U.S. Securities And Exchange Commission

Washington, D.C. 20549

Form 10-Q

(check one)

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~March~~December 31, 2010

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

THE EXCHANGE ACT OF 1934

Commission File Number 000-30486

Encompass Group Affiliates, Inc.

(Exact name of registrant as specified in its charter)

Florida

(State or other jurisdiction

of incorporation or organization)

65-0738251

(IRS Employer Identification No.)

~~420~~775 ~~Lexington~~Tipton ~~Avenue~~Industrial Drive, ~~New York~~Lawrenceville, NYGA ~~10170~~30046

(Address of principal executive offices)

(~~646~~800) 432-~~227-1600~~8542

(Issuer’s telephone number)

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

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

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

Large accelerated filer ¨	Accelerated filer ¨

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

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

Yes ¨ No x

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

Class		Outstanding as of June 1117, ~~2010~~2011
Common Stock, no par value per share		13,286,151,226 shares

Encompass Group Affiliates, Inc.

Index To Form 10-Q

		~~Page No.~~	Page No.
Part I - Financial Information (Dollars in thousands, except share data)
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets As Of March 31, 2010 (Unaudited) and June 30, 2009	2
	Condensed Consolidated Balance Sheets As Of December 31, 2010 (Unaudited) and June 30, 2010		2
	Condensed Consolidated Statements Of Operations (Unaudited) For The Three and Nine Months Ended March 31, 2010 and 2009	3
	Condensed Consolidated Statements Of Operations (Unaudited) For The Three And Six Months Ended December 31, 2010 and 2009		3
	Condensed Consolidated Statement Of Stockholders’ Equity (Unaudited) For The Nine Months Ended March 31, 2010	4
	Condensed Consolidated Statement Of Stockholders’ Deficiency (Unaudited) For The Six Months Ended December 31, 2010		4
	Condensed Consolidated Statements Of Cash Flows (Unaudited) For The Nine Months Ended March 31, 2010 and 2009	5
	Condensed Consolidated Statements Of Cash Flows (Unaudited) For The Six Months Ended December 31, 2010 and 2009		5
	Notes To Condensed Consolidated Financial Statements (Unaudited)	~~6-15~~	6-18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~16-24~~	18-28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24	28
Item 4.	Controls and Procedures	~~24-25~~	28
Part II - Other Information
Item 1.	Legal Proceedings	26	29
Item 1A.	Risk Factors	26	29-32
Item 2.	Unregistered Sales of Equity Securities And Use Of Proceeds	26	32
Item 3.	Defaults Upon Senior Securities	26	32
Item 4.	[Removed and Reserved]	26	32
Item 5.	Other Information	26	32
Item 6.	Exhibits	~~28-30~~	32

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

Unless otherwise noted herein, dollars are presented in thousands, except for per share amounts.

Cautionary Statement Regarding Forward-Looking Statements

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

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

Compliance with Smaller Reporting Company Disclosure Requirements

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

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

Part I - Financial Information

Item 1. – Financial Statements

	March 31, 2010			June 30, 2009
	December 31, 2010			June 30, 2010
	(Unaudited)			(Note 2)
ASSETS
Current Assets
Cash and cash equivalents	$	21,~~776~~463		$	53,~~536~~067
Restricted cash		—			1,509
Accounts receivable, net of allowance for doubtful accounts of $386 and $372, respectively		6,710			7,670
Accounts receivable, net of allowance for doubtful accounts of $304 and $441, respectively		11,639			9,677
Inventory		8,036			9,054
Inventory		11,397			12,267
Due from vendors		1,598			2,075
Due from vendors		2,483			2,487
Prepaid expenses and other current assets		2,449			2,919
Deferred tax asset		—			1,400
Total Current Assets		20,256			24,785
Prepaid expenses and other current assets		3,304			2,386
Property and equipment, net		1,226			1,287
Total Current Assets		31,599			35,262
Property and equipment, net		1,293			1,227
Other Assets
Intangible assets, net		1210,~~067~~886			1311,~~248~~673
Goodwill		208,~~627~~720			208,~~627~~720
Deferred tax asset		6,323			4,170
Other assets		468			526
Other assets		567			1,836
Total Other Assets		20,074			20,919
Total Other Assets		39,584			39,881
TOTAL ASSETS	$	41,556		$	46,991
TOTAL ASSETS	$	72,476		$	76,370
LIABILITIES, SERIES E PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIENCY)
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses	$	1312,~~780~~476		$	1112,~~766~~039
Escrow liability		—			1,509
Notes payable, current portion		38,050			38,121
Notes payable, current portion		541			1,596
Total Current Liabilities		50,526			50,160
Total Current Liabilities		14,321			14,871
Long Term-Liabilities		280			309
Long Term-Liabilities
TOTAL LIABILITIES		50,806			50,469
Notes payable, less current portion		36,752			37,056
Deferred tax liability		1,689			1,836
Other		321			306
Series E preferred stock		6,404			5,360
Total Long-Term Liabilities		45,166			44,558
TOTAL LIABILITIES		59,487			59,429
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
SERIES E PREFERRED STOCK		7,958			6,753
Preferred stock, $.01 par value, 25,000 authorized, 3,000 shares issued and outstanding for Series C, Series D and Series E at March 31, 2010 and June 30, 2009:
STOCKHOLDERS' DEFICIENCY
Series C convertible preferred stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (liquidation value of $8,281 and $7,713 at March 31, 2010 and June 30, 2009, respectively)		—			—
Preferred stock, $.01 par value, 25,000 authorized, 3,000 shares issued and outstanding for Series C, Series D and Series E:
Series D convertible preferred stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (liquidation value of $833 and $776 at March 31, 2010 and June 30, 2009, respectively)		—			—
Series C convertible preferred stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (liquidation value of $8,849 and $8,469 at December 31 and June 30, 2010, respectively)		—			—
Common stock, no par value, 230,000,000,000 shares authorized, 13,286,151,000 shares issued and outstanding at March 31, 2010 and June 30, 2009		36,152			36,152
Series D convertible preferred stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (liquidation value of $891 and $852 at December 31 and June 30, 2010, respectively)		—			—
Additional paid-in capital		10,674			9,160
Common stock, no par value, 230,000,000,000 shares authorized, 13,286,151,000 shares issued and outstanding at December 31 and June 30, 2010		36,152			36,152
Accumulated deficit		(33,837	)		(28,371	)
Additional paid-in capital		10,831			10,761
Total Stockholders' Equity		12,989			16,941
Accumulated deficit		(64,191	)		(57,144	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	72,476		$	76,370
Total Stockholders' Deficiency		(17,208	)		(10,231	)
TOTAL LIABILITIES, SERIES E PREFERRED STOCK AND STOCKHOLDERS’ DEFICIENCY	$	41,556		$	46,991

See accompanying notes to unaudited condensed consolidated financial statements

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

	For The Three Months Ended						For The Nine Months Ended
	For The Three Months Ended December 31,						For The Six Months Ended December 31,
	March 31,						March 31,
	2010			2009			2010			2009
NET SALES	$	2320,~~580~~475		$	2721,~~148~~418		$	6743,~~972~~277		$	8444,~~694~~392
COST OF SALES		1816,~~117~~388			1916,~~946~~270			5135,~~807~~454			6333,~~802~~690
GROSS PROFIT		54,~~463~~087			75,~~202~~148			167,~~165~~823			2010,~~892~~702
OPERATING EXPENSES
Depreciation and amortization		~~532~~490			~~582~~507			1,~~641~~012			1,~~538~~109
Selling, general and administrative expenses		4,~~645~~325			4,~~652~~414			139,~~663~~376			139,~~735~~018
Write off of deferred transaction costs		—			—			1,111			—
Write-off of deferred transaction costs		—			—			—			1,111
TOTAL OPERATING EXPENSES		54,~~177~~815			54,~~234~~921			1610,~~415~~388			1511,~~273~~238
Income (Loss) From Operations		~~286~~(728	)		~~1,968~~227			(~~250~~2,565	)		~~5,619~~(536	)
OTHER INCOME (EXPENSE)
Interest expense and other financial costs, net		(21,~~942~~705	)		(1,~~593~~659	)		(64,~~122~~488	)		(43,~~536~~180	)
Other income		9			64			6			142
Other income (expense)		5			(8	)		6			(3	)
TOTAL OTHER INCOME (EXPENSE), NET		(21,~~933~~700	)		(1,~~529~~667	)		(64,~~116~~482	)		(43,~~394~~183	)
INCOME (LOSS) BEFORE INCOME TAXES		(2,647	)		439			(6,366	)		1,225
LOSS BEFORE INCOME TAXES		(2,428	)		(1,440	)		(7,047	)		(3,719	)
Income tax benefit (provision)		—			(250	)		900			(620	)
Income tax benefit		—			—			—			900
NET INCOME (LOSS)		(2,647	)		189			(5,466	)		605
NET LOSS		(2,428	)		(1,440	)		(7,047	)		(2,819	)
Cumulative dividend on preferred stock		(209	)		(208	)		(625	)		(624	)
Cumulative dividends on preferred stock		(714	)		(208	)		(1,622	)		(416	)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(2,856	)	$	(19	)	$	(6,091	)	$	(19	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(3,142	)	$	(1,648	)	$	(8,669	)	$	(3,235	)
Basic net loss per common share	$	—		$	—		$	—		$	—
Basic and diluted net loss per common share	$	—		$	—		$	—		$	—
Basic weighted average number of common shares outstanding		13,286,151,000			16,019,485,000			13,286,151,000			15,882,198,000
Basic and diluted weighted average number of common shares outstanding		13,286,151,000			13,286,151,000			13,286,151,000			13,286,151,000
Diluted net loss per common share	$	—		$	—		$	—		$	—
Diluted weighted average number of common shares outstanding		13,286,151,000			16,019,485,00			13,286,151,000			15,882,198,000

See accompanying notes to unaudited condensed consolidated financial statements

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ ~~EQUITY~~DEFICIENCY

FOR THE NINE MONTHS ENDED MARCH 31, 2010

(UNAUDITED)

(Dollars in thousands)

	PREFERRED STOCK				COMMON STOCK				ADDITIONAL PAID-IN			ACCUMULATED
	SHARES		AMOUNT		SHARES		AMOUNT		CAPITAL			DEFICIT			TOTAL
BALANCE AT JULY 1, 2009		2,000	$	—		13,286,151,000	$	36,152	$	9,160		$	(28,371	)	$	16,941
BALANCE AT JULY 1, 2010		2,000	$	—		13,286,151,000	$	36,152	$	10,761		$	(57,144	)	$	( 10,231	)
Stock-based compensation		—		—		—		—		~~297~~34			—			~~297~~34
Warrants issued to lender										1,~~217~~241						1,~~217~~241
Net loss for the period		—		—		—		—		—			(5,466	)		(5,466	)
Series E preferred stock dividend		—		—		—		—		(1,205	)		—			(1,205	)
BALANCE AT MARCH 31, 2010		2,000	$	—		13,286,151,000	$	36,152	$	10,674		$	(33,837	)	$	12,989
Net loss for the period		—		—		—		—		—			(7,047	)		(7,047	)
BALANCE AT DECEMBER 31, 2010		2,000	$	—		13,286,151,000	$	36,152	$	10,831		$	(64,191	)	$	(17,208	)

See accompanying notes to unaudited condensed consolidated financial statements

ENCOMPASS GROUP AFFILIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollars in thousands)

	For the Nine Months Ended
	For the Six Months Ended
	March 31,
	December 31,
	2010			2009
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss)	$	(5,466	)	$	605
Net loss	$	(7,047	)	$	(2,819	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		1,~~739~~159			1,~~669~~174
Deferred income taxes		~~(900~~—	)		—(900	)
Allowance for doubtful accounts		(137	)		418
Provision for doubtful accounts		14			(123	)
Stock-based compensation		~~297~~34			~~280~~212
Preferred dividend classified as interest		~~1,044~~—			~~715~~702
Write off of deferred transaction costs		1,111			—
Write-off of deferred transaction costs		—			1,111
Financial costs in connection with warrant issuance		1,~~217~~241			—
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Restricted cash		~~1,509~~—			(1,~~112~~509	)
Accounts receivable		~~(1,825~~946	)		(31,~~339~~999	)
Inventory		~~851~~1,018			~~(5,978~~915	)
Due from vendors		4476			~~(670~~57	)
Prepaid expense and other assets		~~(918~~446	)		(~~710~~303	)
Increase (decrease) in liabilities:
Escrow liability		~~(1,509~~—	)		(1,~~112~~509	)
Accounts payable and accrued expenses		~~2,014~~435			4(2,~~510~~356	)
Net cash used in operating activities		(~~969~~1,278	)		(~~2,500~~331	)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of business, net of cash acquired		—			(8,296	)
Purchase of property and equipment		(190	)		(225	)
Acquisition costs		—			(865	)
Net cash used in investing activities		(190	)		(225	)
Purchase of property and equipment		(391	)		(771	)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net cash used in investing activities		(391	)		(9,932	)
Principal payments on notes payable		(136	)		(1,270	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net cash used in financing activities		(136	)		(1,270	)
Principal payments on notes payable		(1,400	)		(742	)
Net decrease in cash and cash equivalents		(1,604	)		(1,826	)
Proceeds from issuance of preferred stock		—			4,167
Cash and cash equivalents at beginning of period		3,067			5,536
Redemption of common stock		—			(308	)
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,463		$	3,710
Proceeds from issuance of senior and subordinated notes		—			13,000
Payment of debt and equity issuance costs		—			(272	)
Net cash provided by (used in) financing activities		(1,400	)		15,845
Net increase (decrease) in cash and cash equivalents		(2,760	)		3,413
Cash and cash equivalents at beginning of period		5,536			4,008
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,776		$	7,421

See accompanying notes to unaudited condensed consolidated financial statements

NOTE 1.

ORGANIZATION AND BUSINESS

~~Encompass Group~~Asset ~~Affiliates,~~Purchase Inc., a Florida corporation ("we," "us," "our," “Encompass” or the "Company"), specializes in the technology aftermarket service and supply chain known as reverse logistics. Our wholly-owned subsidiaries and principal operating units, Encompass Parts Distribution, Inc. ("Encompass Parts Distribution") and Encompass Service Solutions, Inc., operate businesses that provide parts procurement and distribution services, depot repair of consumer electronics, computers and peripheral equipment, de-manufacturing and reclamation services for flat panel display products, returns management services and anticipates providing end-of-life cycle services for all such products.Agreement

On May 13, 2011, the Company and its subsidiaries, Encompass Parts Distribution, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Tritronics, Inc. and Encompass Service Solutions, Inc., entered into an Asset Purchase Agreement with Sancompass, Inc. and Encompass Supply Chain Solutions, Inc., which are affiliated with the Company’s principal lenders. The Asset Purchase Agreement provides for the sale of substantially all of the Company’s assets and the assets of its subsidiaries to Encompass Supply Chain Solutions, Inc. (the “Buyer”) in exchange for the following consideration: (i) the assumption by the Buyer of substantially all of the Company’s liabilities and the liabilities of its subsidiaries (including all of the obligations in respect of the Company’s senior indebtedness owed to its principal lenders), subject to certain exclusions as set forth in the Asset Purchase Agreement, (ii) the transfer of the subordinated debt held by the Company’s principal lenders in one subsidiary for cancellation, (iii) a cash payment of $1,000; (iv) the issuance to the Company of a 15% common equity interest in Sancompass, Inc., the parent company of the Buyer, and (v) the assumption or discharge of certain of the Company’s other liabilities and expenses. If the transactions contemplated by the Asset Purchase Agreement are completed, the Company’s assets/liabilities would consist of cash remaining after payment of expenses of the transaction in excess of $150 and liabilities not assumed by the Buyer, as well as the common stock of Sancompass, which will rank junior to approximately $10,000 in senior secured indebtedness and approximately $32,000 in preferred equity. The Company does not anticipate a material amount of cash will remain after payment of expenses and non-assumed liabilities. The liquidation preference and accrued dividends of the Company’s preferred stock exceeds $11,000. Therefore, it is not expected that the sale will result in any distribution to common shareholders.

Organization

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

We are a leader in the consumer electronics segment of the reverse logistics industry providing original equipment manufacturers (“OEMs”), retailers, third party administrators (“TPAs”) and end-users with single-source, integrated life cycle reverse logistic professional management services for technology products. Our strategy addresses the overall market from both the end-user driven product support and repair industry and from the manufacturer-driven e-Waste recovery industry. While these two industries have different characteristics, they have significant back-end operational synergies. We are also focused on becoming a full-service provider of repair, refurbishment, parts distribution and end-of-life cycle services in other complementary industries. To that end and to augment our growth, we intend to continue to acquire additional businesses that either repair and refurbish equipment or distribute parts typically used in the repair and refurbishment process, as well as those that provide e-Waste recovery services. We presently provide single source, value-added life cycle professional management services for technology products to businesses and consumers in the North American market, and, as described further below, have expanded into Mexico and Canada.

On August 17, 2007, ~~Encompass~~and ~~Parts~~August ~~Distribution~~1, 2008, EPD completed the ~~acquisition~~acquisitions of Vance Baldwin, Inc. (“Vance Baldwin”) and Tritronics, anInc. ~~OEM~~(“Tritronics”), respectively, both of which were consumer electronics parts ~~distributor~~distributors that ~~has~~have been aleaders ~~leader~~ in the industry, Vance Baldwin for ~~over~~approximately ~~fifty~~50 years, Tritronics for approximately 35 years. ~~Vance~~EPD ~~Baldwin~~is ~~has~~a ~~operations~~distributor of replacement parts in ~~southern~~ ~~Florida,~~the ~~suburban~~U.S. ~~Atlanta~~for ~~and~~substantially ~~Las~~all ~~Vegas~~of the major OEM manufacturers, and distributes tens of thousands of different parts (i.e., SKU’s) ranging from consumer electronics, computers, printers, appliances and office supplies carried in stock or special ordered from the five million parts that it has access to for distribution. In addition, ~~Vance~~EPD ~~Baldwin~~ provides service aids and industrial products such as cable, tools, test equipment, cleaners and other installation equipment. As a key component of our rebranding initiative that began in fiscal 2009, Vance Baldwin and Tritronics, now operating on an integrated single technology platform, are known throughout the industry as EPD.

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

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

In addition, Encompass Parts Distribution has, since June 2004, owned Cyber-Test, Inc., a Delaware corporation ("Cyber-Test"). Cyber-Test, which is also known as Encompass Service Solutions, Inc. (“Encompass Service”), is a depot repair and refurbishment company that has been based in Longwood, Florida; after June 15, 2010, it will operate in one of the aforementioned suburban Atlanta facilities of Encompass Parts Distribution. Encompass Service operates as an independent service organization with the expertise to provide board-level repair of technical products to third-party warranty companies, OEMs, national retailers and national office equipment dealers. Service options include advance exchange, depot repair, call center support, parts supply and warranty management. Encompass Service's technical competency extends from office equipment and fax machines to printers, scanners, laptop computers, monitors, multi-function units and high-end consumer electronics such as GPS devices, PDAs and digital cameras and de-manufacturing and reclamation services for flat-panel display products. Services are delivered nationwide through proprietary systems that feature real-time electronic data interchange (“EDI”), flexible analysis tools and repair tracking. Given the interrelationship of distribution and service functions, the Company anticipates that service facilities will be eventually located within most EPD distribution centers.

In ~~connection~~ ~~with~~addition, ~~its~~EPD ~~strategy~~has, ofsince ~~expanding~~June ~~internationally~~2004, owned Cyber-Test, Inc., a Delaware corporation ("Cyber-Test"). Cyber-Test, which is also known as Encompass ~~Parts Distribution~~Service Solutions, Inc. (“Encompass Service”), is a depot repair and refurbishment company that has ~~formed~~been ~~subsidiaries~~based in ~~Mexico~~Longwood, ~~and~~Florida. Encompass ~~Canada~~Service operates as an independent service organization with the expertise to provide ~~parts procurement~~board-level repair of technical products to third-party warranty companies, OEMs, national retailers and ~~distribution~~national ~~services~~office equipment dealers. Service options include advance exchange, depot repair, ofcall ~~consumer~~center ~~electronics~~support, ~~computers~~ parts supply and ~~peripheral~~warranty management. Encompass Service's technical competency extends from office equipment and fax machines to printers, scanners, laptop computers, monitors, multi-function units and high-end consumer electronics such as GPS devices, PDAs and digital cameras and de-manufacturing and reclamation services ~~and~~ ~~returns~~for ~~management~~flat-panel ~~services~~display products. Services are delivered nationwide through proprietary systems that feature real-time electronic data interchange (“EDI”), flexible analysis tools and repair tracking. ~~Both~~In ~~operations~~fiscal ~~have~~2009, ~~hired employees~~given the interrelationship of distribution and service functions, ~~outfitted~~ESS opened a service center in one of our suburban Atlanta parts distribution warehouses to perform board repair and ~~commenced~~other ~~shipping~~reverse logistics functions enabling us to offer a full range of integrated services to customers; in the fourth quarter of fiscal 2010, all of ESS’ operations were relocated from its Orlando, Florida facility to the aforementioned Atlanta facility.

In connection with its strategy of expanding internationally, EPD has formed subsidiaries in Mexico and Canada to provide parts procurement and distribution services, depot repair of consumer electronics, computers and peripheral equipment, de-manufacturing and reclamation services and returns management services. Both operations have hired employees, outfitted warehouses and commenced shipping to customers, albeit on a limited basis.

Going Concern

As shown in the accompanying condensed financial statements, the Company incurred an operating loss of $2,565 and a net loss of $7,047 for the six months ended December 31, 2010, and an operating loss of $16,864 and a net loss of $28,774 for the fiscal year ended June 30, 2010. The Company's condensed consolidated balance sheet reflects a stockholders’ deficiency of $17,208 as of December 31, 2010. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements contemplate the ability to continue as such and do not include any adjustments that might result from this uncertainty. Management believes that the Company needs to restructure or refinance all or a portion of its existing indebtedness to continue its operations. The Company has undertaken or anticipates undertaking certain actions to increase sales revenue and reduce our selling, general and administrative expenses, principally by reducing (i) compensation expense through wage and appropriate headcount reductions and (ii) occupancy expenses through downsizing and/or closing facilities to reduce overhead. Management cannot be certain that restructuring or refinancing of its existing indebtedness will be available on acceptable terms, or at all. Management’s plans regarding those matters are described in Note 5 – Notes Payable and Note 12 – Subsequent Events.

NOTE 2.

SIGNIFICANT ACCOUNTING POLICIES

General

During the quarter ended September 30, 2009, the Company adopted The FASB Accounting Standards Codification (ASC or Codification) and the Hierarchy of Generally Accepted Accounting Principles (GAAP) which establishes the Codification as the sole source for authoritative accounting principles generally accepted in the United States of America (“U.S. GAAP”) and will supersede all accounting standards in U.S. GAAP, aside from those issued by the SEC. The Codification will include relevant portions of authoritative SEC content relating to matters within the basic financial statements, which are considered as sources of authoritative GAAP for SEC registrants. The adoption of the Codification did not have an impact on the Company’s results of operations, cash flows or financial position. Following the adoption of the Accounting Standards Codification (ASC), the Company’s notes to the consolidated financial statements will no longer make reference to Statement of Financial Accounting Standards (SFAS) or other U.S. GAAP pronouncements.

Interim Financial Statements

The condensed consolidated financial statements as of and for the three and ~~nine~~ six months ended ~~March~~December 31, 2010 and 2009 are unaudited but in the opinion of management include all adjustments consisting of normal accruals necessary for a fair presentation of financial position and the comparative results of operations and cash flows. Results of operations for interim periods are not necessarily indicative of those to be achieved or expected for the entire year. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2009~~ 2010. The June 30, ~~2009~~2010 balance sheet has been derived from the audited financial statements as of that date.

Principles of Consolidation

The consolidated financial statements include the Company and all of its wholly-owned subsidiaries. All significant inter-company transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements of the Company in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. The most significant estimates used are in determining values of intangible assets, sales return accruals, inventory obsolescence and tax assets and tax liabilities. Actual results may differ from the estimated results.

Effective June 30, 2010, the Company changed its method for estimating the value of its Philips inventory and the required reserve for excess and obsolete inventory. This change resulted in an immaterial additional increase in the reserve during the six months ended December 31, 2010.

Cash, Cash Equivalents and Restricted Cash

Restricted cash consisted of funds representing a portion of the purchase price that was held in escrow in connection with an acquisition to satisfy possible indemnification obligations. Such amount was paid on September 30, 2009.

Allowance for Doubtful Accounts

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

Inventory

Inventory ~~principally~~ ~~consists~~ of OEM parts purchased for resale, and ~~includes~~ returned parts that are repaired and also held for resale, ~~and~~consists ~~defective~~of ~~parts~~finished goods and ~~cores to be returned to vendors,~~ is valued at the lower of cost (average cost basis) or market, using the first-in, first-out (“FIFO”) method. Management performs monthly assessments to determine the existence of obsolete, ~~and~~ slow-moving inventory and records necessary provisions to establish reserves to reduce such inventory to net realizable value.

We restated our unaudited condensed consolidated financial statements as of and for the three months ended September 30, 2009 and as of and for the three and six months ended December 31, 2009 due to an overstatement of defective parts and returned core inventories. This overstatement was principally caused by two software system problems in the Company’s enterprise-wide IT system, which have been identified and corrected. The overstatement is not indicative of problems with our basic accounting methodology for cores.

Core Charges

The vendors of products distributed by the Company frequently add a "core charge" to the cost of individual OEM replacement parts that the Company distributes as a means of encouraging the return of certain replaced components, most frequently circuit boards. Such core charges can be significant in relation to the cost of individual replacement parts. These defective, replaced components are returned first to the Company and then to vendors ~~and are ultimately repaired and re-enter the distribution channel~~.

Core charges borne by the Company associated with goods in inventory are not included in inventory as cost, but are classified separately in prepaid expenses and other current assets in the consolidated balance sheets. Such core charges amounted to $21,~~249~~649 and $1,702 as of ~~March~~December 31, ~~2010~~ and June 30, ~~2009~~2010, respectively. Cores physically returned by customers to the Company awaiting return to vendors are included in inventory.

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

The Company records the appropriate ~~assets~~asset and the appropriate liability for all core charges that it may be responsible for at any point in time. Such amounts represent significant assets and liabilities. The Company has no control over core pricing. As core charges increase, our cash flow can be adversely impacted to the extent we may have to pay increased charges in advance of customer payment for the core charge following the sale of the related part or the return of the actual core from the customer.

Property and Equipment

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

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

Maintenance and repairs are charged to expense when incurred.

Goodwill and Intangible Assets

Management reviews and evaluates goodwill, which represents a significant asset, for impairment annually at each fiscal year end and at interim periods if events indicate that the carrying value may be impaired. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. Management believes that its impairment tests have utilized reasonable assumptions which have resulted in the determination that the fair value of the reporting units was substantially in excess of carrying value; however, there can be no assurance that circumstances could not change in the future and result in an impairment charge. Effective July 1, 2009, the carrying value of goodwill is evaluated principally in relation to the operating performance of the Company’s one reporting unit (two units - distribution and service - prior to this date).

The Company’s market capitalization has been deemed to be a poor indicator of fair value because, among other reasons, the Company’s common stock is thinly traded due to concentrated ownership, a lack of institutional awareness of ~~and~~an interest in ownership of the Company’s common stock since it is a “penny stock,” and a lack of research coverage. ~~The~~Because of this the Company’s common stock is trading ~~in the~~lower ~~same~~than ~~general price range as~~ it did prior to the Company’s closing of (i) a recapitalization and major acquisition in August 2007 and (ii) a second major acquisition in August 2008.

8Accordingly, the carrying value of goodwill is evaluated principally in relation to the operating performance, specifically historical or projected adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as appropriate in the circumstances. The key risk factor that determines whether the carrying value of goodwill had been impaired as of June 30, 2010 was a significant decline in Company’s projected EBITDA in future periods based on then current business conditions. The EBITDA multiple valuations used were based on six times a projected EBITDA estimate. Management based its projected EBITDA estimate on annualized EBITDA calculated after giving effect to certain cost reduction initiates that have been implemented or are underway. This reasonableness of the EBITDA multiple is supported by recent M&A activity information.

Accordingly, the carrying value of goodwill is evaluated principally in relation to the operating performance, specifically historical or projected adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as appropriate in the circumstances. The key risk factor that determines whether the carrying value of goodwill has been impaired is a significant decline in actual EBITDA realized and a significant decline in Company’s projected EBITDA in future periods based on then current business conditions. Management bases EBITDA estimates for future years on historical adjusted EBITDA as a percentage of revenue. This reasonableness of the EBITDA multiple is supported by recent M&A activity information.

Management reviews and evaluates purchased intangibles with finite lives, which represents a significant asset, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. These events or circumstances could include the loss of one or more customers or a material portion of one or more customer’s business or the sale or disposition of a significant portion of the business or other factors. Some of the significant unobservable inputs that would be utilized include revised projections of revenue, EBITDA and debt free cash flow, and assumptions as to discount rate and period.

Such intangible assets with finite lives are amortized based on the estimated period in which the economic benefits are consumed. Management believes that its amortization policy has been and will continue to be appropriate unless facts and circumstances change. In the event of a change in facts and circumstances, such as a major attrition in customers, management may alter the method and remaining period of amortization, and amortization expense could change, or an impairment charge may be incurred.

Deferred Finance Costs

Costs associated with the Company’s debt obligations are capitalized and amortized using the interest method over the life of the related debt obligation. As of December 31, 2010 and June 30, 2010, $682 of such costs were capitalized, or $213 and $269, respectively, net of amortization.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the relatively short period to maturity for these instruments. The fair value of the Company’s long-term debt is estimated based on the rates currently available to the Company for debt of the same remaining maturities. The carrying amounts of the Company’s long-term debt obligations approximate its fair value.

Revenue Recognition

~~Revenue and related provisions for returns are significant to the Company’s results of operations.~~ The Company recognizes revenue upon delivery of goods, including new parts and refurbished computer equipment and related products, to a common carrier for delivery to the customer, at which point title passes and collectability is reasonably assured, at a sales price that is fixed and determinable. Revenue for the repair of customer-owned equipment is recognized upon completion of the repair. Revenue represents amounts billed electronically based on established price lists.

Shipping and Handling Costs

The Company ~~classified~~includes shipping costs, associated with outbound freight, asin cost of sales. Total shipping costs included in cost of sales for the ~~nine and~~ three months ended ~~March~~December 31, 2010 and 2009 were $41,~~132~~301 and $1,~~335~~309, respectively,. Total ~~and for~~shipping ~~the~~costs ~~nine~~included ~~and~~in ~~three~~cost of sales for the six months ended ~~March~~December 31, 2010 and 2009 were $52,~~860~~509 and $12,~~930~~797, respectively.

Loss Per Share

Basic net loss per share is computed by dividing loss ~~available~~attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share is based upon the addition of the effect of common stock equivalents (convertible preferred stock and convertible notes payable, potentially dilutive stock options and warrants) to the denominator of the basic net ~~loss~~income per share calculation using the treasury ~~stock~~ ~~method for~~ stock ~~options and warrants and the “if converted”~~ method ~~for convertible securities~~, if their effect is dilutive.

For the three and ~~nine~~six months ended ~~March~~December 31, 2010 and 2009, potentially dilutive securities that could have been issued upon conversion of convertible preferred stock and convertible notes were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. Potentially dilutive securities for each of the three and ~~nine~~six months ended ~~March~~December 31, 2010 and 2009 totaled ~~123~~ 115,~~961~~614,~~379~~655,000 ~~shares,~~ and ~~for the three and nine months ended March 31~~110, ~~2009~~511, ~~totaled 121~~314,~~434,899,~~000 shares, respectively.

At December 31, 2010 and 2009, potentially dilutive securities attributable to stock option grants totalled 2,977,587,000 and 10,923,525,000 shares, respectively. Such options to purchase shares of common stock at $.00075 were not include in the computation of diluted EPS for the years then ended because the options’ exercise price was greater than the average market price of the common shares.

Concentration of Credit Risk

Sales to two customers in each period accounted for approximately 3020.02% and 117.6% of net sales for the three months ended ~~March~~December 31, 2010, and approximately 149.0% and 9 8.91% of net sales for the three months ended ~~March~~December 31, 2009. Sales to two customers in each period accounted for approximately 1622.70% and 128.17% of net sales for the ~~nine~~six months ended ~~March~~December 31, 2010, and approximately 129.50% and 9.8.1% of net sales for the ~~nine~~three months ended ~~March~~ December 31, 2009.

9The Company has certain financial instruments that potentially subject it to significant concentrations of credit risk which consist principally of cash and cash equivalents and accounts receivable. Certain deposits held with banks may exceed the amount of insurance provided on such deposits. At December 31, 2010, the amount of deposits in excess of insurance provided was $1,304. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

The Company has certain financial instruments that potentially subject it to significant concentrations of credit risk which consist principally of cash and cash equivalents and accounts receivable. Certain deposits held with banks may exceed the amount of insurance provided on such deposits. At March 31, 2010, the amount of deposits in excess of insurance provided was $0. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Cash, Cash Equivalents and Restricted Cash

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

Restricted cash consists of funds representing a portion of the purchase price that is held in escrow in connection with the acquisitions described in Note 3 to satisfy possible indemnification obligations. Funds held in escrow since August 2, 2008 in connection with such acquisition were paid on September 30, 2009.

Stock Based Compensation

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

Deferred Finance Costs

Costs associated with the Company’s debt obligations are capitalized and amortized using the interest method over the life of the related debt obligation. As of March 31, 2010 and June 30, 2009, $682 of such costs were capitalized, or $298 and $433, respectively, net of amortization.

Classification of Preferred Stock

Under U.S. GAAP preferred stock must be classified as a liability rather than as a component of stockholders’ equity if there is an unconditional obligation requiring the issuer to redeem it at a specified or determinable date (or dates) or upon the occurrence of an event that is certain to occur. The Series E Certificate of Designation provides for the redemption of all outstanding shares of Series E Preferred Stock upon, among other events, any refinancing or repayment in full, redemption or other discharge or satisfaction in full of the Senior Notes and Series A and Series B Senior Subordinated Notes (Note 6). As of March 31, 2010 and June 30, 2009, the Company was required to classify its Series E Preferred Stock as a liability rather than as a component of stockholders’ equity for this reason.

Income Taxes

Management periodically assesses the Company’s ability to realize its deferred tax asset, which is a significant asset, by considering whether it is more likely than not that some portion or all of the deferred tax asset will be realized. Several factors are evaluated, including the amount and timing of the scheduled expiration of the Company’s net operating loss carry forwards (NOLs). Estimates of future taxable income over the periods for which the NOLs are applicable require assumptions as to revenue and expenses, and differences between projected taxable income and book income. Projected taxable income is expected to exceed projected book income as the dividend on Series E Preferred Stock classified as interest expense under U.S. GAAP is likely not deductible for tax purposes. Projected taxable income in any year may exceed the Company’s annual limitation under Internal Revenue Code Section 382, regarding the amount of loss carryforward that can be utilized to offset such taxable income. Amounts below the annual limitation may be carried forward to future years. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Although management believes the expectations reflected in these estimates are based upon reasonable assumptions, there can be no assurance that actual results will not differ materially from these expectations.

AsStock-Based part of the process of preparing our consolidated financial statements, we are also required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our accompanying consolidated balance sheet. We must assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Correspondingly, we reduce the valuation allowance when our analysis of future taxable income indicates that it is more likely than not that the loss carryforwards will be utilized to offset taxable income. Such reductions were recorded in fiscal 2008, 2009 and in the current fiscal year based on the Company’s projections of future taxable income. We would increase the valuation allowance when facts and circumstances reflected in our analysis of future taxable income change and indicate that there is a low probability of utilization of loss carryforwards to offset taxable income. We believe that our estimate of a valuation allowance against the deferred tax asset is appropriate based on current facts and circumstances.Compensation

The fair value of stock option grants is calculated using the Black-Scholes Option Pricing Model. The exercise price of stock options granted is equal to or greater than fair market value at the date of grant as determined by the closing price per share. The Company recognizes compensation expense for the entire award over the period of vesting. Performance based compensation is recorded when the underlying criteria are considered probable of being met.

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

Income Taxes

The Company follows authoritative guidance for accounting for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance has been used to partially offset the recognition of any deferred tax assets arising from net operating loss carryforwards due to the uncertainty of future realization. The use of any tax loss carryforward benefits may also be limited as a result of changes in control of Company.

Management periodically assesses the Company’s ability to realize its deferred tax asset, which is a significant asset, by considering whether it is more likely than not that some portion or all of the deferred tax asset will be realized. Several factors are evaluated, including the amount and timing of the scheduled expiration of the Company’s net operating loss carry forwards (“NOLs”). Estimates of future taxable income over the periods for which the NOLs are applicable require assumptions as to revenue and expenses, and differences between projected taxable income and book income. Projected taxable income is expected to exceed projected book income as the dividend on Series E Preferred Stock classified as interest expense under U.S. GAAP is likely not deductible for tax purposes. Projected taxable income in any year may exceed the Company’s annual limitation under Internal Revenue Code Section 382, regarding the amount of loss carryforward that can be utilized to offset such taxable income. Amounts below the annual limitation may be carried forward to future years. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Although management believes the expectations reflected in these estimates are based upon reasonable assumptions, there can be no assurance that actual results will not differ materially from these expectations.

As part of the process of preparing our consolidated financial statements, we are also required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our accompanying consolidated balance sheet. We must assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Correspondingly, we reduce the valuation allowance when our analysis of future taxable income indicates that it is more likely than not that the loss carryforwards will be utilized to offset taxable income. Such a reduction was recorded in fiscal 2009 based on the Company’s projections of future taxable income at that time. We increase the valuation allowance when facts and circumstances reflected in our analysis of future taxable income change and indicate that there is a low probability of utilization of loss carryforwards to offset taxable income. We believe that our estimate of a valuation allowance against the deferred tax asset is appropriate based on current facts and circumstances.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. The Company defines the federal jurisdiction as well as various multi-state jurisdictions as “major” jurisdictions. The Company is currently undergoing an examination of its Federal returns for fiscal 2003-2009. All prior years’ federal returns are closed, except with respect to NOLs generated in prior years. The Company has not undergone an examination of any of its state returns for any fiscal years.

Reclassifications

Certain amounts in the fiscal 2010 condensed consolidated financial statements have been reclassified to conform to the fiscal 2011 presentation.

Recent Accounting Pronouncements

~~During~~ In December 2007, the ~~fiscal~~Financial ~~first~~Accounting ~~quarter~~Standards ofBoard ~~2010~~(“FASB”) issued revised authoritative guidance for business combinations, inwhich ~~accordance~~establishes ~~with~~the ~~U.S.~~principles ~~GAAP~~and requirements for how an acquirer recognizes the assets acquired, the ~~Company adopted~~liabilities assumed, and any non-controlling interest in the ~~standards~~acquiree onat ~~business~~the ~~combinations~~acquisition ~~whereby~~date, ~~typical~~measured at their fair values as of that date with limited exceptions. The guidance requires acquisition-related transaction costs such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs ~~incurred in business combinations must~~ be expensed as incurred and ~~can~~ no longer be effectively accounted for as part of excess purchase price and intangible assets. The ~~requirement to~~provisions ~~expense~~as ~~acquisition-related~~revised ~~transaction~~were ~~costs~~effective asfor ~~incurred~~transactions ~~has~~within ~~had~~the aannual ~~material impact~~reporting onperiod ~~results~~beginning ofafter ~~operations~~December in15, ~~the~~2008 ~~nine~~and ~~months~~will ~~ended~~be ~~March~~applied 31to any business combinations entered into thereafter. At June 30, ~~2010~~2009, capitalized transaction costs associated with potential acquisitions in process and ~~will~~ ~~continue~~included in other non-current assets amounted to do$1,111, sowhich inamount was written off during the ~~event~~three ~~such~~month ~~costs~~period ~~are~~ended ~~incurred~~September in30, ~~future periods~~2009.

~~Management does~~In ~~not~~April ~~believe~~2009, ~~that~~the ~~any~~FASB ~~other~~issued ~~recently~~authoritative ~~issued,~~guidance ~~but~~for ~~not~~business ~~yet~~combinations ~~effective~~for the initial recognition and measurement, subsequent measurement and accounting, ~~standards~~and ifdisclosures for assets and liabilities arising from contingencies in business combinations. Management is currently ~~adopted~~evaluating ~~would~~the ~~have~~impact aof ~~material~~this ~~effect~~new standard on future acquisitions, if any, but the ~~accompanying~~ ~~condensed~~nature ~~consolidated~~and ~~financial~~magnitude ~~statements~~of the specific effects will depend upon the nature, term and size of any acquired contingencies.

~~NOTE~~In 3June 2009, the FASB Accounting Standards Codification (“Codification”) was issued to become the source of authoritative U.S. ~~ACQUISITION~~GAAP to be applied by nongovernmental entities and supersede all then-existing non-Securities and Exchange Commission (“SEC”) accounting and reporting standards. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The Codification was effective for our fiscal quarter beginning July 1, 2009. The adoption did not impact the Company's condensed consolidated financial statements.

OnIn ~~August 1,~~February ~~2008~~2010, ~~the~~an ~~Company~~update ~~acquired~~to ~~all~~accounting guidance was issued which eliminates the disclosure of the ~~outstanding~~date ~~equity~~through ~~interests~~which ~~in Tritronics,~~subsequent ~~Inc~~events have been evaluated. This ~~(“Tritronics”),~~update was effective immediately. The adoption of this amendment did not have a ~~privately-held~~significant ~~Maryland~~effect Con ~~corporation~~our ~~engaged in~~financial ~~the~~statements. We ~~distribution~~evaluated ofour ~~replacement~~December ~~parts~~31, ~~and~~2010 ~~accessories~~financial statements for ~~consumer electronics~~subsequent ~~products~~events through the date the financial statements were filed with the SEC. ~~The~~There ~~results~~were ofsubsequent ~~operations~~events ~~include~~that ~~Tritronics since~~are disclosed in Note 12 - Subsequent Events to the ~~acquisition~~accompanying ~~date~~condensed consolidated financial statements.

~~The~~From ~~following~~time ~~unaudited~~to ~~pro~~time, ~~forma financial~~new ~~information~~accounting ~~presents~~pronouncements ~~the~~are ~~results~~issued ofby ~~operations~~FASB ofthat ~~the~~are ~~Company~~adopted asby if the ~~Tritronics~~Company ~~acquisition~~as ~~had~~of ~~occurred at~~ the ~~beginning~~specified ofeffective ~~fiscal 2009~~date. ~~Adjustments~~ toIf ~~the~~not ~~consolidated~~discussed, ~~financial~~management ~~information~~believes ~~related to the acquisition~~ that ~~affect~~ the ~~results~~impact of ~~operations~~recently ~~include the interest expense associated with the debt~~ issued ~~in conjunction with the acquisition~~standards, ~~amortization~~ ofwhich ~~the~~are ~~fair~~not ~~value~~yet ~~of intangible assets and deferred debt financing costs and stock-based compensation. This pro forma information for the nine months ended March 31~~effective, ~~2009~~will ~~does~~ not ~~purport~~have toa bematerial ~~indicative~~impact ofon ~~what would have occurred had~~ the ~~acquisition~~Company’s ~~occurred~~financial asstatements ofupon ~~July 1, 2008 or of results of operations that may occur in the future~~adoption.

Net sales	$	86,584
Operating income		5,758
Net loss available to common stockholders		(62	)
Basic and diluted net loss per common share	$	0.00

NOTE 3.

INVENTORY

NOTE 4. INVENTORY

Inventory consisted of the following:

	March 31, 2010		June 30, 2009
	December 31, 2010		June 30, 2010
Parts	$	94,~~102~~710	$	96,~~656~~650
Cores and defective parts to be returned to vendors		2,295		2,611
Cores and defective parts		3,326		2,404
Total inventory	$	118,~~397~~036	$	129,~~267~~054

11NOTE 4. INTANGIBLE ASSETS

~~NOTE~~Intangible 5.assets ~~GOODWILL~~consisted ~~AND~~of ~~INTANGIBLE~~the ~~ASSETS~~following:

Goodwill and intangible assets consisted of the following:

	December 31, 2010			June 30, 2010
Intangible assets, primarily consisting of customer lists	$	15,750		$	15,750
Less accumulated amortization		(4,864	)		(4,077	)
Total net intangible assets	$	10,886		$	11,673

	March 31, 2010			June 30, 2009
Goodwill	$	20,627		$	20,627
Intangible assets, primarily consisting of customer lists	$	15,750		$	15,750
Less accumulated amortization		(3,683	)		(2,502	)
Total net intangible assets	$	12,067		$	13,248

Amortization expense for intangible assets for each of the three months ended December 31, 2010 and 2009 amounted to $393. Amortization expense for intangible assets for each of the six months ended December 31, 2010 and 2009 amounted to $787.

Amortization expense for intangible assets amounted to $394 and $419 for the three months ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010 and 2009 this expense was $1,181 and $1,138, respectively.

NOTE 6. SHORT-TERM AND LONG-TERM DEBT

Short-term and long-term debt obligations consisted of the following at March 31, 2010 and June 30, 2009:

	March 31,			June 30,
	2010			2009
Senior notes, net	$	10,040		$	11,390
Series A and Series B senior subordinated notes, net		24,702			24,636
Convertible notes		1,206			1,206
Other notes payable		1,035			1,110
Note payable to officer		310			310
Total notes payable		37,293			38,652
Less: current portion		(541	)		(1,596	)
Long-term notes, less current portion	$	36,752		$	37,056

The Company and its principal lender are engaged in discussions to amend certain provisions of the Amended and Restated Note Purchase Agreement dated as of August 1, 2008, to, among others things, revise financial covenants, allow the Company to elect to defer and capitalize an aggregate $1.25 million of interest on the Subordinated Notes with respect to the interest payments otherwise payable for the quarters ended March 31, 2010 and June 30, 2010. An increase in the amount of quarterly principal payments on the senior debt would take effect at some point in the future pursuant to such discussions.

The Company and its principal shareholder are engaged in discussions to provide additional working capital through the purchase of non-convertible preferred stock in the amount of $1,250 on terms substantially similar to those of the Series E Preferred Stock.

The Company did not meet certain financial covenant tests at March 31, 2010, each of which was waived by its principal lender, including any prior quarters, if applicable. The Company did not make the interest payment on the senior subordinated debt due on March 31, 2010. The lender also waived such default.

NOTE 75. ~~EQUITY~~NOTES PAYABLE

~~Dividends in~~Notes ~~the~~Payable ~~amount~~consisted of ~~$342 and $277 were earned by holders of Series E Preferred Stock but not paid in~~ the ~~three~~following ~~month~~at ~~periods~~December ~~ended March~~ 31, 2010 and ~~2009, respectively. Dividends~~June ~~in the amount of $1~~30,~~022~~ ~~and $715 were earned by holders of Series E Preferred Stock but not paid in the nine month periods ended March 31,~~ 2010 and 2009, respectively. Such dividends are included in interest expense since the issue is classified as a liability rather than equity, with the related liability for dividends included in the Series E Preferred Stock Stock balance in long-term liabilities in the condensed consolidated balance sheet. In connection with the discussions with the Company’s principal lender described above (see Note 6), the Company and its principal stockholder are seeking consent from the Company’s principal lender for (i) the issuance of non-convertible preferred stock in the amount of $1,250 with provisions similar to that of the Series E Preferred Stock as amended and (ii) an amendment to the Certificate of Designation for the Series E Preferred Stock to eliminate a provision that has heretofore mandated that it be classified as a liability.:

As a result of the Company failing to meet a certain EBITDA leverage ratio covenant test as of February 1, 2010, the Company’s principal lender earned and was granted a warrant, with a one year term, to purchase 2,526,480,000 shares of the Company’s common stock for no additional or nominal consideration. In connection therewith, the Company recorded a provision in the amount of $1,217 in the three months ended March 31, 2010, which provision is included in interest expense and other financial costs, net.

	December 31, 2010			June 30, 2010
Note payable to officer	$	310		$	310
Senior notes, net		9,819			9,925
Series A and Series B senior subordinated notes, net		25,707			25,663
Convertible notes		1,206			1,206
Other notes payable		1,008			1,017
Total notes payable		38,050			38,121
Less: current portion		(38,050	)		(38,121	)
Notes, less current portion	$	—		$	—

~~NOTE~~ Classification 8.of ~~COMMITMENTS~~Notes ~~AND~~Payable ~~CONTINGENCIES~~as Current

All notes payable have been classified as current liabilities at June 30 and December 31, 2010 as payment has been accelerated due to the matters described in the Proposed Transaction with Lenders section below, and due to the possible satisfaction of all or part of these notes possibly occurring prior to June 30, 2011.

Proposed Transaction with Lenders

The Company did not pay quarterly interest on its subordinated notes due on March 31, 2010 and June 30, 2010 on a timely basis due to cash constraints. In connection with negotiations with our principal stockholder and our principal lenders, we paid the principal and interest on the senior notes, and the negotiated cash portions of interest payments due on our senior subordinated notes for March 31 and June 30, 2010, in June and October 2010, respectively, but have not yet paid the cash portions of quarterly interest on our senior and subordinated notes, and quarterly principal payment on our senior notes, due on September 30, 2010 and December 31, 2010. Further, the Company has not met certain financial covenant tests at March 31 (for which compliance was waived), June 30, September 30 and December 31, 2010. Our lender has elected, pursuant to the terms of our existing debt agreement, to increase the interest rate on our senior and subordinated notes by 2% per annum over the applicable interest rate, effective as of December 31, 2009. See Note 12 – Subsequent Events for a description of the proposed transaction contemplated by the Asset Purchase Agreement entered into by and among the Company, its subsidiaries, and Sancompass, Inc. and Encompass Supply Chain Solutions, Inc., two newly formed entities affiliated with Sankaty Advisors, LLC and the Company’s principal lenders, on May 13, 2011.

NOTE 6.

PREFERRED AND COMMON STOCK

Dividends in the amount of $505 and $342 were earned by holders of Series E Preferred Stock but not paid in the three months ended December 31, 2010 and 2009, respectively. Dividends in the amount of $1,205 and $702 were earned by holders of Series E Preferred Stock but not paid in the six months ended December 31, 2010 and 2009, respectively. Such dividend for the three and months ended December 31, 2009 is included in interest expense since, prior to June 30, 2010, the issue was classified as a liability rather than equity, with the related liability for dividends included in the Series E Preferred Stock balance in long-term liabilities in the condensed consolidated balance sheet.

As a result of the Company failing to meet a certain EBITDA leverage ratio covenant tests as of August 1, 2010, the Company’s principal lender earned warrants with a one year term to purchase 2,577,001,000 shares of the Company’s common stock for no additional or nominal consideration. In connection therewith, the Company recorded a provision in the amount of $1,241 in the six month period ended December 31, 2010, which provision is included in interest expense and other financial costs, net.

On May 13, 2011, the Company, its subsidiaries, and Sancompass, Inc. and Encompass Supply Chain Solutions, Inc., two newly formed entities affiliated with Sankaty Advisors, LLC and the Company’s principal lenders, entered into an Asset Purchase Agreement pursuant to which Encompass Supply Chain Solutions will acquire substantially all of the Company’s and its subsidiaries’ assets (other than any assets of certain inactive subsidiaries) and will assume the Company’s senior debt held by its principal lenders. The Asset Purchase Agreement further contemplates that the lenders will surrender their shares of the Company’s preferred stock, as well as warrants to acquire shares of the Company's common stock at a nominal price. Even if the transactions contemplated by the Asset Purchase Agreement are completed, the liquidation preference and accrued dividends of the Company’s preferred stock that will remain outstanding will exceed approximately $16,000. See the description of the proposed transaction contemplated by the Asset Purchase Agreement in Note 12 – Subsequent Events.

NOTE 7.

COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company has been, and may in the future be involved as, a party to various legal proceedings, which are incidental to the ordinary course of its business. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. In the opinion of management, as of ~~March~~ December 31, 2010, there were no threatened or pending legal matters that would have a material impact on the Company's consolidated results of operations, financial position or cash flows, except that which is disclosed in Note 12 – Subsequent Events.

Lease Obligations

~~In September~~As ~~2009~~of ~~in connection with its expansion into the Canadian market, the Company entered into a new lease for a 30,200 square foot office/warehouse facility for a term expiring on~~ December 31, ~~2012 and rent commencing at approximately $120 per annum. In the same month in connection with its expansion into the Mexican market~~2010, ~~the~~future ~~Company~~minimum ~~entered~~aggregate ~~into a new~~ lease ~~for~~ apayments ~~23,700 square foot office/warehouse facility~~ for athe ~~term~~next ~~expiring~~five ~~on October~~fiscal ~~15,~~years ~~2013~~ and ~~rent~~in ~~commencing~~the ataggregate are approximately ~~$73~~as ~~per annum.~~follows:

As of March 31, 2010, future minimum aggregate lease payments for the next five fiscal years and in the aggregate are approximately as follows:

For the year ending	June 30, 2011	$	738
	June 30, 2012		1,036
	June 30, 2013		709
	June 30, 2014		588
	June 30, 2015		235
		$	3,306

For the year ending	June 30, 2010	$	470
	June 30, 2011		1,587
	June 30, 2012		1,147
	June 30, 2013		920
	June 30, 2014		560
		$	4,684

Advisory Agreement

~~Employment Agreements~~Pursuant to an advisory services agreement between the Company and Phoenix Management Services, Inc. (“Phoenix”) effective August 4, 2010, Phoenix, in an initial phase, reviewed management’s identified cost savings, determined if there are other material cost reduction opportunities available to the Company and provided an evaluation of the overall operations organization structure and process flow. A second, or implementation, phase is in process. In connection therewith, a principal of Phoenix Management Services was appointed interim Chief Executive Officer of the Company for an indefinite period.

~~The Company~~Circuit ~~and~~City ~~certain~~Bankruptcy executive officers entered into an amendment, effective August 17, 2009, to each officers’ employment agreement dated August 17, 2007, which, among other items, replaced a one-year option period and provided for additional two-year employment periods and a one-year option at the Company’s election. Under the terms of the amendments, the Company is obligated to pay aggregate base salaries of $815 to the executive officers in each of the first and second years and upon termination of an executive officer’s employment without cause, the Company will pay the executive twelve months of severance. The Company entered into an agreement with the aforementioned executive officers, as well as other certain members of management, whereby, effective May 1, 2010, base salaries were reduced by 12.5% until the Company achieves defined earnings targets, but no earlier than November 1, 2010. Such deferred amounts would be paid contingently at later dates only upon the attainment of additional defined earnings targets.Proceedings

13In November 2010, Tritronics and Vance Baldwin were named as defendants in adversary proceedings in a bankruptcy proceeding relating to Circuit City Stores, Inc. in the United States Bankruptcy Court for the Eastern District of Virginia (Alfred Siegel, as Liquidating Trustee of the Circuit City Stores, Inc. Liquidating Trust v. Tritronics, Inc., Bankruptcy Case No. 08-35653-KRH, Adversary No. 10-03753-KRH and Alfred Siegel, as Liquidating Trustee of the Circuit City Stores, Inc. Liquidating Trust v. Vance Baldwin, Inc., Bankruptcy Case No. 08-35653-KRH, Adversary No. 10-03257-KRH). The Company considers the plaintiff trustee’s allegations against Tritronics immaterial. The plaintiff trustee is seeking (i) to reduce Vance Baldwin’s unsecured claim against Circuit City from $298 to $80 and its Section 503(b)( 9) unsecured, priority claim from $632 to $352, (ii) to preclude Vance Baldwin’s unliquidated claim, and (iii) to recover alleged preference claims of up to $2,184 and alleged unpaid obligations of up to $1,044.

~~NOTE~~Tritronics 9has settled with the plaintiff trustee for a minor amount. Vance ~~STOCK-BASED~~Baldwin ~~COMPENSATION~~has answered the trustee’s allegations and will enter into mediation proceedings with the trustee in September 2011.

Vance Baldwin has received informal discovery from the plaintiff trustee. Formal discovery in this proceeding is stayed until after the parties complete such mandatory mediation. If the parties fail to reach a settlement prior to or after the mediation, then formal discovery will commence and the parties will begin to prepare for trial.

Management believes that Vance Baldwin has a strong defense to the preference claims and that alleged unpaid obligations are either appropriately reserved for or are without merit. Management believes that the outcome of this matter will not have a material impact on the Company’s results of operations or financial position

Dispute with Former Chief Executive Officer

In December 2010, Wayne I. Danson, the Company’s former Chief Executive Officer, brought suit against the Company and each of its directors in the United States District Court for the Southern District of New York. Mr. Danson’s complaint seeks severance in the amount of $315, approximately $45 in other damages, statutory damages under the New York Labor law and attorney’s fees, less the amount of severance paid. The Company has paid approximately $225 as severance to Mr. Danson as of June 15, 2011. On March 10, 2011, the directors were dismissed from the suit.

Resignation of Chief Operating Officer

On November 10, 2010, Steven Miller, the Company’s former Chief Operating Officer, resigned from his employment with the Company and from his position as Executive Vice-President of the Company.

NOTE 8.

STOCK-BASED COMPENSATION

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

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

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

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

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

~~The weighted-average~~There ~~assumptions~~were ~~used~~no ~~in the option pricing model for~~ stock option grants awarded in the ~~nine~~three ~~months~~and six month periods ended ~~March~~December 31, ~~2009~~2010 ~~were~~and ~~as follows:~~2009.

Expected Volatility in Stock Price		26.6	%
Risk-Free Interest Rate		4.39	%
Expected Life of Stock Awards—Years		6
Weighted Average Fair Value at Grant Date	$	.00005

The following table summarizes stock option activity for the six months ended December 31, 2010:

There were no stock option grants awarded in the nine months ended March 31, 2010.

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at June 30, 2010		10,923,525,000		$	0.00075
Granted		—			—
Exercised		—			—
Forfeited		(7,945,938,000	)	$	0.00075
Outstanding at December 31, 2010		2,977,587,000		$	0.00075		7.0
Exercisable at December 31, 2010		2,671,749,000		$	0.00075		7.0
Expected to vest		305,838,000		$	0.00075		7.6

~~The following~~During ~~table~~the ~~summarizes~~six months ended December 31, 2010 stock ~~option~~options ~~activity~~granted to the Company’s former Chief Executive Officer and former Chief Operating Officer were not exercised and, therefore, were forfeited. Stock-based compensation expense for the ~~nine~~three months ended ~~March~~ December 31, 2010: and 2009 amounted to $3 and $86, respectively. Stock-based compensation expense for the six months ended December 31, 2010 and 2009 amounted to $34 and $212, respectively. As of December 31, 2010, the aggregate intrinsic value of options outstanding and options exercisable was $0 as the Company’s market price of common stock was less than the exercise price for all options.

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at June 30, 2009		10,923,525,000	$	0.00075
Granted		—		—
Exercised		—		—
Canceled or expired		—		—
Outstanding at March 31, 2010		10,923,525,000	$	0.00075		7.5
Exercisable at March 31, 2010		8,563,335,000	$	0.00075		7.5
Expected to vest		2,360,190,000	$	0.00075		7.6

Stock-based compensation expense for the nine months ended March 31, 2010 and 2009 amounted to $297 and $280, respectively. As of March 31, 2010, the aggregate intrinsic value of options outstanding and options exercisable was $0 as the Company’s market price of common stock was less than the exercise price for all options.

NOTE 10. RETIREMENT PLANS

The Company maintains 401K Profit Sharing Plans for substantially all of its eligible employees. The expense incurred for the three months ended March 31, 2010 and 2009 amounted to $62 and $44, respectively. The expense incurred for the nine months ended March 31, 2010 and 2009 amounted to $178 and $114, respectively.

NOTE 11. INCOME TAXES

The Company periodically assesses its ability to realize our deferred tax assets by considering whether it is more likely than not that some portion or all of deferred tax assets will be realized. Several factors are evaluated, including the amount and timing of the scheduled expiration and reversals of net operating loss carry forwards (NOLs) and deferred tax items, respectively, as well as potential generation of future taxable income over the periods for which the NOLs are applicable. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Although the Company believes the expectations reflected in these estimates are based upon reasonable assumptions, there can be no assurance that actual results will not differ materially from these expectations. The Company recorded a tax benefit of $0 and $900 for the three and nine month periods ended March 31, 2010, respectively, based on a re-evaluation of its valuation allowance. The Company recorded an income tax provision of $250 and $620, respectively, for the three and nine months ended March 31, 2009, based on our estimated effective tax rate and our pretax income, which resulted in a reduction of the deferred tax asset of an equivalent amount. The Company’s estimated effective tax rate for each period exceeds statutory rates primarily because the dividend on the Series E Preferred Stock which is classified as interest expense for book purposes may not be deductible for tax purposes.

NOTE 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following are the payments made during the nine months ended March 31, 2010 and 2009 for income taxes and interest:

	2010		2009
Income taxes	$	108	$	25
Interest	$	3,628	$	3,248

Nine Months Ended March 31, 2010:

(1) On February 1, 2010, the Company became obligated to issue a warrant, having a value of $1,217, to its principal lender to purchase 2,526,480,000 shares of the Company’s common stock.

Nine Months Ended March 31, 2009:

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

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

NOTE 9.

RETIREMENT PLANS

The Company maintains 401K profit sharing plans for substantially all of its eligible employees. The expense incurred for the three months ended December 31, 2010 and 2009 amounted to $57 and $64, respectively. The expense incurred for the six months ended December 31, 2010 and 2009 amounted to $104 and $116, respectively.

NOTE 10.

INCOME TAXES

The Company periodically assesses its ability to realize its deferred income tax assets by considering whether it is more likely than not that some portion or all of deferred income tax assets will be realized. Several factors are evaluated, including the amount and timing of the scheduled expiration and reversals of net operating loss carry forwards (NOLs) and deferred tax items, respectively, as well as potential generation of future taxable income over the periods for which the NOLs are applicable. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Although the Company believes the expectations reflected in these estimates are based upon reasonable assumptions, there can be no assurance that actual results will not differ materially from these expectations. The Company recorded a tax provision (benefit) of $0 for the three and six months ended December 31, 2010, and a tax benefit of $900 for the six months ended December 31, 2009. The benefit recorded in the three month period ended September 30, 2009 was based on a re-evaluation of its valuation allowance as of that date, which amount was subsequently restored as of June 30, 2010.

NOTE 11.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following are the payments made during the six months ended December 31, 2010 and 2009 for income taxes and interest:

	2010		2009
Income taxes	$	11	$	35
Interest		1,216		1,328

Six Months Ended December 31, 2010:

(1)

On August 1, 2010, the Company became obligated to issue a warrant, having a value of $1,241, to its principal lender to purchase 2,577,001,000 shares of the Company’s common stock.

NOTE 12.

SUBSEQUENT EVENTS

Proposed Transaction with Lenders

On February 11, 2011, Sankaty Advisors, LLC (“Sankaty”), advisor to the Company’s principal lenders (the “Lenders”), submitted to the Company’s Board of Directors a proposal pursuant to which, if accepted, ownership of all of the assets of the Company would be transferred to a new entity controlled by the Lenders, in exchange for assuming or extinguishing the Company’s obligations to the Lenders, payment of certain Company expenses and the payment to the Company of cash and issuance of equity in the new company. A special committee comprised of all of the Company’s directors who are not affiliated with the Company’s majority shareholder was formed to evaluate the proposal. No member of the Company’s management currently serves on its Board of Directors.

On May 13, 2011, following negotiations among the parties, the Company and its operating subsidiaries entered into an Asset Purchase Agreement providing for the sale of substantially all of their assets to Encompass Supply Chain Solutions, Inc. (the “Buyer”). The Buyer is a newly formed entity affiliated with Sankaty and the Lenders.

Under the Asset Purchase Agreement, the Buyer will acquire substantially all of the Company’s and its subsidiaries’ assets (other than any assets of certain inactive subsidiaries). The Buyer will assume the Company’s senior debt held by the Lenders. The Lenders will contribute the Company’s subordinated debt to the Buyer, and the Buyer will contribute the subordinated debt to the Company, making the Company both the debtor and creditor, effectively extinguishing the subordinated debt. In addition,

The Buyer will assume all of the Company’s other liabilities except for specified excluded liabilities (as described below).

The Buyer will pay $1,000 in cash purchase price.

The Company will receive common equity in the Buyer’s parent company (the “Parent”), also a newly formed entity affiliated with the Lenders. The equity is discussed further below.

The Buyer will reimburse up to $150 of the Company’s transaction expenses, and will contribute a scheduled amount to the settlement of certain liabilities.

The Lenders will surrender their equity interests in the Company. Currently, the Lenders own shares of the Company’s Series C Preferred Stock and Series E Preferred Stock, as well as warrants to acquire shares of the Company’s common stock at a nominal price.

The Company is expected to receive preferred equity of the Parent, which is then expected to be exchanged for all of the subordinated debt owed by the Company to the former majority shareholders of the Company’s subsidiaries, Vance Baldwin, Inc., and Tritronics, Inc. (the “Baldwin/Tritronics Parent Equity”). This subordinated debt (approximately $2,045 in the aggregate) was issued as part of the purchase price for those subsidiaries.

Excluded liabilities include:

the debt held by the former Tritronics and Vance Baldwin shareholders (which is expected to be cancelled in exchange for the Baldwin/Tritronics Parent Equity as described above);

any obligations to the Company’s former CEO, Wayne Danson, arising from pending litigation between Mr. Danson and the Company regarding the termination of his employment;

any obligations to Mr. Danson, arising from a letter agreement between the Company and Mr. Danson, executed in the 2007, relating to $310 in accrued consulting fees;

a note in the principal amount of $206 held by the Company’s counsel;

transaction expenses in excess of $150;

liabilities to employees, unless the liability is caused or increased by the Buyer’s failure to offer employment to any Company employee; and

the Company’s or its subsidiaries’ tax liabilities.

A portion of the purchase price ($350) will be placed in escrow to cover the Company’s indemnification obligations under the Asset Purchase Agreement. In addition, the Company will be prohibited from making any cash distributions to shareholders or payments to affiliates for two years after closing under the Asset Purchase Agreement. The Company will be required to indemnify the Buyer for any losses and expenses arising from:

a breach of any representation or warranty by the Company relating to employee benefits or taxes;

a breach or violation of any covenant of the Company relating to taxes;

the excluded liabilities; and

certain claims arising from the bankruptcy proceeding relating to Circuit City Stores, Inc. in the United States Bankruptcy Court for the Eastern District of Virginia in which Tritronics and Vance Baldwin were named as defendants in adversary proceedings in November 2010. (See description below.)

The Company’s indemnification liability is limited to an amount equal to the sum of the following: (1) the escrow amount, (2) cash on hand to the extent it exceeds claims payable to third parties, and (3) distributions to shareholders or payments to affiliates made in contravention of the Asset Purchase Agreement.

The closing of the transactions contemplated by the Asset Purchase Agreement is subject to a number of conditions, including:

the representations and warranties of the parties being true and correct in all material respects at closing,

there being no material breaches of the terms of the Asset Purchase Agreement,

absence of any litigation or other legal requirement prohibiting the consummation of the transaction or preventing the Buyer from owning the purchased assets,

certain third party consents,

requisite shareholder approval (as described in more detail below),

the completion of arrangements to effect the exchange of the Baldwin/Tritronics Parent Equity received by the Company for the subordinated debt held by the former Tritronics and Vance Baldwin shareholders,

the completion of the terms of the preferred and common equity arrangements for the Parent,

the execution by H.I.G. Capital, L.L.C. of a non-competition agreement, and

certain other customary closing conditions.

The Company may terminate the Asset Purchase Agreement if, before the closing, it enters an acquisition agreement with a third party that provides, on terms reasonably acceptable to the Buyer, for payment in full of the senior and subordinated notes held by the Lenders. As of May 31, 2011, that amount was approximately $37 in principal and $4 in interest. In the event the Asset Purchase Agreement is terminated on this basis, the Company must reimburse Buyer’s transaction expenses. The financial advisor to the Special Committee of the Board of Directors has been authorized to contact parties who may have an interest in acquiring the Company or its assets.

The Company’s Board of Directors approved the Asset Purchase Agreement after receiving the recommendation of the special committee. The special committee was advised by its financial advisor, who rendered an opinion that the transaction contemplated by the Asset Purchase Agreement is fair to the Company, from a financial point of view. The special committee will evaluate any potential alternative transaction brought to its attention by its financial advisor.

If the transactions contemplated in the Asset Purchase Agreement and the exchange of the Baldwin/Tritronics Parent Equity for the subordinated debt held by the former Tritronics and Vance Baldwin shareholders are effected, the Company’s assets/liabilities would consist of cash remaining after payment of expenses of the transaction in excess of $150 and liabilities not assumed by the Buyer, as well as the common stock of the Parent. The common stock in the Parent that the Company will receive will represent a 15% interest in the common equity of the Parent, but there will be approximately $10,000 in secured debt and at least $33,000 in preferred equity senior to the common stock the Company will receive. Accordingly, the Company does not place any significant value on the common stock. The Company does not anticipate a material amount of cash will remain after payment of expenses and non-assumed liabilities. The liquidation preference and accrued dividends of the Company’s preferred stock exceeds $11,000. Therefore the transactions contemplated by the Asset Purchase Agreement will not result in any distribution to common shareholders.

The transactions contemplated by the Asset Purchase Agreement are expected to permit the business currently conducted by the Company to operate profitably with reduced debt and a more favorable capital structure. As the Company will be divested of its business as assets, however, those improvements will not benefit the Company or its shareholders.

The Asset Purchase Agreement requires shareholder approval. All classes of the Company’s voting preferred stock will vote together with the common stock as one class, with each share of preferred stock entitled to cast a number of votes equal to the number of common shares into which it can be converted. Because of this, the holder of a majority of the Company’s outstanding Series C Preferred Stock, ACT-DE, LLC, has sufficient votes to approve the Asset Purchase Agreement without the vote of any other shareholders. ACT-DE, LLC has committed to vote for approval of the Asset Purchase Agreement pursuant to a Voting Agreement between ACT-DE, LLC and the Buyer.

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

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

Executive Summary

As Encompass Group Affiliates, Inc., a Florida corporation, we specialize in the technology aftermarket service and supply chain known as reverse logistics. Our wholly-owned subsidiaries and principal operating units, Encompass Parts Distribution, Inc., a Delaware corporation ("~~Encompass Parts Distribution~~EPD"), and Encompass Service Solutions, Inc. (a Delaware corporation) collectively operate businesses that, on a national level, provide parts procurement and distribution services, depot repair of consumer electronics, computer and peripheral equipment, board level repair, de-manufacturing and reclamation services for flat panel display and computer products, returns management services, and anticipates providing end-of-life cycle services for all such products. We are a market leader in reverse logistics for the consumer electronics industry by providing original equipment manufacturers (“OEMs”), retailers, third party administrators (“TPAs”) and end-users with single-source, integrated life cycle reverse logistic professional management services for technology products. The Company operates as one segment in the reverse logistics industry serving the electronics industry.

We are a market leader in reverse logistics for the consumer electronics industry by providing original equipment manufacturers (“OEMs”), retailers, third party administrators (“TPAs”) and end-users with single-source, integrated life cycle reverse logistic professional management services for technology products.18

Encompass Parts Distribution owns Vance Baldwin, Inc. and Tritronics, Inc., jointly operating as an integrated entity, and Cyber-Test, Inc. d/b/a Encompass Service Solutions, which collectively engage in the distribution of replacement parts for electronic equipment and the repair of such equipment. Encompass Parts Distribution is headquartered in and operates out of two distribution and repair facilities located in Lawrenceville, Georgia with additional distribution, call center and administrative facilities located in Las Vegas, Nevada, Abington, Maryland and Miami, Florida. Encompass Service Solutions had, until June 15, 2010, its headquarters and an operating facility located in Longwood, Florida, near Orlando, and now operates in one of the aforementioned Lawrenceville, Georgia facilities. The Company operates as one segment in the reverse logistics industry serving the electronics industry.

Financial Condition

~~We believe~~On ~~that~~May 13, 2011, we and our ~~present~~subsidiaries, Encompass Parts Distribution, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Tritronics, Inc. and ~~future~~Encompass ~~sales~~Service ~~levels~~Solutions, ~~will~~Inc., ~~assuming~~entered ~~successful discussions~~into an Asset Purchase Agreement with Sancompass, Inc. and Encompass Supply Chain Solutions, Inc., which are affiliated with our principal ~~shareholder~~lenders. The ~~and~~Asset ~~our~~Purchase ~~senior~~Agreement ~~lender~~provides ~~described below,~~for ~~generate~~the ~~cash~~sale ~~flows~~of ~~that~~substantially ~~will~~all beof ~~sufficient~~our toassets ~~fund~~and the assets of our ~~operating~~subsidiaries ~~working capital~~to ~~needs~~Encompass Supply Chain Solutions, asInc. ~~well~~(the as“Buyer”) ~~capital~~in ~~expenditures~~exchange ~~and~~for ~~quarterly~~the ~~interest~~following ~~and principal~~consideration: ~~payments~~(i) the ~~that~~assumption ~~are~~by ~~required~~the ~~under~~Buyer of substantially all of our ~~debt facility. However,~~liabilities ~~there~~and ~~can~~the beliabilities noof ~~assurance~~our ~~that~~subsidiaries ~~projected~~(including ~~sales levels~~all ~~will~~of bethe ~~achieved,~~obligations orin ~~such~~respect ~~projected~~of ~~sales~~our ~~levels~~senior ~~will~~indebtedness beowed ~~sufficient~~to ~~or economic~~our ~~conditions~~principal ~~will~~lenders), ~~improve~~subject to certain exclusions as set forth in the ~~near~~Asset ~~future~~Purchase Agreement, in(ii) the ~~which~~transfer ~~case~~of ~~our operations~~the ~~could~~subordinated bedebt ~~materially~~held ~~adversely~~by ~~affected. We~~our ~~did~~principal ~~not~~lenders ~~pay quarterly~~in ~~interest~~one onof our ~~senior~~subsidiaries ~~subordinated~~for ~~notes~~cancellation, ~~due~~(iii) a oncash ~~March~~payment 31of $1,000; ~~2010~~(iv) the ~~due~~issuance to ~~cash~~ ~~constraints. Our~~us ~~lender~~of ~~has~~a ~~waived~~15% ~~that~~common ~~failure~~equity ~~and~~interest in Sancompass, ~~pursuant~~Inc., ~~to negotiations~~the ~~described~~parent ~~further~~company ~~below,~~of ~~agreed~~the toBuyer, ~~capitalize~~and (v) the ~~unpaid~~assumption ~~interest as~~or ~~additional~~discharge ~~principal~~of certain of our other liabilities and expenses. WeIf ~~have~~the ~~implemented~~transactions ~~and~~contemplated ~~continue~~by ~~to implement~~the ~~internal~~Asset ~~growth~~Purchase ~~initiatives~~Agreement toare ~~expand~~completed, our ~~sales~~assets/liabilities ~~levels,~~would ~~increase profitability,~~consist of cash remaining after payment of expenses of the transaction in excess of $150 and toliabilities ~~seek~~not ~~significant~~assumed ~~future~~by ~~business~~the ~~acquisitions~~Buyer, as well as the ~~latter~~ common stock of Sancompass, which will ~~likely~~rank ~~require~~junior ~~additional~~to ~~equity~~approximately $10,000 in senior secured indebtedness and ~~additional borrowings. Further~~approximately $32,000 in wepreferred ~~have~~equity. We ~~undertaken~~do ornot anticipate ~~undertaking certain~~a ~~actions~~material toamount ~~reduce~~of ~~our~~cash ~~selling,~~will ~~general~~remain ~~and~~after ~~administrative~~payment of expenses~~, principally~~ byand ~~reducing~~non-assumed ~~(i)~~liabilities. The ~~compensation~~liquidation ~~expense~~preference ~~through~~and ~~wage~~accrued ~~and~~dividends ~~headcount reductions~~of ~~and~~our ~~(ii)~~preferred ~~occupancy~~stock ~~expenses~~exceeds ~~through~~$11,000. Therefore, ~~downsizing~~we ~~and/or~~do ~~closing facilities~~not expect that the sale will result in any distribution to ~~reduce~~common ~~overhead~~shareholders. ~~Because~~Our Board of ~~these~~Directors ~~actions,~~has ~~our~~considered ~~cash flow~~various ~~has~~strategic ~~improved. Our~~alternatives ~~debt~~to ~~agreement~~allow ~~requires~~for anthe ~~annual~~maximization ~~sweep~~of value of ~~excess~~ ~~cash~~the ~~flow~~company ~~(as~~and ~~defined~~to ~~therein),~~satisfy ~~which~~our ~~may~~obligations. We ~~limit~~have ~~our~~concluded ~~ability~~that tothe ~~use operating~~sale ~~cash~~transaction ~~flow~~is tothe ~~fund~~company’s ~~acquisitions~~only viable alternative.

As shown in the accompanying condensed consolidated financial statements, the Company incurred an operating loss of $2,565 and a net loss of $7,047 for the six months ended December 31, 2010, and an operating loss of $16,864 and a net loss of $28,774 for the fiscal year ended June 30, 2010. The Company's condensed consolidated balance sheet reflects a stockholders’ deficiency of $17,208 as of December 31, 2010. We did not pay quarterly principal and interest on our senior notes and interest on our subordinated notes due on March 31 and June 30, 2010 on a timely basis due to cash constraints and, pending negotiations with our principal stockholder and our principal lenders, have not paid quarterly interest on our senior and subordinated notes, and quarterly principal payments on our senior notes, due on September 30, 2010. December 31, 2010 and March 31, 2011. On September 17, 2010, our lenders notified us that, pursuant to the terms of our existing debt agreement, the interest rate on our senior and subordinated notes would increase by 2% per annum over the otherwise applicable interest rate and the increase would be effective as of December 31, 2009. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management believes that the Company needs to restructure or refinance all or a portion of its existing indebtedness to continue its operations. The Company has undertaken or anticipates undertaking certain actions to increase sales revenue and reduce our selling, general and administrative expenses, principally by reducing (i) compensation expense through wage and appropriate headcount reductions and (ii) occupancy expenses through downsizing and/or closing facilities to reduce overhead. Management cannot be certain that restructuring or refinancing of its existing indebtedness will be available on acceptable terms, or at all. Management’s plans regarding those matters are described in Note 5 – Notes Payable and Note 12 – Subsequent Events.

Critical Accounting Policies, Estimates and Judgments

Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, core charges, inventory, goodwill and intangible assets and income taxes. Actual results may differ from these estimates under different assumptions or conditions.

We believe the application of the following critical accounting policies used in the preparation of our consolidated financial statements requires significant judgments and estimates on the part of management.

Revenue Recognition

Revenue and related provisions for returns are significant to the Company’s results of operations. The Company recognizes revenue upon delivery of goods, including new parts and refurbished computer equipment and related products, to a common carrier for delivery to the customer, at which point title passes and collectability is reasonably assured, at a sales price that is fixed and determinable. Revenue for the repair of customer-owned equipment is recognized upon completion of the repair. Revenue represents amounts billed electronically based on established price lists. This methodology has historically been accurate and is expected to continue to be so.

Provisions for future product returns and core returns from customers are accounted for as sales reductions in the same period that the related sales are recorded, and are estimated based on historical trends, as well as specifically identified anticipated returns due to known business conditions. While the Company’s rate of customer returns of new parts sold and defective parts, as well as cores, can vary from period to period as a percent of sales, our methodology of using historical trends as the basis for our assumptions and estimates has yielded accurate provisions and is expected to continue to do so.

Core Charges

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

Core charges borne by the Company associated with goods in inventory are not included in inventory as cost, but are classified separately in prepaid expenses and other current assets in the consolidated balance sheets. ~~Such core charges amounted to $2,249 and $1,702 as of March 31, 2010 and June 30, 2009, respectively.~~ Cores physically returned by customers to the Company awaiting return to vendors are included in inventory.

The Company records the appropriate assets and the appropriate liability for all core charges that it may be responsible for at any point in time. Such amounts represent significant assets and liabilities. The Company has no control over core pricing. As core charges increase, our cash flow can be adversely impacted to the extent we may have to pay increased charges in advance of customer payment for the core charge following the sale of the related part or the return of the actual core from the customer.

Inventory

Inventory principally consists of OEM parts purchased for resale, and includes returned parts that are repaired and also held for resale and defective parts and cores to be returned to vendors, is valued at the lower of cost (average cost basis) or market, using the first-in, first-out (“FIFO”) method. Management performs monthly assessments to determine the existence of obsolete and slow-moving inventory and records necessary provisions to establish reserves to reduce such inventory to net realizable value. We believe that the current methodology used to determine excess and obsolete inventory and required reserves have been, and will continue to be, appropriate.

We restated our unaudited condensed consolidated financial statements as of and for the three months ended September 30, 2009 and as of and for the three and six months ended December 31, 2009 due to overstatement of defective parts and returned core inventories. This overstatement was principally caused by two software system problems in the Company’s enterprise-wide IT system, which have been identified and corrected. The overstatement is not indicative of problems with our basic accounting methodology for cores.

Goodwill and Intangible Assets

The Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. Historically, the Company included transaction costs, such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs, as part of the purchase price of its acquisitions. Under U.S. GAAP effective July 1, 2009, the Company is required to expense such costs as incurred.

Management reviews and evaluates goodwill, which represents a significant asset, for impairment annually at each fiscal year end and at interim periods if events indicate that the carrying value may be impaired. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. Management believes that its impairment tests have utilized reasonable assumptions which have resulted in the determination that the fair value of the reporting units was ~~substantially~~ in excess of carrying value; however, there can be no assurance that circumstances could not change in the future and result in an impairment charge. The evaluation of goodwill for impairment is performed at the entity level ~~effective~~annually ~~July~~at 1,each ~~2009~~fiscal year end.

The Company’s market capitalization has been deemed to be a poor indicator of fair value because, among other reasons, the Company’s common stock is thinly traded due to concentrated ownership, a lack of institutional awareness of and interest in ownership of the Company’s common stock since it is a “penny stock,” and a lack of research coverage. The Company’s common stock is trading in the same general price range as it did prior to the Company’s closing of (i) a recapitalization and major acquisition in August 2007 and (ii) a second major acquisition in August 2008.20

The Company’s market capitalization has been deemed to be a poor indicator of fair value because the Company’s common stock is thinly traded due to concentrated ownership, a lack of institutional awareness of and interest in ownership of the Company’s common stock since it is a “penny stock,” and a lack of research coverage. The Company’s common stock is trading in the same general price range as it did prior to the Company’s closing of (i) a recapitalization and major acquisition in August 2007 and (ii) a second major acquisition in August 2008.

Income Taxes

~~Management periodically~~The ~~assesses the~~ Company’s ~~ability~~follows toauthoritative ~~realize~~guidance ~~its~~for ~~deferred~~accounting ~~tax~~for ~~asset, which~~income istaxes awhereby ~~significant~~deferred ~~asset,~~tax byassets ~~considering~~and ~~whether~~liabilities itare isrecognized ~~more~~for ~~likely than not that some portion or all of~~ the ~~deferred~~future tax ~~asset~~consequences ~~will~~attributable ~~be realized. Several~~to ~~factors~~differences ~~are~~between ~~evaluated,~~the ~~including~~financial ~~the~~statement ~~amount~~carrying ~~and timing~~amounts of ~~the~~existing ~~scheduled~~assets ~~expiration~~and ofliabilities ~~the~~and ~~Company’s~~their ~~net~~respective ~~operating~~tax ~~loss carry forwards (NOLs)~~bases. ~~Estimates~~Deferred oftax ~~future~~assets ~~taxable~~and ~~income~~liabilities ~~over~~are ~~the~~measured ~~periods for~~using ~~which~~enacted ~~the~~tax ~~NOLs~~rates ~~are~~expected ~~applicable~~to ~~require~~apply ~~assumptions as~~ to ~~revenue~~taxable ~~and expenses,~~income ~~and~~in ~~differences~~the ~~between~~years ~~projected~~in ~~taxable~~which ~~income~~those ~~and~~temporary ~~book income. Projected~~differences ~~taxable~~are ~~income is~~ expected to ~~exceed~~be ~~projected~~recovered ~~book income~~or assettled. The ~~the~~effect ~~dividend~~ on ~~Series~~deferred Etax ~~Preferred~~assets ~~Stock~~and ~~classified~~liabilities asof ~~interest expense~~a ~~under~~change ~~U.S.~~in ~~GAAP~~tax rates is ~~likely~~recognized ~~not~~in ~~deductible for tax purposes. Projected taxable~~ income in ~~any year may exceed~~ the ~~Company’s~~period ~~annual~~that ~~limitation~~includes ~~under Internal Revenue Code Section 382, regarding~~ the ~~amount~~enactment ofdate. A ~~loss~~valuation ~~carryforward that~~allowance ~~can~~has bebeen ~~utilized~~used to partially offset ~~such taxable income. Amounts below~~ the ~~annual~~ ~~limitation~~recognition ~~may~~of beany ~~carried~~deferred ~~forward~~tax toassets ~~future~~arising ~~years. Certain estimates~~from ~~used~~net inoperating ~~this~~loss ~~analysis~~carryforwards ~~are~~due ~~based~~to on the ~~current~~uncertainty ~~beliefs and expectations~~ of ~~management,~~future ~~as well as assumptions made by, and information currently available to, management~~realization. ~~Although~~The ~~management~~use ~~believes~~of ~~the expectations~~any ~~reflected~~tax inloss ~~these~~carryforward ~~estimates~~benefits ~~are~~may ~~based~~also ~~upon reasonable assumptions, there can~~ be nolimited ~~assurance~~as ~~that~~a ~~actual~~result ~~results~~of ~~will~~changes ~~not~~in ~~differ~~control ~~materially~~of ~~from these expectations~~Company.

18Management periodically assesses the Company’s ability to realize its deferred tax asset, which is a significant asset, by considering whether it is more likely than not that some portion or all of the deferred tax asset will be realized. Several factors are evaluated, including the amount and timing of the scheduled expiration of the Company’s net operating loss carry forwards (“NOLs”). Estimates of future taxable income over the periods for which the NOLs are applicable require assumptions as to revenue and expenses, and differences between projected taxable income and book income. Projected taxable income is expected to exceed projected book income as the dividend on Series E Preferred Stock classified as interest expense under U.S. GAAP is likely not deductible for tax purposes. Projected taxable income in any year may exceed the Company’s annual limitation under Internal Revenue Code Section 382, regarding the amount of loss carryforward that can be utilized to offset such taxable income. Amounts below the annual limitation may be carried forward to future years. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. Although management believes the expectations reflected in these estimates are based upon reasonable assumptions, there can be no assurance that actual results will not differ materially from these expectations.

As part of the process of preparing our consolidated financial statements, we are also required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our accompanying consolidated balance sheet. We must assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Correspondingly, we reduce the valuation allowance when our analysis of future taxable income indicates that it is more likely than not that the loss carryforwards will be utilized to offset taxable income. Such reductions were recorded in fiscal 2008, 2009 and in the current fiscal year based on the Company’s projections of future taxable income. We would increase the valuation allowance when facts and circumstances reflected in our analysis of future taxable income change and indicate that there is a low probability of utilization of loss carryforwards to offset taxable income. We believe that our estimate of a valuation allowance against the deferred tax asset is appropriate based on current facts and circumstances.21

As part of the process of preparing our consolidated financial statements, we are also required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our accompanying consolidated balance sheet. We must assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Correspondingly, we reduce the valuation allowance when our analysis of future taxable income indicates that it is more likely than not that the loss carryforwards will be utilized to offset taxable income. Such a reduction was recorded in fiscal 2009 based on the Company’s projections of future taxable income at that time. We would increase the valuation allowance when facts and circumstances reflected in our analysis of future taxable income change and indicate that there is a low probability of utilization of loss carryforwards to offset taxable income. We believe that our estimate of a valuation allowance against the deferred tax asset is appropriate based on current facts and circumstances.

Recent Accounting Pronouncements

~~During~~ In December 2007, the ~~fiscal~~Financial ~~first~~Accounting ~~quarter~~Standards ofBoard ~~2010~~(“FASB”) issued revised authoritative guidance for business combinations, inwhich ~~accordance~~establishes ~~with~~the ~~U.S.~~principles ~~GAAP~~and requirements for how an acquirer recognizes the assets acquired, the ~~Company adopted~~liabilities assumed, and any non-controlling interest in the ~~standards~~acquiree onat ~~business~~the ~~combinations~~acquisition ~~whereby~~date, ~~typical~~measured at their fair values as of that date with limited exceptions. The guidance requires acquisition-related transaction costs such as investment banking fees, accounting fees, legal fees, appraisal fees and Company-incurred direct out-of-pocket costs ~~incurred in business combinations must~~ be expensed as incurred and ~~can~~ no longer be effectively accounted for as part of excess purchase price and intangible assets. The ~~requirement to~~provisions ~~expense acquisition-related transaction costs~~ as ~~incurred~~revised ~~has~~were ~~had~~effective afor ~~material impact~~transactions onwithin ~~results~~the ofannual ~~operations~~reporting inperiod ~~the~~beginning ~~nine~~after ~~months~~December ~~ended March 31~~15, ~~2010,~~2008 and will ~~continue~~be applied to doany sobusiness incombinations ~~the~~entered ~~event~~into ~~such costs are incurred in future periods~~thereafter. ~~The~~At ~~statement~~June ~~became effective for the Company as of July 1~~30, ~~2009;~~ ~~accordingly~~2009, capitalized transaction costs associated with potential acquisitions in process and ~~formerly~~ included in other non-current assets inamounted ~~the amount~~to of $1,111, ~~were~~which amount was written off induring the ~~quarter~~year ended ~~September~~June 30, ~~2009. The~~ Company does not believe that the new standard will have an impact on financial position or cash flows, lead to technical violation of debt covenants, impact the availability or cost of capital or lead to changes in business practices2010.

~~Business Combination~~In June 2009, the FASB Accounting Standards Codification (Codification) was issued to become the source of authoritative U.S. GAAP to be applied by nongovernmental entities and supersede all then-existing non-Securities and Exchange Commission (“SEC”) accounting and reporting standards. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The Codification was effective for our fiscal quarter beginning July 1, 2009. The adoption did not impact the company's consolidated financial statements.

OnIn ~~August 1,~~February ~~2008~~2010, ~~the~~an ~~Company~~update ~~acquired~~to ~~all~~accounting ofguidance ~~the~~was ~~outstanding~~issued ~~equity~~which ~~interests~~eliminates ~~in Tritronics,~~the ~~Inc.,~~disclosure aof ~~company~~the ~~engaged~~date inthrough ~~the~~which ~~distribution~~subsequent ofevents ~~replacement~~have ~~parts~~been ~~and accessories~~evaluated. This ~~for~~update ~~consumer~~was ~~electronics~~effective ~~products (“Tritronics”)~~immediately. The ~~results~~ adoption of ~~operations~~this ~~for~~amendment ~~the~~did ~~nine~~not ~~months~~have ~~ended~~a ~~March~~significant effect on our financial statements. We evaluated our December 31, 2010, ~~include Tritronics~~financial statements for ~~the~~subsequent ~~full~~events ~~period;~~through the ~~results~~date ofthe ~~operations~~financial ~~for~~statements were filed with the ~~nine~~SEC. There ~~months ended~~were ~~March~~subsequent ~~31,~~events ~~2009,~~that ~~include~~are ~~Tritronics~~disclosed ~~only~~in ~~from~~Note ~~the~~12 ~~acquisition~~- ~~date~~Subsequent ~~through~~ Events to the ~~end~~accompanying ofcondensed ~~the~~consolidated ~~period~~financial statements.

~~RESULTS OF~~From ~~OPERATIONS~~time -to ~~COMPARISON~~time, OFnew ~~THE~~accounting ~~THREE~~pronouncements ~~MONTHS~~are ~~ENDED~~issued ~~MARCH~~by 31FASB that are adopted by the Company as of the specified effective date. If not discussed, ~~2010~~management TObelieves ~~THE~~that ~~THREE MONTHS~~the ~~ENDED~~impact ~~MARCH~~of 31recently issued standards, ~~2009~~which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.

~~The following~~RESULTS ~~table~~OF ~~sets~~OPERATIONS ~~forth~~- ~~certain~~COMPARISON ~~selected~~OF ~~financial~~THE ~~data~~THREE asMONTHS aENDED ~~percentage~~DECEMBER ~~of sales~~31, ~~for~~2010 ~~the~~TO ~~three~~THE ~~months~~THREE ~~ended~~MONTHS ~~March~~ENDED DECEMBER 31, ~~2010 and~~ 2009:

	Three Months Ended					Three Months Ended
	March 31, 2010					March 31, 2009
Net sales	$	23,580		100.00	%	$	27,148		100.00	%
Cost of sales		18,117		76.8	%		19,946		73.5	%
Gross profit		5,463		23.2	%		7,202		26.5	%
Operating expenses		5,177		22.0	%		5,234		19.3	%
Income from operations		286		1.2	%		1,968		7.2	%
Other income (expense), net		(2,933	)	(12.4	)%		(1,529	)	(5.6	)%
Income (loss) before taxes		(2,647	)	(11.2	)%		439		1.6	%
Income tax benefit (provision)		0		0.0	%		(250	)	(0.9	)%
Net income (loss)	$	(2,647	)	(11.2	)%	$	189		0.7	%

The following table sets forth certain selected financial data as a percentage of sales for the three months ended December 31, 2010 and 2009:

	Three Months Ended					Three Months Ended
	December 31, 2010					December 31, 2009
Net sales	$	20,475		100.0	%	$	21,418		100.0	%
Cost of sales		16,388		80.0	%		16,270		76.0	%
Gross profit		4,087		20.0	%		5,148		24.0	%
Operating expenses		4,815		23.6	%		4,921		23.0	%
Income (Loss) from operations		(728	)	(3.6	)%		227		1.0	%
Other expense, net		(1,700	)	(8.3	)%		(1,667	)	(7.7	)%
Loss before taxes		(2,428	)	(11.9	)%		(1,440	)	(6.7	)%
Income tax benefit		—		—	%		—		—	%
Net loss	$	(2,428	)	(11.9	)%	$	(1,440	)	(6.7	)%

Net Sales

Net sales for the three months ended ~~March~~ December 31, 2010 amounted to $2320,~~580~~475 as compared to net sales of $2721,~~148~~418 for the three months ended ~~March~~December 31, 2009, a decrease of $3943,~~568,~~ or 13 4.14%. The decrease in net sales was ~~principally attributable to the (i) lower sales by Encompass Parts Distribution as~~ a result of ~~(a)~~an ~~the~~increase ~~current economic downturn, (b) the loss of a key customer that began liquidation proceedings~~ in ~~February~~sales ~~2009, and (c), a higher level of shipments of Philips products in the three months ended March 31, 2009 due~~ to ~~the Company~~EPD’s ~~then recent~~major ~~appointment~~customer ~~as authorized distributor for Philips digital replacement parts, and~~ (~~ii)~~at a lower ~~sales~~gross ~~by Encompass Service Solutions~~margin), ~~principally attributable~~which towas ~~the~~more ~~loss~~than ofoffset aby ~~contract with~~ a ~~major~~net ~~customer~~decrease ~~which~~in ~~has~~sales ~~only partially~~to ~~been offset by~~ other ~~new~~customers ~~business. Such~~in ~~decreases~~the ~~were~~aggregate ~~partially~~as ~~offset by~~ a ~~substantial~~result ~~increase~~of inthe ~~business~~impact ~~with~~of athe ~~major~~continuing ~~customer~~economic ~~that~~downturn ~~commenced~~on ~~in February~~much ~~2010,~~of ~~but~~its atcustomer ~~a lower gross margin~~base.

Cost of Sales and Gross Profit

Our cost of sales totaled $1816,~~117~~388 for the three months ended ~~March~~December 31, 2010, as compared to $1916,~~946~~270 for the three months ended ~~March~~December 31, 2009, aan ~~decrease~~immaterial increase of $1118,~~829,~~ or 9 0.27%. Cost of sales did not decrease in line with the decrease in net sales due to a decrease in gross margin. Our gross profit decreased to $54,~~463~~087 for the three months ended ~~March~~ December 31, 2010 as compared to $75,~~202~~148 for the three months ended ~~March~~December 31, 2009, ~~with~~ ~~gross~~a ~~margin~~decrease ~~decreasing~~of to$1,061, 23or 20.26%, ~~from~~due ~~26.5%~~to ~~for~~both the ~~comparable~~decrease ~~period~~ in net sales referred to above and the ~~prior~~decrease ~~year~~in gross margin discussed below.

~~The decrease~~Gross inmargin ~~cost~~decreased ofto ~~sales~~20.0% for the three months ended ~~March~~December 31, 2010 ~~was~~ from 24.0% for the comparable period in the prior year. The decrease is primarily attributable to the ~~decline~~effect of a change in product and customer mix. Gross margin for the current quarter decreased due to the effect of (i) the aforementioned increase in lower margin incremental sales asby ~~described~~EPD ~~above~~to a major customer compared to the prior year quarter, ~~partially offset~~(ii) no sales by EPD in the current quarter under a high margin short-term contract that was in effect ofin the year ago quarter, and (iii) a lower realized gross margin on service work performed by Encompass Service Solutions this quarter due to inefficiencies caused by the relocation of its operations from its own leased facility in Florida to a facility leased by EPD in Georgia.

The decrease in gross margin for the three months ended March 31, 2010 is primarily attributable to the effect of a change in product and customer mix. Gross margin for the current quarter decreased primarily due to the aforementioned decrease in sales of higher margin Philips products, lower gross margin attributable to the incremental sales to a major customer and reduced revenue from higher margin service work performed by Encompass Service Solutions. The level of gross margin realized in the current period may not be indicative of the level of gross margin to be achieved in future periods.

Operating Expenses

Total operating expenses for the three months ended ~~March~~December 31, 2010 and 2009 were $54,~~177~~815 and $54,~~234~~921, respectively, representing a decrease of $~~57,~~106 or 1 2.12%. ~~The net change was primarily attributable to due to cost reductions in light of lower sales volume offset by increased expenses related to expanded international operations.~~

Depreciation and amortization for the three months ended ~~March~~December 31, 2010 amounted to $~~532~~ 490 compared to $~~582~~507 for the three months ended ~~March~~December 31, 2009, a minor difference.

Selling, general and administrative expenses decreased to $4,~~645~~325 for the three months ended ~~March~~December 31, 2010 from $4,~~652~~414 for the three months ended ~~March~~December 31, 2009, for a decrease of $7,89 or 2.1%,. The ~~due~~decrease was attributable to ~~cost~~(i) ~~reductions~~fees inassociated ~~light~~with ofan ~~lower~~advisory ~~sales~~services ~~volume~~agreement, ~~offset~~ in(ii) ~~part~~increased byexpenses ~~the~~associated ~~inclusion~~with ofinternational ~~costs~~operations ~~associated~~and ~~with~~(iv) a charge for severance compensation payable to the ~~Las~~Company’s ~~Vegas,~~former ~~Canada and~~Chief ~~Mexico~~Operating ~~distribution~~Officer, ~~centers~~offset by reductions in (i) occupancy expenses attributable to the ~~current~~closing ~~quarter~~of ~~compared~~certain facilities and (ii) compensation expenses attributable to $0headcount inreductions ~~the prior~~as ~~year~~executed ~~period~~under a restructuring and cost reduction program.

Other Income (Expense)

~~Interest expense~~Total ~~and~~ other ~~financial~~expense ~~costs,~~amounted ~~net~~to $1,700 for the three months ended ~~March~~December 31, 2010 ~~were $2,942~~ compared to $1,~~593~~667 for the three months ended ~~March~~December 31, 2009~~. Included~~ ~~in interest expense~~ for ~~three months ended March 31, 2010 is $342 of non-cash interest accrued but not currently payable in connection with Series E Preferred Stock compared to $277 for three months ended March 31, 2009, and~~ a ~~charge~~minor ofchange ~~$1,217 for issuance~~ of ~~warrants to the Company’s principal lender for the three months ended March 31, 2010~~$33.

20RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2010 TO THE SIX MONTHS ENDED DECEMBER 31, 2009

~~RESULTS OF~~The ~~OPERATIONS~~following -table ~~COMPARISON~~sets OFforth ~~THE~~certain ~~NINE~~selected ~~MONTHS~~financial ~~ENDED~~data ~~MARCH~~as ~~31,~~a ~~2010~~percentage TOof ~~THE~~sales ~~NINE MONTHS~~for ~~ENDED~~the ~~MARCH~~six months ended December 31, 2010 and 2009:

The following table sets forth certain selected financial data as a percentage of sales for the nine months ended March 31, 2010 and 2009:

	Six Months Ended					Six Months Ended
	December 31, 2010					December 31, 2009
Net sales	$	43,277		100.00	%	$	44,392		100.00	%
Cost of sales		35,454		81.9	%		33,690		75.9	%
Gross profit		7,823		18.1	%		10,702		24.1	%
Operating expenses		10,388		24.0	%		10,127		22.8	%
Write-off of deferred transaction costs		—		—			1,111		2.5	%
Total operating costs		10,388		24.0	%		11,238		25.3	%
Loss from operations		(2,565	)	(5.9	)%		(536	)	(1.2	)%
Other expense, net		(4,482	)	(10.4	)%		(3,183	)	(7.2	)%
Loss before taxes		(7,047	)	(16.3	)%		(3,719	)	(8.4	)%
Income tax benefit		0		0.0	%		900		2.0	%
Net loss	$	(7,047	)	(16.3	)%	$	(2,819	)	(6.4	)%

	Nine Months Ended					Nine Months Ended
	March 31, 2010					March 31, 2009
Net sales	$	67,972		100.00	%	$	84,694		100.00	%
Cost of sales		51,807		76.2	%		63,802		75.3	%
Gross profit		16,165		23.8	%		20,892		24.7	%
Operating expenses		16,415		24.1	%		15,273		18.0	%
Income from operations		(250	)	(0.3	)%		5,619		6.6	%
Other income (expense), net		(6,116	)	(9.0	)%		(4,394	)	(5.2	)%
Income (loss) before taxes		(6,366	)	(9.3	)%		1,225		1.4	%
Income tax benefit (provision)		900		1.3	%		(620	)	(0.7	)%
Net income (loss)	$	(5,466	)	(8.0	)%	$	605		0.7	%

Net Sales

Net sales for the ~~nine~~six months ended ~~March~~ December 31, 2010 amounted to $6743,~~972~~277 as compared to net sales of $8444,~~694~~392 for the ~~nine~~ six months ended ~~March~~December 31, 2009, a decrease of $161,~~722~~115, or 192.75%. The decrease in net sales was ~~due~~attributable ~~principally~~ to ~~the~~a ~~(i)~~net ~~lower~~decrease in sales byas ~~Encompass Parts~~a ~~Distribution~~result ~~which~~of ~~management~~the ~~attributes~~impact toof ~~(a)~~ the ~~2008-2009~~ continuing economic downturn~~, (b)~~ ~~the~~on ~~loss~~much of aits ~~key~~ customer ~~that~~base ~~began liquidation proceedings in February 2009,~~ and ~~(c) the positive effect in the nine months ended March 31~~, ~~2009~~to of a ~~short-term,~~ ~~high~~lesser ~~level of shipments of Philips products as the Company filled back orders following its then recent appointment as authorized distributor for Philips~~extent, ~~which~~ lower sales by Encompass ~~Parts~~Service ~~Distribution~~Solutions ~~was~~due ~~partially~~to ~~offset by~~ the ~~inclusion~~loss of ~~nine~~a ~~months~~contract ofwith ~~Tritronics’~~a ~~results~~major incustomer, ~~the~~offset ~~current~~in ~~nine-month period~~part ~~versus~~by ~~eight~~an ~~months~~increase in ~~the comparable prior period, and (ii) lower~~ sales by ~~Encompass Service Solutions due principally~~ to ~~the~~EPD’s ~~loss of a contract with a~~ major customer ~~which~~(at ~~has~~a ~~only~~lower ~~partially~~gross ~~been offset by other new business~~margin).

Encompass Parts Distribution has been awarded a substantial amount of additional business with an existing customer that commenced in February 2010, which management believes may result in approximately $2 million in monthly net sales, but at lower gross margin. However, there can be no assurance that such levels in monthly net sales will be achieved in the future.

Cost of Sales and Gross Profit

Our cost of sales totaled $5135,~~807~~454 for the ~~nine~~six months ended ~~March~~December 31, 2010, as compared to $6333,~~802~~690 for the ~~nine~~six months ended ~~March~~December 31, 2009, aan ~~decrease~~increase of $111,~~995~~764, or 18 5.82%, despite the aforementioned decrease in net sales in the current period compared to the earlier period. This unfavorable change is directly related to a decrease in gross margin described below. Our gross profit decreased to $167,~~165~~823 for the ~~nine~~six months ended ~~March~~December 31, ~~2009~~2010 as compared to $2010,~~892~~702 for the ~~nine~~six months ended ~~March~~December 31, 2009, ~~with~~a ~~gross~~decrease ~~margin~~of ~~decreasing~~$2,879, toor 2326.89% ~~in the nine months ended March 31~~, ~~2010~~ ~~from~~also ~~24.7%~~due into the ~~comparable~~decrease ~~period~~ in ~~the~~gross ~~prior~~margin ~~year~~described below.

~~The decrease~~Gross inmargin ~~cost~~decreased ofto ~~sales~~18.1% for the ~~nine~~six months ended ~~March~~December 31, 2010 ~~was~~ from 24.1% for the comparable period in the prior year. The decrease is primarily attributable to the ~~decline~~effect of a change in product and customer mix. Gross margin for the current period decreased due to the effect of (i) the aforementioned increase in lower margin incremental sales asby ~~described~~EPD ~~above~~to a major customer compared to the prior year period, ~~partially~~(ii) ~~offset~~no sales by EPD in the current period under a high margin short-term contract that was in effect ofin the year ago period, and (iii) a lower realized gross margin on service work performed by Encompass Service Solutions this quarter due to inefficiencies caused by the relocation of its operations from its own leased facility in Florida to a facility leased by EPD in Georgia.

The decrease in gross margin for the nine months ended March 31, 2010 is primarily attributable to the effect of a change in product and customer mix. Gross margin for the nine months ended March 31, 2010 decreased primarily due to the aforementioned decreased sales of higher margin Philips products and reduced revenue from higher margin service work performed by Encompass Service Solutions, which were offset by higher gross margins from certain business activities associated with a strategic contractual relationship into which the Company entered in the first quarter of the current fiscal year. The level of gross margin experienced in the current period may not be indicative of the level of gross margin to be achieved in future periods.

Operating Expenses

Total operating expenses for the ~~nine~~six months ended ~~March~~December 31, 2010 and 2009 were $1610,~~415~~388 and $1511,~~273~~138, respectively, representing ana ~~increase~~decrease of $~~1,142~~750 or 7 6.57%. The net change was primarily attributable to a ~~write~~charge of $1,111 in the earlier quarter to write-off of deferred transaction costs to conform to recently enacted change in U.S. GAAP, ~~that~~offset ~~became~~by ~~effective in~~ the ~~first~~ ~~quarter~~offsetting ofnet ~~the~~effect ~~current~~on ~~fiscal year~~selling, ~~which~~general ~~resulted~~and inadministrative ~~the~~expenses ~~Company recording a non-cash expense in the amount~~ of ~~$1,111. This~~several ~~charge reduced~~matters ~~operating~~described ~~income, but did not have an impact on liquidity or financial condition~~below.

21Depreciation and amortization for the six months ended December 31, 2010 amounted to $1,012 compared to $1,009 for the six months ended December 31, 2009, a minor difference.

~~Depreciation~~ Selling, general and ~~amortization~~administrative expenses increased to $9,376 for the ~~nine~~six months ended ~~March~~December 31, 2010 ~~amounted~~from to $19,~~641 compared~~018 ~~to $1,538~~ for the ~~nine~~six months ended ~~March~~December 31, 2009, for an increase of $358 or 4.0%. The ~~slight~~ increase iswas attributable to ~~higher~~(i) ~~amortization~~charges ~~expense~~recorded in the current period under the Company’s restructuring program for restructuring expenses related to the consolidation of EPD’s warehouse operations from five to two facilities, (ii) fees associated with ~~intangible~~an ~~assets~~advisory ~~recorded~~services inagreement, ~~connection~~(iii) increased expenses associated with international operations and (iv) a charge for severance compensation payable to the ~~Tritronics~~ ~~acquisition~~Company’s former Chief Executive Officer and former Chief Operating Officer, offset by reductions in (i) occupancy expenses attributable to the closing of certain facilities and (ii) compensation expenses attributable to headcount reductions as executed under a restructuring and cost reduction program.

Selling, general and administrative expenses decreased to $13,663 for the nine months ended March 31, 2010 from $13,735 for the nine months ended March 31, 2009, for a decrease of $72, or .5%, due to cost reductions in light of lower sales volume. Selling, general and administrative expenses for the nine months ended March 31, 2010 were inflated over expenses in the comparable prior period because they included such expenses of Tritronics for all nine months and costs associated with the Las Vegas and Georgia returns and distribution centers for all nine months. Selling, general and administrative expenses for the nine months ended March 31, 2009 included only eight months of such expenses of Tritronics following its acquisition and only eight months of such costs for the Georgia returns center and $0 of such costs for the Las Vegas distribution center.

Other Income (Expense)

~~Interest expense~~Total ~~and~~ other ~~financial~~income ~~costs,~~(expense) ~~net~~amounted to $4,482 for the ~~nine~~six months ended ~~March~~December 31, 2010 ~~was~~ ~~$6,122~~ compared to $43,~~536~~083 for the ~~nine~~six months ended ~~March~~December 31, 2009, an increase of $1,~~586~~399, or 45. 4%. This increase was due principally to a charge of $1,~~217~~241 in the current period for the issuance of warrants to the Company’s principal lender~~. Interest~~ recorded in interest expense ~~includes~~and ~~$1,044~~other offinancial ~~non-cash~~costs, ~~interest~~net, ~~accrued~~as ~~but~~well ~~not~~as ~~currently payable~~higher ininterest ~~connection~~expense ~~with~~on ~~Series~~senior Eand ~~preferred~~senior ~~stock~~subordinated notes.

LIQUIDITY AND CAPITAL RESOURCES

At ~~March~~ December 31, 2010, the Company had cash and cash equivalents of $21,~~776~~463 available to meet its working capital and operational needs. ~~Since~~Working ~~concluding~~capital amounted to a negative $30,270 due to the effect of the classification of notes payable in current liabilities as described in Note 5 – Notes Payable. Following a series of transactions in August 2007 and August 2008, to, among other things, effect a recapitalization and complete two major acquisitions, the Company’s cash flows ~~have~~ ~~historically~~had been consistent and stable from quarter to quarter in fiscal 2008 and 2009 based on the level of net earnings and EBITDA generated by our operating units. The bankruptcy filing and liquidation of a major parts customer that occurred in the third quarter of our prior fiscal year, and the loss of a large laptop service contract with a major parts and service customer, negatively impacted the amount, but not the certainty, of our cash flows. While these two events have had an impact on sales, operating income and cash flows the Company’s overall liquidity and financial condition nonetheless was sufficient. Working capital needed to fund increases in inventory and accounts receivable or capital expenditures historically has been provided by operations and cash on hand.

The ~~above notwithstanding,~~bankruptcy ~~during~~filing ~~the quarter ended March 31, 2010,~~ and inliquidation ~~the~~of ~~ensuing months, the Company has experienced~~ a ~~decrease~~major inparts ~~available~~customer ~~cash~~that ~~due~~occurred ~~principally to an increase~~ in ~~accounts receivable arising in connection with~~ the ~~substantial increase~~third inquarter ~~sales to one~~ of ~~its~~fiscal ~~major~~year ~~customers. The~~2009, ~~Company did~~and ~~not pay quarterly interest on~~ the ~~senior~~loss ~~subordinated~~of ~~notes~~a ~~due~~large onlaptop ~~March~~service ~~31, 2010~~contract ~~due~~with toa ~~cash~~major ~~constraints. In~~parts ~~light of these circumstances, the Company, its principal shareholder~~ and ~~its~~service ~~senior lender have entered into discussions to provide $2~~customer,~~500~~ ofnegatively ~~working~~impacted ~~capital~~our ~~through~~cash ~~(i)~~flows ~~the purchase of additional preferred stock~~ in ~~the~~fiscal ~~amount~~2010. While ofthese ~~$1,250~~two ~~and~~events ~~(ii)~~had ~~the deferral~~an ~~and~~impact ~~capitalization of interest~~ on ~~the senior subordinated notes in the aggregate amount of $1~~sales,~~250,~~ ~~$938~~operating ~~for~~income ~~the three month period ended March 31, 2010~~ and ~~$312~~cash ~~for~~flows the ~~three month period ending June 30, 2010. Further, in connection with these discussions, the~~ Company’s ~~senior~~overall ~~lender~~liquidity ~~will~~and ~~waive certain~~ financial ~~covenants~~condition ~~set~~nonetheless ~~forth~~had inbeen ~~the Company’s~~sufficient ~~debt~~to ~~agreement~~meet ~~for~~ the ~~periods ending June 30, 2010 through December 31, 2010, and will revise them for future periods. The Lender has also waived the~~ Company’s ~~non-payment~~working ofcapital ~~interest~~and ondebt ~~its~~service ~~senior~~needs ~~subordinated notes~~through ~~for~~ the ~~three~~quarter ~~months~~ ended ~~March~~December 31, ~~2010, as well as all loan covenant violations as of March 31, 2010 and for any prior periods~~2009.

~~The Company~~We ~~expects~~did not pay quarterly interest on our subordinated notes due on March 31 and June 30, 2010 on a timely basis due to ~~complete~~cash constraints. In connection with negotiations with our principal stockholder and our principal lenders preceding our entry in an Asset Purchase Agreement on May 13, 2011 (described below under the ~~equity~~heading, ~~infusion~~Subsequent Event – Proposed Transaction with Lenders), we paid the required principal and ~~amendment~~interest topayments ~~its~~for ~~existing debt~~March ~~agreement~~31 ~~before~~and June 30, 2010; ~~however,~~in ~~there~~June isand noOctober ~~assurance~~2010, ~~that~~respectively, ~~the parties~~but ~~will~~have ~~reach~~not ~~agreement~~paid ~~upon~~quarterly ~~financing~~interest on ~~such~~our ~~terms. In~~senior ~~the unlikely~~and ~~event~~subordinated ~~that~~notes, ~~our~~and ~~majority~~quarterly ~~shareholder~~principal orpayment on our senior ~~lender~~notes, isdue ~~unwilling~~on ~~to provide~~September 30, 2010, December 31, 2010 and March 31, 2011. Further, the ~~necessary~~Company ~~working~~has ~~capital~~not ~~funding~~met oncertain ~~terms~~financial ~~acceptable~~covenant totests usat March 31 (for which compliance was waived), ~~we would~~June ~~seek~~30, toSeptember ~~obtain~~30 ~~this~~and ~~funding~~December ~~from~~31, ~~other~~2010 ~~financing~~and ~~sources~~March ~~if available~~31, 2011. IfOur welenders ~~are~~have ~~unable~~elected, pursuant to ~~obtain~~the ~~such~~terms ~~funding~~of ~~from~~our ~~either~~existing debt agreement, to increase the interest rate on our ~~existing~~ ~~majority~~senior ~~shareholder~~and orsubordinated ~~another~~notes ~~source~~by ~~acceptable~~2% toper usannum over the otherwise applicable interest rate, ~~our~~effective ~~operations will~~as beof ~~materially~~December ~~adversely~~31, ~~affected~~2009.

WeIn ~~have undertaken~~addition, orwe ~~anticipate~~failed ~~undertaking~~to ~~certain~~make ~~actions~~the EBITDA leverage ratio for the twelve month periods prior to ~~reduce~~February ~~our~~1, ~~selling~~2010; accordingly, ~~general~~ ~~and~~our ~~administrative~~principal ~~expenses~~lenders earned warrants to purchase an aggregate of 2,526,480,000 ~~principally~~shares byof ~~reducing~~our ~~(i)~~common ~~compensation expense~~stock ~~through~~pursuant ~~wage~~to ~~and~~the ~~appropriate~~terms ~~headcount~~of ~~reductions~~the Amended and ~~(ii)~~Restated ~~occupancy expenses~~Note ~~through~~Purchase ~~downsizing~~Agreement, ~~and/or~~as ~~closing~~amended. When ~~facilities~~we also failed to ~~reduce~~make ~~overhead. Because~~the ofEBITDA ~~actions~~leverage ~~taken~~ratio for the twelve month period prior to ~~date~~August 1, 2010, our ~~cash~~principal ~~flow~~lenders ~~has~~earned ~~improved~~warrants to purchase an aggregate of 2,577,001,000 shares of our common stock. The warrants expire on the first anniversary of their issuance, have anti-dilution protections and benefit from other customary protections. See the discussion below under the heading Subsequent Event – Proposed Transaction with Lenders for more information concerning the warrants.

22We have undertaken or anticipate undertaking certain actions to reduce our selling, general and administrative expenses, principally by reducing (i) compensation expense through wage and appropriate headcount reductions and (ii) occupancy expenses through downsizing and/or closing facilities to reduce overhead. Because of actions taken to date, our cash flow has improved vis. a vis. what it would have otherwise been.

~~Assuming we~~The ~~are~~interest ~~able~~rate toon ~~secure~~the ~~additional~~Company’s ~~working~~senior ~~capital~~subordinated ~~in the short term~~notes, wewhich ~~intend~~had ~~in the~~a ~~long-term~~floor toof ~~continue~~13% ~~to seek significant business acquisitions~~ and ~~to continue~~a ~~the~~ceiling ~~expansion~~ of ~~our~~17%, ~~product~~was ~~and~~determined ~~service~~by ~~offerings~~the asCompany’s ~~well~~maximum asEBITDA ~~our international~~leverage ~~operations. Such~~ratio, ~~potential~~as ~~acquisitions and anticipated future business and international expansion activities will require significant additional working capital~~defined, ~~which~~on wethe ~~anticipate~~first ~~obtaining~~day ~~from~~of ~~our~~each ~~majority shareholder and/or existing lender~~quarter. WeAs ~~expect~~described ~~that~~above, ~~such form of further investment on~~ the ~~part~~Company’s ofinterest ~~our~~rate ~~principal~~has ~~shareholder~~been orincreased ~~lender~~by ~~would~~an ~~be a combination of~~ additional ~~equity~~2% orand, ~~senior indebtedness~~accordingly, ~~but~~for ~~there~~the isquarters ~~no assurance~~ended ~~that~~March we31, ~~could~~June ~~obtain~~30 ~~financing~~and onSeptember ~~such~~30, ~~terms.~~2010, In the ~~unlikely~~rate ~~event our~~increased ~~majority shareholder or our senior lender are unwilling~~ to ~~provide~~ the ~~necessary~~ ~~working~~aforementioned ~~capital~~19%. We oranticipate ~~acquisition~~that ~~funding on terms acceptable to us,~~ the ~~Company~~ ~~anticipates~~interest ~~obtaining~~rate ~~this~~will ~~growth~~remain ~~capital~~at ~~from~~that ~~other~~level ~~financing sources. If~~for weany ~~are~~subsequent ~~unable~~periods prior to ~~obtain~~the ~~growth~~closing ~~capital~~of ~~from~~the ~~either~~Asset ~~our existing~~Purchase ~~majority~~Agreement ~~shareholder~~dated orMay ~~another source acceptable to us~~13, we2011 ~~would~~(described ~~be unable~~below tounder ~~aggressively~~the ~~expand~~heading, ~~our~~Subsequent ~~business~~Event ~~operations~~– ~~and/or~~Proposed ~~make~~Transaction ~~one~~with ~~or more significant acquisitions~~Lenders).

~~The interest~~Our ~~rate~~debt onagreement ~~the~~requires ~~Company’s~~an ~~senior~~annual ~~subordinated~~sweep ~~notes, which has a floor~~ of ~~13%~~ ~~and~~excess acash ~~ceiling of 17%~~flow, ~~is determined by the Company’s maximum EBITDA leverage ratio,~~ as defined, onin the ~~first~~debt ~~day of each quarter~~agreement. For the ~~quarter~~ fiscal year ended June 30, 2009, ~~this~~although ~~ratio~~no payment was ~~less~~required ~~than~~under ~~3.50:1:00 for~~ the ~~initial~~definition ~~time; accordingly,~~of ~~the~~a ~~interest~~cash ~~rate~~flow onsweep in the ~~senior~~debt ~~subordinated~~agreement, ~~notes~~the ~~decreased~~Company agreed pursuant to ~~15% from~~an ~~17%~~amendment ~~for~~to ~~the~~such ~~quarters~~agreement ~~ended~~to ~~September~~pay 30a one-time, ~~2009~~additional ~~through~~$1,000 ~~March~~principal ~~31, 2010~~payment. ~~For~~The ~~the~~Company ~~quarter~~paid ~~ended~~this ~~June~~additional ~~30,~~principal ~~2010,~~on ~~the~~October ~~rate~~2, ~~will increase to 17%~~2009. WeA ~~anticipate~~payment ~~that this rate~~ will ~~remain~~not atbe ~~that~~required ~~level thereafter,~~for ~~assuming~~fiscal we2010 ~~reach~~under ~~agreement~~the ~~with~~cash ~~our~~flow ~~senior~~sweep ~~lender on such terms~~ in the ~~aforementioned~~debt ~~on-going negotiations~~agreement.

Our debt agreement requires an annual sweep of excess cash flow, as defined in the debt agreement, which may limit our ability to use operating cash flow to fund acquisitions. For the fiscal year ended June 30, 2009, although no payment was required under the definition of a cash flow sweep in the debt agreement, the Company agreed pursuant to an amendment to such agreement to pay a one-time, additional $1,000 principal payment. This Company paid this additional principal on October 2, 2009. The Company currently does not believe that a payment will be required for fiscal 2010 under the cash flow sweep in the debt agreement.25

~~Net~~Subsequent ~~cash used~~Event in– ~~operating~~Proposed ~~activities~~Transaction ~~of $969 for the nine months ended March 31, 2010 was principally attributable to a net loss of $5,466 and an increase in accounts receivable of $1,825 (which was due to an increase in revenue~~ with major customer late in the quarter), partially offset by an increase in accounts payable and accrued expenses of $2,014 attributable to inventory purchases, and non-cash charges of $4,371, principally consisting of depreciation and amortization, deferred income taxes, the aforementioned one-time write off of deferred transaction costs and aforementioned financial costs in connection with the warrant issuance to our senior lender. Net cash used in operating activities of $2,500 for the nine months ended March 31, 2009 was principally due to an increase in accounts receivable and inventory of $3,339 and $5,978, respectively, attributable to the growth in the business, partially offset by net income of $605 and an increase in accounts payable and accrued expenses of $4,510 also attributable to the growth in the business.Lenders

~~Net~~On ~~cash used~~February in11, ~~investing~~2011, ~~activities~~Sankaty ofAdvisors, ~~$391~~LLC ~~for~~(“Sankaty”), ~~the~~advisor ~~nine~~to ~~months~~our ~~ended~~principal ~~March~~lenders 31(the “Lenders”), ~~2010 was~~submitted ~~attributable~~ to ~~capital~~our ~~expenditures~~Board of ~~$391~~Directors ~~for~~a ~~property~~proposal ~~and equipment. Net~~pursuant ~~cash~~to ~~used~~which, inif ~~investing~~accepted, ~~activities~~ownership of ~~$9,932~~all ~~for~~of ~~the nine~~our ~~months~~assets ~~ended~~would ~~March~~be 31transferred to a new entity controlled by the Lenders, ~~2009~~in ~~was~~exchange ~~attributable~~for assuming or extinguishing our obligations to the ~~acquisition~~Lenders, payment of ~~Tritronics~~ ~~for~~certain ~~$8,296,~~Company ~~net~~expenses and the payment to the Company of cash ~~acquired,~~and ~~plus~~issuance ~~related~~of ~~transaction~~equity ~~costs~~ in the ~~amount~~new company. A special committee comprised of ~~$865~~all ~~and~~of ~~capital~~our ~~expenditures~~directors who are not affiliated with our majority shareholder was formed to evaluate the proposal. No member of ~~$771~~the ~~for~~Company’s ~~property~~management ~~and equipment~~currently serves on our Board of Directors.

~~Net~~On ~~cash used~~May in13, ~~financing~~2011, ~~activities~~following ofnegotiations ~~$1,400~~among ~~for~~ the ~~nine months ended March 31~~parties, ~~2010 was~~we ~~attributable~~and ~~entirely~~our tooperating ~~principal~~subsidiaries ~~payments. Net~~entered ~~cash provided~~into byan ~~financing~~Asset ~~activities~~Purchase ofAgreement ~~$15,845~~providing for the ~~nine~~sale ~~months~~of ~~ended~~substantially ~~March~~all ~~31, 2009~~of ~~was~~our ~~attributable~~assets to ~~proceeds~~Encompass ofSupply ~~$4,167~~Chain ~~and $13~~Solutions,~~000~~ ~~from~~Inc. (the ~~sale~~“Buyer”). The ofBuyer ~~Series E~~is ~~Preferred~~a ~~Stock~~newly ~~and~~formed ~~senior~~entity ~~and~~affiliated ~~subordinated notes, respectively, in connection~~ with ~~the~~Sankaty ~~acquisition of Tritronics~~ and the ~~Philips transactions, offset by payments of principal on notes and capital lease payments of $742 and redemption of common stock of $308~~Lenders. ~~In addition, financing costs of $272 were incurred in connection with the debt issuance.~~

Under the Asset Purchase Agreement, the Buyer will acquire substantially all of our and our subsidiaries’ assets (other than any assets of certain inactive subsidiaries). The Buyer will assume our senior debt held by the Lenders. The Lenders will contribute our subordinated debt to the Buyer, and the Buyer will contribute the subordinated debt to us, making us both the debtor and creditor, effectively extinguishing the subordinated debt. In addition,

The Buyer will assume all of our other liabilities except for specified excluded liabilities (as described below).

The Buyer will pay $1,000 in cash purchase price.

We will receive common equity in the Buyer’s parent company (the “Parent”), also a newly formed entity affiliated with the Lenders. The equity is discussed further below.

The Buyer will reimburse up to $150 of our transaction expenses, and will contribute a scheduled amount to the settlement of certain liabilities.

The Lenders will surrender their equity interests in the Company. Currently, the Lenders own shares of our Series C Preferred Stock and Series E Preferred Stock, as well as warrants to acquire shares of our common stock at a nominal price.

We expect to receive preferred equity of the Parent, which is then expected to be exchanged for all of the subordinated debt owed by us to the former majority shareholders of our subsidiaries, Vance Baldwin, Inc., and Tritronics, Inc. (the “Baldwin/Tritronics Parent Equity”). This subordinated debt (approximately $2,045 in the aggregate) was issued as part of the purchase price for those subsidiaries.

Excluded liabilities include:

the debt held by the former Tritronics and Vance Baldwin shareholders (which is expected to be cancelled in exchange for the Baldwin/Tritronics Parent Equity as described above);

any obligations to our former CEO, Wayne Danson, arising from pending litigation between Mr. Danson and us regarding the termination of his employment;

any obligations to Mr. Danson, arising from a letter agreement between the Company and Mr. Danson, executed in the 2007, relating to $310 in accrued consulting fees;

a note in the principal amount of $206 held by our outside counsel;

transaction expenses in excess of $150;

liabilities to employees, unless the liability is caused or increased by the Buyer’s failure to offer employment to any Company employee; and

our or our subsidiaries’ tax liabilities.

A portion of the purchase price ($350) will be placed in escrow to cover our indemnification obligations under the Asset Purchase Agreement. In addition, we will be prohibited from making any cash distributions to our shareholders or payments to affiliates for two years after closing under the Asset Purchase Agreement. We will be required to indemnify the Buyer for any losses and expenses arising from:

a breach of any representation or warranty by us relating to employee benefits or taxes;

a breach or violation of any covenant of the Company relating to taxes;

the excluded liabilities; and

Our indemnification liability is limited to an amount equal to the sum of the following: (1) the escrow amount, (2) cash on hand to the extent it exceeds claims payable to third parties, and (3) distributions to our shareholders or payments to our affiliates made in contravention of the Asset Purchase Agreement.

The closing of the transactions contemplated by the Asset Purchase Agreement is subject to a number of conditions, including:

the representations and warranties of the parties being true and correct in all material respects at closing,

there being no material breaches of the terms of the Asset Purchase Agreement,

absence of any litigation or other legal requirement prohibiting the consummation of the transaction or preventing the Buyer from owning the purchased assets,

certain third party consents,

requisite shareholder approval (as described in more detail below),

the completion of arrangements to effect the exchange of the Baldwin/Tritronics Parent Equity received by us for the subordinated debt held by the former Tritronics and Vance Baldwin shareholders,

the completion of the terms of the preferred and common equity arrangements for the Parent,

the execution by H.I.G. Capital, L.L.C. of a non-competition agreement, and

certain other customary closing conditions.

We may terminate the Asset Purchase Agreement if, before the closing, we enter an acquisition agreement with a third party that provides, on terms reasonably acceptable to the Buyer, for payment in full of the senior and subordinated notes held by the Lenders. As of March 31, 2011, that amount was approximately $37,000. In the event the Asset Purchase Agreement is terminated on this basis, we must reimburse Buyer’s transaction expenses. The financial advisor to the special committee of the Board of Directors, has been authorized to contact parties who may have an interest in acquiring the Company or its assets.

Our Board of Directors approved the Asset Purchase Agreement after receiving the recommendation of the special committee. The special committee was advised by its financial advisor, who rendered an opinion that the transaction contemplated by the Asset Purchase Agreement is fair to the Company, from a financial point of view. The special committee will evaluate any potential alternative transaction brought to its attention by its financial advisor.

If the transactions contemplated in the Asset Purchase Agreement and the exchange of the Baldwin/Tritronics Parent Equity for the subordinated debt held by the former Tritronics and Vance Baldwin shareholders are effected, our assets/liabilities would consist of cash remaining after payment of expenses of the transaction in excess of $150 and liabilities not assumed by the Buyer, as well as the common stock of the Parent. The common stock in the Parent that we will receive will represent a 15% interest in the common equity of the Parent, but there will be approximately $10,000 in secured debt and at least $33,000 in preferred equity senior to the common stock that we will receive. Accordingly, we do not place any significant value on the common stock. Nor do we anticipate a material amount of cash will remain after payment of expenses and non-assumed liabilities. The liquidation preference and accrued dividends of our preferred stock exceeds $11,000. Therefore the transactions contemplated by the Asset Purchase Agreement will not result in any distribution to common shareholders.

The transactions contemplated by the Asset Purchase Agreement are expected to permit the business currently conducted by us to operate profitably with reduced debt and a more favorable capital structure. As we will be divested of these businesses as assets, however, those improvements will not benefit us or our shareholders.

The Asset Purchase Agreement requires shareholder approval. All classes of our voting preferred stock will vote together with the common stock as one class, with each share of preferred stock entitled to cast a number of votes equal to the number of common shares into which it can be converted. Because of this, the holder of a majority of our outstanding Series C Preferred Stock, ACT-DE, LLC, has sufficient votes to approve the Asset Purchase Agreement without the vote of any other shareholders. ACT-DE, LLC has committed to vote for approval of the Asset Purchase Agreement pursuant to a Voting Agreement between ACT-DE, LLC and the Buyer.

Net Cash Used In Operating Activities

Net cash used in operating activities of $1,278 for the six months ended December 31, 2010 was principally attributable to a net loss of $7,047, offset by non-cash charges of $2,448, principally consisting of depreciation and amortization, and the aforementioned financial cost incurred in connection with the warrants issued to our senior lender, as well as a decrease in accounts receivable of $946 (which was generally due to a change in payment terms with a major customer), a decrease in inventory of $1,018 due to the effect of facilities consolidation under the restructuring program, a decrease of $476 in the amount due from vendors resulting from reduced purchases and therefore fewer returns to vendors, a decrease in prepaid expense and other assets due to lower core charges resulting from a decrease in new parts inventory, and an increase in accrued interest due to non-payment of June 30, 2010 interest payable to the Company’s principal lender, offset in part by a reduction accounts payable associated with the decrease in inventory.

Net cash used in operating activities of $331 for the six months ended December 31, 2009 was principally due to a decrease in accounts payable and accrued expenses of $2,356, attributable to a lower level business in the current period, offset by a decrease in accounts receivable of $1,999, also attributable to a lower level business in the current period, and non-cash charges of $2,176, principally consisting of depreciation and amortization, deferred income taxes and the aforementioned one-time write off of deferred transaction costs.

Net Cash Used In Investing Activities

Net cash used in investing activities of $190 and $225 for the six months ended December 31, 2010 and 2009, respectively, was attributable to capital expenditures in each period for property and equipment.

Net Cash Used In Financing Activities

Net cash used in financing activities of $136 for the six months ended December 31, 2010 was principally attributable to quarterly principal payments on senior notes. Net cash used in financing activities of $1,270 for the six months ended December 31, 2009 was primarily attributable to an annual cash sweep in the amount of $1,000 and quarterly principal payments on senior notes.

Off-Balance Sheet Arrangements

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

RISKS FACTORS

In addition to the other information included in this Quarterly Report on Form 10-Q, you should carefully review and consider the factors discussed in Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended June 30, 2009, certain of which have been updated below. These factors materially affect our business, financial condition or future results of operations. The risks, uncertainties and other factors described in our Annual Report on Form 10-K and below are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations, financial condition or operating results. Any of the risks, uncertainties and other factors could cause the trading price of our common stock to decline substantially.

Failure To Meet Certain Financial Covenant Tests required By Our Debt Agreements Would Result In An Event Of Default.

Our ability to meet certain financial covenants will depend on our ability to generate sufficient earnings from our operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. On February 1, 2010, we failed to satisfy a certain EBITDA leverage ratio covenant under our debt agreement, which required us to issue to our principal lender a warrant to purchase 2,526,480,000 shares of our common stock for no additional or nominal consideration. At March 31, 2010, we failed to meet certain financial covenant tests, each of which our principal lender waived. We cannot provide any assurances that we will have sufficient earnings to meet our financial covenant tests or that our principal lender will grant us further waivers.

Our Disclosure Controls and Procedures for Financial Reporting Are Subject to Certain Limitations and Have Required Remediation.

Management has concluded that as of the period ended March 31, 2010, our disclosure controls and procedures were effective. Such controls and procedures, however, may not be adequate to prevent or identify existing or future internal control weaknesses due to certain limitations, including, but not limited to, our dependence on our enterprise-wide IT system for inventory management. As an example, we concluded the our disclosure controls and procedures were not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for the periods ended September 30, 2009 and December 31, 2009 because of the identification of a material weakness relating to the proper carrying value of certain components of inventory and the result of a certain key controls in place not operating effectively. The material misstatement of inventory was not prevented or detected on a timely basis due to lack of adequate testing of perpetual inventory records for the subject components of inventory and the failure of entity level controls in place, such as the analyses of balance sheet account balance fluctuations, gross profit and gross margin, which were designed to detect the overstatement of inventory and gross profit. As a result, we restated our consolidated financial statements for the periods ended September 30, 2009 and December 31, 2009. We believe that we have remediated the material weakness described above and will continue to do so in future periods by performing periodic verification of the accuracy of the perpetual records by cycle counting quantities of the subject components of inventory reported as being on hand and conducting more in-depth analyses of all the various factors impacting balance sheet account balance fluctuations, monthly gross profit and gross margin. Despite our remediation efforts, however, certain limitations remain and there is a risk that material misstatements in results of operations and financial condition may not be prevented or detected on a timely basis by our internal controls over financial reporting and may require us to restate our financial statements in the future. This could, in turn, adversely affect the trading price of our common stock and there is a risk that repeated restatements could result in an investigation by the SEC.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

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

Item 4. Controls And Procedures

(A) Evaluation Of Disclosure Controls And Procedures

Prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(B) Changes In Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Section 13a-15(f) or 15d-15(f) of the Exchange Act) during our fiscal quarter ended ~~March~~December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2528

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

~~None~~The Company from time-to-time is involved in litigation incidental to the conduct of its business. See Note 12 – Subsequent Events under the heading Circuit City Bankruptcy Proceedings and Note 7 – Commitments and Contingencies under the heading Dispute with Former Chief Executive Officer of the Notes to the Consolidated Financial Statements set forth under Item 1 - Financial Statements of Part I of this Report for a description of legal proceedings in which we are currently involved, which disclosure is incorporated herein by reference.

Item 1A. Risk Factors

~~In addition~~Our to the other information included in this Quarterly Report on Form 10-Q, you should carefully review and consider the factors discussed in Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended June 30, 2009 and filed with the SEC on September 28, 2009. These factors materially affect our business, ~~financial~~is ~~condition~~subject or future results of operations. The risks, uncertainties and other factors described in our Annual Report on Form 10-K are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to ~~us or that we currently deem immaterial may also impair our business operations, financial condition or operating results. Any of~~ the ~~risks,~~following ~~uncertainties~~risk ~~and other~~ factors ~~could cause the trading price of our common stock to decline substantially.~~:

To Ensure Continuation of Our Operations, We Need to Restructure or Refinance All or a Portion of Our Existing Indebtedness.

In the fiscal year ended June 30, 2010 and in the three months ended September 30 and December 31, 2010 and March 31, 2011, we failed to satisfy all our quarterly principal and interest debt service payments and failed to meet certain other covenants under our existing debt agreement. To date, our lenders have not exercised any of its rights under the existing debt agreement with respect to such failures. We have reached an agreement with our principal lenders with respect to our existing indebtedness. On May 13, 2011, we and our operating subsidiaries entered into an Asset Purchase Agreement providing for the sale of substantially all of our assets to Encompass Supply Chain Solutions, Inc. (which we refer to herein as the “buyer”), which is a newly formed entity affiliated with our principal lenders and Sankaty Advisors, LLC (“Sankaty”), the advisor to our principal lenders. Under the Asset Purchase Agreement, the buyer will acquire substantially all of our and our subsidiaries’ assets (other than any assets of certain inactive subsidiaries). The buyer will assume our senior debt held by the lenders. The lenders will contribute our subordinated debt to the buyer, and the buyer will contribute the subordinated debt to us, making us both the debtor and creditor, effectively extinguishing the subordinated debt. The transactions contemplated by the Asset Purchase Agreement are subject to the approval of our shareholders and certain other closing conditions, including the agreement by the former majority shareholders of our subsidiaries, Vance Baldwin, Inc., and Tritronics, Inc., to exchange the subordinated debt that they hold for preferred equity of the buyer’s parent. The Asset Purchase Agreement may also be terminated upon the occurrence of certain events. We cannot make any assurances that the transactions contemplated by the Asset Purchase Agreement will be completed. In the event that we do not complete the transactions contemplated by the Asset Purchase Agreement and do not obtain funding from other sources to pay off the debt held by the lenders, our operations would be materially adversely affected.

Restructuring Would Not Result in Material Distribution to Current Stockholders.

If the transactions contemplated in the Asset Purchase Agreement dated May 13, 2011 as described above are effected, our assets/liabilities would consist of cash remaining after payment of expenses of the transaction in excess of $150 and liabilities not assumed by the buyer, as well as the common stock of the buyer’s parent. The common stock in the parent that we will receive will represent a 15% interest in the common equity of the parent, but there will be approximately $10,000 in secured debt and at least $33,000 in preferred equity senior to the common stock that we will receive. Accordingly, we do not place any significant value on the common stock. Nor do we anticipate a material amount of cash will remain after payment of expenses and non-assumed liabilities. The liquidation preference and accrued dividends of our preferred stock exceeds $11,000. Therefore, the transactions contemplated by the Asset Purchase Agreement will not result in any distribution to our common shareholders.

Failure To Meet Certain Financial Covenant Tests Required By Our Debt Agreements Has Resulted In An Event Of Default.

On February 1 and August 1, 2010, we failed to satisfy a certain EBITDA leverage ratio covenant under our debt agreement, which entitled the purchasers of our notes to receive warrants to purchase shares of our common stock for nominal consideration in the aggregate amounts of 2,526,280,000 shares and 2,577,001,000 shares, respectively. At March 31 (for which compliance was waived), June 30, September 30 and December 31, 2010 and March 31, 2011, we failed to meet certain financial covenant tests. At each of March 31 and June 30, 2010, we failed to make required principal and interest payments on a timely basis although we paid the principal and interest payment due on those dates later in June and October 2010, respectively. At each of September 30 and December 31, 2010 and March 31, 2011, we failed to make required principal and interest payments. Due to these failures, our principal lenders have declared an event of default under our loans. To date the only remedy sought by our lenders has been an increase of the interest rate to a default rate specified in the loan documents. If we do not complete the transactions contemplated by the Asset Purchase Agreement dated May 13, 2011 and described above, or engage in another transaction that enables us to repay our debt, the lenders could declare all of our obligations due and payable, and foreclose on all of our assets. We cannot provide any assurances that we will have sufficient earnings to meet our financial covenant tests or that our principal lenders will grant us further waivers. If our principal lenders do not grant us further waivers and if we do not reach an agreement to restructure our debt, we would likely be in default under our debt agreement..

Our Independent Auditors Have Expressed Substantial Doubt About Our Ability To Continue As A Going Concern As Of June 30, 2010.

We received a report from our independent auditors for the year ended June 30, 2010 that includes an explanatory paragraph describing the uncertainty as to the Company’s ability to continue as a going concern. We failed to make certain payments of principal and interest on a timely basis and failed to meet certain financial covenant tests required by our debt agreements which have resulted in an event of default. Management believes that the Company needs to restructure or refinance all or a portion of its existing indebtedness to continue its operations. As described above, we have reached an agreement with our principal lenders and entered into an Asset Purchase Agreement, dated May 13, 2011, pursuant to which, among other things, we will sell substantially all of our and our subsidiaries’ assets (other than any assets of certain inactive subsidiaries) and our senior debt held by the lenders will be extinguished.

Our Disclosure Controls and Procedures for Financial Reporting Are Subject to Certain Limitations and Have Required Remediation.

Management has concluded that as of the period ended September 30, 2010, our disclosure controls and procedures were effective. Such controls and procedures, however, may not be adequate to prevent or identify existing or future internal control weaknesses due to certain limitations, including, but not limited to, our dependence on our enterprise-wide IT system for inventory management. As an example, we concluded that our disclosure controls and procedures were not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for the periods ended September 30, 2009 and December 31, 2009 because of the identification of a material weakness relating to the proper carrying value of certain components of inventory and the result of a certain key controls in place not operating effectively. The material misstatement of inventory was not prevented or detected on a timely basis due to lack of adequate testing of perpetual inventory records for the subject components of inventory and the failure of entity level controls in place, such as the analyses of balance sheet account balance fluctuations, gross profit and gross margin, which were designed to detect the overstatement of inventory and gross profit. As a result, we restated our consolidated financial statements for the periods ended September 30, 2009 and December 31, 2009. We believe that we have remediated the material weakness described above and will continue to do so in future periods by performing periodic verification of the accuracy of the perpetual records by cycle counting quantities of the subject components of inventory reported as being on hand and conducting more in-depth analyses of all the various factors impacting balance sheet account balance fluctuations, monthly gross profit and gross margin.

Despite our remediation efforts, however, certain limitations remain and there is a risk that material misstatements in results of operations and financial condition may not be prevented or detected on a timely basis by our internal controls over financial reporting and may require us to restate our financial statements in the future. This could, in turn, adversely affect the trading price of our common stock and there is a risk that repeated restatements could result in an investigation by the SEC.

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

We rely on the business of a limited number of key customers. While some of these key customers are contractually committed, these contracts are terminable within 60 to 90 days. If one or more of these key customers terminate their relationships with us, it could have a material adverse effect on our business.

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

The price of office equipment parts and computer peripheral products that ESS purchases and the parts for consumer electronics, appliances, printers and office equipment that EPD purchases for resale may fluctuate significantly in the future although we have experienced no such fluctuations to date. Changes in the supply of or demand for such parts and products could also affect delivery times and prices. We cannot provide assurances that EPD and ESS will continue to have access to such parts and products in the necessary amounts or at reasonable prices in the future or that any increases in the cost of such parts and products will not have a material adverse effect on our business.

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

EPD and ESS depend on their ability to identify, hire, train, and retain qualified technical and other personnel as well as a management team to oversee the services that each provide. A loss of a significant number of these experienced personnel would likely result in reduced revenues for and could materially affect our business. Our ability to attract and retain qualified personnel depends on numerous factors, including factors we cannot control, such as conditions in the local employment markets in which it operates. We cannot provide any assurances that EPD and ESS will be able to hire or retain a sufficient number of qualified personnel to achieve their financial objectives.

We Could Fail To Attract Or Retain Key Personnel.

Our success largely depends on the efforts and abilities of key corporate executives as well as key executives at EPD and ESS. The loss of the services of these key executives could materially adversely affect our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management’s attention away from operational issues.

Ours Issuances of Preferred Stock Has Significantly Diluted the Equity Ownership of our Stockholders and the Future Conversion of our Outstanding Preferred Stock will also Cause Significant Dilution to our Existing Stockholders.

Our issuances of preferred stock in August 2007 in connection with our recapitalization and acquisition of Vance Baldwin significantly diluted the equity ownership of our stockholders. The significant dilution of the common stock ownership of existing stockholders could have an adverse effect on the price of the shares of common stock and on the future volume of the shares of common stock traded.

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

There is a very limited public market for our common stock, and there can be no assurance that an active trading market will continue. An absence of an active trading market could adversely affect our stockholders’ ability to sell our common stock in short time periods, or at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors, such as possible quarterly fluctuations in our financial results, changes in the overall economy and the volatility of the financial markets, could cause the price of our common stock to fluctuate substantially.

As a result of the significant preferred stock issuances we have undertaken, outstanding shares of our common stock represent only a small portion of our fully diluted equity. The price at which shares of our common stock may trade from time to time may not reflect the actual value of our business or the actual value of our common stock.

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

Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Exchange Act. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could also cause our stock price to decline. Penny stocks:

have a price of less than $5.00 per share;

are not traded on a "recognized" national exchange;

are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or

include stock in issuers with net tangible assets of less than $2,000 (if the issuer has been in continuous operation for at least three years) or $5,000 (if in continuous operation for less than three years), or with average revenues of less than $6,000 for the last three years.

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor.

The Holders of Preferred Stock are Entitled to Rights and Preferences that are Significantly Greater than the Rights and Preferences of the Holders of our Common Stock, Including Preferential Payments Upon a Sale or Liquidation of the Company.

Holders of our preferred stock are entitled to a number of rights and preferences which holders of shares of our outstanding common stock do not and will not have. Among these rights and preferences is a preference on a sale or liquidation of the Company, which means that holders of preferred stock will be entitled to receive the proceeds out of any sale or liquidation of the Company before any such proceeds are paid to holders of our common stock. In general, if the proceeds received upon any sale or liquidation do not exceed the total liquidation proceeds payable to the holders of preferred stock, holders of common stock would receive no value for their shares upon such sale or liquidation.

Certain Private Stockholders, such as ACT-DE, LLC and Sankaty Entities, Control a Substantial Interest in the Company and thus may Influence Certain Actions, Including Actions Requiring a Shareholder Vote.

ACT-DE, LLC and Sankaty own approximately 62.5% and 9.9%, respectively, of our outstanding common stock in the aggregate on a fully diluted basis. In addition, in connection with our recapitalization in August 2007, we entered into a Stockholder Agreement with, among other parties, ACT-DE, LLC that addresses the election of certain individuals, or individuals nominated by certain parties, to our Board of Directors. Thus, these shareholders have the ability to influence certain actions requiring a shareholder vote, including the election of directors.

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

As a result of the Company failing to meet a certain EBITDA leverage ratio covenant test as of ~~February~~August 1, 2010 under the debt agreement with Sankaty Advisors, LLC, the Company’s principal lender, Sankaty earned ~~and was granted~~ on ~~February~~August 1, 2010 awarrants ~~warrant~~ to purchase 2,~~526~~577,~~480~~001,000 shares of the Company’s common stock for no additional or nominal consideration. The ~~warrant~~warrants ~~has~~have a one-year term. The issuance of the ~~warrant~~warrants was exempt from registration under the Securities Act in reliance upon Section 4(2) thereof. The Company believes that Sankaty is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act. ~~The~~ ~~warrant~~If certificated, the warrants will include a legend to indicate that itthey isare restricted. The issuance of the ~~warrant~~warrants did not involve the use of underwriters, and no commission was paid in connection therewith.

Item 3. Defaults Upon Senior Securities

The Company did not make the ~~interest~~principal payment on the senior debt or interest payments on the senior and senior subordinated debt due as of ~~March~~September 30 and December 31, 2010, and did not meet certain financial covenants as of ~~that date~~such dates. ~~Subsequent~~Due to ~~that~~the failure to make the required principal and interest payments, our principal lenders have declared an event of default under our senior debt and senior subordinated debt. To date, the ~~lender~~only ~~waived~~remedy ~~all~~sought ~~such defaults~~by our lenders has been an increase of the interest rate to a default rate specified in the loan documents. The aggregate amount of the senior and senior subordinated debt in default was $34,588 on December 31, 2010.

Item 4. [Removed and Reserved.]

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits are incorporated herein by reference or are filed with this quarterly report as set forth in the Exhibit Index beginning on page 2834 hereof.

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Signatures

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

	Encompass Group Affiliates, Inc.
Date: June 22, 2010	By:	/s/ Wayne I. Danson
Date: June 27, 2011	By:	/s/ Robert B. Gowens
	Name:	~~Wayne~~Robert IB. ~~Danson~~Gowens
	Title:	~~President,~~Interim Chief Executive Officer (Principal Executive Officer) ~~and Director~~
Date: June 22, 2010	By:	/s/ John E. Donahue
Date: June 27, 2011	By:	/s/ John E. Donahue
	Name:	John E. Donahue
	Title:	Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

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Exhibit No.	Description	Location (1)

2.1	Asset Purchase Agreement dated May 27, 2004, by and between Cyber-Test, Inc., a Delaware corporation, and Cyber-Test, Inc., a Florida corporation.	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 18, 2004

2.2	Stock Purchase Agreement entered into by and between Encompass Group Affiliates, Inc. and Fred V. Baldwin, dated as of August 17, 2007	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

2.3	Stock Purchase Agreement entered into by and between Encompass Group Affiliates, Inc., a Florida corporation, Encompass Group Affiliates, Inc., a Delaware corporation, Tritronics, Inc., Tritronics, LLC and the members of Tritronics, LLC listed on Schedule 2 thereto, dated as of August 1, 2008	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

3(i)(a)	Restated Articles of Incorporation of Advanced Communications Technologies, Inc.	Incorporated by reference to Exhibit 3(i) to the Company’s Annual Report on Form 10-KSB filed with the SEC on September 28, 2007

3(i)(b)	Articles of Amendment to the Articles of Incorporation of Advanced Communications Technologies, Inc. filed with the Secretary of State of Florida on May 6, 2008	Incorporated by reference to Exhibit 3(i)(b) to the Company’s Annual Report on Form 10-KSB filed with the SEC on September 28, 2007

3(i)(c)	Articles of Amendment to the Articles of Incorporation of Advanced Communications Technologies, Inc. filed with the Secretary of State of Florida on August 1, 2008	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

3(ii)	Amended Bylaws of Advanced Communications Technologies, Inc.	Incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

4.1	Form of Exchange Agreement, dated June 24, 2004, by and among Advanced Communications Technologies, Inc. and certain debenture holders of Hy-Tech Technology Group, Inc.	Incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-KSB filed with the SEC on November 3, 2004

4.2	Form of Convertible Promissory Note issued in connection with Exhibit 2.2	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

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4.3.1	Note Purchase Agreement, dated as of August 17, 2007, by and among Encompass Group Affiliates, Inc. as Issuer, and Advanced Communications Technologies, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

4.3.2	Form of Senior Note issued in connection with Exhibit 4.3.1	Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

4.3.3	Form of Subordinated Note issued in connection with Exhibit 4.3.1	Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

4.3.4	First Lien Pledge and Security Agreement, dated as of August 17, 2007, between Encompass Group Affiliates, Inc., Advanced Communications Technologies, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

4.3.5	Second Lien Pledge and Security Agreement , dated August 17, 2007, between Encompass Group Affiliates, Inc., Advanced Communications Technologies, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2007

4.4	Form of Subordinated Promissory Note issued in connection with Exhibit 2.3	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

4.5.1	Amended and Restated Note Purchase Agreement, dated as of August 1, 2008, by and among Encompass Group Affiliates, Inc., a Delaware corporation as Issuer, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC.	Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

4.5.2	Form of Series B Subordinated Note issued in connection with Exhibit 4.5.1.	Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

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4.5.3	Amended and Restated First Lien Pledge and Security Agreement, dated as of August 1, 2008, between Encompass Group Affiliates, Inc., a Delaware corporation, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC	Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

4.5.4	Amended and Restated Second Lien Pledge and Security Agreement, dated August 1, 2008, between Encompass Group Affiliates, Inc., a Delaware corporation, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC.	Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2008

4.5.5	Amendment No. 1 to the Amended and Restated Note Purchase Agreement, dated as of August 1, 2008, by and among Encompass Group Affiliates, Inc., a Delaware corporation as Issuer, Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and Sankaty Advisors, LLC, dated January 12, 2009.	Incorporated by reference to Exhibit 4.5.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 13, 2009

31.1	Certification by Principal Executive Officer pursuant to Sarbanes-Oxley Section 302	Filed herewith

31.2	Certification by Principal Financial Officer pursuant to Sarbanes-Oxley Section 302	Filed herewith

32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350	Filed herewith

32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith

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

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