Changes in purchasing mechanisms enacted by the State of New Jersey in fiscal 2010 require certain purchases made by State entities be made directly from manufacturers, which decreases our equipment sales revenue. Under this “agency model,” certain orders are processed directly by our hardware partners, who receive purchase orders directly, and ship and invoice to our clients directly. TransNet is paid an agency fee for generating the transaction. Although these transactions lower the amount of revenue realized, they provide payment of the fee within a shorter period than the typical payment period for sales invoiced by the Corporation, and free our funding for other transactions. Sales under this agency model were not a material source of revenues. Revenues from these transactions are included in Service revenues. Cost of equipment sold may be impacted by the Corporation’s eligibility for temporary incentives, such as rebates, offered by equipment manufacturers from time to time. The Corporation’s eligibility for the rebates is usually subject to minimum sales levels and satisfaction of other criteria established by the manufacturers in their sole discretion.

Service related revenues are a material portion of revenues and, as noted above, are significant in their contributions to net income because these operations typically yield a higher profit margin than equipment sales. Service revenues are generated primarily by services including planning, design, configuration, installation and implementation, testing, and optimization, often related to the sale and implementation of VoIP networks. Project work is the major source of service revenue generation and Management continues its focus on optimizing utilization rates of its service technicians. Revenues are also generated by a variety of support contracts for these networks which provide service and support for the customer’s personal computers, peripherals, and networks. These contracts are short-term, and contain provisions which permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur. Under these agreements, TransNet’s Support Center provides troubleshooting, diagnosis, and remedial services performed remotely by skilled system engineers, who will be dispatched to perform on-site repairs, if necessary. The agreements are for twelve months or less. In addition, our system engineers and service technicians provide service and support on an on-call basis.

Management believes that future spending will be subject to specific criteria, but also believes that as single source provider, the Corporation is in a better position to satisfy client demands for cost-effectiveness and a suitable return on investment. The VoIP systems and solutions marketed by TransNet are designed with the capacity for “optimization” through the subsequent addition of layers of solutions, for example, security solutions, paving the way to future business from existing customers. The Corporation reviews and modifies its service offerings in response to industry fluctuations, and has recruited experienced and specially certified systems engineers and project managers to respond to increased VoIP projects. We are confident that our strategy of being an advanced solutions provider will result in future revenues from clients’ optimization of already installed networks, providing clients with greater operating efficiencies.

In addition to these technical services, TransNet provides temporary and permanent IT staffing and consulting services. Our staffing services are not a material source of revenues, but these services carry higher profit margins than equipment sales. Despite the economic slowdown, businesses continue to be faced with special projects to perform required upgrades, repairs, and replacement of their networks despite the recession and demand for our services increased. Because employers are reluctant to expand their own workforce in light of the recession, TransNet’s staffing operations experienced a strong demand for temporary IT support specialists. Revenues generated by our staffing operations continue to improve in conjunction with the demand for temporary employees and an increased demand for permanent placements noted during the third fiscal quarter.. Although no assurances can be given, we believe that as the economy recovers and businesses begin to increase the number of employees, revenues and profits from our staffing services will be positively affected and will continue to increase.

Our clients continued to be conservative in their IT budgetary spending and scrutinize budgets and returns on investments. In conjunction with attention on utilization rates of our service technicians, Management monitors and takes steps to reduce selling, general and administrative expenses in an effort to contain expenses as much as possible.

In addition to the challenging economic environment, the IT industry experiences a continuing trend of decreasing prices of equipment and intense competition. Management believes that this trend will continue. Industry-wide, the result of price erosion has been lower profit margins on sales, which require businesses to sell a greater volume of equipment to maintain past earning levels. Price decreases has intensified competition within the industry, including the consolidation of businesses through merger or acquisition, as well as the increased initiation of sales by certain manufacturers directly to the end-user and the entrance of manufacturers into technical services business.

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