617 shares of the registrant’s common stock.

EMTEC, INC.

FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2009

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

Condensed Consolidated Balance Sheets			1

Condensed Consolidated Statements of Operations			2

Condensed Consolidated Statements of Cash Flows			3

Notes to Condensed Consolidated Financial Statements			4

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3 - Quantitative and Qualitative Disclosures About Market Risk			40

Item 4T - Controls and Procedures			41

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings			42

Item 1A – Risk Factors			43

Item 4 – Submission of Matters to a Vote by Securities Holders			44

Item 6 – Exhibits			45

SIGNATURES			46

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EMTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	February 28,
	2009			August 31,
	(Unaudited)			2008
Assets
Current Assets
Cash	$	3,100,687		$	2,025,098
Receivables:
Trade, less allowance for doubtful accounts		25,569,671			32,178,967
Others		2,791,970			2,285,542
Inventories, net		1,616,224			659,994
Prepaid expenses and other		1,362,164			1,006,686
Deferred tax asset - current		707,028			900,028
Total current assets		35,147,744			39,056,315
Property and equipment, net		1,089,508			1,108,327
Intangible assets, net		11,856,976			11,315,422
Goodwill		11,070,412			10,697,516
Deferred tax asset- long term		104,083			171,985
Other assets		150,413			124,475
Total assets	$	59,419,136		$	62,474,040
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit	$	11,985,200		$	8,583,552
Accounts payable		17,537,911			24,824,365
Current portion of long term debt - related party		3,319,018			2,810,937
Income taxes payable		302,666			315,111
Accrued liabilities		5,720,347			5,418,625
Due to former stockholders		-			631,415
Customer deposits		-			500
Deferred revenue		1,837,076			1,323,177
Total current liabilities		40,702,218			43,907,682
Deferred tax liability		2,569,332			2,298,650
Accrued liabilities		140,344			342,708
Long term debt - related party		169,582			754,578
Total liabilities		43,581,476			47,303,618
Commitments and contingent liabilities
Stockholders' Equity
Common stock $0.01 par value; 25,000,000 shares authorized;
17,949,206 and 17,714,180 shares issued and 15,084,617 and
14,849,591, outstanding at February 28, 2009 and August 31, 2008, respectively		179,492			177,142
Additional paid-in capital		20,717,394			20,635,972
Retained earnings (accumulated deficit)		574,280			(46,645	)
Cumulative translation adjustment		(37,459	)		-
		21,433,707			20,766,469
Less: treasury stock, at cost, 2,864,589 shares		(5,596,047	)		(5,596,047	)
Total stockholders' equity		15,837,660			15,170,422
Total liabilities and stockholders' equity	$	59,419,136		$	62,474,040

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

EMTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended						Six months ended
	February 28, 2009			February 29, 2008			February 28, 2009			February 29, 2008
Revenues
Procurement services	$	29,414,055		$	40,928,623		$	85,772,778		$	111,691,000
Service and consulting		12,547,235			3,139,879			26,207,622			7,017,688
Total Revenues		41,961,290			44,068,502			111,980,400			118,708,688

Cost of Sales
Cost of procurement services		26,370,454			36,625,710			76,762,952			99,655,022
Service and consulting		9,464,436			2,471,549			20,297,062			5,437,446
Total Cost of Sales		35,834,890			39,097,259			97,060,014			105,092,468

Gross Profit
Procurement services		3,043,601			4,302,913			9,009,826			12,035,978
Service and consulting		3,082,799			668,330			5,910,560			1,580,242
Total Gross Profit		6,126,400			4,971,243			14,920,386			13,616,220

Operating expenses:
Selling, general, and administrative expenses		5,758,088			4,920,946			11,935,963			10,676,389
Rent expense – related parties		152,496			89,325			304,992			178,650
Depreciation and amortization		567,746			307,511			1,101,645			608,014
Total operating expenses		6,478,330			5,317,782			13,342,600			11,463,053

Operating income (loss)		(351,930	)		(346,539	)		1,577,786			2,153,167

Other expense (income):
Interest income – other		(6,290	)		(48,888	)		(11,188	)		(66,663	)
Interest expense		269,930			315,720			523,993			652,743
Other expense (income)		248			-			4,411			(18	)

Income (loss) before income taxes		(615,818	)		(613,371	)		1,060,570			1,567,105
Provision (benefit) for income taxes		(230,801	)		(221,993	)		439,645			712,281
Net income (loss)	$	(385,017	)	$	(391,378	)	$	620,925		$	854,824

Net income (loss) per common share
Basic and Diluted	$	(0.03	)	$	(0.03	)	$	0.04		$	0.06

Weighted Average Shares Outstanding
Basic		14,629,231			14,519,049			14,629,231			14,519,049

Diluted		14,629,231			14,519,049			14,788,619			14,594,685

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

EMTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	February 28, 2009			February 29, 2008
Cash Flows From Operating Activities
Net income	$	620,925		$	854,824
Adjustments to Reconcile Net Income to Net
Cash (Used In) Provided By Operating Activities
Depreciation and amortization		401,672			317,839
Amortization related to intangible assets		699,974			290,175
Deferred income taxes		(162,264	)		499,606
Stock-based compensation		83,772			146,075
Indemnification of professional fees		(269,882	)		-
Changes In Operating Assets and Liabilities
Receivables		6,721,009			1,149,222
Inventories		(956,230	)		4,208,842
Prepaid expenses and other assets		185,368			(146,748	)
Accounts payable		(7,737,239	)		(2,050,944	)
Customer deposits		(500	)		(136,089	)
Income taxes payable		9,207			(1,620	)
Accrued liabilities		292,849			(966,709	)
Deferred revenue		(312,797	)		(170,015	)
Net Cash (Used In) Provided By Operating Activities		(424,136	)		3,994,458
Cash Flows From Investing Activities
Purchases of property and equipment		(314,999	)		(57,373	)
Acquisition of businesses, net of cash acquired		(896,960	)		-
Goodwill/ tax settlement		(164,602	)		-
Net Cash Used In Investing Activities		(1,376,561	)		(57,373	)
Cash Flows From Financing Activities
Net increase (decrease) in line of credit		3,401,648			(4,846,207	)
Repayment of debt		(473,865	)		(478,400	)
Net Cash Provided By (Used In) Financing Activities		2,927,783			(5,324,607	)
Effect of rate changes on cash		(51,498	)		-
Net increase (decrease) in Cash		1,075,588			(1,387,522	)
Beginning Cash		2,025,099			2,251,352
Ending Cash	$	3,100,687		$	863,830
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes	$	560,485		$	922,050
Interest	$	353,180		$	511,552
Supplemental Schedule of Non Cash Investing and Financing Activities
Indemnification receivable due from former shareholders settled by the amounts
due to former shareholders	$	631,415			-
Note payable issued, acquisition of Capital Stock of Koan-IT	$	396,950			-

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

EMTEC, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

2. General

Description of Business

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

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

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

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

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

Principles of Consolidation

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

Reclassifications

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

Accounting Estimates

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

Goodwill

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

The changes in the carrying amount of goodwill for the six months ended February 28, 2009 are as follows:

Balance at August 31, 2008	$	10,697,516
Increase in goodwill arising from acquistion of KOAN-IT		548,435
Foreign currency translation effect of Canadian goodwill		(13,876	)
Reduction in goodwill arising from settlement of tax
uncertainties acquired in April 16, 2004 merger		(161,663	)
Balance at February 28, 2009	$	11,070,412

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

Based on the income (discounted cash flows) and market-based (guideline company method) approaches there was no goodwill impairment for the Systems Division at June 1, 2008. Based on the income (discounted cash flows) approach there was no goodwill impairment for the Luceo reporting unit at June 1, 2008. At February 28, 2009, Emtec's market capitalization was less than its total stockholders' equity, which is one factor the Company considered when determining whether goodwill should be tested for impairment between annual tests. The Company does not currently believe that the reduced market capitalization represents a goodwill impairment indicator as of February 28, 2009, however, if current market conditions persist and the Company’s estimated value under the income and market-based approaches is effected, then it is possible that the Company may have to take a goodwill impairment charge against earnings in a future period.

Identifiable Intangible Assets

At February 28, 2009 and August 31, 2008, the components of identifiable intangible assets are as follows:

	February 28, 2009			August 31, 2008
Customer relationships		13,932,753			12,861,712
Noncompete agreements		394,342			370,000
Trademarks		146,051			-
		14,473,146			13,231,712
Accumulated amortization		(2,616,170	)		(1,916,290	)
		11,856,976			11,315,422

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

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

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

Amortization expense was $699,974 and $290,175 for the six months ended February 28, 2009 and February 29, 2008, respectively. We currently expect future amortization for the next 5 years ending August 31, 2009 through 2013 will be approximately $1,590,000 per year.

Long-lived assets, including customer relationships and property and equipment, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with “SFAS” No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated undiscounted future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows are less than the carrying amount, the asset is considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset. No impairment of long-lived assets occurred during the six months ended February 28, 2009.

Foreign Currency Translation and Other Comprehensive Income (Loss)

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

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

	Three months ended						Six months ended
	February 28, 2009			February 29, 2008			February 28, 2009			February 29, 2008

Net Income (loss)	$	(385,017	)	$	(391,378	)	$	620,925		$	854,824
Cumulative translation adjustment		(37,459	)		-			(37,459	)		-
Total comprehensive income (loss)	$	(422,476	)	$	(391,378	)	$	583,466		$	854,824

Earnings (loss) Per Share

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

The computation of diluted earnings per share is similar to the computation of basic earnings (loss) per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive options, restricted stock awards and warrants had been exercised as of the end of the period. Potentially dilutive shares consist of stock options, restricted stock awards and warrants totaling 219,842 and 122,944, and 159,388 and 45,792 for the three and six months ended February 28, 2009 and February 29, 2008, respectively. Diluted shares for the three months ended February 28, 2009 and February 29, 2008 were not included in the calculation of diluted net loss per share because the effect of the inclusion would be anti-dilutive. In addition, outstanding warrants to purchase 1,682,444 and 1,649,955 common shares as of and for the periods ended February 28, 2009 and February 29, 2008, respectively, were also not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the Company’s common shares over those periods.

Income Taxes and Due to Former Stockholders

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

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

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

Reconciliation of Unrecognized Tax Benefits for the six months ended February 28, 2009:

Balance at September 1, 2008	$	692,532
Unrecognized tax postions of prior periods:
Increase		-
Decrease		-
Unrecognized tax postions of current year:
Increase	$	5,939
Decrease		-
Decrease in Unrecognized tax benefits due to settlements	$	(547,119	)
Decrease in Unrecognized tax benefits due to lapse of
statute of limitations		-
Balance at February 28, 2009	$	151,352
Total amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate	$	52,597
Accrued interest and penalties for unrecognized tax benefits
as of February 28, 2009 balance sheet	$	67,412
Interest and penalties classified as income tax expense (benefit)-
for the six months ended February 28, 2009	$	(35,382	)

3. Acquisitions

KOAN-IT Corp.

On February 12, 2009, 7119747 Canada Inc. (“Emtec Canada”), a wholly-owned subsidiary of Emtec, EIS-US,, KOAN-IT Corp. and the shareholders of KOAN-IT (the “Shareholders”) entered into a Share Purchase Agreement (the “Purchase Agreement”), pursuant to which (i) Emtec Canada agreed to acquire all of the outstanding stock of KOAN-IT from the Shareholders and (ii) EIS-US acquired all of the outstanding stock of KOAN-IT (US) Corp. from KOAN-IT for an aggregate consideration of up to approximately $3.30 million. The purchase price consisted of (i) cash at closing in an aggregate amount equal to $1,223,049 (consisting of $1,202,665 for the outstanding stock of KOAN-IT and $20,384 for the outstanding stock of KOAN-IT (US)), (ii) unsecured subordinated 6% promissory notes issued to each of the Shareholders in an aggregate principal amount of $407,683 payable in full on the 12 month anniversary of the closing and (iii) the potential right to receive additional cash consideration each year for the next three years on the anniversary of the closing in the aggregate of $1,630,731 if certain performance goals are met. The purchase price may be reduced pursuant to a post-closing working capital adjustment. The acquisition was funded through borrowings under the Credit Facility with the Lender. All dollar amounts in this footnote have been translated into U.S. dollars from Canadian dollars at the exchange rate in effect as of the acquisition date of February 12, 2009. As of March 1, 2009 KOAN-IT Corp. and Emtec Canada were amalgamated to form EIS-Canada, which does business as KOAN-IT.

The Company accounted for the acquisition under the purchase method, whereby, amounts were assigned to assets acquired and liabilities assumed based on their fair values, on the date of the acquisition. Management determined the fair value of KOAN-IT and KOAN-IT (US)’s net assets on February 12, 2009 were $1,082,297, which resulted in an excess purchase price over fair value of net assets acquired of $548,435, which amount was recognized as goodwill. Additionally, the purchase price includes capitalized professional fees of $245,524 that were associated with the acquisition of KOAN-IT and KOAN-IT (US).

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

Cash	$	571,613
Trade receivable, net		984,817
Prepaid expenses & other current assets		582,566
Plant and equipment		69,677
Customer relationships		1,100,000
Trademarks		150,000
Noncompete asset		25,000
Accounts payable		(463,033	)
Income taxes payable		27,355
Deferred tax liabilities		(414,607	)
Deferred revenue		(848,488	)
Accrued expenses		(457,080	)
Fair value of net assets acquired		1,327,820
Purchase price		1,876,255
Excess purchase price	$	548,435

The allocation is preliminary and such amounts are subject to adjustment as additional analysis is performed or obtained from third party sources. The Company allocated $1.1 million to client relationships at the acquisition date which amount is being amortized over a period of six years. The Company also allocated $150,000 and $25,000 to trademarks and a noncompete asset, respectively, that are being amortized over a period of five years.

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

Luceo, Inc.

On March 20, 2008, EGS, Luceo and Sivapatham Natarajan (“Mr. Natarajan”) entered into a Stock Purchase Agreement, pursuant to which EGS acquired all of the outstanding stock of Luceo from Mr. Natarajan for the purchase price that consisted of (i) cash at closing in an aggregate amount equal to $1,795,000; (ii) a subordinated promissory note in a principal amount of $820,000 which is payable in two equal installments of $410,000 each on the 12 month and 18 month anniversaries of the closing and (iii) contingent payments of additional cash consideration each year for three years on the anniversary of the closing if certain performance goals are met. During the year ended August 31, 2008, the purchase price was reduced by $68,489 in connection with the post-closing working capital adjustment.

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

eBusiness Applications Solutions, Inc. and Aveeva, Inc.

On August 13, 2008, EGS eBAS, Aveeva and Ms. Chopra entered into a Purchase Agreement, pursuant to which EGS acquired all of the outstanding stock of eBAS and Aveeva from Ms. Chopra. The purchase price consisted of (i) cash at closing in an aggregate amount equal to $7,313,500 and (ii) the potential right to pay contingent consideration of $1.0 million each year for three years on the anniversary of the closing if certain performance goals are met. The purchase price may be increased or decreased pursuant to a post-closing working capital adjustment.

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

	Three months ended						Six months ended
	February 28, 2009			February 29, 2008			February 28, 2009		February 29, 2008
Revenue	$	41,961,290		$	52,535,389		$	111,980,400	$	135,979,828
Income (loss) from continuing operations		(385,017	)		(150,107	)		620,925		1,209,824
Net income (loss)		(385,017	)		(150,107	)		620,925		1,209,824
Basic and diluted earning (loss) per share from continuing operations	$	(0.03	)	$	(0.01	)	$	0.04	$	0.08
Basic and diluted earning (loss) per share	$	(0.03	)	$	(0.01	)	$	0.04	$	0.08

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

4. Stock-Based Compensation and Warrants

Stock Options

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

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

A summary of stock options for the six months ended February 28, 2009 is as follows:

				Weighted Average		Weighted Average	Aggregate
For the Six Months Ended February 28, 2009	Shares			Exercise Price		Remaining Term	Intrinsic Value *
Options Outstanding -September 1, 2008		386,500		$	1.22
Options Granted		20,000		$	0.33
Options Exercised		-
Options Forfeited or Expired		(56,000	)	$	0.78

Options Outstanding - February 28, 2009		350,500		$	1.19	5.89 years	$	5,000

Options Exercisable -February 28, 2009		228,375		$	1.14	6.45 years	$	5,000

* Represents the total pre-tax intrinsic value based on the Company’s average closing stock prices for the six months ended February 28, 2009.

There were no stock options issued during the three months ended February 28, 2009. The following assumptions were used to value stock options issued during the six months ended February 28, 2009:

	2009
Weighted-Average Fair Value	$	0.28
Assumptions
Expected Volatility		106.49	%
Expected Term	5 years
Expected Forfeiture Rate		0	%
Dividend Yield		0	%
Risk-Free Interest Rate		1.89	%

Nonvested Stock (Restricted Stock)

During the fiscal year ended August 31, 2007, the Company granted 459,224 shares of nonvested (restricted) stock to certain members of senior management and employees. These nonvested shares vest equally over 4 years. During January 2008, the Company granted 10,331 shares of stock to a member of senior management. During November 2008, the Company granted 292,402 shares of nonvested (restricted) stock to certain members of senior management in connection with annual bonus compensation. These nonvested shares vest over a one-year period. The fair value of these shares was determined based upon the quoted closing price of the Company’s stock on the Over-the-Counter Bulletin Board on the grant date. The Company recognizes compensation expense associated with the issuance of such shares using the closing price of the Company’s common stock on the date of grant over the vesting period on a straight-line basis.

The following table summarizes the Company’s restricted stock activity during the six months ended February 28, 2009:

For the Six Months Ended February 28, 2009	Shares			Weighted Average Grant Date Fair Value		Fair Value
Nonvested - September 1, 2008		330,542		$	1.24
Granted		292,402		$	0.36
Vested		(110,182	)	$	1.24	$	46,218	(a)
Forfeited		(57,376	)		-
Nonvested -February 28, 2009		455,386		$	0.79	$	387,078	(b)

(a)

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

(b)

The aggregate fair value of the nonvested restricted stock shares expected to vest represents the total pre-tax fair value, based on the Company’s closing stock price as of February 28, 2009 which would have been received by holders of restricted stock shares had all such holders sold their underlying shares on that date.

Stock Options and Nonvested Stock

Stock-based compensation costs related to the 2006 Plan totaled $41,597 and $78,723 during the three months ended February 28, 2009 and February 29, 2008, respectively. Stock-based compensation costs related to the 2006 Plan totaled $83,772 and $146,075 during the six months ended February 28, 2009 and February 29, 2008, respectively. As of February 28, 2009, the Company had $211,215 of unrecognized compensation cost related to these instruments. The cost is expected to be recognized over a remaining period of 3 years.

Warrants

On August 5, 2005, the Company issued certain stockholders stock warrants that evidence the obligation of the Company to issue a variable number of shares, in the aggregate, equal to 10% of then total issued and outstanding shares of the Company’s common stock, measured on a post-exercise basis, at any date during the 5-year term of the warrants, which ends August 5, 2010. The aggregate exercise price of these warrants is fixed at $3,695,752. The exercise price per warrant will vary based upon the number of shares issuable under the warrants. The number of shares issuable under the warrants totaled 1,682,444 and 1,649,955 shares, with an exercise price of $2.20 and $2.24 per share, as of February 28, 2009 and February 29, 2008, respectively. The outstanding warrants were anti-dilutive for the three and six months ended February 28, 2009 and February 29, 2008 because the exercise price was greater than the average market price of the Company’s common shares.

5. Line of Credit

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

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

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

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

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

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

The Company had balances of $11.99 million and $8.58 million outstanding under the revolving portion of the Credit Facility, and balances of $893,435 and $2.05 million (included in the Company’s accounts payable) outstanding plus $503,600 and $444,700 in open approvals under the floor plan portion of the Credit Facility at February 28, 2009 and August 31, 2008, respectively. Net availability was $6.11 million and $14.44 million under the revolving portion of the Credit Facility, and additionally $12.51 million and $6.49 million was available under the floor plan portion of the Credit Facility as of February 28, 2009 and August 31, 2008, respectively.

As of February 28, 2009, the Company determined that it was in compliance with its financial covenants with the Lender.

6. Concentration of Credit Risk and Significant Clients

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

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

	For the Three Months Ended
	February 28, 2009		% of Total			February 29, 2008		% of Total
Departments of the U.S.
Government	$	11,244,201		26.9	%	$	26,482,919		60.1	%
State and Local Governments		1,949,078		4.6	%	$	2,262,595		5.1	%
Commercial Companies		17,979,862		42.8	%	$	11,387,333		25.8	%
Education and other		10,788,149		25.7	%	$	3,935,654		8.9	%
Total Revenues	$	41,961,290		100.0	%	$	44,068,502		100.0	%

	For the Six Months Ended
	February 28, 2009		% of Total			February 29, 2008		% of Total
Departments of the U.S.
Government	$	51,439,447		46.0	%	$	74,853,433		63.1	%
State and Local Governments		4,945,273		4.4	%		5,980,610		5.0	%
Commercial Companies		34,738,777		31.0	%		24,469,810		20.6	%
Education and other		20,856,903		18.6	%		13,404,835		11.3	%
Total Revenues	$	111,980,400		100.0	%	$	118,708,688		100.0	%

Major Customers

Three and six months ended February 28, 2009

Sales to school districts in Georgia and Florida accounted for approximately $4.18 million or 10.0%, and $6.35 million or 15.1% of the Company’s total revenues for three months ended February 28, 2009, respectively. The same customers accounted for approximately $912,000 or 2.1%, and $2.55 million or 5.8% of the Company’s total revenues for the three months ended February 29, 2008, respectively.

Sales to a school district in Georgia accounted for approximately $13.16 million or 11.7% of the Company’s total revenues for six months ended February 28, 2009. The same customer accounted for approximately $6.50 million or 5.5% the Company’s total revenues for the six months ended February 29, 2008.

Three and six months ended February 29, 2008

The Department of the Air Force, one of the departments of the United States Government accounted for approximately $14 million or 31.8%, and $15.07 million or 12.7% of the Company’s total revenues for the three and six months ended February 29, 2008. The same customer accounted for approximately $245,624 or 0.6% and $2.57 million or 2.3% of the Company’s total revenue for the three and six months ended February 28, 2009.

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

The trade account receivables consist of the following:

	February			August
	28, 2009			31, 2008
Trade receivables	$	25,822,824		$	32,570,104
Allowance for doubtful accounts		(253,153	)	$	(391,137	)
Trade receivables, net	$	25,569,671		$	32,178,967

7. Accrued Liabilities

Current accrued liabilities consisted of the following:

	February 28, 2009		August 31, 2008

Accrued payroll	$	2,044,285	$	2,384,922
Accrued commissions		523,608		730,848
Accrued state sales taxes		86,878		97,514
Accrued third-party service fees		29,665		108,070
Other accrued expenses		3,035,911		2,097,271
	$	5,720,347	$	5,418,625

8. Related Party Transactions

One of the Company’s facilities is leased under a non-cancelable operating lease agreement with an entity that is owned by certain directors and officers of the Company and their related family members. Rent expense was $45,000 and $90,000 for each of the three and six months ended February 28, 2009 and February 29, 2008, respectively. The facilities consist of office and warehouse space totaling 42,480 square feet located in Springfield, New Jersey

The Company is occupying approximately 26,000 square feet of office and warehouse space in a 70,000 square-foot building in Suwannee, GA. This space is leased from GS&T Properties, LLC, in which certain officers of the Company are passive investors with an approximately 20% equity interest. The lease term is for 5 years, with monthly base rent of $15,832. During the three months ended February 28, 2009 and February 29, 2008, the Company recorded expense under this lease totaling $47,496 and $44,325, respectively. During the six months ended February 28, 2009 and February 29, 2008, the Company recorded expense under this lease totaling $94,992 and $88,650, respectively.

In conjunction with the acquisition of eBAS/Aveeva, the Company entered into a lease for approximately 20,000 square feet of office space in Fremont, California. This space is leased from the spouse of the President of eBAS/Aveeva. The lease term is through August 31, 2011 with a monthly rent of $20,000. Rent expense was $60,000 and $120,000 for each of the three and six months ended February 28, 2009, respectively.

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

9. Segment Information

The Company has adopted Statement of Financial Accounting Standard No. 131, “Disclosure about Segments of an Enterprise and Related Information.” The Company’s business activities are divided into two business segments, Systems Division and Global Services Division. Systems Division provides services and products to commercial, federal, education, state and local government clients. System Division’s areas of specific practices include communications, data management, enterprise computing, managed services, storage and data center planning and development. Systems Division’s client base is comprised of departments of the United States Federal Government, state and local governments, schools and commercial businesses throughout the United States. Global Services Division offers a broad range of consulting/contracting services to clients throughout the United States and Canada including IT project management services, packaged software implementation, web technologies/client server application development, business service management methodologies and extended service maintenance and upgrades. Global Services is comprised primarily of the business operations acquired through the acquisitions of Luceo on March 20, 2008, eBAS/Aveeva on August 13, 2008 and KOAN-IT on February 12, 2009.

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

	February 28, 2009		August 31, 2008
	(Unaudited)
Identifiable Assets:
Systems Division		40,642,086		46,212,267
Global Services Division		18,777,055		16,261,773
Total Assets		59,419,141		62,474,040

	Three months ended						Six months ended
	February 28, 2009			February 29, 2008			February 28, 2009		February 29, 2008
	(Unaudited)						(Unaudited)
Revenues
Systems Division		33,135,967			44,068,502			92,442,187		118,708,688
Global Services Division		8,825,323			-			19,538,213		-
Total Revenue		41,961,290			44,068,502			111,980,400		118,708,688

Gross Profit
Systems Division		4,485,432			4,971,243			11,172,102		13,616,220
Global Services Division		1,640,968			-			3,748,284		-
Gross Profit		6,126,400			4,971,243			14,920,386		13,616,220

Operating Income
Systems Division		(594,482	)		(346,539	)		605,562		2,153,167
Global Services Division		242,552			-			972,224		-
Operating Income		(351,930	)		(346,539	)		1,577,786		2,153,167

Interest and Other Expense (Income)
Systems Division		154,956			266,832			289,520		586,062
Global Services Division		108,931			-			227,696		-
Interest and Other Expense (Income)		263,887			266,832			517,216		586,062

Provision for Income Taxes
Systems Division		(296,142	)		(221,993	)		119,955		712,281
Global Services Division		65,341						319,690		-
Provision for Income Taxes		(230,801	)		(221,993	)		439,645		712,281

Net Income
Systems Division		(453,297	)		(391,378	)		196,088		854,824
Global Services Division		68,280			-			424,837		-
Net Income		(385,017	)		(391,378	)		620,925		854,824

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

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

Overview of Emtec

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

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

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

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

For three and six months ended February 28, 2009 and February 29, 2008, our Systems Divisions revenues decreased to $33.14 million and $92.44 from $44.07 million and $118.71 million. If we are unable to increase our revenues in future periods, whether due to the effects of the economic downturn on our commercial business or otherwise, then we may be forced to consolidate our operations to further reduce operating expenses sufficiently to achieve profitable operations. We have implemented several cost containment measures beginning in December 2008 that have and will reduce our selling, general and administrative expenses in future quarters, but there can be no assurance that we will be able to generate sufficient new business or that our cost containment measures currently in place will provide us the ability to maintain profitability in the future.

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

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

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

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

Our primary business objective is to become a leading single-source provider of high quality and innovative IT consulting, services and products. Through our strategic partners, we have an expanded array of products and technology solutions to offer our clients.

Results of Operations

Comparison of Three Months Ended February 28, 2009 and February 29, 2008

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our Results of Operations for each of the three months ended February 28, 2009 and February 29, 2008.

EMTEC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three Months Ended
	February 28, 2009				February 29, 2008			Change			%
Revenues
Procurement services		$	29,414,055		$	40,928,623		$	(11,514,568	)		(28.1	)%
Service and consulting			12,547,235			3,139,879			9,407,356			299.6	%
Total Revenues			41,961,290			44,068,502			(2,107,212	)		(4.8	)%

Cost of Sales
Cost of procurement services			26,370,454			36,625,710			(10,255,256	)		(28.0	)%
Service and consulting			9,464,436			2,471,549			6,992,887			282.9	%
Total Cost of Sales			35,834,890			39,097,259			(3,262,369	)		(8.3	)%

Gross Profit
Procurement services			3,043,601			4,302,913			(1,259,312	)		(29.3	)%
Procurement services %			10.3	%		10.5	%
Service and consulting			3,082,799			668,330			2,414,469			361.3	%
Service and consulting %			24.6	%		21.3	%

Total Gross Profit			6,126,400			4,971,243			1,155,157			23.2	%
Total Gross Profit %			14.6	%		11.3	%

Operating expenses:
Selling, general, and administrative expenses			5,758,088			4,920,946			837,142			17.0	%
Rent expense – related party			152,496			89,325			63,171			70.7	%
Depreciation and amortization			567,746			307,511			260,235			84.6	%
Total operating expenses			6,478,330			5,317,782			1,160,548			21.8	%
Pecent of revenues			15.4	%		12.1	%

Operating loss			(351,930	)		(346,539	)		(5,391	)		1.6	%
Percent of revenues			-0.8	%		-0.8	%

Other expense (income):
Interest income – other			(6,290	)		(48,888	)		42,598			(87.1	)%
Interest expense			269,930			315,720			(45,790	)		(14.5	)%
Other			248			-			248			N/A

Loss before income taxes			(615,818	)		(613,371	)		(2,447	)		0.4	%
Provision for income taxes			(230,801	)		(221,993	)		(8,808	)		4.0	%
Net loss		$	(385,017	)	$	(391,378	)	$	6,361			(1.6	)%
Percent of revenues			(0.9	)%		(0.9	)%

Total Revenues

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

	Three months ended
	February 28, 2009		February 29, 2008
	(Unaudited)
Revenues
Systems Division		33,135,967		44,068,502
Global Services Division		8,825,323		-
Total Revenue		41,961,290		44,068,502

Systems Division

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

	For the Three Months Ended
Client Type	February 28, 2009		% of Total			February 29, 2008		% of Total
Departments of the U.S.
Government	$	11,244,201		33.9	%	$	26,482,919		60.1	%
State and Local Governments		1,949,078		5.9	%		2,262,595		5.1	%
Commercial Companies		9,154,539		27.6	%		11,387,333		25.8	%
Education and other		10,788,149		32.6	%		3,935,654		8.9	%
Total Revenues	$	33,135,967		100.0	%	$	44,068,502		100.0	%

			For Three Months Ended
	February 28, 2009		February 29, 2008		Change			%
Revenues
Procurement services	$	29,414,055	$	40,928,623	$	(11,514,568	)		(28.1	)%
Service and consulting		3,721,912		3,139,879		582,033			18.5	%
Total Revenues		33,135,967		44,068,502		(10,932,535	)		(24.8	)%

Systems Division’s total revenues decreased $10.93 million, or 24.8%, to $33.13 million for the three months ended February 28, 2009, compared to $44.07 million for the three months ended February 29, 2008. Procurement services revenue decreased $11.51 million or 28.1%, to $29.41 million for the three months ended February 28, 2009, compared to $40.93 million for the three months ended February 29, 2008. This decrease in procurement services revenue is mainly due to an overall decrease in our client’s IT spending, particularly in various departments of the U.S. government, agency and commercial business and various governmental agencies in the State of New Jersey. We believe that this decrease in revenues can be attributed to the current economic downturn and the deferral of some larger computer roll-out projects to future quarters. Services and consulting revenue for the Systems Division increased $582,033, or 18.5%, to $3.72 million for the three months ended February 28, 2009. This increase is mainly attributable to various installation and configuration related services associated with computer roll-out projects for school districts in Florida and Georgia during the three months ended February 28, 2009.

During the three months ended February 28, 2009 and February 29, 2008, U.S. governmental department and agency related revenues represented approximately 33.9% and 60.1% of total Systems Division’s revenues, respectively. These clients include the Department of Defense, Department of Justice, Department of Homeland Security, Department of Health and Human Services, Department of Agriculture, Department of Commerce and the General Service Administration. Revenues from various civilian and military U.S. governmental departments and agencies decreased by approximately $15.24 million during the three months ended February 28, 2009 compared with the three months ended February 29, 2008. This is mainly due to a large computer hardware sale to the Department of the Air Force of approximately $14.0 million in the three months ended February 29, 2008. The same client only accounted for approximately $245,000 in revenue during the three months ended February 28, 2009.

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

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

Revenues from commercial clients decreased by approximately $2.23 million during the three months ended February 28, 2009 compared with the three months ended February 29, 2008. This decrease is mainly due to the current economic downturn that caused reductions in technology and discretionary spending by our commercial clients.

During the three months ended February 28, 2009, revenues from our education business increased by approximately $6.85 million compared with the three months ended February 29, 2008. This increase is attributable to increase in various computer roll-out projects for school districts in Florida and Georgia during the three months ended February 28, 2009.

Global Services Division

Our Global Services Division’s revenues were $8.83 million for the three months ended February 28, 2009. Global Services Division consists of revenues from our recently acquired subsidiaries Luceo, eBAS, Aveeva and KOAN-IT.

Gross Profit

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

	Three months ended
	February 28, 2009		February 29, 2008
	(Unaudited)

Gross Profit
Systems Division		4,485,432		4,971,243
Global Services Division		1,640,968		-
Gross Profit		6,126,400		4,971,243

Systems Division

Aggregate gross profit for our Systems Division decreased $485,812, or 9.8%, to $4.49 million for the three months ended February 28, 2009 as compared to $4.97 million for the three months ended February 29, 2008. This decrease is mainly due to a decrease in revenue as discussed in the total revenue section.

Measured as a percentage of revenues, our gross profit margin for Systems Division increased to 13.5% of our Systems Division’s revenues for the three months ended February 28, 2009 from 11.3% for the three months ended February 29, 2008. This increase is primarily a result of increase in our service and consulting gross profit margin attributable to higher utilization of our engineering resources and increase in our services and consulting revenue associated with computer roll-out projects for school districts in Florida and Georgia during the three months ended February 28, 2009.

Global Services Division

Our Global Services Division’s gross profit was $1.64 million for the three months ended February 28, 2009. Global Services Division consists of revenues from our recently acquired subsidiaries Luceo, eBAS, Aveeva and KOAN-IT.

Selling, General and Administrative Expenses

Systems Division

Selling, general and administrative expenses for our Systems Division decreased by $271,876, or 5.5% to $4.65 million for the three months ended February 28, 2009, compared to $4.92 million for the three months ended February 29, 2008. This decrease in selling, general and administrative expenses for the three months ended February 28, 2009 is primarily attributable to the reduction of various expense categories including compensation, sales commissions, travel, lodging, telephone, office expenses, credit card bank fees, recruiting, professional fees and merger and acquisition related costs. In January 2009, we implemented wage reductions to all employees whose earnings are expected to be greater than $75,000 annually, froze salary increases and implemented many other cost containment measures. During the three months ended February 28, 2009, we eliminated approximately 18 positions from various selling and administrative departments in the Systems Division and incurred approximately $98,000 in severance costs that are included in selling, general and administrative expenses in the three months ended February 28, 2009.

Global Services Division

Our Global Services Division’s selling, general and administrative expenses for the three months ended February 28, 2009 were $1.11 million.

Rent Expense-Related Party

Systems Division

We occupy approximately 42,000 square feet of office and warehouse space in Springfield, New Jersey. This space is leased from a limited liability company owned by certain directors and officers of the Company and their related family members. The lease term is through April 2009 with monthly base rent of $15,000. We have provided notice of renewal to extend the lease for an additional five year term. During the three months ended February 28, 2009 and February 29, 2008, we recorded $45,000 in expense under this lease.

We occupy approximately 26,000 square feet of office and warehouse space in a 70,000 square foot building in Suwannee, GA. This space is leased from a limited liability company in which certain officers of our company are passive investors with an approximately 20% equity interest. The lease term is for 5 years with monthly base rent of $15,832. During the three months ended February 28, 2009 and February 29, 2008, the Company recorded expense under this lease totaling to $47,496 and $44,325, respectively.

Global Services Division

We occupy approximately 20,000 square feet of office space in Fremont, CA. This space is leased from the spouse of the President of eBAS/Aveeva. The lease term is for 3 years with monthly base rent of $20,000. During the three months ended February 28, 2009, we recorded $60,000 in expense under this lease.

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

Depreciation and Amortization

Systems Division

Depreciation and amortization expense for our Systems Division increased by 10.0%, or $30,837, to $338,348 for the three months ended February 28, 2009, compared to $307,511 for the three months ended February 29, 2008. This increase in depreciation expense is mainly due to depreciation expense associated with our purchase of computer equipment, a document management system and other modifications made to our accounting systems made during the quarter ended February 28, 2009.

Intangible assets of the Systems Division at February 28, 2009 and August 31, 2008 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $2,099,463 and $1,809,288, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13 to 15 years. Amortization expense of the Systems Division was $145,088 for each of the three months ended February 28, 2009 and February 29, 2008.

Global Services Division

Our Global Services Division’s depreciation and amortization expense for the three months ended February 28, 2009 was $229,398.

As of February 28, 2009, intangible assets of the Global Services Division consisted of the estimated value ascribed to customer relationships of $5,271,041 less accumulated amortization of $466,217, the estimated value ascribed to non-compete of $394,342 less accumulated amortization of $49,051 and the estimated value ascribed to trademarks of $146,051 less accumulated amortization of $1,441. As of August 31, 2008 intangible assets of the Global Services Division consisted of the estimated value ascribed to customer relationships of $4,200,000 less accumulated amortization of $276,303 and the estimated value ascribed to non-compete of $370,000 less accumulated amortization of $30,311. The assets ascribed to customer relationships are being amortized on a straight-line basis over 5 to 9 years and noncompete covenants and trademarks are being amortized on a straight-line basis over 5 years. Amortization expense for the Global Services Division was $210,095 for the three months ended February 28, 2009.

Operating income (loss)

Systems Division

Operating loss for our Systems Division for the three months ended February 28, 2009 increased by 71.5%, or $247,944, to $594,482, compared to $346,539 for the three months ended February 29, 2008. This increase in operating loss is mainly due to decreased revenues and gross profit as discussed in the Total Revenue and Gross Profit sections above.

Global Services Division

Our Global Services Division’s operating income for the three months ended February 28, 2009 was $242,552.

Interest expense

Systems Division

Interest expense for the Systems Division decreased by 49.0%, or $154,651, to $161,069 for the three months ended February 28, 2009, compared to $315,720 for the three months ended February 29, 2008. This is primarily attributable to lower balances on various notes payable compared with prior period.

Global Services Division

Our Global Services Division’s interest expense for the three months ended February 28, 2009 was $108,861. This interest expense is related to acquisition debt from the line of credit, 8% subordinated note payable to Mr. Natarajan as part of the acquisition of Luceo and 6% subordinated notes payable to former shareholders of KOAN-IT as part of the acquisition of KOAN-IT.

Provision (benefit) for income taxes

Systems Division

We recorded an income tax benefit of $296,142 for the three months ended February 28, 2009 as compared to an income tax benefit of $221,993 for the three months ended February 29, 2008. The effective tax benefit rate was 39.5% for the three months ended February 28, 2009 versus 36.2% for the three months ended February 29, 2008. The increase in tax benefit rate was primarily the result of reduction in permanent differences between our financial statements and income tax returns.

Global Services Division

We recorded an income tax expense for the Global Services Division of $65,341 for the three months ended February 28, 2009. The effective tax rate for the Global Services Division for this period was 48.9%.

Comparison of Six Months Ended February 28, 2009 and February 29, 2009

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our Results of Operations for each of the six months ended February 28, 2009 and February 29, 2008.

EMTEC, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Six Months Ended
	February 28, 2009			February 29, 2008			Change			%
Revenues
Procurement services	$	85,772,778		$	111,691,000		$	(25,918,222	)		(23.2	)%
Service and consulting		26,207,622			7,017,688			19,189,934			273.5	%
Total Revenues		111,980,400			118,708,688			(6,728,288	)		(5.7	)%

Cost of Sales
Cost of procurement services		76,762,952			99,655,022			(22,892,070	)		(23.0	)%
Service and consulting		20,297,062			5,437,446			14,859,616			273.3	%
Total Cost of Sales		97,060,014			105,092,468			(8,032,454	)		(7.6	)%

Gross Profit
Procurement services		9,009,826			12,035,978			(3,026,152	)		(25.1	)%
Procurement services %		10.5	%		10.8	%
Service and consulting		5,910,560			1,580,242			4,330,318			274.0	%
Service and consulting %		22.6	%		22.5	%

Total Gross Profit		14,920,386			13,616,220			1,304,166			9.6	%
Total Gross Profit %		13.3	%		11.5	%

Operating expenses:
Selling, general, and administrative expenses		11,935,963			10,676,389			1,259,574			11.8	%
Rent expense – related party		304,992			178,650			126,342			70.7	%
Depreciation and amortization		1,101,645			608,014			493,631			81.2	%
Total operating expenses		13,342,600			11,463,053			1,879,547			16.4	%
Pecent of revenues		11.9	%		9.7	%

Operating income		1,577,786			2,153,167			(575,381	)		(26.7	)%
Percent of revenues		1.4	%		1.8	%

Other expense (income):
Interest income – other		(11,188	)		(66,663	)		55,475			(83.2	)%
Interest expense		523,993			652,743			(128,750	)		(19.7	)%
Other		4,411			(18	)		4,429			N/A

Income before income taxes		1,060,570			1,567,105			(506,535	)		(32.3	)%
Provision for income taxes		439,645			712,281			(272,636	)		(38.3	)%
Net income	$	620,925		$	854,824		$	(233,899	)		(27.4	)%
Percent of revenues		0.6	%		0.7	%

Total Revenues

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

	Six months ended
	February 28, 2009		February 29, 2008
	(Unaudited)
Revenues
Systems Division		92,442,187		118,708,688
Global Services Division		19,538,213		-
Total Revenue		111,980,400		118,708,688

Systems Division

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

	For the Six Months Ended
Client Type	February 28, 2009		% of Total			February 29, 2008		% of Total
Departments of the U.S.
Government	$	51,439,447		55.7	%	$	74,853,433		63.1	%
State and Local Governments		4,945,273		5.3	%		5,980,610		5.0	%
Commercial Companies		15,200,564		16.4	%		24,469,810		20.6	%
Education and other		20,856,903		22.6	%		13,404,835		11.3	%
Total Revenues	$	92,442,187		100.0	%	$	118,708,688		100.0	%

	For Six Months Ended
	February 28, 2009		February 29, 2008		Change			%
Revenues
Procurement services	$	85,772,778	$	111,691,000		##########			(23.2	)%
Service and consulting		6,669,409		7,017,688		(348,279	)		(5.0	)%
Total Revenues		92,442,187		118,708,688		(26,266,501	)		(22.1	)%

Systems Division’s total revenues decreased $26.27 million, or 22.1%, to $92.44 million for the six months ended February 28, 2009, compared to $118.71 million for the six months ended February 29, 2008. Procurement services revenue decreased $25.91 million or 23.2%, to $85.77 million for the six months ended February 28, 2009, compared to $111.69 million for the six months ended February 29, 2008. Services and consulting revenue for the Systems Division decreased $348,279, or 5.0%, to $6.67 million for the six months ended February 28, 2009, compared to $7.02 million for the six months ended February 29, 2008. These decreases are mainly due to an overall decrease in our client’s IT spending, particularly in various departments of the U.S. government and our agency and commercial business and various governmental agencies in the State of New Jersey. We believe that this decrease in revenues can be attributed to the current economic downturn and the deferral of some larger computer roll-out projects in future quarters.

During the six months ended February 28, 2009 and February 29, 2008, U.S. governmental department and agency related revenues represented approximately 55.7% and 63.1% of total Systems Division’s revenues, respectively. These clients include the Department of Defense, Department of Justice, Department of Homeland Security, Department of Health and Human Services, Department of Agriculture, Department of Commerce and the General Service Administration. Revenues from various civilian and military U.S. governmental departments and agencies decreased by approximately $23.41 million during the six months ended February 28, 2009 compared with the six months ended February 29, 2008. This is mainly due to a large computer hardware sale to the Department of the Air Force of approximately $15.1 million and Federal Bureau of Prisons of approximately $11.0 million in the six months ended February 29, 2008. The same clients only accounted for approximately $2.57 million and $3.94 million in revenue for the three months ended February 28, 2009, respectively.

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

Revenues from commercial clients decreased by approximately $9.27 million during the six months ended February 28, 2009 compared with the six months ended February 29, 2008. This decrease is mainly due to the current economic downturn that caused reductions in technology and discretionary spending by our commercial clients.

During the six months ended February 28, 2009, revenues from our education business increased by approximately $7.45 million compared with the six months ended February 29, 2008. This increase is attributable to increase in various computer roll-out projects for school districts in Florida and Georgia during the six months ended February 28, 2009.

Global Services Division

Our Global Services Division’s revenues were $19.54 million for the six months ended February 28, 2009. Global Services Division consists of revenues from our recently acquired subsidiaries Luceo, eBAS, Aveeva and KOAN-IT.

Gross Profit

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

	Six months ended
	February 28, 2009		February 29, 2008
	(Unaudited)

Gross Profit
Systems Division		11,172,102		13,616,220
Global Services Division		3,748,284		-
Gross Profit		14,920,386		13,616,220

Systems Division

Aggregate gross profit for our Systems Division decreased $2.44 million, or 18.0%, to $11.17 million for the six months ended February 28, 2009 as compared to $13.62 million for the six months ended February 29, 2008. This decrease is mainly due to a decrease in revenue as discussed in the total revenue section.

Measured as a percentage of revenues, our gross profit margin for Systems Division increased to 12.1% of our Systems Division’s revenues for the six months ended February 28, 2009 from 11.5% for the six months ended February 29, 2008. This increase is primarily a result of increase in our service and consulting gross profit margin attributable to higher utilization of our engineering resources and increase in our services and consulting revenue associated with computer roll-out projects for school districts in Florida and Georgia during the three months ended February 28, 2009.

Global Services Division

Our Global Services Division’s gross profit was $3.75 million for the six months ended February 28, 2009.

Selling, General and Administrative Expenses

Systems Division

Selling, general and administrative expenses for our Systems Division decreased by $957,576, or 9.0% to $9.72 million for the six months ended February 28, 2009, compared to $10.68 million for the six months ended February 29, 2008. A portion of the $957,576 decrease represented the recovery of $269,882 in professional fees. The Company previously expensed these professional fees associated with defending the Company’s tax positions during the IRS’ 2003 and 2004 tax audits and appeals process. During the quarter ended November 30, 2008, the Company recognized the recovery of these previously paid professional fees based on the successful results of an indemnification clause associated with the April 2004 Westwood merger.

Without the reduction of $269,882 in selling, general and administrative expenses associated with indemnification claim, Systems Division’s selling, general and administrative expenses would have decreased by $687,694, or 6.4% to $9.99 million for the six months ended February 28, 2009, compared to $10.68 million for the six months ended February 29, 2008. This decrease in selling, general and administrative expenses for the six months ended February 28, 2009 is mainly due to a decrease in sales commission of approximately $366,000 and bonus expense by approximately $193,000, which is directly related to the decrease in our gross profit as discussed in the gross profit section. The remaining approximately $128,000 decrease in selling, general and administrative expenses for the six months ended February 28, 2009 is primarily attributable to decrease in various expense categories such as travel, lodging, telephone, office expenses, credit card bank fees, recruiting, professional fees and merger and acquisition related costs. In January 2009, we implemented wage reductions to all employees whose earnings are expected to be greater than $75,000 annually, froze salariy increases and implemented many other cost containment measures. During the six months ended February 28, 2009, we eliminated approximately 22 positions from various selling and administrative departments in the Systems Division and incurred approximately $102,000 in severance costs that are included in selling, general and administrative expenses for the six months ended February 28, 2009.

Global Services Division

Our Global Services Division’s selling, general and administrative expenses for the three months ended February 28, 2009 were $2.22 million.

Rent Expense-Related Party

Systems Division

We occupy approximately 42,000 square feet of office and warehouse space in Springfield, New Jersey. This space is leased from a limited liability company owned by certain directors and officers of the Company and their related family members. The lease term is through April 2009 with monthly base rent of $15,000. We have provided notice of renewal to extend the lease for an additional five year term. During the six months ended February 28, 2009 and February 29, 2008, we recorded $90,000 in expense under this lease.

We occupy approximately 26,000 square feet of office and warehouse space in a 70,000 square foot building in Suwannee, GA. This space is leased from a limited liability company in which certain officers of our company are passive investors with an approximately 20% equity interest. The lease term is for 5 years with monthly base rent of $15,832. During the six months ended February 28, 2009 and February 29, 2008, the Company recorded expense under this lease totaling to $94,992 and $88,650, respectively.

Global Services Division

We occupy approximately 20,000 square feet of office space in Fremont, CA. This space is leased from the spouse of the President of eBAS/Aveeva. The lease term is for 3 years with monthly base rent of $20,000. During the six months ended February 28, 2009, we recorded $120,000 in expense under this lease.

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

Depreciation and Amortization

Systems Division

Depreciation and amortization expense for our Systems Division increased by 9.0%, or $54,721, to $662,735 for the six months ended February 28, 2009, compared to $608,014 for the six months ended February 29, 2008. This increase in depreciation expense is mainly due to depreciation expense associated with purchase of computer equipment, a document management system and other modifications made to our accounting systems made during the six months ended February 28, 2009.

Intangible assets of the Systems Division at February 28, 2009 and August 31, 2008 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $2,099,463 and $1,809,288, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13 to 15 years. Amortization expense of the Systems Division was $290,175 for each of the six months ended February 28, 2009 and February 29, 2008.

Global Services Division

Our Global Services Division’s depreciation and amortization expense for the six months ended February 28, 2009 was $438,910.

Amortization expense for the Global Services Division was $409,706 for the six months ended February 28, 2009.

Operating income

Systems Division

Operating income for our Systems Division for the six months ended February 28, 2009 decreased by 71.9%, or $1.55 million, to $605,563, compared to $2.15 million for the six months ended February 29, 2008. This decrease in operating income is mainly due to decreased revenues and gross profit as discussed in the Total Revenue and Gross Profit sections above.

Global Services Division

Our Global Services Division’s operating income for the six months ended February 28, 2009 was $972,224.

Interest expense

Systems Division

Interest expense for the Systems Division decreased by 54.2%, or $353,835, to $298,908 for the six months ended February 28, 2009, compared to $652,743 for the six months ended February 29, 2008. This is primarily attributable to lower balance on various notes payable and a lower average interest rate charged on the line of credit attributable to decreasing prime rate during this period.

Global Services Division

Our Global Services Division’s interest expense for the six months ended February 28, 2009 was $225,084. This interest expense is related to acquisition debt from the line of credit, 8% subordinated notes payable to Mr. Natarajan as part of the acquisition of Luceo and 6% subordinated note payable to former shareholders of KOAN-IT as part of the acquisition of KOAN-IT.

Provision for income taxes

Systems Division

Income tax expense for Systems Division decreased by $592,326, to $119,955 for the six months ended February 28, 2009, compared to $712,281 for the six months ended February 29, 2008. This decrease is mainly due to an approximate $1.25 million decrease in income before income taxes in the six months ended February 28, 2009 compared to the six months ended February 29, 2008. The effective tax rate for the Systems Division was 38.0% for the six months ended February 28, 2009 versus an effective tax rate of 45.6% for the six months ended February 29, 2008. This was primarily attributable to recording a $35,382 income tax benefit from the adjustment of interest and penalties accrued for previously unrecognized tax positions compared to a $24,179 income tax expense in the prior six month period.

Global Services Division

We recorded an income tax expense for the Global Services Division of $319,690 for the six months ended February 28, 2009. The effective tax rate for the Global Services Division for this period was 42.9%.

Recently Issued Accounting Standards

Fair Value Measurements

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

Fair Value Option for Financial Assets and Liabilities

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

Noncontrolling Interests in Consolidated Financial Statements

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

Business Combinations

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

Liquidity and Capital Resources

Cash at February 28, 2009 of $3.10 million represented an increase of $1.08 million from $2.02 million at August 31, 2008. We are a net borrower; consequently, we believe our cash balance must be viewed along with the available balance on our line of credit. Borrowings under our line of credit at February 28, 2009 increased to $11.99 million from $8.58 million at August 31, 2008. As of February 28, 2009, our net working capital (defined as the excess of our current assets over our current liabilities) was approximately $703,107 less than it was at August 31 2008. The decrease in working capital and increase in line of credit is mainly due to the acquisition of KOAN-IT on February 12, 2009. The purchase price for the acquisition of KOAN-IT, consisting of cash at closing including capitalized professional fees less the amount of cash acquired amounted to $896,960, which was funded through the borrowings under the Credit Facility and the issuance of a subordinated promissory notes in an aggregate principal amount of $407,683 which is payable on the 12 month anniversary of the closing.

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

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

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

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

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

As of February 28, 2009, we had an outstanding balance of $11.99 million under the revolving portion of the Credit Facility and $896,435 of outstanding (included in the Company’s accounts payable) balances plus $503,600 in open approvals under the floor plan portion of the Credit Facility with Lender. As of February 28, 2009, we had net availability of $6.11 million under the revolving portion of the Credit Facility and additional net availability of $12.51 million under the floor plan portion of the Credit Facility.

As of February 28, 2009, the Company determined that it was in compliance with its financial covenants with the Lender.

As of February 28, 2009, we had open term credit facilities with our primary trade vendors, including aggregators and manufacturers, of approximately $27.20 million with outstanding principal of approximately $10.76 million. Under these lines, we are typically obligated to pay each invoice within 30-45 days from the date of such invoice. These credit lines could be reduced or eliminated without notice and this action could have a material adverse affect on our business, result of operations, and financial condition.

Capital expenditures of $314,999 during the six months ended February 28, 2009 related primarily to the purchase of computer equipment for internal use, purchase of a document management system and software costs to upgrade various modules of our accounting systems. We anticipate our total capital expenditures for our fiscal year ending August 31, 2009 will be approximately $600,000, of which approximately $250,000 will be for the upgrade of our organizational computer system and the remaining $350,000 will primarily be for the purchase of computer equipment for internal use, furniture, delivery trucks and leasehold improvements.

We have approximately $2.25 million in principal payments due on various notes payable to related-parties during the upcoming quarter ending on May 31, 2009. We plan to fund these payments from borrowing under the Credit Facility.

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

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

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

Critical Accounting Policies

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

Revenue Recognition

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

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

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

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

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

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

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

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

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

Trade Receivables

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

Inventories

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

Goodwill and Intangible Assets

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

Intangible assets at February 28, 2009 and August 31, 2008 consisted of the value ascribed to customer relationships and noncompete covenants. The assets ascribed to customer relationships are being amortized on a straight-line basis over 5 to 15 years and five years for noncompete covenants. Intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated undiscounted future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows are less than the carrying amount, the asset is considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset.

Rebates

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

Income Taxes

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

Item 3. Quantitative and Qualitative Information About Market Risk

We do not engage in trading market risk sensitive instruments and do not purchase hedging instruments or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. We have entered into no forward or future contracts, purchased no options and entered into no swaps. Our primary market risk exposures are those of interest rate fluctuations. A change in interest rates would affect the rate at which we could borrow funds under our revolving credit facility. Our balance on the line of credit at February 28, 2009 was approximately $12.0 million. Assuming no material increase or decrease in such balance, a one percent change in the interest rate would change our interest expense by approximately $120,000 annually.

Item 4T. Controls and Procedures

(a) Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of February 28, 2009. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decision regarding required disclosure, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions, regardless of how remote.

(b) There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended February 28, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On December 15, 2008, Unisys Corporation, one of our suppliers, filed a lawsuit against us in the Superior Court of New Jersey in Union County alleging that we owe $158,003 for various products and related services they claim to have provided from November 2005 through March 2007, plus interest and legal fees, so totaling $233,784. They have since withdrawn the lawsuit.

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

Item 1A. Risk Factors

Our 2008 Annual Report on Form 10-K includes a detailed discussion of our risk factors. Additionally, our quarterly report on Form 10-Q for the period ended November 30, 2008 includes updates to our risk factors. The information presented below amends, updates and should be read in conjunction with the risk factors and information disclosed under Item 1A of our Form 10-K for the year ended August 31, 2008, and of our Form 10-Q for the period ended November 30, 2008.

Fluctuations in foreign currency exchange rates could negatively impact our results of operations.

We are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our Consolidated Financial Statements due to the translation of operating results and financial position of our foreign subsidiaries.

Item 4. Submission of Matters to a vote by Securities Holders

The Annual Meeting of Shareholders of the Company (the “Meeting”) was held on February 2, 2009. There were present at the Meeting in person or by proxy shareholders holding an aggregate of 13,615,672 shares of Common Stock out of a total number of 15,141,993 shares of Common Stock outstanding and entitled to vote at the Meeting.

1.	Election of Directors.

The following directors were elected as Class A directors.

NOMINEE	FOR	AGAINST	ABSTENSIONS
Dinesh R. Desai	13,532,069	76,050	7,553
Brian McAdams	13,519,819	76,300	19,553
Gregory P. Chandler	13,469,819	138,300	7,553

The following director was elected as a Class B director.

NOMINEE		FOR		AGAINST		ABSTENSIONS
Keith Grabel		13,531,402		76,717		7,553

Robert J. Mannarino’s term as a director continues until the 2010 annual meeting of stockholders.

2.	The stockholders ratified the appointment of McGladrey & Pullen, LLP as the Company’s independent registered public accounting firm for the fiscal year ending August 31, 2009 by the vote set forth below:

FOR		AGAINST		ABSTENSIONS
13,607,008		250		8,414

3.	The stockholders approved the Amendment of 2006 Stock-Based Incentive Compensation Plan by the vote set forth below:

FOR		AGAINST		ABSTENSIONS
13,900,633		257,716		734,960

Item 6. Exhibits

Exhibit 2.1 – Share Purchase Agreement by and among 7119747 Canada Inc., Emtec Infrastructure Services Corporation, KOAN-IT Corp. and the Shareholders of KOAN-IT Corp. dated February 12, 2009.(1)

Exhibit 10.1 – First Amendment and Joinder to Loan and Security Agreement and Schedule to Loan and Security Agreement dated December 5, 2008. (2)

Exhibit 21.1 – List of Subsidiaries.

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

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

Exhibit 32.1 - Section 1350 Certificate of Dinesh R. Desai, Principal Executive Officer, of Emtec, Inc. dated April 14, 2009.

Exhibit 32.2 - Section 1350 Certificate of Stephen C. Donnelly, Principal Financial Officer, of Emtec, Inc. dated April 14, 2009.

Exhibit 99.1 – Employment Agreement between KOAN-IT Corp. and Peter Pranschke dated February 12, 2009.(1)

Exhibit 99.2 – Employment Agreement between KOAN-IT Corp. and Kim Orava dated February 12, 2009.(1)

Exhibit 99.3 – Employment Agreement between KOAN-IT Corp. and Tim Stratton dated February 12, 2009.(1)

Exhibit 99.4 – Employment Agreement between KOAN-IT Corp. and Dominique Roberge dated February 12, 2009.(1)

(1) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on February 13, 2009 and incorporated herein by reference.

(2) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on December 11, 2008 and incorporated herein by reference.

SIGNATURES

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

	EMTEC, INC.

	By:	/s/ DINESH R. DESAI
		Dinesh R. Desai
		Chairman and Chief Executive Officer
		(Principal Executive Officer)



	By:	/s/ STEPHEN C. DONNELLY
		Stephen C. Donnelly
		Chief Financial Officer
		(Principal Financial Officer)

Date: April 14, 2009

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Emtec Inactive 10-Q2009 Q2 Quarterly report

Content analysis