Edgar Filing: EMTEC INC/NJ

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K/A

AMENDMENT No. 1

(MARK ONE)


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

For the fiscal year ended August 31, 2005

OR

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

For the transition period from___________to___________

Commission file number: 0-32789

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


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

572 Whitehead Road, Bldg#1
Trenton, New Jersey 08619
(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act:
None

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


	Common Stock, $0.01 par value

	Title of class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No 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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 28, 2005 was approximately $10,912,085 computed by reference to the closing price of the common stock for that date.

As of June 30, 2006, there were outstanding 14,381,286 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXPLANATORY NOTE

Emtec, Inc. is filing this Amendment No. 1 to its Annual Report on Form 10-K for the year ended August 31, 2005, as filed with the Securities and Exchange Commission on December 14, 2005 (the “Original 10-K”). At the time of filing its Original 10-K, the Company’s financial statements for 2003 had been audited by an accounting firm, Glassel & Bonfiglio, LLC (“Glassel”), that was not registered by the PCAOB. Subsequently, Glassel registered with the PCAOB and reaudited the 2003 financial statements which are filed with this Form 10-K/A. This amendment updates all references to the 2003 financial statements by removing all references to the 2003 financial statements as being unaudited in Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”, Item 6, “Selected Financial Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Item 15(a), “Financial Statements” is also amended to include a Report of the Independent Registered Public Accounting Firm for 2003.

The Company has also amended footnote 15 Quarterly Financial Information – (Unaudited) of Notes to Consolidated Financial Statements to correct a typographical error that was included in the Original Filing.

As required by Rule 12b-15 of the Exchange Act, new certifications by our principal executive officer and principal financial officer are being flied as exhibits herewith under Item 15(c) “Exhibits” as part of this Amendment No. 1. Additionally, the Company is filing, as Exhibits 23.1 and 23.2, Consents of each of the Registered Public Accounting Firms that has audited its financial statements. As further required by Rule 12b-15, this Amendment No. 1 sets forth the complete text of each item as amended.

This Amendment No. 1 does not affect any other section of the Original 10-K not otherwise discussed herein and continues to speak as of the date of the Original 10-K. Accordingly, this Amendment No. 1 should be read in conjunction with the Registrant’s other filings made with the Securities and Exchange Commission subsequent to the filing of the Original 10-K.

References in this Annual Report to “we,” “us,” or “our” are to Emtec, Inc. and its subsidiaries, unless the context specifies or requires otherwise.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on the Over The Counter Bulletin Board under the symbol “ETEC.” The following table sets forth the high and low closing prices of our common stock for the periods indicated:


Three Months Ended	High		Low

August 31, 2005	$	2.85	$	1.60
May 31, 2005	$	2.00	$	1.32
February 28, 2005	$	3.04	$	1.70
November 30, 2004	$	2.25	$	0.88

August 31, 2004	$	1.15	$	0.91

May 31, 2004	$	1.45	$	0.99
February 29, 2004	$	1.25	$	0.82
November 30, 2003	$	1.20	$	0.77

The above quotations represent prices between dealers and do not include retail mark-ups, markdowns or commissions. They do not necessarily represent actual transactions.

As of November 7, 2005, there were 612 record holders of our common stock, although we believe that beneficial holders approximate 850.

We have not previously declared any dividends. It is not likely that dividends on the shares will be declared in the forseeable future. Under our current loan agreement, we may not declare any dividends without the consent of our lenders. However, even if our lenders consented, the determination and payment of dividends with respect to the shares in the future will be within the discretion of our board of directors and will depend on our earnings, capital requirements and operating and financial condition, among other factors.

Equity Compensation Plan Information


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))

	(a)	(b)			(c)

Equity compensation plans approved by security holders	—			—	—

Equity compensation plans not approved by security holders ⁽¹⁾	92,453		$	1.22	639,058

Total	92,453		$	1.22	639,058

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⁽¹⁾ Our 1996 Stock Option Plan (the “Plan”) (amended in 1999) authorizes the granting of stock options to directors and eligible employees. We have reserved 1,000,000 shares of our common stock for issuance under the Plan at prices not less than 100% of the fair value of our common stock on the date of grants (110% in the case of shareholders owning more than 10% of our common stock). As of August 31, 2005, 268,489 options have been exercised under the Plan.

Recent Sales of Unregistered Securities

In connection with the Merger, all of the shares of Darr common stock issued and outstanding were exchanged for 9,528,110 shares of our common stock and warrants to purchase an additional 10% of our common stock, measured on a post exercise basis. Neither the shares issued nor the shares underlying the warrant were registered in connection with the closing of the Merger. The new issuance of common stock represented approximately 55.7% of the issuer’s total outstanding common stock post-merger and resulted in a change of control of the registrant.

The warrants to purchase our common stock issued to Darr’s former shareholders evidences our obligation to issue a variable number of shares, in the aggregate, equal to 10% of the total issued and outstanding shares of the Company’s stock, measured on a post exercise basis, at any date during the 5 year term of the warrants ending August 5, 2010. The aggregate exercise price of these warrants is fixed at $3,645,752. The exercise price per warrant shall vary based upon the number of shares issuable under the warrants. As of August 31, 2005, the aggregate number of shares issuable under these warrants totaled 1,914,682 with an exercise price per share of $1.90. In addition, Darr issued a promissory note with a face value of $1,102,794 at an 8% annual interest rate in full redemption of its outstanding $1 million of preferred stock previously issued by Darr in connection with the Westwood Acquisition and in payment of $102,794 of dividends payable on preferred stock at the merger date.

Pursuant to the Merger, we initiated a self tender offer on September 7, 2005. When the tender offer closed on October 4, 2005, 4,984,185 shares had been properly tendered and not withdrawn. Because the number of shares of common stock tendered exceeded the number of shares that we offered to purchase, 57.473 percent of the shares that were tendered were repurchased. We funded the payment for the shares of our common stock from borrowings of $5.5 million under our revolving credit facility.

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Item 6. Selected Financial Data

The issuance of our common stock in connection with the Merger gave the former Darr shareholders shares equal to approximately 55.7% of our total outstanding common stock post-merger and resulted in a change of control for us. Accordingly, for financial reporting purposes, the Merger was treated as an acquisition of Emtec by Darr and a recapitalization of Darr and the registrant’s historical financial statements for periods prior to the Merger become those of Darr. In addition, for financial accounting purposes, the Westwood Acquisition was treated as an acquisition of Darr by Westwood with the result that the pre-Westwood Acquisition financial statements of Darr, and therefore, the Registrant are those of Westwood. As a result, the consolidated financial statements included in this Form 10-K include (i) the accounts and transactions for Westwood for the year ended August 31, 2003, (ii) the accounts and transactions of Westwood for the period from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and for Westwood and Darr for the period from April 17, 2004 to August 31, 2004 (Darr Successor Period) and (iii) the accounts and transactions of Darr for the period from September 1, 2004 to August 31, 2005 and including the accounts and transactions of Emtec for the period from August 6, 2005 to August 31, 2005.

The following selected consolidated financial data below should be read in conjunction with our consolidated financial statements including the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both elsewhere in this Report. The data as of August 31, 2005, 2004 and 2003 and for the year ended August 31, 2005, and for the periods from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and from April 17, 2004 to August 31, 2004 (Darr Successor Period), and for the year ended August 31, 2003 have been derived from, and should be read in conjunction with, our audited consolidated financial statements and accompanying notes, which are contained elsewhere in this Report. The data as of August 31, 2002, and 2001 and for each of the two years in the period ended August 31, 2002 have been derived from our unaudited financial statements, which are not contained in this Report.



	*YEAR ENDED AUGUST 31,*

	2005		(Successor Period) 2004		(Predecessor Period) 2004		2003		2002 (unaudited)		2001 (unaudited)

Net revenues	$	162,632,042	$	41,641,604	$	88,229,719	$	97,449,611	$	94,165,222	$	80,184,220

Net Income (loss)	$	826,985	$	122,281	$	885,837	$	467,390	$	549,605	$	612,757

Net Income (loss) per common share (basic & diluted)	$	0.08	$	0.01	$	0.09	$	0.05	$	0.06	$	0.06


	AT AUGUST 31,

	2005		2004		2003		2002 (unaudited)		2001 (unaudited)

Total assets	$	70,009,919	$	21,737,638	$	22,984,079	$	23,060,145	$	14,038,416

Total long-term debt	$	3,010,219	$	2,405,084			$	351,112	$	404,445

Total preferred stock *			$	1,030,000

Total redeemable common stock	$	5,500,000	$	0	$	0	$	0	$	0

*Liquidation value of $1,030,00.00

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There was a dividend in the form of the distribution of a note receivable in the amount of $399,958 paid to the shareholders of Westwood on April 15, 2004. There were no other dividends paid to common stockholders during the five year period ended on August 31, 2005.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Reference is made to the “Risk Factors” outlined in Item 1A for a discussion of important factors that could cause actual results to differ from expectations and any of our forward-looking statements contained herein. The following discussion as of August 31, 2005, 2004 and 2003 and the corresponding data for (i) the year ended August 31, 2005, and (ii) for the periods from (a) September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and (b) from April 17, 2004 to August 31, 2004 (Darr Successor Period) and for the year ended August 31, 2006 have been derived from, and should be read in conjunction with, our audited consolidated financial statements and accompanying notes, which are contained elsewhere in this Report.

Overview

We are an information technology company, providing services and products to commercial, federal, education, state and local verticals. Areas of specific practices include communications, data availability, enterprise computing, managed services, storage and data center planning and development. Our solutions are crafted to enable our customers to become more efficient and effective, thereby 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.

Merger with Darr

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

The Merger has been accounted for as a capital transaction followed by a recapitalization. Our management concluded that the transaction resulted in a change in control of the Company and that the Merger should be accounted for as a reverse acquisition. Accordingly, Darr is deemed to be the acquiring company for financial reporting purposes in the reverse acquisition. The reverse merger was treated as an acquisition of Emtec by Darr and a recapitalization of Darr. Consequently, Emtec’s historical financial statements for periods prior to the Merger become those of Darr.

Furthermore, in connection with the closing of the Merger, Emtec changed its fiscal year end from March 31 to August 31, effective as of August 5, 2005.

Darr and Its 2004 Merger with Westwood

Prior to the Merger, Darr was a holding company formed in April 2004 in order to effectuate the purchase of all of the outstanding capital stock of Westwood. Darr’s acquisition of Westwood’s capital stock was completed on April 16, 2004. Westwood is engaged in the sale and service of computers and

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peripherals to customers which include departments of the United States, state and local governments and commercial businesses throughout the United States.

We refer to Darr’s acquisition of Westwood as the “Westwood Acquisition.” Darr is referred to as “Darr Predecessor” for the periods prior to the Westwood Acquisition and “Darr” for the periods following the Westwood Acquisition. Similarly to the Emtec-Darr Merger, in the Westwood Acquisition, Westwood was deemed to be the acquiring company for financial reporting purposes in the reverse acquisition. Consequently, Westwood’s historical financial statements for periods prior to the Westwood Acquisition become those of Darr. For the discussion and analysis in this Report we have combined Westwood’s period from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and Darr’s period from April 17, 2004 to August 31, 2004 (Darr Successor Period).

Westwood is engaged in the sale and service of computers and peripherals to customers which include departments of the United States, state and local governments and commercial businesses throughout the United States. Westwood is a supplier of information technology products and services primarily to the Federal Government. It has been recognized as one of the top 20 General Services Administration vendors in the IT industry during each of the past eight years and was named in data compiled by the GSA as the ninth largest such vendor for the Federal Government’s 2004 fiscal year. Westwood has additional locations in New York and Virginia, as well as five regional offices in the South and western United States.

The majority of Westwood’s sales are drawn from various civilian and military U.S. governmental departments and agencies. These customers include the Department of Defense, Department of Justice, Department of Homeland Security, Department of Health and Human Services, Department of Agriculture, Department of Commerce and the GSA. During the last three fiscal years ended on August 31, 2005, 2004, and 2003, U.S. governmental departments and agencies accounts for approximately 76.1%, 75.6%, and 75.7%, respectively. The federal government business typically experiences increased activity during the months August through November.

Overview of Financial Statements Presented Herein

As previously noted, the Merger was treated as an acquisition of Emtec by Darr and a recapitalization of Darr and the registrant. Darr is deemed to be the acquiring company for financial reporting purposes and Emtec’s historical financial statements for periods prior to the Merger become those of Darr.

In evaluating our results of operations and financial performance, our management has used combined results for the fiscal year ended August 31, 2005 as a single measurement period. Due to the Merger, we believe that comparisons between the eleven months ended August 5, 2005 and either Darr’s results for the period from September 1, 2004 to August 5, 2005 or Emtec’s results for the period from August 6, 2005 through August 31, 2005 may impede the ability of users of our financial information to understand our operating and cash flow performance. Consequently, in order to enhance an analysis of our operating results and cash flows, we have presented our operating results and cash flows on a combined basis for the fiscal year ended August 31, 2005. This combined presentation for the fiscal year ended August 31, 2005 simply represents the mathematical addition of the pre-acquisition results of operations of Darr for the period from September 1, 2004 through August 5, 2005 and the results of operations of Emtec, following the Merger, for the period from August 6, 2005 through August 31, 2005.

Therefore, the financial statements presented in this Report consist of the following financial statements:

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	1. Westwood for the fiscal year ended August 31, 2003;

	2. Westwood for the period from September 1, 2003 to April 16, 2004 (the Darr Predecessor Period);

	3. Darr (following the Westwood Merger on April 16, 2004) for the period from April 17, 2004 to August 31, 2004 (Darr Successor Period);

	4. Darr for the fiscal year ended August 31, 2005 (including Emtec, following the Merger, for the period from August 6, 2005 to August 31, 2005).

As mentioned above, for the discussion and analysis in this Report we have combined Westwood’s period from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and Darr’s period from April 17, 2004 to August 31, 2004 (Darr Successor Period) and our period from September 1, 2004 to August 31, 2005 represents the financial statements of Darr for the 2005 fiscal year plus the financial statements of Emtec for the period from August 6, 2005 to August 31, 2005.

Results of Operations

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our Results of Operations for the fiscal years ended August 31, 2005 and 2004. For this discussion and analysis we have combined the periods from September 1, 2003 to April 16, 2004 (Darr Predecessor Period) and from April 17, 2004 to August 31, 2004 (Darr Successor Period and our period from September 1, 2004 to August 31, 2005 represents the results of operations of Darr for the 2005 fiscal year plus the financial statements of Emtec for the period from August 6, 2005 to August 31, 2005.

Our Report on Form 10-Q that will be filed for the quarter ended November 30, 2005, will be our first quarterly report that will include full three months of results of operations of the combined company.

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Comparison of Years Ended August 31, 2005 and 2004

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31,


	2005			2004			Change			%

Revenues	$	162,632,042		$	129,871,323		$	32,760,719			25.2	%
Cost of revenues		148,587,442		$	117,214,228			31,373,214			26.8	%

Gross profit		14,044,600			12,657,095			1,387,505			11.0	%
Percent of revenues		8.6	%		9.7	%

Operating expenses:
Selling, general, and administrative expenses		11,872,766		$	10,711,020			1,161,746			10.8	%
Management fee – related party		350,000			116,664			233,336			200.0	%
Rent expense – related party		180,000		$	215,333			(35,333	)		-16.4	%
Depreciation and amortization		174,944		$	75,005			99,939			133.2	%

Total operating expenses		12,577,710			11,118,022			1,459,688			13.1	%

Pecent of revenues		7.7	%		8.6	%					0.0	%

Operating income		1,466,890			1,539,073			(72,183	)		-4.7	%
Percent of revenues		0.9	%		1.2	%

Other expense (income):
Forgiveness of debt		—			($405,652	)		405,652			-100.0	%
Interest income – related party		—			($21,483	)		21,483			-100.0	%
Interest income – other		(120,520	)		($70,262	)		(50,258	)		71.5	%
Interest expense		611,479		$	257,484			353,995			137.5	%
Other expense (income)		(303,604	)		—			(303,604	)		N/A
Loss on sales of land and building		—			—			—			N/A


Income before income taxes		1,279,535			1,778,986			(499,451	)		28.1	%
Provision for income taxes		452,550		$	770,868			(318,318	)		-41.3	%

Net income	$	826,985		$	1,008,118		$	(181,133	)		-18.0	%

Percent of revenues		0.5	%		0.8	%

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Total Revenues

Total revenues increased by 25.2% or $32.76 million to $162.63 million for the year ended August 31, 2005, compared to $129.87 million for the year ended August 31, 2004. This increase is primarily attributable to an increase in the federal government business including significant one-time sale to a federal government customer - the United States Department of Agriculture (USDA) of approximately $21.79 million which represented approximately 66% of our total increase in revenue. Additionally, our revenue increased as a result of our merger with Emtec on August 5, 2005. Revenues associated with this merger equaled $6.26 million for the year ended August 31, 2005 which represents approximately 19% of the total revenue increase. Other factors which increased revenue include increased service revenue and higher selling efforts.

The federal government business typically experiences increased activity during the months of August through November. We do not expect that significant one-time sales like one discussed above will continue to occur in the future periods.

Gross Profit

Aggregate gross profit increased by 11.0% or $1.39 million to $14.04 million for the year ended August 31, 2005, as compared to $12.66 million for the year ended August 31, 2004. This increase is primarily attributable to a significant sale to a federal government customer- the USDA discussed above in the revenue section, and the gross profit associated with Emtec post-merger, (Old Emtec) revenues. Gross profits associated with USDA sales approximated $814,000, and gross profit associated with merger equaled approximately $772,000. Without this one-time sale and the Merger, our aggregate gross profit would have decreased by approximately $200,000. Measured as a percentage of revenues, our gross profit margin decreased to 8.6% of total revenues for the year ended August 31, 2005 from 9.7% for the year ended August 31, 2004. Both of these decreases are mainly due to competitive pressures and aggressive pricing strategies which lowered our gross margins.

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

Selling, General, and Administrative Expenses

Selling, general and administrative expenses increased by 10.8% or $1.16 million to $11.87 million for the year ended August 31, 2005, compared to $10.71 million for the year ended August 31, 2004. This increase is mainly due to the Merger with Emec on August 5, 2005. Selling, general and administrative expenses associated with Emtec post-merger (Old Emtec) approximated $857,000. Our increase in head count company-wide and the corresponding compensation and benefits expense associated with our long-term investment in new employees also factored into the increase of our selling, general and administrative expenses. Selling, general and administrative expenses as a percentage of sales decreased to 7.3% from 8.2%.

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

Management Fee-Related Party

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Management fee related-party increased by 200% or $233,336 to $350,000 for the year ended August 31, 2005 compared to $116,664 for the year ended August 31, 2004. The increase in the management fee-related party is due to a full year of management fees paid to DARR Global Holdings, Inc. as compared with only a partial year of management fees in 2004. DARR Global Holdings, Inc. is a management consulting company owned by Dinesh Desai, our Chief Executive Officer.

Rent Expense-Related Party

Rent Expense-Related Party decreased by 16.4% or $35,333 to $180,000 for the year ended August 31, 2005 compared to $215,333 for the year ended August 31, 2004. The decrease in Rent Expense-Related Party is due to the decrease in rent for the Springfield, NJ office and warehouse space.

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

Depreciation and Amortization

Depreciation and Amortization expense increased by 133.2% or $99,939 to $174,944 for the year ended August 31, 2005 compared to $75,005 for the year ended August 31, 2004. This increase is attributable to the merger with Emtec acquisition on August 5. Old Emtec’s post-merger depreciation and amortization accounted for approximately for $52,000 of the increase. Additionally, we made fixed asset acquisitions of $491,310 during the year ended August 31, 2005. These capital assets acquisitions were primarily for the purchase of computer equipment for internal use, purchase of software licenses to upgrade our computer systems, and for furniture and fixtures, which increased our depreciation expense.

On August 5, 2005, the Company recorded an Intangible asset, ascribed to customer relationship of $8,378,166 in connection with the acquisition of Old Emtec. Intangible assets at August 31, 2005 and 2004 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $68,868 and $283,546 less accumulated amortization of $7,270, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13-15 years. Amortization expense was $61,598 and $7,270 for the periods ended August 31, 2005 and August 31, 2004, respectively. Amortization expense of $580,356 is expected to be recorded each year through August 31, 2016, $573,085 for the year ended August 31, 2017, $558,544 for the years ended August 31, 2018, and 2019, and $518,755 for the year ended August 31, 2020.

Interest expense

Interest expense increased by 137.5% or $353,995 to $611,479 for the year ended August 31, 2005, compared to $257,484 for the year ended August 31, 2004. This is mainly due to a full year of interest expense on notes payable to former stockholders of Westwood, DARR Westwood LLC, and Four Kings Management, LLC, which were associated with the April 2004 acquisition of Westwood by Darr.

Other expense (income)

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Other income of $303,604 recorded on August 31, 2005, was due to the change in the value of the put options issued on August 5, 2005 using a Black-Scholes option pricing model. Under the Black-Scholes model, the total value of the put options was $315,104. As of August 31, 2005, the total value of the put options was $11,500.

Income Taxes

Income taxes decreased by 41.3% or $318,318 to $452,550 for the year ended August 31, 2005, compared to $770,868 for the year ended August 31, 2004. This decrease is primarily attributable to the decrease in taxable income. Taxable income decreased by 28.19% or $499,451 to $1.28 million for the year ended August 31, 2005, compared to $1.78 million for the year ended August 31, 2004.

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Comparison of Years Ended August 31, 2004 and 2003

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31,


	2004			2003			Change			%

Revenues	$	129,871,323		$	97,449,611		$	32,421,712			33.3	%
Cost of revenues	$	117,214,228			87,843,440			29,370,788			33.4	%

Gross profit		12,657,095			9,606,171			3,050,924			31.8	%
Percent of revenues		9.7	%		9.9	%

Operating expenses:
Selling, general, and administrative expenses	$	10,711,020			8,623,016			2,088,004			24.2	%
Management fee – related party		116,664			—			116,664			N/A
Rent expense – related party	$	215,333			—			215,333			N/A
Depreciation and amortization	$	75,005			125,054			(50,049	)		-40.0	%

Total operating expenses		11,118,022			8,748,070			2,369,952			27.1	%


Percent of revenues		8.6	%		9.0	%

Operating income		1,539,073			858,101			680,972			79.4	%
Percent of revenues		1.2	%		0.9	%

Other expense (income):
Forgiveness of debt	$	(405,652	)		—			(405,652	)		N/A
Interest income – related party	$	(21,483	)		—			(21,483	)		N/A
Interest income – other	$	(70,262	)		(48,613	)		(21,649	)		44.5	%
Interest expense	$	257,484			42,324			215,160			508.4	%
Loss on sales of land and building		—			102,253			—			N/A


Income before income taxes		1,778,986			762,137			1,016,849			133.4	%
Provision for income taxes	$	770,868			294,747			476,121			161.5	%

Net income	$	1,008,118		$	467,390		$	540,728			115.7	%

Percent of revenues		0.8	%		0.5	%

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Total Revenues

Total revenues increased by 33.3% or $32.42 million, to $129.87 million for year ended August 31, 2004, compared to $97.45 for the year ended August 31, 2003. Of this $32.42 million increase, $24.31 million, representing 75.0% of the increase, was attributable to a substantial increase in federal government related business. The increase was amongst various military and civilian departments and agencies including sizable increases in sales to the Department of Defense and the Department of Justice which amounted to approximately $3.23 million and $5.71 million, respectively, for the year ended August 31, 2004. In addition to our federal government related business, our overall revenues from our commercial customer base increased by approximately $8.0 million for the fiscal year ended August 31, 2004 as compared with the year ended August 31, 2003. This is mainly attributable to an overall increase in our commercial customers’ IT spending.

Gross Profit

Aggregate gross profit increased by 31.8%, or $3.05 million, to $12.66 million for the year ended August 31, 2004, compared to $9.61 million for the year ended August 31, 2003. This was primarily attributable to an increase in our overall revenues as discussed in the total revenue section above. Measured as a percentage of product revenues, our gross profit margin decreased to 9.7% of revenue for the year ended August 31, 2004, as compared with 9.9% for the year ended August 31, 2003. This decrease is mainly due to continued downward pricing pressure on product sales from our customers.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses increased by 26.7%, or $2.33 million to $11.02 million for the year ended August 31, 2004, compared to $8.7 million for the year ended August 31, 2003. This increase was mainly due to payroll and benefits costs associated with increase in employee headcount company-wide, increased management related compensation, increased sales commission expense related to increased revenue and gross profits and increased professional fees as a result of the April 16, 2004 acquisition of Westwood by Darr.

Depreciation and Amortization

Depreciation and Amortization expense decreased by 40.0% or $50,049 to $75,005 for the year ended August 31, 2004 as compared to $125,054 for year ended August 31, 2003

Interest expense

Interest expense increased by 508.4%, or $215,160, to $257,484 for the year ended August 31, 2004, compared to $42,324 for the year ended August 31, 2003. This is primarily attributable to the interest expense on the notes payable to former stockholders of Westwood, the note payable to DARR Westwood LLC, and the note payable to Four Kings Management, LLC. Partial year interest expense was recorded in 2004. These notes did not exist in 2003.

Income Taxes

Income tax expense increased by 161.5%, or $476,121, to $770,868 for the year ended August 31, 2004, compared to $294,747 for the year ended August 31, 2003. This increase is primarily attributable to the increase in taxable income. Taxable income increased by 133.4% or $1.02 million to $1.78 million for the year ended August 31, 2004, compared to $762,137 for the year ended August 31, 2004.

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Recently Issued Accounting Standards

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, and an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, “Inventory Pricing,” that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires that fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We believe that implementing SFAS No. 151 should not have any material impact on our financial condition, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the next fiscal year that begins after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption.

SFAS No. 123R will apply to awards granted or modified by us after August 31, 2005. Compensation cost will also be recorded for prior option grants that vest after that date. The effect of adopting SFAS 123 on our consolidated results of operations will depend on the level of future option grants and the fair value of the options granted at such future dates, as well as the vesting periods provided by such awards and, therefore, cannot currently be estimated. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

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Liquidity and Capital Resources

Cash and cash equivalents at August 31, 2005 of $1.02 million represented a decrease of $194,680 from $1.22 million at August 31, 2004. Outstanding borrowings under our line of credit at August 31, 2005 represented an increase of $4.11 million from $299,290 at August 31, 2004. At August 31, 2005, our working capital was decreased by $901,605 to $2.90 million from $3.80 million as of August 31, 2004.

The Merger was treated as a purchase by Darr of Emtec. Working capital of Emtec acquired by Darr amounted to $5.49 million at August 5, 2005. Darr incurred merger transaction costs of $521,134 that reduced its working capital. Pursuant to the merger terms, we executed a self tender offer to purchase up to 2,864,584 shares of its outstanding common stock from pre-merger Emtec stockholders at a price per share of $1.92. We recorded a current liability of $315,104 at August 5, 2005 related to the fair value of the put options granted in the self tender offer. We borrowed $5.5 million on August 5, 2005 under our revolving credit facility with GE Commercial Distribution Finance Corporation; this amount is classified as restricted cash on the balance sheet as a non-current asset and therefore, reduced our working capital. We initiated this self tender offer on September 7, 2005 and closed on October 4, 2005. The net effect of the Merger and related aforementioned transactions reduced the overall working capital of Darr by $846,728 exclusive of post-merger interest costs related to the $5.5 million borrowing.

The March 1, 2005 acquisition of Proven Technology business was done at a cost of $162,610 which reduced working capital. Earnings from operations for the year ended August 31, 2005 added approximately $1.0 million to our working capital, whereas capital expenditures of $491,000 and debt repayments of $449,000 reduced working capital as of August 31, 2005.

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

Borrowings under the Credit Facility will bear interest at an annual rate equal to the greater of (i) the rate of interest which JP Morgan Chase Bank (or its successor) publicly announces from time to time as its prime rate or reference rate or (ii) four percent (4%). Interest will be calculated by multiplying (i) the annual rate divided by 360 and (ii) the amount of the outstanding principal balance under the Credit Facility at the end of each day.

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

In connection with the Credit Facility, Emtec NJ and Westwood (together, the “Dealer”) entered into the Agreement for Wholesale Financing with the Lender on August 5, 2005 (the “Wholesale

- 16 -

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

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

As of August 31, 2005, we were in compliance with all of our financial covenants and we had a $4.41 million outstanding balance under the credit facility and an unused availability of $11.16 million.

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

Our open terms credit facilities at August 31, 2005 with our primary trade vendors, including aggregators and manufacturers was $20.75 million with outstanding principal of approximately $13.67 million. Under these credit lines, we are obligated to pay each invoice within 30-45 days from the date of such invoice. These credit lines could be reduced or eliminated without a notice, and this action could have a material adversely affect our business, result of operations, and financial condition.

Capital expenditures of $491,310 during the year ended August 31, 2005 were primarily for the purchase of computer equipment for internal use, purchase of software licenses to upgrade our computer systems, and for furniture and fixtures. We anticipate our capital expenditures for fiscal year ending August 31, 2006 will be approximately $650,000. Approximately $540,000 will primarily be for the upgrade of our computer system across the organization, as well as implementation and data conversion costs, and remaining $110,000 will primarily be for the purchase of computer equipment for internal use.

The following are our long-term contractual obligations for leases, debt and other long term liabilities as of August 31, 2005. Other long-term liabilities consist of accrued severance.


	Payments due by period:

Contractual Obligations:	Total		less than 1 year		1-3 years		4-5 years		more than 5 years


Long-term debt obligations		3,535,093		524,874		1,223,027		1,787,192		—

Capital lease obligations		—		—		—		—		—

Operating lease obligations		3,010,259		973,463		1,498,299		538,497		—

Purchase obligations		—		—		—		—		—

Other long-term liabilities		380,356		130,150		235,900		14,306		—


Total	$	6,925,708	$	1,628,487	$	2,957,226	$	2,339,995	$	—

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We will need to generate cash flow from operations at a sufficient enough level through fiscal 2009 to finance anticipated capital expenditures and service our current outstanding debt.

Cash generated from operations may be negatively affected by a number of factors. See “Forward Looking Statements” and “Business Risk Factors” for a discussion of the factors that can negatively impact the amount of cash we generate from our operations.

We anticipate that our primary sources of liquidity in fiscal 2006 will be cash generated from operations, trade vendor credit and cash available to us under our revolving credit facility. Our future financial performance will depend on our ability to continue to reduce and manage operating expenses, as well as our ability to grow revenues. Our revenues will continue to be impacted by the loss of customers due to price competition and technological advances. Our future financial performance could be negatively affected by unforeseen factors and unplanned expenses. See “Forward Looking Statements” and “Business – Risk Factors.”

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

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

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

Critical Accounting Policies

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

Revenue Recognition

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

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

We may also enter into sales arrangements with customers 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 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 customer arrangements include “set-up” services performed at customer locations where our personnel perform the routine tasks of removing the equipment from boxes, and setting up the equipment at customer workstations by plugging in all necessary connections. This service is usually performed the same day as delivery. Revenue is recognized on the date of acceptance, except as follows:


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

•	There are occasions when a customer 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. At August 31, 2005, accounts receivable related to bill and hold sales totaled $221,255. Total revenue from bill and hold sales were $768,726 with a gross profit of $86,860 which was included in the results of operations for the year ended August 31, 2005. We do not modify our normal billing and credit terms for these customers. The customer is invoiced at the date of revenue recognition when all of the criteria have been met.

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

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

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

Trade Receivables

We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers 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 customers 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. Allowance for doubtful accounts was $225,000 and $225,000 as of August 31, 2005, and 2004, respectively.

Inventories

Inventory is stated at the lower of average cost (specific identification) or market. Inventory is entirely finished goods purchased for resale and consists of computer hardware, computer software, computer peripherals and related supplies. We provide an inventory reserve for products it determines are obsolete or where salability has deteriorated based on managements review of products and sales.

The components of inventory at August 31 are as follows:


Hardware, software, accessories, and parts	$	6,070,728		$	644,262

Less: Inventory reserve	$	(300,138	)	$	(120,000	)


Net Inventory	$	5,770,590		$	524,262

Property and Equipment

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

- 20 -

in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset.

Property and equipment along with their components are as follows:


	2005			2004			Estimated Life Years


Leasehold improvements	$	197,903		$	132,018		4.67

Computer equipment		572,728			199,504		3 to 5

Furniture and fixtures		31,156			7,738		3 to 5

Automobiles		72,956			27,445		3 to 5

Software		172,410			—		3 to 5


Total Property Plant & Equipment	$	1,047,153		$	366,705

Less accumulated depreciation		(129,994	)		(16,469	)


	$	917,159		$	350,236

Goodwill and Intangible Assets

We have adopted Statement of Financial Accounting Standards No. 141 “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets”. As a result, amortization of goodwill was discontinued. Goodwill is the excess of the purchase price over the fair value of the net assets acquired in a business combination accounted for under the purchase method. At August 31, 2005, we recorded goodwill related to the acquisition of Old Emtec of $8,974,610. We test goodwill and indefinite-lived assets for impairment at least annually in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). Intangible assets that have finite useful lives are amortized over their useful lives.

Intangible assets at August 31, 2005 and 2004 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $68,868 and $283,546 less accumulated amortization of $7,270, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13-15 years. Amortization expense was $61,598 and $7,270 for the periods ended August 31, 2005 and August 31, 2004, respectively. Absent any further acquisitions, amortization expense of $580,356 is expected to be recorded each year through August 31, 2016, $573,085 for the year ended August 31, 2017, $558,544 for the years ended August 31, 2018, and 2019, and $518,755 for the year ended August 31, 2020.

Property and equipment and customer relationship intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated undiscounted future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows are less than the carrying amount, the asset is considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset.

- 21 -

Rebates

Rebates are recorded in the accompanying consolidated statements of income as a reduction of the cost of revenues in accordance with Emerging Issues Task Force Abstract No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16). At August 31, 2005 and August 31, 2004, approximately $2,117,290 and $1,009,000, respectively, of rebates receivable are recorded in accounts-receivable-other in the accompanying consolidated balance sheets.

Income Taxes

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

Off-Balance Sheet Arrangements

Under SEC regulations, in certain circumstances, we are required to make certain disclosures regarding the following off-balance sheet arrangements, if material:


•	Any obligation under certain guarantee contracts;

•	Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

•	Any obligation under certain derivative instruments; and

•	Any obligation arising out of a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.

We do not have any off-balance sheet arrangements that are required to be disclosed pursuant to these regulations.

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Item 8. Financial Statements and Supplementary Data

Reference is made to Item 15(a)(i) herein.

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PART IV

Item 15. Exhibits and Financial Statement Schedules


(a) Financial Statements

Report of Independent Registered Public Accounting Firm			29

Report of Independent Registered Public Accounting Firm			30

Consolidated Balance Sheets as of August 31, 2005 and 2004			31

Consolidated Statements of Operations for the periods ended August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003			32

Consolidated Statements of Cash Flows for the periods ended August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003			33

Consolidated Statements of Changes in Shareholders’ Equity for the periods ended August 31, 2005, August 31, 2004, April16, 2004 and August 31, 2003			34

Notes to Consolidated Financial Statements			35-52

(b) Financial Statement Schedules

None.


Exhibit No.		Description


2.1	Agreement and Plan of Merger and Reorganization, dated as of December 14, 2000, between Registrant, then known as American Geological Enterprises, Inc., and Emtec, Inc.⁽¹⁾

2.2	Agreement and Plan of Merger, dated as of March 15, 2004, by and among DARR Westwood Technology Corporation, DARR Westwood Acquisition Corporation, the Shareholders of Westwood Computer Corporation Named, Westwood Computer Corporation, and Keith Grabel, as Shareholder’s Agent.⁽¹⁸⁾

2.3	Agreement and Plan of Merger, dated as of July 14, 2005, by and among the Registrant, Emtec Viasub LLC, and Darr Westwood Technology Corporation.⁽¹⁴⁾

3.1	Certificate of Incorporation, as amended.⁽²⁾

3.2	Amended and Restated Bylaws.⁽²⁾

4.1	Certificate evidencing shares of common stock.⁽²⁾

10.1	Resale Agreement, dated September 29, 1997, between Registrant and Ingram Micro, Inc.⁽²⁾

10.2	Volume Purchase Agreement, dated January 28, 1998, between Registrant and Tech Data Corporation.⁽²⁾

10.3	1996 Stock Option Plan, as amended in 1999.⁽²⁾

10.4	U.S. Systems Integrator Agreement, dated December 22, 1999, between Cisco System, Inc. and Registrant.⁽³⁾

10.5	Sun Microsystem, Inc. Channel Agreement, dated February 1, 2000, between Sun Microsystems, Inc. and Registrant.⁽⁵⁾

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Exhibit No.		Description


10.6	IBM Business Partner Agreement, dated May 31, 2000, between International Business Machines Corporation and Registrant.⁽³⁾

10.7	Microsoft Certified Partner Agreement, dated December 20, 2000, between Microsoft and Registrant.⁽³⁾

10.8	Letter Agreement, dated April 24, 2001, between Novell Inc. and Registrant.⁽³⁾

10.9	Citrix Solutions Network Gold Renewal Membership Agreement, dated April 30, 2001, between Citrix Systems, Inc. and Registrant.⁽³⁾

10.10	Loan and Security Agreement, dated November 21, 2001, by and between Fleet Capital Corporation and Registrant.⁽¹²⁾

10.11	Agreement for Wholesale Financing, dated November 21, 2001, by and between IBM Credit Corporation and Registrant.⁽¹²⁾

10.12	Subordination Agreement, dated as of November 21, 2001, among Registrant, MRA Systems, Inc., dba GE Access, and Fleet Capital Corporation.⁽¹²⁾

10.13	Intercreditor Agreement, dated as of November 21, 2001, between Fleet Capital Corporation and Ingram Micro, Inc., and accepted by Registrant.⁽¹²⁾

10.14	Asset Acquisition Agreement, dated December 5, 2001, by and between Devise Associates, Inc. and Registrant.⁽⁴⁾

10.15	Lease Agreement, dated January 9, 2002, between Registrant and Vandergrand Properties Co., L.P., for New York, New York facility.⁽⁸⁾

10.16	Lease Agreement, dated March 1, 2002, between Registrant and G. F. Florida Operating Alpha, Inc., for Jacksonville, Florida facility.⁽⁸⁾

10.17	Asset Acquisition Agreement, dated August 12, 2002, by and between Acentra Technologies, Inc. and Registrant.⁽⁶⁾

10.18	Remarketer/Integrator Agreement, dated August 15, 2002, between Dell Marketing L.P. and Registrant.⁽⁶⁾

10.19	Asset Acquisition Agreement, dated August 31, 2002, by and between Turnkey Computer Systems, Inc. and Registrant.⁽⁷⁾

10.20	Lease Agreement, dated November 15, 2002, between Registrant and Hamilton Transit Corporate Center, for warehouse facility in Trenton, New Jersey.⁽⁹⁾

10.21	Lease Agreement, dated April 21, 2003, between V-Sullyfield Properties II LLC and Westwood Computer Corporation, for Chantilly, Virginia facility.⁽¹⁸⁾

10.22	Lease Agreement, dated July 1, 2003, between Westwood Property Holdings LLC and Westwood Computer Corporation, for Springfield, New Jersey facility.⁽¹⁸⁾

10.23	Amendment to Lease Agreement, dated July 14, 2003, between V-Sullyfield Properties II LLC and Westwood Computer Corporation, for Chantilly, Virginia facility.⁽¹⁸⁾

10.24	Management Services Agreement, dated April 16, 2004, by and between DARR Global Holdings, Inc., and Westwood Computer Corporation.⁽¹⁸⁾

10.25	Employment Agreement, dated as of April 16, 2004, by and between Keith Grabel and Westwood Computer Corporation.⁽¹⁸⁾

10.26	Employment Agreement, dated as of April 16, 2004, by and between Mary Margaret Grabel and Westwood Computer Corporation.⁽¹⁸⁾

- 25 -


Exhibit No.		Description


10.27	Separation Agreement, dated April 16, 2004, between Westwood Computer Corporation and Joyce Tischler.⁽¹⁸⁾

10.28	Subordinated Note, dated April 16, 2004, in the amount of $750,000, made by DARR Westwood Acquisition Corporation in favor of DARR Westwood LLC.⁽¹⁷⁾

10.29	Subordinated Note, dated April 16, 2004, in the amount of $750,000, made by DARR Westwood Acquisition Corporation in favor of Four Kings Management LLC.⁽¹⁷⁾

10.30	5% Junior Subordinated Note, dated April 16, 2004, in the amount of $7,771.63, made by Westwood Computer Corporation in favor of Michael John Grabel.⁽¹⁸⁾

10.31	5% Junior Subordinated Note, dated April 16, 2004, in the amount of $12,588.89, made by Westwood Computer Corporation in favor of Megan Patricia Grabel.⁽¹⁸⁾

10.32	5% Junior Subordinated Note, dated April 16, 2004, in the amount of $132,183.32, made by Westwood Computer Corporation in favor of Mary Margaret Grabel.⁽¹⁸⁾

10.33	5% Junior Subordinated Note, dated April 16, 2004, in the amount of $161,151.16, made by Westwood Computer Corporation in favor of Keith Grabel.⁽¹⁷⁾

10.34	8% Junior Subordinated Note, dated April 16, 2004, in the amount of $23,314.84, made by Westwood Computer Corporation in favor of Michael John Grabel.⁽¹⁸⁾

10.35	8% Junior Subordinated Note, dated April 16, 2004, in the amount of $37,766.58, made by Westwood Computer Corporation in favor of Megan Patricia Grabel.⁽¹⁸⁾

10.36	8% Junior Subordinated Note, dated April 16, 2004, in the amount of $396,549.13, made by Westwood Computer Corporation in favor of Mary Margaret Grabel.⁽¹⁸⁾

10.37	8% Junior Subordinated Note, dated April 16, 2004, in the amount of $483,452.45, made by Westwood Computer Corporation in favor of Keith Grabel.⁽¹⁷⁾

10.38	First Amendment to Lease Agreement, dated April 16, 2004, between Westwood Property Holdings LLC and Westwood Computer Corporation, for Springfield, New Jersey facility.⁽¹⁸⁾

10.39	Lease Agreement, dated May 20, 2004, between Registrant and Facstore, for office space in Cranford, New Jersey.⁽¹⁰⁾

10.40	Lease Agreement, dated June 1, 2004, between Registrant and Hamilton Transit Corporate Center, for office space in Trenton, New Jersey.⁽¹⁰⁾

10.41	Lease Agreement, dated September 2, 2004, between Registrant and GS&T Properties, LLC, for Suwanee, Georgia facility.⁽¹¹⁾

10.42	Sublease Agreement, dated November 24, 2004, between Registrant and vFinance, Inc., for office space in New York, New York.⁽¹¹⁾

10.43	Amendment to Loan and Security Agreement, dated as of December 10, 2004, between Bank of America Business Capital Corporation and Registrant.⁽¹³⁾

10.44	Lease Agreement, dated January 1, 2005, between Registrant and Select Office Suites, for a sales office space in New York, New York.⁽¹¹⁾

10.45	Lease Agreement, dated March 1, 2005, between Twenty Keyland Corporation and Westwood Computer Corporation, for Bohemia, New York facility.⁽¹⁸⁾

- 26 -


Exhibit No.		Description


10.47	Revocable License Agreement, dated June 1, 2005, between A.M. Property Holding Corporation and Westwood Computer Corporation, for New York, New York facility.⁽¹⁸⁾

10.48	Employment Agreement, dated as of July 14, 2005, between Registrant and John Howlett.⁽¹⁴⁾

10.49	Employment Agreement, dated as of July 14, 2005, between Registrant and Ronald Seitz.⁽¹⁴⁾

10.50	Form of Guaranty issued by Registrant in favor of Four Kings Management LLC, Keith Grabel, Mary Margaret Grabel, Megan Patricia Grabel, Michael John Grabel, Darr Westwood LLC, and Joyce Tischler, dated September, 2005.⁽¹⁸⁾

10.51	Business Financing Agreement, dated August 5, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of Registrant.⁽¹⁵⁾

10.52	Agreement for Wholesales Financing, dated August 5, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of Registrant.⁽¹⁵⁾

10.53	Addendum to Agreement for Wholesales Financing and Business Financing Agreement, dated August 5, 2005, by and between GE Commercial Distribution Finance Corporation and subsidiaries of Registrant.⁽¹⁵⁾

10.54	Common Stock Purchase Warrant between Registrant and DARR Westwood LLC, dated August 5, 2005.⁽¹⁶⁾

10.55	Common Stock Purchase Warrant between Registrant and Margaret Grabel, dated August 5, 2005.⁽¹⁶⁾

10.56	8% Subordinated Promissory Note, dated August 5, 2005, issued by Darr Westwood Technology Corporation in favor of Darr Westwood LLC.⁽¹⁷⁾

10.57	Assignment of State of New Jersey Contract from Acentra Technologies, Inc. to Registrant.⁽⁶⁾

14.1	Code of Ethics.⁽¹⁰⁾

21.1	List of Subsidiaries.⁽¹⁸⁾

23.1	Consent of a Registered Public Accounting Firm

23.2	Consent of a Registered Public Accounting Firm

31.1	Certification of Dinesh R. Desai, Principal Executive Officer of Registrant, dated July 6 2006. Rule 13a-14(a)/15 d-14(a).

31.2	Certification of Stephen C. Donnelly, Principal Financial Officer of Registrant, dated July 6 2006. Rule 13a-14(a)/15 d-14(a).

32.1	Certificate of Dinesh R. Desai, Principal Executive Officer of Registrant, dated July 6 2006. Section 1350.

32.2	Certificate of Stephen C. Donnelly, Principal Financial Officer of Registrant, dated July 6 2006. Section 1350.


⁽¹⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated January 17, 2001, filed on January 31, 2001, and incorporated herein by reference.

⁽²⁾	Previously filed as an exhibit to Registrant’s Registration Statement on Form 10, filed on May 21, 2001,

- 27 -


	and incorporated herein by reference.

⁽³⁾	Previously filed as an exhibit to Amendment No. 1 to Registration Statement on Form 10, filed on July 12, and incorporated herein by reference.

⁽⁴⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated December 5, 2001, filed on December 20, 2001, and incorporated herein by reference.

⁽⁵⁾	Previously filed as an exhibit to Registrant’s Form 10-K dated March 31, 2001, filed on July 12, 2001, and incorporated herein by reference.

⁽⁶⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated August 12, 2002, filed on August 26, 2002, and incorporated herein by reference.

⁽⁷⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated August 31, 2002, filed on September 13, 2002, and incorporated herein by reference.

⁽⁸⁾	Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2002, filed on June 30, 2002, and incorporated herein by reference.

⁽⁹⁾	Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2003, filed on July 15, 2003, and incorporated herein by reference.

⁽¹⁰⁾	Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2004, filed on July 14, 2004, and incorporated herein by reference.

⁽¹¹⁾	Previously filed as an exhibit to Registrant’s Form 10-K, dated March 31, 2005, filed on July 14, 2005, and incorporated herein by reference.

⁽¹²⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated November 21, 2001, filed on November 26, 2001, and incorporated herein by reference.

⁽¹³⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated December 10, 2004, filed on December 14, 2004, and incorporated herein by reference.

⁽¹⁴⁾	Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, dated July 14, 2005, filed on July 20, 2005, and incorporated herein by reference.

⁽¹⁵⁾	Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, dated June 30, 2005, filed on August 19, 2005, and incorporated herein by reference.

⁽¹⁶⁾	Previously filed as an exhibit to Registrant’s Tender Offer Statement on Form SC TO-I, filed September 7, 2005, and incorporated herein by reference.

⁽¹⁷⁾	Previously filed as an exhibit to Amendment to Registrant’s Tender Offer Statement on Form SC TO-I/A, filed September 22, 2005, and incorporated herein by reference.

⁽¹⁸⁾	Previously filed as an exhibit to Registrant’s Form 10-K, dated August 31, 2005, filed on December 14, 2005, and incorporated herein by reference.

- 28 -

Report of Independent Registered Public Accounting Firm

Board of Directors
Emtec, Inc.

We have audited the accompanying consolidated balance sheets of Emtec, Inc. as of August 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and changes in stockholders’ equity, for the year ended August 31, 2005, the period from April 17, 2004 to August 31, 2004 (Successor Period) and the period from September 1, 2003 to April 16, 2004 (Predecessor Period). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of The Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Emtec, Inc at August 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for the year ended August 31, 2005, the period from April 17, 2004 to August 31, 2004 (Successor Period) and the period from September 1, 2003 to April 16, 2004 (Predecessor Period), in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Philadelphia, PA
December 2, 2005

REPORT of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Westwood Computer Corporation
11 Diamond Road
Springfield, N.J. 07081

We have audited the accompanying consolidated balance sheet of Westwood Computer Corporation and subsidiary as of August 31, 2003, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year ended August 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westwood Computer Corporation as of August 31, 2003, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Glassel & Bonfiglio, LLC

GLASSEL & BONFIGLIO, LLC

May 15, 2006

EMTEC, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2005 and 2004


	2005		2004

Assets

Current Assets

Cash & cash equivalents	$	1,021,237	$	1,215,917
Receivables:
Trade, less allowance for doubtful accounts		34,541,373		17,732,321
Others		3,385,891		1,191,658
Inventories, net		5,770,590		524,262
Prepaid expenses		433,238		79,388
Deferred tax asset - current		603,533		172,232


Total Current Assets		45,755,862		20,915,778

Net property and equipment		917,159		350,236
Deferred tax asset - long term		—		154,344
Customer relationships, net		8,592,844		276,276
Goodwill		8,974,610		—

Restricted cash		5,650,000		—
Other assets		119,443		41,004


Total Assets	$	70,009,918	$	21,737,638


Liabilities and Shareholders’ Equity

Current Liabilities

Line of credit		4,412,526		299,250
Accounts payable - trade		29,738,061		14,259,738
Accounts payable - related party		133,333		33,333
Current portion of long term debt - related party		524,874		349,694
Income taxes payable		828,659		97,786
Accrued liabilities		4,190,728		1,021,994
Due to former stockholders		631,415		664,567
Customer deposits		1,268,672		—
Deferred revenue		1,125,205		385,422


Total Current Liabilities		42,853,473		17,111,784

Accrued severance		380,356		473,489
Deferred tax liability		2,838,298		—
Long term debt - related party		3,010,219		2,405,084


Total Liabilities		49,082,346		19,990,357


Shareholders’ Equity
Redeemable preferred stock, $0.01 par value		—		10
Common Stock $0.01 par value; 25,000,000 shares authorized; 17,232,134 and 9,528,110 shares issued and outstanding at August 31, 2005 and 2004		172,321		95,281

Additional paid-in capital		19,908,779		1,529,709
Retained earnings		846,472		122,281


Total Shareholders’ Equity		20,927,572		1,747,281


Total Liabilities and Shareholders’ Equity	$	70,009,918	$	21,737,638

The accompanying notes are an integral part of these consolidated financial statements.

EMTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Periods Ended August 31, 2005, 2004 and 2003


	Year Ended August 31, 2005			Period from April 17, 2004 to August 31, 2004 (Successor Period)			Period from September 1, 2003 to April 16, 2004 (Predecessor Period)			Year Ended August 31, 2003


Revenues	$	162,632,042		$	41,641,604		$	88,229,719		$	97,449,611
Cost of revenues		148,587,442			37,617,860			79,596,368			87,843,440

Gross profit		14,044,600			4,023,744			8,633,351			9,606,171

Operating expenses:
Selling, general, and administrative expenses		11,872,766			3,418,755			7,292,265			8,623,016
Management fee – related party		350,000			116,664			—			—
Rent expense – related party		180,000			60,000			155,333			—
Depreciation and amortization		174,944			23,739			51,266			125,054

Total operating expenses		12,577,710			3,619,158			7,498,864			8,748,070


Operating income		1,466,890			404,586			1,134,487			858,101

Other expense (income):
Forgiveness of debt		—			—			(405,652	)		—
Interest income – related party		—			—			(21,483	)		—
Interest income – other		(120,520	)		(25,783	)		(44,479	)		(48,613	)
Interest expense		611,479			184,665			72,819			42,324
Other expense (income)		(303,604	)		—			—			—
Loss on sales of land and building		—			—			—			102,253


Income before income taxes		1,279,535			245,704			1,533,282			762,137
Provision for income taxes		452,550			123,423			647,445			294,747


Net income		826,985			122,281			885,837			467,390

Preferred stock dividends		(72,794	)		(30,000	)		—			—


Net income allocable to common stockholders	$	754,191		$	92,281		$	885,837		$	467,390


Net income per common share Basic and Diluted	$	0.08		$	0.01		$	0.09		$	0.05

Weighted Average Shares Outstanding
Basic		10,075,520			9,528,110			9,528,110			9,597,871

Diluted		10,108,803			9,528,110			9,528,110			9,597,871

The accompanying notes are an integral part of these consolidated financial statements.

Emtec Inc.
Consolidated Statements of Cash Flows
Periods Ended August 31, 2005, 2004 and 2003


	Year Ended August 31, 2005			Period from April 17, 2004 to August 31, 2004 (Successor Period)			Period from September 1, 2003 to April 16, 2004 (Predecessor Period)			Year Ended August 31, 2003

Cash Flows From Operating Activities

Net income for the year	$	826,985		$	122,281		$	885,837		$	467,390

Adjustments to Reconcile Net Income to Net Cash (Used In) Provided by Operating Activities

Forgiveness of debt		—			—			(405,652	)		—
Depreciation and amortization		196,755			23,739			51,266			125,054
Loss on sale of land and building		—			—			—			102,253
Deferred income tax (benefit) expense		(147,382	)		50,578			58,303			(203,517	)
Put option valuation		(303,604	)		—			—			—

Changes In Operating Assets and Liabilities
Receivables		(2,118,382	)		(6,854,567	)		579,725			4,918,052
Inventories		(3,090,989	)		(75,838	)		622,947			1,290,429
Prepaid expenses and other assets		(21,380	)		7,706			(22,063	)		45,233
Accounts payable		5,875,608			8,707,348			(1,238,723	)		(1,056,019	)
Customer deposits		(43,935	)		—			—			—
Income Taxes Payable		148,501			—			—			—
Accrued liabilities		1,362,375			(637,962	)		765,315			149,630
Deferred compensation		—			—			—			489,465
Deferred revenue		(74,611	)		16,815			(125,914	)		291,583


Net Cash (Used In) Provided By Operating Activities	$	2,609,941		$	1,360,100		$	1,171,041		$	6,619,553


Cash Flows From Investing Activities
Purchases of property and equipment	$	(491,310	)	$	(147,705	)	$	(45,616	)	$	(67,593	)
Repurchase of treasury stock		—			—			—			(13,670	)
Payments from note receivable		—			—			—			(2,706	)
Acquisition of businesses, net of cash acquired		(678,875	)		(4,917,499	)		—			—


Net Cash Used In Investing Activities	$	(1,170,185	)	$	(5,065,204	)	$	(45,616	)	$	(83,969	)


Cash Flows From Financing Activities
Net Increase (decrease) in line of credit	$	4,054,524		$	299,250		$	(7,121,955	)	$	—
Proceeds from issuance of common stock		16,671			625,000			—			—
Proceeds from issuance of preferred stock		—			1,000,000			—			—
Proceeds from long-term debt		—			1,500,000			—			—
Repayment of amount due to former stockholders		(33,152	)		—			—			—
Increase in restricted cash		(5,350,000	)		—			—			—
Repayment of debt		(322,479	)		—			—			(44,445	)


Net Cash Provided By (Used In) Financing Activities	$	(1,634,436	)	$	3,424,250		$	(7,121,955	)	$	(44,445	)

Net (decrease) increase in Cash and Cash Equivalents	$	(194,680	)	$	(280,854	)	$	(5,996,530	)	$	6,491,139
Beginning Cash and Cash Equivalents	$	1,215,917		$	1,496,771		$	7,493,301		$	1,002,162


Ending Cash and Cash Equivalents	$	1,021,237		$	1,215,917		$	1,496,771		$	7,493,301

The accompanying notes are an integral part of these consolidated financial statements.

Emtec Inc.
Consolidated Statement of Changes in Shareholders’ Equity


																						Total Stockholders’ Equity
	Preferred Stock						Common Stock						Additional Paid-in Capital			Retained Earnings			Treasury Stock, at Cost

	Shares			Amount			Shares			Amount

Predecessor period
Balance at September 1, 2002								9,667,645		$	96,676		$	770,285		$	3,664,339		$	(1,767	)	$	4,529,533
Purchase of treasury stock								(139,535	)		(1,395	)		1,395						(13,670	)		(13,670	)
Net income																	467,390						467,390

Balance at August 31, 2003								9,528,110		$	95,281		$	771,680		$	4,131,729		$	(15,437	)	$	4,983,253

Capital contribution								—			—			903,811			—			—			903,811
Noncash distribution								—			—			—			(399,587	)		—			(399,587	)
Net income								—			—			—			885,837			—			885,837

Balance at April 16, 2004								9,528,110		$	95,281		$	1,675,491		$	4,617,979		$	(15,437	)	$	6,373,314


Successor period
Balance at April 17, 2004		1,000		$	10			9,528,110		$	95,281		$	1,529,709			—			—		$	1,625,000
Net income		—			—			—			—			—			122,281			—			122,281


Balance at August 31, 2004		1,000		$	10			9,528,110		$	95,281		$	1,529,709		$	122,281		$	—		$	1,747,281

Common stock deemed to be issued in reverse merger								7,676,024			76,760			19,362,670									19,439,430
Dividends on preferred stock																	(102,794	)					(102,794	)
Conversion of preferred stock into debt		(1,000	)		(10	)								(999,990	)								(1,000,000	)
Common stock issued upon exercise of options- post merger								28,000			280			16,390									16,670
Net income																	826,985						826,985

Balance at August 31, 2005		—		$	—			17,232,134		$	172,321		$	19,908,779		$	846,472		$	—		$	20,927,572

The accompanying notes are an integral part of these consolidated financial statements.

Emtec, Inc.
Notes to Consolidated Financial Statements

1. Organization

Business

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

Accordingly, the historical financial statements of Emtec are considered to be those of Darr for all periods presented. The consolidated financial statements include the accounts and transactions of Darr for the year ended August 31, 2005 (and including the accounts and transactions of Emtec for the period from August 6, 2005 to August 31, 2005), the periods from September 1, 2003 to April 16, 2004 (Predecessor Period) and from April 17, 2004 to August 31, 2004 (Successor Period) and for the year ended August 31, 2003 and the accounts and transactions of Old Emtec for the period from August 5, to August 31, 2005. The notes to the consolidated financial statements refer to the following defined periods ended: August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003.

The Company is a systems integrator focused on providing technology solutions that enable its customers to use and manage their data to grow their businesses. The Company’s customer base is comprised of departments of the United States, state and local governments, education and commercial businesses throughout the United States. Emtec specializes in information technology services including: enterprise computing, data communications, data access, network design, enterprise backup and storage consolidation, managed services and staff augmentation. The most significant portion of the Company’s revenue is derived from activities as a reseller of IT products, such as workstations, servers, microcomputers, and application software and networking and communications equipment.

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Westwood, and Westwood’s wholly owned subsidiary, Solutions. Significant intercompany account balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company typically maintains cash at major financial institutions. At times throughout the year, bank account balances exceed FDIC insurance limits, which are up to $100,000 per account.

The Company has restricted cash from time to time during the year that represents amounts collected on accounts receivable that have not been released to the Company by its financing company. At August 31, 2005 cash that has not been released by the finance company totaled $476,290. In addition, the Company recorded $5,650,000 of restricted cash at August 31, 2005 that represents cash earmarked to fund a self tender offer of $5,500,000 that begins September 7, 2005, and $150,000 to obtain a letter of credit required as a security deposit for a real estate lease.

Concentration of Credit Risk and Significant Customers

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

The Company’s revenues comprised of the following customer types for the periods ended:


	August 31, 2005		August 31, 2004		April 16, 2004		August 31, 2003

Departments of the United States Government	$	123,823,906	$	31,463,023	$	66,663,466	$	73,816,257
State and Local Governments		17,625,586		3,571,827		7,567,943		11,691,527
Commercial Companies		12,338,163		4,580,576		9,705,269		9,880,240
Education and other		8,844,387		2,026,178		4,293,041		2,061,587

Total Revenues	$	162,632,042	$	41,641,604	$	88,229,719	$	97,449,611

The United States Department of Agriculture (USDA), accounted for approximately 13.4%, 1.2%, 1.1% and 1.1% of our total revenues for the periods ended August 31, 2005, August 31 2004, April 16, 2004 and 2003, respectively.

As of August 31, 2005 and 2004, trade accounts receivable are comprised of the following:


	August 31, 2005			August 31, 2004

Trade receivables	$	34,766,373		$	17,957,321
Allowance for doubtful account		(225,000	)		(225,000	)

Trade receivables, net	$	34,541,373		$	17,732,321

Fair Value of Financial Instruments

The carrying amounts of accounts receivable, other receivables accounts payable, accrued expenses and customer deposits approximate fair value because of their short-term nature. The carrying amount of the line of credit and long-term debt approximates their fair value because the interest rates reflect rates the Company would be able to obtain on debt with similar terms and conditions.

Revenue Recognition

The Company recognizes revenue from the sales of products when risk of loss and title passes which is upon customer acceptance.

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

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


	•	In some instances, the “set-up” service is performed after date of delivery. The Company recognizes revenue for the “hardware” component at date of delivery when the amount of revenue allocable to this component is not contingent upon the completion of “set-up” services and therefore, the Company’s customer has agreed that the transaction is complete as to the “hardware” component. In instances where the Company’s customer does not accept delivery until “set-up” services are completed, the Company defers all revenue in the transaction until customer acceptance occurs.

	•	There are occasions when a customer requests a transaction on a “bill & hold” basis. The Company follows the SAB 104 criteria and recognizes revenue from these sales prior to date of physical delivery only when all the criteria of SAB 104 are met. At August 31, 2005, accounts receivable related to bill and hold sales totaled $221,255. Total revenue from bill and hold sales were $768,726 with a gross profit of $86,860 which was included in the results of operations for the year ended August 31, 2005. The Company does not modify its normal billing and credit terms for these customers. The customer is invoiced at the date of revenue recognition when all of the criteria have been met.

The Company has experienced minimal customer returns. Since all eligible products must be returned to the Company with 30 days from the date of the invoice, the Company reduces the product revenue and cost of goods in each accounting period based on the actual returns that occurred in the next 30 days after the close of the accounting period.

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

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

Rebates

Rebates received on products purchased are recorded in the accompanying consolidated statements of operations as a reduction of the cost of revenues in accordance with Emerging Issues Task Force Abstract No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16). At August 31, 2005 and August 31, 2004, approximately $2,117,290 and $1,009,000, respectively, of rebates receivable were recorded in accounts-receivable-other in the accompanying consolidated balance sheets.

Inventory

Inventory is stated at the lower of average cost (specific identification) or market. Inventory is entirely finished goods purchased for resale and consists of computer hardware, computer software, computer peripherals and related supplies. The Company provides an inventory reserve for products it determines are obsolete or where salability has deteriorated based on managements review of products and sales. The components of inventory at August 31 are as follows:


	2005			2004

Hardware, software, accessories, and parts	$	6,070,728		$	644,262
Less: Inventory reserve	$	(300,138	)	$	(120,000	)

Net Inventory	$	5,770,590		$	524,262

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets, which generally are three to five years. Maintenance and repair costs are charged to expense as incurred. The cost and accumulated depreciation relating to property and equipment retired or otherwise disposed of are eliminated from the accounts and any resulting gains or losses are credited or charged to income.

Goodwill

Goodwill 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. On August 5, 2005, the Company recorded goodwill related to the acquisition of Old Emtec equal to $8,817,231. On March 1, 2005, the Company recorded goodwill related to the acquisition of Proven Technologies, Inc. equal to $157,739. Total Goodwill at August 31, 2005 is $8,974,610. The Company tests goodwill and indefinite-lived assets for impairment at least annually in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). The Company’s annual impairment test is made on June 1 of each year. Intangible assets that have finite useful lives are amortized over their useful lives.

Identifiable Intangible Asset

On August 5, 2005, the Company ascribed $8,378,166 of the purchase price associated with the acquisition of Old Emtec to customer relationships. Intangible assets at August 31, 2005 and 2004 consisted of the value ascribed to customer relationships of $8,661,712 less accumulated amortization of $68,868 and $283,546 ascribed to customer relationships less accumulated amortization of $7,270, respectively. The assets ascribed to customer relationships are being amortized on a straight-line basis over 13-15 years. Amortization expense was $61,598 and $7,270 for the periods ended August 31, 2005 and August 31, 2004, respectively. Amortization expense of $580,356 is expected to be recorded each year through August 31, 2016, $573,085 for the year ended August 31, 2017, $558,544 for the years ended August 31, 2018, and 2019, and $518,755 for the year ended August 31, 2020.

Advertising

Advertising costs are expensed as incurred. Advertising expense was $551,065, $200,690, $217,557, and $320,196 for the periods ending August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations. Marketing development funds received from various manufacturers are included in selling, general and administrative expense.

Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations. Accordingly, no compensation cost for stock options granted to employees is reflected in net income, since all options granted had an exercise price equal to the fair market value of the Company’s common stock on the date of the grant. Stock options in the Company are fully vested and were granted by Old Emtec prior to the August 5, 2005 merger.

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (Revised), “Share-Based Payments” (“SFAS 123R”), which is effective for the Company beginning December 15, 2005. Under SFAS 123R, the Company will be required to measure the cost of employee service received in exchange for awards of stock options based upon the fair value of the options as of their grant date. The cost of the employee service will be recognized as compensation cost ratably over the option vesting period. Currently, the Company recognizes compensation expense pursuant to APB 25, whereby compensation expense is recognized to the extent that an option price is less than the market price of the stock at the date of the grant (the “Intrinsic Value”). SFAS 123R allows the use of either the Black-Scholes or a lattice option-pricing model to calculate the fair value of options. Currently, the Company is evaluating the adoption alternatives under SFAS 123R. There will be no impact on future operating results until the Company issues stock options in future periods.

Income Taxes

The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.

Earnings Per Share

Basic earnings/(loss) per share is computed based on the weighted average shares outstanding during the reporting period without considering any dilutive effects. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the weighted average shares outstanding reflects all shares that could be issued, including options and warrants.

3. Acquisition

On August 5, 2005, Old Emtec and Darr completed a transaction pursuant to which the two companies merged and will operate as a new consolidated entity that retains the name Emtec, Inc. Under the terms of the merger agreement all shares Darr common stock that were issued and outstanding immediately prior to the merger were exchanged for 9,528,110 shares of Old Emtec’s common stock plus warrants to purchase an additional 10% of the Company, measured on a post exercise basis. Immediately following the merger, Darr’s stockholders owned approximately 55.7% of the outstanding shares of the Company’s common stock. In addition, as a condition of the transaction, the Company was required to initiate a self tender offer to repurchase issued and outstanding shares of the Company for an aggregate purchase price up to $5,500,000 at a fixed price of $1.92 per share. The Company believes that the merger transaction will allow the Company to expand its service offerings, add to or enhance its base of technical or sales personnel, and nurture and expand existing client relationships. The anticipated synergies from the merger include enhanced buying power, cross utilization of resources, and cross selling into existing client relationships.

Management concluded that the transaction resulted in a change in control of the Company and that the transaction should be accounted for as a reverse merger, whereby Darr is considered the accounting acquirer and the purchase price is allocated to the net tangible and intangible assets of Old Emtec (hereinafter net assets) based on their underlying fair values.

The aggregate purchase price was $20,275,670 based on the fair value of the consideration, which consisted of: $19,266,820 for 7,676,024 shares of common stock of Old Emtec deemed to be issued at $2.51 per share, $172,612 for stock options deemed to be issued, $315,104 for put warrants issued under a self tender offer and $521,134 of acquisition costs incurred by Darr. The Company accounted for the acquisition under the purchase method, whereby, amounts were assigned to assets acquired and liabilities assumed based on their respective fair values, on the date of merger. Management determined the fair value of Old Emtec’s net assets on August 5, 2005 was $11,458,800, which resulted in an excess purchase price over fair value of net assets acquired of $8,816,870, which was recognized as goodwill.

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


Accounts and other receivables	$	16,884,901
Inventories		2,155,339
Deferred tax asset-current		267,574
Prepaid expenses		354,260
Property and equipment		210,770
Customer relationships		8,378,166
Other assets		356,651
Accounts payable		(9,702,715	)
Other current liabilities		(4,469,849	)
Deferred tax liabilities		(2,976,297	)

Fair value of net assets acquired	$	11,458,800
Purchase price		20,275,670

Excess purchase price	$	8,816,870

The value of the put options issued was estimated on the date of grant (August 5, 2005) using a Black-Scholes option pricing model. Under the Black-Scholes model, the total value of the put options was $315,104. Key assumptions used in the model included: exercise price - $1.92 per share, stock price- $2.15 per share, expected volatility of 0.869; risk free rate of 4.5% and dividend yield of 0.0%. At August 31, 2005, the value of the put options was estimated to be $11,500 and was determined based on the same key assumptions with a stock price of $2.40 per share. In connection with the change in value, the Company recorded other income of $303,600 in the consolidated statement of operation.

On April 16, 2004, Darr purchased substantially all of the net assets of Westwood for $6,697,816. Prior to the acquisition, the Company had no operating history. The acquisition was accounted for under the purchase method of accounting and allowed the Company to enter into the computer and peripheral sales and service industry. The accompanying financial statements present the results of operations for the period from September 1, 2003 to April 16, 2004 under the Predecessor’s basis of accounting (Predecessor Period) and for the period from April 17, 2004 to August 31, 2004 under the Company’s basis of accounting (Successor Period). The purchase price consisted of cash of $5,245,222, assumed liabilities of $1,254,778 and related acquisition costs of $197,816.

The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, on the date of purchase, as follows:


Current assets	$	14,152,360
Customer relationships		283,546
Property and equipment		188,420
Deferred tax asset		377,154
Other assets		58,038
Current liabilities		(7,853,970	)
Accrued severance		(507,732	)

Net assets acquired	$	6,697,816

On March 1, 2005, Old Emtec acquired selected assets of Proven Technology LLC, a provider of data storage solutions including hardware, software and support services for $162,610. The acquisition was accounted for under the purchase method of accounting and allowed the Company to enter into the data storage market. The purchase price was allocated to assets acquired, which consisted of property and equipment of $4,871 based on their respective fair values on the date of purchase. There were no liabilities assumed in the transaction and the excess of purchase price over the estimated fair value of assets acquired totaled $157,740 and is recorded as goodwill.

Unaudited pro forma condensed results of operations for the year ended August 31, 2005 and the twelve month (predecessor and successor combined) period ended August 31, 2004 are presented as if the August 5, 2005 merger and the March 1, 2005 asset acquisition had been completed at the beginning of each year as follows:


	2005		2004


Net revenues	$	267,658,142	$	235,794,558
Gross profit		29,839,291		28,664,004

Income from continuing operations	$	1,984,942	$	892,829


Income from continuing operations per share (basic and diluted)	$	0.12	$	0.05

4. Property, Plant and Equipment

Property and equipment consisted of the following at August 31:


	2005			2004			Estimated Life Years

Leasehold improvements	$	197,903		$	132,018			4.67
Computer equipment		572,728			199,504			3 to 5
Furniture and fixtures		31,156			7,738			3 to 5
Automobiles		72,956			27,445			3 to 5
Software		172,410			—			3 to 5

Total Property and Equipment	$	1,047,153		$	366,705
Less accumulated depreciation		(129,994	)		(16,469	)

	$	917,159		$	350,236

Depreciation expense was $113,525, $16,469, $51,266 and $125,054 for the periods ended, August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003, respectively.

5. Line of Credit

The Company maintains a credit facility under two agreements with a financing company. The credit facility finances purchases from specified vendors, as defined, and allows for borrowings based on a percentage of eligible accounts receivable, as defined. Borrowings under both agreements are limited to an aggregate of $35,000,000 and bear interest at the greater of the prime rate as published by JP Morgan Chase Bank or 4.0%. The underlying agreements allow for an increased borrowing base during periods of high seasonal activity. At August 31, 2005 and 2004, there were $4,412,526 and $299,250 of borrowings outstanding under this facility. The credit facility was amended on August 5, 2005 and expires on August 31, 2006.

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

6. Commitments

The Company leases its operating facilities, certain sales offices and transportation equipment under noncancelable operating lease agreements that expire on various dates through August 31, 2010. Rent expense was $385,990, $118,958, $222,329 and $149,291 for the periods ending August 31, 2005, August 31, 2004, April 16, 2004, and August 31, 2003, respectively, and is recorded in general and administrative expenses on the consolidated statements of operations.

The following are our contractual obligations associated with lease commitments. We lease warehouse and office facilities, vehicles and certain office equipment under noncancellable operating leases. Future minimum lease payments under such leases are as follows:


Fiscal Years

2006	$	975,743
2007		810,249
2008		688,430
2009		383,428
2010		155,069

Total	$	3,012,919

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

In March 2002, a lawsuit was filed against the Company by a competitor seeking damages of an unspecified amount. The competitor is alleging that the Company illegally interfered with customer relationships of the competitor. There has been no change to this litigation matter in the last twelve months. The lawsuit is still in the discovery phase.

At March 16, 2005, Old Emtec sold its 5.49% working interest in the Roosevelt Hot Springs geothermal unit to Energy Minerals, Inc. (‘buyer”). As part of the transaction, the buyer assumed the remaining liability under the geothermal steam purchase agreement with Pacificorp (d/b/a Utah Power & Light Company). Under the 30-year agreement executed in 1993, a $1 million prepayment was received by Old Emtec from Pacificorp. The agreement gives Pacificorp the right to recover a pro-rata portion of their original $1 million pre-payment should the geothermal unit fail to produce steam at levels specified under the agreement. Old Emtec recorded the pre-payment as deferred revenue and was amortizing the amount as earned revenue over the 30-year term of the steam purchase agreement. Energy Minerals, Inc. has been assigned rights to the steam purchase agreement with Pacificorp and assumed the remaining $672,123 deferred revenue liability as of March 16, 2005. However, should the geothermal unit fail to produce steam at levels specified under the agreement during the remaining 30 year term of the agreement, PacifiCorp could potentially make a claim against the Company as a former owner, if the current ownership of the geothermal unit failed to satisfy Pacificorp’s claims. The Company believes that the probability of this occurrence is remote due to the strong production and operating history of the geothermal unit.

The Company was counterparty to deferred compensation arrangements with a spouse (as beneficiary) of a former officer and a former stockholder of Westwood during the periods ended April 16, 2004 and August 31, 2003. Commensurate with the acquisition of Westwood on April 16, 2004, the arrangement with the spouse was forfeited in exchange for a separation agreement. The agreement provides quarterly severance payments to the beneficiary of $22,000 to $33,900 through February 2009. In connection with the exchange, the Company recorded forgiveness of debt of $405,652 for the difference between the estimated present value of future cash flows of the forfeited deferred compensation arrangement and the separation agreement during the period ended April 16, 2004. The Company’s liability at August 31, 2005 and 2004 was $380,356 and $473,489, respectively for the separation agreement. The deferred compensation arrangement between the Company and former stockholder of Westwood was forfeited without recompense. In

connection with this forfeiture, the Company recorded a contribution to capital of $1,507,181, net of income tax effect, during the period ended April 16, 2004.

7. Long-Term Debt

The Company’s long-term debt at August 31, consists of the following:


	2005			2004

5% junior subordinated notes payable to former stockholders of Westwood	$	313,695		$	313,695
8% junior subordinated notes payable to former stockholders of Westwood		627,389			941,083
8% junior subordinated note payable to Darr Westwood LLC, a related entity		1,102,794			—
Subordinate note payable to Darr Westwood
Subordinate note payable to Darr Westwood LLC, a related entity		750,000			750,000
Subordinate note payable to Four Kings Management, a related entity		714,000			750,000
GMAC		27,215			—

Total debt		3,535,093			2,754,778
Less current portion		(524,874	)		(349,694	)

Long-term debt, net of current portion	$	3,010,219		$	2,405,084

The 5% junior subordinated notes payable to the former stockholders of Westwood requires annual principal payments of $94,108 plus accrued interest in April 2006 and April 2007. Annual principal payments of $62,739 plus accrued interest are due in April 2008 and April 2009.

The 8% junior subordinated notes payable to the former stockholders of Westwood require principal payments of $156,847 plus accrued interest due semiannually commencing October 2004.

The 8% junior notes payable to Darr Westwood LLC is due in April 2009 with accrued interest payable annually in August of 2008 and annually thereafter. These notes were issued in exchange for 1,000 shares outstanding of series A redeemable preferred stock of Darr in conjunction with the August 5, 2005 merger.

The subordinated note payable to Darr Westwood LLC bears interest at a rate equal to the prime rate, as published in the Wall Street Journal, plus 4%, not to exceed 10%. Annual principal payments are due in April 2007 ($194,482), April 2008 ($323,859) and April 2009 ($231,659). Accrued interest is payable annually beginning in March 2007 through April 2009. The Company is obligated under this note to pay additional interest in the form of a fee based on achieving certain levels of revenue, as defined. The fee, if any, is limited to $30,000 per quarter and is payable in March 2008 and April 2009. Interest expense was $202,870 and $69,879 for the periods ended August 31, 2005 and August 31, 2004, respectively, all of which is accrued at the end of each respective period.

The subordinated note payable to Four Kings Management, LLC (Four Kings) bears interest at a rate equal to the prime rate, as published in the Wall Street Journal, plus 4%, not to exceed 10%. Interest is payable monthly. Monthly principal payments of $9,000 began in May 2005 and continue through March 2009. The remaining balance plus accrued interest is due in April 2009. The Company is obligated under this note to pay additional interest in the form of a fee based on achieving certain levels of revenue, as defined. The fee, if any, is limited to $30,000 per quarter and is payable quarterly. Officers of Westwood own membership interests in Four Kings. Interest expense was $202,203 and $69,879 for the periods ended August 31, 2005 and 2004, respectively, of which $32,198 and $27,217 is accrued at the end of the respective period.

Principal maturities of long-term debt at August 31, 2005 are as follows $524,874, $719,357, $503,670 and $1,787,192 for the respective years ended August 31, 2006 through August 31, 2009.

8. Income Taxes

Income tax expense (benefit) for the periods ended August 31, 2005, August 31, 2004, April 16, 2004, and August 31, 2003 consists of the following:


	Year Ended August 31, 2005			Successor Period		Predecessor Period		Year Ended August 31, 2003



Current provision:
Federal	$	499,144		$	56,208	$	454,620	$	381,382
State		136,284			16,637		134,522	$	116,882

		635,428			72,845		589,142	$	498,264
Deferred provision (benefit):
Federal		(141,485	)		39,029		45,019	$	(157,047	)
State		(41,393	)		11,549		13,284	$	(46,470	)

		(182,878	)		50,578		58,303	$	(203,517	)

	$	452,550		$	123,423	$	647,445	$	294,747

A reconciliation of the federal statutory provision to the provision for financial reporting purposes is as follows:


	Year Ended August 31, 2005			Successor Period		Predecessor Period		Year Ended August 31, 2003




Statutory federal tax Provision	$	435,043		$	83,539	$	521,316	$	259,127
State income taxes net of federal		69,696			14,823		92,503		46,441
Fair value adjustment of put options		(103,225	)		—		—		—
Other permanent difference		51,036			25,061		33,626		(10,821	)

Provision for income taxes	$	452,550		$	123,423	$	647,445	$	294,747

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at August 31, 2005 and 2004 are as follows:


Deferred Tax Assets/(Liabilities)	2005			2004

Differences between book and tax basis:
Deferred tax assets:
Trade receivables	$	249,595		$	90,074
Inventories		358,996			36,548
Accrued liabilities		80,726			45,609
Goodwill		74,998			—
Property and equipment		44,113			—
Accrued Liabilities		372,939			189,551

	$	1,181,367		$	411,784

Deferred tax liabilities:
Customer Relationships	$	(3,330,347	)	$	—
Property and equipment		—			(35,208	)
Deferred revenue		(85,785	)		—

	$	(3,416,134	)	$	(35,208	)

Net Deferred tax (liability) asset	$	(2,234,765	)	$	376,576

9. Retirement Plan

The Company maintains a defined contribution 401(k) pension plan. Contributions are based on up to 1% of each covered employees salary and totaled $50,448, $13,317, 19,333, and $22,989 for the periods ending August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003, respectively. The expense is included in selling, general and administrative expenses in the consolidated statement of operations.

The Company sponsors a 401(k) plan for all employees who are at least 20 years of age with at least 6 months of service. Eligible employees may contribute 2% to 15% of their annual compensation to the plan. The Company matches 25% of the first 6% of employee plan contributions and could contribute additional amounts at its discretion. Participants are vested 20% for each year of service and are fully vested after 5 years. The Company adopted the provisions of this plan in conjunction with the August 5, 2005 merger. There were contributions to this plan during the period ended August 31, 2005.

10. Stock Option Plan

The Company’s 1996 Stock Option Plan (amended in 1999) (the Plan) authorizes the granting of stock options to directors and eligible employees. The Company has reserved 1,000,000 shares of its common stock for issuance under the Plan at prices not less than 100% of the fair value of the Company’s common stock on the date of grant over a 4 year period (110% in the case of shareholders owning more than 10% of the Company’s common stock). Options under the plan typically terminate after 5 years and vest over a four year period. Options were issued by Old Emtec and no other options were issued by the Company. Options outstanding and exercisable at August 31, 2005 total 92,453 and their estimated weighted average value is $1.22.

11. Equity

In connection with the August 5, 2005 merger, the 500 aggregate shares of outstanding Darr class A and B common stock were exchanged for 9,528,110 shares of the Company’s common stock. The accompanying consolidated financial statements reflect the retroactive effects of the recapitalization.

Concurrent with the purchase of Westwood, Darr authorized 5,000 shares and issued 1,000 shares of series A redeemable preferred stock for $1,000,000. Series A redeemable preferred stock was senior to all securities outstanding. The holders of series A redeemable preferred stock were entitled to dividends at a rate of 8% per annum. Dividends were cumulative and were due and payable after April 2008. The series A redeemable preferred stock had no voting rights and was redeemable at the option of the Company commencing April 17, 2009 at 100% of its liquidation value. The liquidation value of series A redeemable preferred stock was equal to $1,000 plus accumulated but unpaid dividends. The outstanding shares of series A redeemable preferred stock were exchanged for notes payable in connection with the August 5, 2005 acquisition, total notes payable issued was $1,102,794, which represented the carrying value of preferred stock on that date.

12. Supplemental Cash Flow Information

Cash paid for interest and income taxes for the periods ended August 31, 2005, August 31, 2004, April 16, 2004, and August 31, 2003 were as follows:


	Interest		$355,474; $52,500; $28,000; $42,324

	Income Taxes		$417,056; $433,000; $345,000; $318,800

Supplemental noncash investing and financing activities for the periods ended August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003 were as follows:

Capital contribution: The deferred compensation arrangement between the Company and former stockholder of Westwood was forfeited without recompense. In connection with this forfeiture, the Company recorded a contribution to capital of $1,507,181, net of income tax effect $603,370, during the period ended April 16, 2004.

Notes Receivable Distributed: Note receivable distributed to the former stockholders in the amount of $399,587 during the period ended April 16, 2004.

Issuance of long-term debt: Issuance of long-term debt with a face value of $1,102,794 at an 8% annual rate to former preferred stockholders in full redemption of preferred stock previously issued by Darr during the period ended August 31, 2005. Issuance of $664,567 of notes payable to former stockholders during the period ended August 31, 2004, in connection with the April 16, 2004 acquisition of Westwood.

13. Related Party Transactions

During the period ended April 16, 2004, the Company held a note receivable from a company controlled by former stockholders of Westwood which was repaid through periodic payments.

The note receivable was distributed to the former stockholders of Westwood through a dividend on April 16, 2004. Interest income recorded on this note for the period ended April 16, 2004 totaled $21,483.

Beginning April 17, 2004, the Company is charged a monthly management fee of $29,166 by Darr Global Holdings, Inc. Darr Global Holdings, Inc is a management consulting company 100% owned by the majority stockholder of Darr Westwood LLC. For the periods ended August 31, 2005, and August 31, 2004, the Company recorded $350,000 and $116,664, respectively for this management fee in the accompanying consolidated statements of operations. At August 31, 2005, and August 31, 2004 $133,333 and $33,333 of the fee is included in accounts payable – related party.

One of the Company’s facilities is leased under a non-cancelable operating lease agreement with an entity that is owned by officers of Westwood. Rent expense recorded for the period ended August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003 totaled $180,000, $60,000, $155,333 and $38,833, respectively.

The Company is occupying approximately 21,000 square feet of office and warehouse space out of a total of approximately 70,000 square feet. This space is leased from GS&T Properties, LLC, in which officers of the Company are passive investors, owning approximately 20% equity interest. The lease term is for 5 years with monthly base rent of $12,500. During the period ended August 31, 2005, the Company recorded $14,190 in expense under this lease.

14. Accrued Expenses

Accrued expenses consisted of the following at August 31:


	2005		2004


Accrued payroll	$	1,042,864	$	263,952
Accrued commissions		511,858		334,551
Accrued state sales taxes		579,056		—
Accrued third party service fees		627,526		—
Industrial funding fee		216,126		—
Other accrued expenses		1,213,298		423,491

	$	4,190,728	$	1,021,994

15. Quarterly Financial Information – (Unaudited)


	Period ended August 31, 2005

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Fiscal 2005


Revenue	$	45,528,612	$	44,821,474	$	29,886,006	$	42,395,951	$	162,632,042

Gross Profit	$	3,753,505	$	3,376,432	$	3,069,503	$	3,845,160	$	14,44,600

Net Income (Loss)	$	472,111	$	225,824	$	62,726	$	66,324	$	826,985

Net Income (Loss) per share:
Basic and Diluted	$	0.05	$	0.02	$	0.01		0.01	$	0.08


	Predecessor and Successor periods ended April 16, 2004 and August 31, 2004

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Fiscal 2004


Revenues - Predecessor	$	54,525,132	$	21,989,226	$	11,715,361	$	—	$	88,229,719
Revenues - Successor	$	—	$	—	$	12,313,070	$	29,328,534	$	41,641,604

Gross Profit - Predecessor	$	4,834,128	$	2,619,462	$	1,179,761	$	—	$	8,633,351
Gross Profit- Successor	$	—	$	—	$	1,389,473	$	2,634,271	$	4,023,744

Net Income (Loss) - Predecessor	$	683,152	$	46,507	$	156,178	$	—	$	885,837
Net Income (Loss) - Successor	$	—	$	—	$	44,606	$	77,675	$	122,281

Combined net income	$	683,152	$	46,507	$	200,784	$	77,675	$	1,008,118

Net Income(Loss) per share:
Basic and Diluted	$	0.07	$	0.00	$	0.02		0.01	$	0.11

Earnings per share for the third quarter ended May 31, 2004 is calculated based on the combined net income from the predessor and successor periods for the quarter.

16. Accounts Receivable and Inventory Allowances

The following table provides information regarding accounts receivable and inventory valuation allowance activity for the periods ending August 31, 2005, August 31, 2004, April 16, 2004 and August 31, 2003:


	Receivable Allowance		Inventory Allowance


Balance, September 1, 2002	$	180,000	$	—

Charged to costs and expenses		20,000		—
Write-offs		—		—


Balance, August 31, 2003	$	200,000		—

Charged to costs and expenses		25,000		120,000
Write-offs		—		—


Balance, April 16, 2004	$	225,000	$	120,000
Charged to costs and expenses		—		—
Write-offs		—		—


Balance, August 31, 2004	$	225,000	$	120,000
Charged to costs and expenses		—		180,138
Write-offs		—		—

Balance, August 31, 2005	$	225,000	$	300,138

17. Subsequent Event

Pursuant to the August 5, 2005 merger agreement, the Company initiated a self tender offer on September 7, 2005 to repurchase up to 2,864,584 shares of its then issued and outstanding common stock having an aggregate purchase price of up to $5.5 million at a price of $1.92 per share. The tender offer closed on October 4, 2005. In the tender offer 4,984,185 shares were properly tendered and not withdrawn. Because the number of shares of common stock tendered exceeded the number of shares that the Company offered to purchase 57.473 percent of the shares that were tendered were repurchased by the Company. The Company funded the payment for the 2,864,584 shares of common stock validly tendered and accepted under the tender offer from borrowings of $5.5 million under its revolving credit facility made prior to August 31, 2005.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated:	July 7, 2006

		EMTEC, INC.

		By:	/s/ Dinesh R. Desai

			Dinesh R. Desai
			Chairman and Chief Executive Officer