As a matter of policy, the Company does not provide forecasts of future financial performance.  The statements made in this Form 10-Q Quarterly Report which are not historical facts are forward-looking statements.  Such forward-looking statements often contain or are prefaced by words such as “will” and “expect.” As a result of a number of factors, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause the Company’s actual results to differ materially from those in the forward-looking statements include, without limitation, general business conditions, the demand for the Company’s services, competitive market pressures, the ability of the Company to attract and retain qualified personnel for regular full-time placement and contract assignments, the possibility of incurring liability for the Company’s business activities, including the activities of its contract employees and events affecting its contract employees on client premises, and the ability to attract and retain qualified corporate and branch management.  The Company is under no obligation to (and expressly disclaims any such obligation to) and does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

Finite life intangible assets are comprised of a non-compete agreement, management agreement, trade name and customer relationships.  The non-compete agreement and trade name are amortized on a straight – line basis over the estimated useful lives of 5 years.  The customer relationships are amortized based on the future undiscounted cash flows over estimated remaining useful lives of three to 10 years.  The management agreement intangible was previously being amortized over the five year term of the agreement.  Over the next five years, annual amortizationAmortization expense for these finite life intangible assets will be $394,000 in$193,000 for the remainder of fiscal 2012, $376,000 in fiscal 2013, $359,000 in fiscal 2014, $340,000 in fiscal 2015, $321,000 in fiscal 2016 and $1,230,000$910,000 thereafter.

Long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company evaluates, regularly, whether events and circumstances have occurred that indicate possible impairment and relies on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows.  The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable.

As of DecemberMarch 31, 2011,2012, the Company had contractual obligations to purchase approximately $560,000$380,000 of recruitment advertising through December 31, 2011.2012.

The Company had a loan and security agreement with Crestmark Bank for financing of its accounts receivable which was terminated in December 2010.  Interest expense under this agreement was $4,500 for the three months ended December 31, 2010.  In addition, the agreement required a maintenance fee of $3,500 per month and an annual loan fee of 1% of the maximum borrowing amount under the agreement.  The Company incurred $29,000 of fees related to this agreement during the three months ended December 31, 2010.

In December 2010, the Company entered into a two-year, $3,000,000 account purchase agreement (“AR Credit Facility”) with Wells Fargo Bank N.A. (“Wells Fargo”).  The AR Credit Facility provides for borrowings, on a revolving basis, of up to 85% of the Company’s eligible accounts receivable less than 90 days old and bears interest at a rate equal to the three month LIBOR plus 5.25% (effective rate was 5.83 %5.75% as of DecemberMarch 31, 2011)2012).

The Company believes that the borrowing availability provided by the Wells Fargo agreement will be adequate to fund the increase in working capital needs resulting from the prior year acquisitions of certain assets.

The outstanding borrowings under this agreement, which are classified as short-term debt on the consolidated balance sheets were $2,360,000$2,299,000 and $1,938,000 as of DecemberMarch 31, 20112012 and September 30, 2011, respectively.  As of DecemberMarch 31, 2011,2012, the borrowing base availability under this agreement was $337,000.$639,000.  Total interest expense related to the line of credit for the three months ended DecemberMarch 31, 2012 and 2011 approximated $44,000.was $50,000 and $18,000 respectively, and $88,000 and $19,000 for the six months ended March 31, 2012 and 2011, respectively.

The loan and security agreement with Wells Fargo Bank includes certain covenants which require compliance until termination of the agreement.  As of DecemberMarch 31, 2011,2012, the Company was in compliance with all such covenants.

General Employment Enterprises, Inc. (the “Company”) was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893.  The Company providesCompany’s segments consist of the following distinctive services:following: (a) professional placement services specializing in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing, (b) temporary staffing services in the agricultural industry and (c) temporary staffing services in light industrial staffing, and (d) management services.staffing.

Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of common stock, to improve the overall profitability and cash flows of the Company.  We believe our current segments complement one another and position us for future growth.

As of DecemberMarch 31, 2011,2012, the Company operated eighteen branch offices located in eleven states.

Consolidated net revenues increased $6,808,000$4,798,000 or 114.0%60.7% from the same period last year primarily due to the acquisition of certain assets of RFFG of ClevelandAshley Ellis, LLC in September 2011 and DMCC in November 2010.  The Industrial Contract Services segment has seen tremendous growth over the last year with the addition of these entities as well as the start upups of BMCH Inc. and BMCHPA, Inc. in May 2011 and July 2011, respectively.  The incremental revenue growth due BMCH Inc. and BMCHPA, Inc was $4,891,000Ashley Ellis acquisition resulted in the three months ended December 31, 2011.  These increases are coupled with strong demand forincremental Placement Services and Professional Contract Services.  Increases in each areaServices revenue of $393,000 and $366,000 respectively.  These increases were partially offset with a $162,000 decreaseby decreases in Management Services revenue due toresulting from the termination of the management agreement with RFFG Inc. in July 2011.2011 and by the loss of a major customer in the Agricultural Contract Services segment in January 2012.

The cost of services includes wages and the related payroll taxes and employee benefits of the Company’s employees while they work on contract assignments.  The cost of contract services for the three months ended DecemberMarch 31, 20112012 increased $5,207,000$3,635,000 or 126.6%62.6% primarily due to revenue growth.  Cost of contract services expressed as a percentage of net contract services revenue increased from 68.9%decreased to 85.3% for the three months ended DecemberMarch 31, 2010 to 72.9%2012 from 87.6% for the three months ended DecemberMarch 31, 2011 primary due to revenue mix.  The current quarter has significantly more Industrial service revenue which carries a lower gross profit percentage.2011.  See chart below for summary of Gross Profit % by segment:

Selling, general and administrative expenses include the following categories:

Selling, general and administrative expenses for the three months ended DecemberMarch 31, 20112012 increased $1,548,000$1,599,000 or 89.2%79.0% compared to the same period last yearyear.  Increase can be attributed to a larger organization as the Company operated more branch offices with the acquisition of Ashley Ellis as well with the start up of BMCH Inc. and BMCHPA, Inc.  Additionally, total compensation for our operating divisions has increased significantly more than the increases in net revenue primarily due to a compensation policy change in the Professional Services segment.  In order to attract, retain and motivate the operating teams in a competitive marketplace, commission structures as well as base compensation were changed which resulted in a move away from advances and toward base salaries.  While revenue growth.  Expressed as a % of revenue, selling, general and administrative expenses decreased from 29.1% to 25.7 % as we leverage our growth.growth is strong, the Company has not yet leveraged total compensation expense in this segment with this change.

Amortization expense of $100,000 and $94,000$155,000 was recorded for the three months ended DecemberMarch 31, 2011and 20102012 and 2011, respectively.  Amount represents the amortization associated with the identifiable intangibles recorded for the Company’s acquisitions of certain assets of Onsite, RFFG of Cleveland, DMCC and Ashley Ellis.  The reduction is primarily due to a decrease in the amortization of the management agreement intangible asset as a result of the $1,126,000 impairment charge recorded in September 2011 upon the termination of the related management services agreement with RFFG, Inc.

Interest expense for the three months ended DecemberMarch 31, 2011 increased $39,000, or 300% from2012 was $55,000 as compared to $25,000 for the same period last year primarily as athree months ended March 31, 2011.  The increase is the result of higher borrowings.  Borrowings have increased as we continueborrowings due to grow the business.growth of business through acquisitions.

There was no provision for income taxes recorded for the three months ended DecemberMarch 31, 20112012 and 2010March 31, 2011 as a result of cumulativecurrent and historical net operating losses of the Company which it expects will be used to offset any current tax liability.  As of September 30, 2011 there were approximately $8,500,000 of losses available to reduce federal taxable income in future years through 2030, and there were approximately $7,000,000 of losses available to reduce state taxable income in future years, expiring from 2012 through 2030.  Due to common stock transactions in the current and prior years, it is likely that the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.  The Company is currently evaluating the effects of any such limitation.

The following table sets forth certain consolidated statements of cash flows data (in thousands):

As of DecemberMarch 31, 2011,2012, the Company had cash and cash equivalents of approximately $45,000,$95,000, which was a decrease of approximately $269,000$219,000 from September 30, 2011.  Net working capital (current assets less current liabilities) at DecemberMarch 31, 20112012 was approximately $1,091,000,$502,000, which was an increasea decrease of approximately $104,000$485,000 from September 30, 2011 and the current2011.  Current assets divided by current liabilities – current ratio - was 1.21.1 to 1.   Net cash used in operating activities for the threesix months ended DecemberMarch 31, 2012 and the six months ended March 31, 2011 and the three months ended December 31, 2010 was ($681,000)174,000) and ($966,000)1,616,000), respectively.  The fluctuationimprovement is primarily due to the timing of our accounts receivableAccounts Receivable billings and collections as a result of the DMCC and payments of accounts payableRFFG acquisitions in the prior year offset by a larger operating loss and the change in payroll accruals.

Net cash used in investing activities for the threesix months ended DecemberMarch 31, 20112012 was ($10,000)406,000) and zero($1,000) for the threesix months ended DecemberMarch 31, 2010.2011.  The increasechange was the direct result of a $200,000 payment made to Ashley Ellis, LLC as required by the purchase agreement as well as vehicle purchasepurchases to support our Agriculturalthe Light Industrial segment.

Net cash flow provided by financing activities for the threesix months ended DecemberMarch 31, 20112012 was $422,000$361,000 compared to $264,000$1,271 in the threesix months ended DecemberMarch 31, 2010.2011.  Fluctuations in financing activities are attributable to the level of borrowings.borrowings on the AR Credit Facility with Wells Fargo.

Information about future minimum lease payments, purchase commitments and long-term obligations is presented in the notes to consolidated financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011.  There have been no significant changes from the amounts presented in the Form 10-K.

On August 31, 2011, the Company entered into an asset purchase agreement with Ashley Ellis LLC, an Illinois limited liability company, and Brad A. Imhoff, for the purchase of certain assets of Ashley Ellis, including customer lists, comprising Ashley Ellis’ services business.  Ashley Ellis’ services business was operated from offices in Illinois, Texas and Georgia and provided services related to the recruitment and placement of technical personnel.  The asset purchase agreement was deemed effective on September 1, 2011.  Brad A. Imhoff is the brother of Herbert F. Imhoff, Jr., a director and President of the Company. The assets purchased related to Ashley Ellis, LLC acquisition was not considered a significant acquisition and as such the acquisition of these assets will be accounted for as a business combination.

As consideration for the assets, the Company paid Ashley Ellis $200,000 on the date of closing and agreed to paypaid Ashley Ellis an additional $200,000 within six months of closing.in February 2012.  The Company also agreed to issue to Ashley Ellisissued 1,250,000 shares of the Company’s common stock.stock to Ashley Ellis.

In November 2010, the Company purchased certain assets of RFFG of Cleveland, LLC and DMCC Staffing, LLC (“DMCC”) and entered into a management agreement with RFFG, LLC (the previous parent company of RFFG of Cleveland and DMCC Staffing, LLC) to provide services to RFFG to operate its day-to-day business, including services related to accounting, sales, finance, workers compensation, benefits, physical locations, IT, and employees.  Thomas J. Bean, a 10% shareholder of the Company (prior to consideration of common shares issued in this transaction), is the owner of RFFG. The assets purchased related to RFFG of Cleveland, LLC and DMCC Staffing, LLC constitute businesses and as such the acquisition of these assets will be accounted for as a business combination.

In connection with the completion of the sale of shares of common stock to PSQ in fiscal 2009, the Company’s Chairman, Chief Executive Officer and President (the “former CEO”) resigned from those positions and his employment agreement with the Company was replaced by a new consulting agreement.  Under the consulting agreement, the Company became obligated to pay an annual consulting fee of $180,000 over a five-year period and to issue 500,000 shares of common stock to the former CEO for no additional consideration, and the Company recorded a liability for the net present value of the future fee payments in the amount of $790,000.  As of DecemberMarch 31, 2011, $420,0002012, $381,000 remains payable under this agreement and is included in accrued compensation and long-term obligations on the Company’s balance sheet.  The agreement expires on June 30, 2014.

In December 2010, the Company entered into a two-year, $3,000,000 account purchase agreement (“AR Credit Facility”) with Wells Fargo Bank N.A. (“Wells Fargo”).  The AR Credit Facility provides for borrowings on a revolving basis of up to 85% of the Company’s eligible accounts receivable less than 90 days old and bears interest at a rate equal to the three month LIBOR (minimum of .5%) plus 5.25% for a total interest rate of 5.75%.  Upon the terms and subject to the conditions in the agreement, Wells Fargo may determine which receivables are eligible receivables, may determine the amount it will advance on any such receivables, and may require the Company to repay advances made on receivables and thereby repay amounts outstanding under the AR Credit Facility.  Wells Fargo also has the right to require the Company to repurchase receivables that remain outstanding 90 days past their invoice date.  The Company continues to be responsible for the servicing and administration of the receivables purchased.  The Company will carry the receivables and any outstanding borrowings on its consolidated balance sheet.  The outstanding borrowings at DecemberMarch 31, 20112012 are $2,360,000$2,299,000 and the remaining borrowing availability is $337,000.$639,000.

As of September 30, 2011, there were approximately $8,500,000 of losses availableIn February 2012 the AR Credit Facility with Wells Fargo Bank N.A. was amended whereby the facility maximum increased to reduce federal taxable income in future years through 2030, and there were approximately $7,000,000 of losses available to reduce state taxable income in future years, expiring$4,500,000 from 2011 through 2029.  Due to the sale of shares of common stock to PSQ during fiscal 2009 and the change in ownership of PSQ in November 2010, the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.  The Company is currently evaluating the effects of any such limitation.  Future realization of the tax benefits of net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period.  Based on the weight of available evidence, the Company determined that it is more likely than not that all of the deferred tax assets will not be realized.  Accordingly, the Company maintained a full valuation allowance as of December 31, 2011 and September 30, 2011.$3,000,000.

The Company believes that the borrowing availability under its AR Credit Facility will be adequate to fund continuing operations and the increase in working capital due to growth in the business.  In the event Wells Fargo elects not to advance us funds on our accounts receivable balance or the performance of the acquired entities do not meet our expectations, we could experience liquidity constraints.