##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 30,
    2003                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission file number 0-16345

SED International Holdings, Inc.

(Exact name of Company as specified in its
charter)


|                                                                                                |  |                                         
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------
|GEORGIA                                                                                         |  | 22-2715444                              
|(State or other jurisdiction
    of incorporation or organization)                              |  | (I.R.S. Employer
    Identification No.)
|                                                                                               
|4916 North Royal Atlanta Drive, Tucker,
    Georgia(Address of principal executive
    offices) |  | 30085(Zip Code)                         

Companys telephone number, including
area code:

770-491-8962


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


None


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

|                             |  |                             
|---------------------------- |  | ----------------------------
|(Title of Class)             |  | (Title of Class)            
|                             |  |                             
|Common Stock, $.01 par value |  | Common Stock Purchase Rights

Indicate by check mark whether the Company
(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 Company was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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

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

The aggregate market value of the voting stock
held by non-affiliates of the Company was approximately
$2.8 million as of September 11, 2003 based upon the
last sale price of the Common Stock as reported on the Over the
Counter Bulletin Board on that day. There were 3,875,155
shares of Common Stock, $.01 par value, outstanding at
September 11, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates information by
reference from portions of the Companys definitive proxy
statement for its 2003 annual meeting of shareholders scheduled
to be held on December 10, 2003, which will be filed no
later than 120 days after the close of the Companys
fiscal year ended June 30, 2003.



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TABLE OF CONTENTS



|                                             |                                                                                               |                                                                                                   |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                      
|                                             | Item 1. Business                                                                             
|                                             | Item 2. Properties                                                                           
|                                             | Item 3. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to A Vote of Security Holders                                  
|PART II                                     
|                                             | Item 5. Market for the Companys Common Stock and Related Shareholder Matters                
|                                             | Item 6. Selected Financial Data Five Year Financial Summary                                  
|                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                             | Item 8. Financial Statements and Supplementary Data                                          
|                                             |                                                                                               | REPORT OF INDEPENDENT AUDITORS                                                                   
|                                             |                                                                                               | SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS          
|                                             |                                                                                               | SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|                                             |                                                                                               | SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                                             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                             | Item 9A. Controls and Procedures                                                             
|PART III                                    
|                                             | Item 10. Directors and Executive Officers of the Company                                     
|                                             | Item 11. Executive Compensation                                                              
|                                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                             | Item 13. Certain Relationships and Related Transactions                                      
|                                             | Item 14. Principal Accounting Fees and Services                                              
|PART IV                                     
|                                             | Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                  
|POWER OF ATTORNEY                           
|EX-21 SUBSIDIARIES OF THE COMPANY           
|EX-23 INDEPENDENT AUDITORS CONSENT          
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO



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##### Table of Contents



TABLE OF CONTENTS

|                  |  |                                                                                           |    |      |    | 
|----------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                  |  |                                                                                           |    | Page
|                  |  |                                                                                           |    |     
|PART I            |  |                                                                                           |    |     
|Item 1.           |  | Business                                                                                  |    |      | 2  | 
|Item 2.           |  | Properties                                                                                |    |      | 6  | 
|Item 3.           |  | Legal Proceedings                                                                         |    |      | 7  | 
|Item 4.           |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 7  | 
|PART II           |  |                                                                                           |    |     
|Item 5.           |  | Market of the Companys Common Stock and
    Related Shareholder Matters                  |    |      | 7  | 
|Item 6.           |  | Selected Financial Data Five Year Financial
    Summary                                   |    |      | 9  | 
|Item 7.           |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 11 | 
|Item 7A.          |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 21 | 
|Item 8.           |  | Financial Statements and Supplementary Data                                               |    |      | 23 | 
|                  |  | Report of Independent Auditors                                                            |    |      | 23 | 
|                  |  | Consolidated Balance Sheets                                                               |    |      | 24 | 
|                  |  | Consolidated Statements of Operations                                                     |    |      | 25 | 
|                  |  | Consolidated Statements of Shareholders
    Equity                                       |    |      | 26 | 
|                  |  | Consolidated Statements of Cash Flows                                                     |    |      | 27 | 
|                  |  | Notes to Consolidated Financial Statements                                                |    |      | 28 | 
|Item 9.           |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 44 | 
|PART III          |  |                                                                                           |    |     
|Item 10.          |  | Directors and Executive Officers of the Company                                           |    |      | 44 | 
|Item 11.          |  | Executive Compensation                                                                    |    |      | 44 | 
|Item 12.          |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 45 | 
|Item 13.          |  | Certain Relationships and Related Transactions                                            |    |      | 45 | 
|Item 14.          |  | Principal Accounting Fees and Services                                                    |    |      | 45 | 
|PART IV           |  |                                                                                           |    |     
|Item 13.          |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |    |      | 45 | 
|Signatures        |  |                                                                                           | 52 |     
|Power of Attorney |  |                                                                                           | 53 |     
|Certifications    |  |                                                                                           |    |     





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PART I




Item 1.     Business

(a) General Development of
Business

SED International Holdings, Inc., a Georgia
corporation, and its wholly-owned operating subsidiary, SED
International, Inc., a Georgia corporation (SED
International), were incorporated in 1986 to take over the
operations of the business of the Companys predecessor,
Southern Electronics Distributors, Inc., which was engaged in
the wholesale distribution of consumer electronic products. In
fiscal 1999, the Company, formerly a Delaware corporation,
reincorporated as a Georgia corporation. As used herein, the
term Company or the Registrant means SED
International Holdings, Inc. and its subsidiaries, including SED
International, unless the context otherwise indicates.

The Company is a distributor of microcomputer
products, including mass storage, imaging, display and wireless
products throughout the United States and Latin America. The
Company offers to an active base of over 6,500 reseller
customers a broad inventory of more than 3,500 products from
approximately 170 vendors (direct and indirect), including such
market leaders as Hewlett-Packard, Intel, Maxtor, Creative Labs,
Acer, Epson, Microsoft, LG Electronics, Envision, and IBM,
through a dedicated and highly motivated sales force. The
Company distributes products in the United States from its
strategically located warehouses in Atlanta, Georgia; Miami,
Florida; City of Industry, California; Richardson, Texas; and
San Juan, PR. The Company services Latin America through its
wholly-owned subsidiaries SED International de Colombia Ltda. in
Bogota, Colombia and Intermaco S.R.L. in Buenos Aires, Argentina.

The Company also distributes wireless telephone
products in the United States and to Latin America. The Company
is a direct distributor of wireless telephone products for LG
Infocomm and Audiovox and an indirect distributor for other
leading wireless telephone product vendors such as Motorola,
Nokia, and Samsung. In fiscal 2003, the Companys net sales
of microcomputer products generated approximately 88.0% of the
Companys total net sales and wireless telephone products
represented the remaining 12.0%.

The shareholders of the Company approved a
one-for-two reverse stock split in a special meeting of
shareholders held on April 26, 2002. As a result of the
reverse split, all holders of the Companys common stock
returned their current share certificates and received new
certificates which reduced the number of shares held on a 1 for
2 basis. The new certificates have the same terms as the old
certificates. All applicable amounts reflected herein give
retroactive effect to the reverse stock split.

Subsequent to June 30, 2002, the Company
terminated its credit facility with Wachovia Bank, NA, and IBM
Global Finance. In October 2002, the Company entered into a new
credit facility with Fleet Capital Corporation which provides
access by the Company to additional credit capacity and
liquidity. Additional information about the agreement with Fleet
Capital Corporation may be found in the Liquidity and Capital
Resources section of this document.

In February 2003, the Company approved a plan to
discontinue commercial operations of its Brazilian subsidiary,
SED International do Brasil Distribuidora, Ltda. As a result,
SED International do Brasil Distribuidora, Ltda. was reported as
a disposal of a business in the third quarter 2003. Accordingly,
the operating results of SED International do Brasil
Distribuidora, Ltda. have been classified as a discontinued
operation for all periods presented in the Companys
consolidated statements of operations. Additionally, the Company
has reported all of SED International do Brasil Distribuidora,
Ltda. assets at their estimated net realizable values in the
Companys condensed consolidated balance sheet as of
June 30, 2003 in accordance with Accounting Principles
Board Opinion No. 30. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Discontinued Operations and
Note 19 of the Companys Consolidated Financial
Statements.

2



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(b) Financial Information about Industry
Segments

The Company operates in only one business segment.

(c) Narrative Description of
Business



| |                     
| | --------------------
| | Products and Vendors

The Company offers its customers a broad
inventory of more than 3,500 products from approximately 170
vendors (direct and indirect), including such market leaders as
Hewlett-Packard, Intel, Maxtor, Creative Labs, Acer, Microsoft,
Envision, and LG Electronics. The Company is a direct
distributor of wireless telephone products for LG Infocomm and
Audiovox and an indirect distributor for other leading wireless
telephone product vendors such as Motorola, Nokia, and Samsung.
Microcomputer related products accounted for $364.6 million
or 88.0% of the Companys net sales for fiscal 2003, $399.9
million or 94.0% of net sales in fiscal 2002, and
$411.8 million or 92.0% of net sales in fiscal 2001.
Approximately $48.5 million or 12.0% of the Companys
net sales for fiscal 2003, $24.0 million or 6.0% of net
sales for fiscal 2002, and $33.8 million or 8.0% of net
sales for fiscal 2001, consisted of wireless handsets and
accessories. The Company continually evaluates its product mix
and inventory levels and maintains flexibility by adjusting its
product offerings based on demand. The Companys vendors
generally warrant the products distributed by the Company and
allow the return of defective products. Generally, the
Companys authorized distributor agreements with its
microcomputer and wireless telephone products vendors permit the
Company to sell these vendors products in the United
States and in designated countries in Latin America.

As a distributor, the Company incurs the risk
that the value of its inventory will be affected by
industry-wide forces. Rapid technological change is commonplace
in the microcomputer and wireless industries and can quickly
diminish the marketability of certain items, whose functionality
and demand decline with the appearance of new products. These
changes, coupled with price reductions by vendors, may cause
rapid obsolescence of inventory and corresponding valuation
reductions in that inventory. Accordingly, the Company seeks
provisions in its vendor agreements common to industry practice
which provide price protections or credits for declines in
inventory value and the right to return unsold inventory. No
assurance can be given, however, that the Company can negotiate
such provisions in each of its agreements or that such industry
practice will continue.

The Company purchases goods from approximately
170 vendors (directly and indirectly) and has negotiated
favorable terms from certain vendors by purchasing a substantial
volume of those vendors products. In fiscal 2003, 2002,
and 2001, Maxtor accounted for 44.4%, 40.0%, and 27.9%,
respectively, Hewlett Packard accounted for 8.6%, 10.1% and
10.9%, respectively, of the Companys purchases.

There can be no assurance that the Company will
be able to maintain its existing vendor relationships or secure
additional vendors as needed. The Companys vendor
relationships typically are non-exclusive and subject to annual
renewal, terminable by either party on short notice, and contain
territorial restrictions that limit the countries in which the
Company is permitted to distribute the products. The loss of a
major vendor, the deterioration of the Companys
relationship with a major vendor, the loss or deterioration of
vendor support for certain Company-provided services, the
decline in demand for a particular vendors product, or the
failure of the Company to establish good relationships with
major new vendors or other Virtual Vendor Model distributors
could have a material adverse effect on the Companys
business, financial condition and results of operations.

Product orders typically are processed and
shipped from the Companys distribution facilities on the
same day an order is received or, in the case of orders received
after customary cutoff time, on the next business day. The
Company relies almost entirely on arrangements with independent
shipping companies for the delivery of its products to United
States customers. Products sold within the Latin American
markets are either picked up by the customer, or delivered to
the customers or their agents from the Companys Colombia
and Argentina facilities. Generally, the Companys
inventory level of products has been adequate to permit the
Company to be responsive to its customers purchase
requirements. From time to time, however, the Company
experiences temporary shortages of certain products as its
vendors experience increased demand or manufac-

3



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turing difficulties with respect to their
products, resulting in smaller allocations of such products to
the Company.




| |                    
| | -------------------
| | Sales and Marketing

The Companys sales are generated by a
telemarketing sales force, which, on June 30, 2003,
consisted of approximately 112 people in sales offices located
in Atlanta, Georgia; Miami, Florida; City of Industry,
California; Richardson, Texas; San Juan, Puerto Rico; Bogota,
Colombia and Buenos Aires, Argentina. Of the total number of
salespersons on June 30, 2003, 49 people focused on sales
to customers for export to Latin America and on sales in
Colombia and Argentina. Substantially all of the export and
Latin American based salespeople are fluent in Spanish or
Portuguese. The Companys Atlanta sales office maintains a
separate telemarketing sales force for the sale of wireless
telephone products to retailers and wireless telephone carriers
and their authorized agents located throughout the United States
and Latin America.

Members of the sales staff are trained through
intensive in-house sales training programs, along with
vendor-sponsored product seminars. This training allows sales
personnel to provide customers with product information and to
use their marketing expertise to answer customers
questions about important new product considerations, such as
compatibility and capability, while offering advice on which
products meet specific performance and price criteria. The
Companys salespeople are able to analyze quickly the
Companys extensive inventory through a sophisticated
management information system and recommend the most appropriate
solution for each customer, whether that customer is a full-line
retailer or an industry-specific reseller.

The Companys domestic sales force is
organized in teams generally consisting of two to four people.
The Company believes that teams provide superior customer
service because customers can contact one of several people.
Moreover, the long-term nature of the Companys customer
relationships is better served by teams that increase the depth
of the relationship and improve the consistency of service. It
has been the Companys experience that the team approach
results in superior customer service and better employee morale.

Compensation incentives are provided to the
Companys salespeople, thus encouraging them to increase
their product knowledge and to establish long-term relationships
with existing and new customers. Customers can telephone their
salespersons using a toll-free number provided by the Company.
In addition, salespeople initiate calls to introduce the
Companys existing customers to new products and to solicit
orders. Salespeople also seek to develop new customer
relationships by using targeted mailing lists, vendor leads and
telephone directories of various cities.

The telemarketing salespersons are supported by a
variety of marketing programs. For example, the Company
regularly sponsors shows for its resellers where it demonstrates
new product offerings and discusses industry developments. Also,
the Companys in-house marketing staff prepares catalogs
that list available microcomputer and wireless telephone
products and routinely produces marketing materials and
advertisements. In addition, the in-house marketing staff
promotes products and services through the Companys
Internet web page (www.sedonline.com) providing 24-hour
access to on-line order entry. The Companys web page
provides customers secured access to place orders and review
product specifications at times that are convenient to them.
Customers also can determine on a real-time basis inventory
availability, pricing, and verify the status of previously
placed orders through hyperlinks to certain independent shipping
companies.

The Company prides itself on being service
oriented and has a number of on-going value-added services
intended to benefit both the Companys vendors and reseller
customers. For example, the Company is committed to training its
salespeople to be technically knowledgeable about the products
they sell. This core competency supplements the sophisticated
technical support and configuration services also provided by
the Company. The Company believes that its salespersons
ability to listen to a resellers needs and recommend a
cost-efficient solution strengthens the relationship between the
salesperson and his or her reseller and promotes customer
loyalty to the Company. In addition, the Company provides such
other value-added services as new product demonstrations and
technical education programs for resellers, configuration
services for computer and wireless products, order fulfillment
and electronic ordering, and informational assistance through
the Companys web page (www.sedonline.com).

4



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Management continually evaluates the
Companys product mix and the needs of its customers in
order to minimize inventory obsolescence and carrying costs. The
Companys rapid delivery terms are available to all of its
customers, and the Company seeks to pass through its shipping
and handling costs to its customers.

The Company offers various credit terms
including, open account, prepay, credit card, and COD to
qualifying customers. The Company closely monitors
customers creditworthiness through its on-line computer
system, which contains detailed information on each
customers payment history and other relevant information.
In addition, the Company participates in national and
international credit associations that exchange credit rating
information on customers. The Company reviews customers credit
worthiness based on sales trends, industry trends in a
geography, and other factors. The Company establishes reserves
for estimated credit losses in the normal course of business and
carries credit insurance for larger customers.



| |          
| | ---------
| | Customers

The Company serves an active, nonexclusive
customer base of over 6,500 resellers of microcomputer and
wireless handset products. Resellers include value-added
resellers, corporate resellers and retailers. The Company
believes the multi-billion dollar microcomputer and wireless
telephone wholesale distribution industries serve customers
primarily on a nonexclusive basis, which provides the Company
with significant growth opportunities. During fiscal 2003, no
single customer accounted for more than 10% of the total company
net sales of the Company. The Company believes that most of its
customers rely on distributors as their principal source of
microcomputer and wireless telephone products.



| |            
| | -----------
| | Competition

The microcomputer and wireless telephone
distribution industries are highly competitive, both in the
United States and in Latin America. Competition in these
industries is typically characterized by pricing pressures,
product availability and potential obsolescence, speed and
accuracy of delivery, effectiveness of sales and marketing
programs, credit availability, ability to tailor specific
solutions to customer needs, quality of product lines and
services, and availability of technical support and product
information. Additionally, the Companys ability to compete
favorably is principally dependent upon its ability to manage
inventory and accounts receivable and to control other operating
costs. Successful management of the Company also requires the
Company to react quickly and appropriately to short and
long-term trends, price its products competitively, increase its
net sales and maintain economies of scale.

The Companys competitors include regional,
national and international microcomputer and wireless
distributors, many of which have substantially greater
technical, financial and other resources than the Company, as
well as vendors that sell directly to resellers and large
resellers that sell to other resellers. Major competitors
include Ingram Micro, Inc., Tech Data Corporation, D&H, ASI,
Brightpoint, Inc., Cellstar Corporation, and Synnex Information
Technologies, Inc. in the United States; and Tech Data
Corporation, Ingram Mico, Inc., and Intcomex Holdings, L.L.C. in
Latin America. From time to time, these competitors may be used
as vendors.



| |            
| | -----------
| | Seasonality

The Companys sales currently are not
subject to material seasonal fluctuations although no assurance
can be given that seasonal fluctuations will not develop,
especially during the holiday season in the United States and
Latin America. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Quarterly Data; Seasonality.



| |          
| | ---------
| | Employees

As of June 30, 2003, the Company had 287
full-time employees, 112 of whom were engaged in telemarketing
and sales, 99 in administration and 76 in warehouse management
and shipping. Management believes the Companys relations
with its employees are good and the Company has never
experienced a strike or work stoppage. There are no collective
bargaining agreements covering any of the Companys
employees.

5



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| |            
| | -----------
| | SEC Filings

A copy of Form 10-K will be provided upon
written request and without charge. Please send your requests to
the attention of Barbara Gay, SED International, Inc.,
4916 North Royal Atlanta Drive, Tucker, Georgia 30084.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Financial Information about Foreign and
    Domestic Operations and Export Sales

During the fiscal year ended June 30, 1998,
the Company began selling directly to customers in Colombia
through the Companys facilities in Bogota, Colombia.
During the fiscal year ended June 30, 1999, the Company
also began selling directly to customers in Argentina through
the Companys facilities in Buenos Aires. Sales are
denominated in the respective local currencies of these
countries. For the fiscal year ended June 30, 2003, 2002
and 2001, approximately 22.5%, 26.6% and 33.6%, respectively, of
the Companys net sales were to customers for export
principally into Latin America and direct sales to customers in
Colombia and Argentina. See Item 8 and Notes 13, 17 and 19
to the consolidated financial statements of the Company for
additional information concerning the Companys domestic
and foreign operations.




Item 2.     Properties

The Company maintains its executive offices at
4916 North Royal Atlanta Drive in Atlanta, Georgia, where 42 of
its sales employees are also located. The Company leases its
executive, administrative and sales office from Diamond Chip
Group, L.L.C., a Georgia limited liability company comprised of
certain minority shareholders and officers of the Company,
previously doing business as Royal Park Company, a Georgia
general partnership. The lease commenced in April 1999 and
expires in September 2006. The facility consists of
approximately 30,000 square feet, with an annual rental of
approximately $277,000 effective October 1, 2002, with
annual increases of three percent through September 30,
2006. The Company has a right of first refusal to purchase the
facility should it be offered for sale. The Company believes
that the lease of its executive offices is on terms no less
favorable than those available from unaffiliated parties.

The Company maintains warehouse facilities in
Atlanta, Georgia; City of Industry, California; Miami, Florida,
Richardson, Texas; San Juan, Puerto Rico; Bogota, Colombia and
Buenos Aires, Argentina. The Companys distribution
facility in Atlanta, Georgia consists of approximately 100,000
square feet subject to a lease expiring January 31, 2004.
Rental payments for this facility are approximately $293,000 per
annum. The Company believes there is sufficient additional
warehouse and sales office space available for lease at
reasonable prices near its principal facility in the event the
Companys growth plans so require.

The Company leases its sales and distribution
facility in Miami, Florida under a lease expiring March 31,
2004. This facility consists of approximately 61,000 square feet
at an annual rental of approximately $463,000 effective
April 1, 2002 and increasing to $478,800 effective
April 1, 2003.

The Company also leases an approximately 50,000
square foot facility in City of Industry, California. The City
of Industry facility serves as a distribution center and sales
center for the Company. Annual rental under the lease is
approximately $237,000. Pursuant to its terms, the lease will
expire on March 31, 2005.

On April 1, 1998, the Company began leasing
an approximately 102,000 square foot distribution facility in
Harrisburg, Pennsylvania. The Company was obligated for lease
payments of approximately $408,000 per year through
March 31, 2003. From June 1, 2000 through
December 31, 2000 the Company sublet approximately 51,000
square feet of the facility for approximately $222,000 per year.
The Company entered into a sublease for the entire building
beginning on October 1, 2001 to cover the entire cost of
this facility through the end of the lease on March 31,
2003.

On December 1, 1997, the Company began
leasing an approximately 33,000 square foot administrative
center and sales office in Bogota, Colombia. The Bogota center
serves as a sales office and distribution facility for SED
International de Colombia Ltda., a wholly owned subsidiary of
the Company. Annual payments total approximately $60,000 per
year. The lease will expire on November 30, 2003.

6



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On November 1, 1998, the Company assumed the
lease obligations for several small facilities in Buenos Aires,
Argentina. These facilities consist of various spaces in the
Galeria business complex and are utilized for sales offices,
administrative offices and warehouses by Intermaco S.R.L., a
wholly owned subsidiary of the Company. Aggregate space is
approximately 5,500 square feet. Payments total approximately
$36,000 annually. The leases expire at various dates until May
2004.

On May 1, 2003, the Company began leasing an
approximately 25,700 square foot facility in Richardson, Texas.
The facility serves as a sales office and distribution center to
service the Companys customers in the Dallas area. The
Company is obligated for lease payments of approximately
$115,700 per year through April 30, 2006.

On January 1 2001, the Company began leasing
approximately 3,900 square foot sales and distribution facility
in Hato Rey, Puerto Rico. The space was expanded to
approximately 5,500 square feet in October 2002 and the Company
is obligated for lease payments of approximately $39,000 through
December 31, 2003.




Item 3.     Legal
Proceedings

The Company is involved in litigation relating to
claims arising out of its operations in the normal course of
business. The Company is not currently engaged in any legal
proceedings that are expected, individually or in the aggregate,
to have a material adverse effect on the Company.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to A Vote of Security
    Holders

No matters were submitted to a vote of the
Companys shareholders during the fourth quarter of fiscal
2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for the Companys Common Stock
    and Related Shareholder Matters

Until October 4, 2002 the Companys
common stock was traded over the counter and quoted on the
Nasdaq National Market System under the symbol SECX.
The Company received notification on September 27, 2002
from Nasdaq that the Companys common stock would be
delisted from the Nasdaq National Market due to noncompliance
with the value of public float requirement of $5,000,000.00 for
continued listing on Nasdaq National Market. The Companys
stock price also has fallen below the $1.00 minimum necessary
for continued listing on the Nasdaq National Market and Nasdaq
Small Cap. The Company does not presently intend to take actions
to regain compliance with the Nasdaq National Market or Small
Cap listing standards. The Companys common stock is now
traded on the Over-the Counter Bulletin Board (OTCBB). The OTCBB
is a regulated quotation service that displays real-time quotes,
last-sale prices and volume information in over-the-counter
(OTC) equity securities. OTCBB securities are traded by a
community of market makers that enter quotes and trade reports.
The Company expects that SEDs ticker symbol
(SECX) will remain the same.

The following table sets forth the high and low
sales prices for Companys common stock as reported for
each quarter of fiscal 2003 and 2002 as adjusted for the 1 for 2
recapitalization on April 26, 2002. The

7



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quotations are inter-dealer prices without retail
mark-ups, mark-downs or commissions and may not represent actual
transactions.


|                 |  |             |      |     |  |   |      | 
|---------------- |  | ----------- | ---- | --- |  | - | ---- | 
|                 |  |            
|                 |  | Sales Price
|                 |  |            
|                 |  | High        |      | Low
|                 |  |             |      |    
|Fiscal year 2003 |  |             |      |     |  |   |      | 
|First            |  | $           | 1.49 |     |  | $ | 0.37 | 
|Second           |  | $           | 0.66 |     |  | $ | 0.15 | 
|Third            |  | $           | 0.51 |     |  | $ | 0.29 | 
|Fourth           |  | $           | 1.00 |     |  | $ | 0.35 | 
|Fiscal year 2002 |  |             |      |     |  |   |      | 
|First            |  | $           | 2.38 |     |  | $ | 1.70 | 
|Second           |  | $           | 2.10 |     |  | $ | 1.30 | 
|Third            |  | $           | 2.00 |     |  | $ | 0.92 | 
|Fourth           |  | $           | 2.08 |     |  | $ | 1.07 | 

There were 3,875,155 shares of common stock
outstanding and approximately 3,000 beneficial owners of the
common stock of the Company (including individual participants
in securities position listings) as of September 11, 2003.

The Company has never declared or paid cash
dividends on its common stock. The Company currently intends to
retain earnings to finance its ongoing operations and it does
not anticipate paying cash dividends in the foreseeable future.
Future policy with respect to payment of dividends on the common
stock will be determined by the Board of Directors based upon
conditions then existing, including the Companys earnings
and financial condition, capital requirements and other relevant
factors. SED International, the earnings of which would be the
primary source of any dividend payments, and the Company are
parties to a revolving credit agreement which contains certain
financial covenants that may impact the Companys ability
to pay dividends in the event the Company should change its
policy and choose to issue dividends. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Liquidity and Capital
Resources.

8



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|        |                                                        
|------- | -------------------------------------------------------
|Item 6. | Selected Financial Data Five Year Financial
    Summary

|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |           |  
|-------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------------------- | ----------- | --------- | - | ---- | ----------- | --------- | - | ---- | ----------- | --------- | - | - | ----------- | --------- | - | - | ----------- | --------- | -
|                                                                                                                                       |                              |                    
|                                                                                                                                       |                              | Year ended June 30,
|                                                                                                                                       |                              |                    
|                                                                                                                                       |                              | 2003                |             | 2002      |   | 2001 |             | 2000      |   | 1999
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |     
|Statement of operations data:                                                                                                          |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Net sales                                                                                                                              |                              | $                   | 413,148,000 |           |   | $    | 423,881,000 |           |   | $    | 445,580,000 |           |   | $ | 530,789,000 |           |   | $ | 662,047,000 |          
|Cost of sales                                                                                                                          |                              |                     | 393,724,000 |           |   |      | 403,792,000 |           |   |      | 420,441,000 |           |   |   | 500,856,000 |           |   |   | 638,097,000 |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Gross profit                                                                                                                           |                              |                     | 19,424,000  |           |   |      | 20,089,000  |           |   |      | 25,139,000  |           |   |   | 29,933,000  |           |   |   | 23,950,000  |          
|Selling, general and admin expenses                                                                                                    |                              |                     | 24,961,000  |           |   |      | 20,628,000  |           |   |      | 24,153,000  |           |   |   | 23,617,000  |           |   |   | 39,424,000  |          
|Depreciation & amortization expense                                                                                                    |                              |                     | 1,614,000   |           |   |      | 2,081,000   |           |   |      | 2,687,000   |           |   |   | 2,395,000   |           |   |   | 3,077,000   |          
|Foreign currency transactions loss (gain)                                                                                              |                              |                     | 581,000     |           |   |      | (9,000      | )         |   |      | 220,000     |           |   |   | 96,000      |           |   |   | 214,000     |          
|(Gain) loss disposal of assets                                                                                                         |                              |                     | (3,000      | )         |   |      | 13,000      |           |   |      | 224,000     |           |   |   | (3,000      | )         |   |   |             |          
|Impairment charges                                                                                                                     |                              |                     | 39,000      |           |   |      |             |           |   |      | 6,147,000   |           |   |   |             |           |   |   | 15,386,000  |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Operating (loss) income                                                                                                                |                              |                     | (7,768,000  | )         |   |      | (2,624,000  | )         |   |      | (8,292,000  | )         |   |   | 3,828,000   |           |   |   | (34,151,000 | )        
|Interest expense  net                                                                                                                 |                              |                     | 470,000     |           |   |      | 265,000     |           |   |      | 60,000      |           |   |   | 147,000     |           |   |   | 253,000     |          
|Other income  net                                                                                                                     |                              |                     | 10,513,000  |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Income (loss) before income taxes and before
    cumulative effect of a change in accounting principle and
    discontinued operations |                              |                     | 2,275,000   |           |   |      | (2,889,000  | )         |   |      | (8,352,000  | )         |   |   | 3,681,000   |           |   |   | (34,404,000 | )        
|Income tax (benefit) expense                                                                                                           |                              |                     | 613,000     |           |   |      | (1,390,000  | )         |   |      | 344,000     |           |   |   | 578,000     |           |   |   | (1,407,000  | )        
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Income (loss) from continuing operations                                                                                               |                              |                     | 1,662,000   |           |   |      | (1,499,000  | )         |   |      | (8,696,000  | )         |   |   | 3,103,000   |           |   |   | (32,997,000 | )        
|Loss from discontinued operations                                                                                                      |                              |                     | (4,742,000  | )         |   |      | (3,009,000  | )         |   |      | (3,149,000  | )         |   |   | (1,414,000  | )         |   |   | (4,911,000  | )        
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|(Loss) income before cumulative effect of a
    change in accounting principle                                                         |                              |                     | (3,080,000  | )         |   |      | (4,508,000  | )         |   |      | (11,845,000 | )         |   |   | 1,689,000   |           |   |   | (37,908,000 | )        
|Cumulative effect of a change in accounting
    principle, net of income tax benefit of $75,000                                        |                              |                     |             |           |   |      | 6,297,000   |           |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Net (loss) income                                                                                                                      |                              | $                   | (3,080,000  | )         |   | $    | (10,805,000 | )         |   | $    | (11,845,000 | )         |   | $ | 1,689,000   |           |   | $ | (37,908,000 | )        
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Basic and diluted (loss) income per share:                                                                                             |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       | From continuing operations   |                     | $           | 0.43      |   |      | $           | (0.39     | ) |      | $           | (2.40     | ) |   | $           | 0.92      |   |   | $           | (7.59     | )
|                                                                                                                                       | From discontinued operations |                     |             | (1.24     | ) |      |             | (0.78     | ) |      |             | (0.87     | ) |   |             | (0.42     | ) |   |             | (1.13     | )
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Before cumulative effect of a change in
    accounting principle                                                                       |                              |                     | (0.81       | )         |   |      | (1.17       | )         |   |      | (3.27       | )         |   |   | 0.50        |           |   |   | (8.72       | )        
|Cumulative effect of a change in accounting
    principle, net of tax                                                                  |                              |                     |             |           |   |      | (1.63       | )         |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Basic and diluted (loss) income per share                                                                                              |                              | $                   | (0.81       | )         |   | $    | (2.80       | )         |   | $    | (3.27       | )         |   | $ | 0.50        |           |   | $ | (8.72       | )        
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Weighted average number of shares outstanding                                                                                          |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       | Basic                        |                     |             | 3,816,000 |   |      |             | 3,862,000 |   |      |             | 3,618,000 |   |   |             | 3,364,000 |   |   |             | 4,349,000 |  
|                                                                                                                                       | Diluted                      |                     |             | 3,816,000 |   |      |             | 3,862,000 |   |      |             | 3,618,000 |   |   |             | 3,386,000 |   |   |             | 4,349,000 |  

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|                                           |  |             |            |      |  |      |            |      |  |      |             |  |  |   |             |  |  |   |             | 
|------------------------------------------ |  | ----------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ----------- |  |  | - | ----------- |  |  | - | ----------- | 
|                                           |  |            
|                                           |  | At June, 30
|                                           |  |            
|                                           |  | 2003        |            | 2002 |  | 2001 |            | 2000 |  | 1999
|                                           |  |             |            |      |  |      |            |      |  |     
|Balance sheet data:                        |  |             |            |      |  |      |            |      |  |      |             |  |  |   |             |  |  |   |             | 
|Working capital                            |  | $           | 38,337,000 |      |  | $    | 28,963,000 |      |  | $    | 30,539,000  |  |  | $ | 36,506,000  |  |  | $ | 45,193,000  | 
|Total assets                               |  |             | 86,170,000 |      |  |      | 80,562,000 |      |  |      | 107,466,000 |  |  |   | 121,319,000 |  |  |   | 141,090,000 | 
|Long-term obligations less current portion |  |             | 12,823,000 |      |  |      | 4,900,000  |      |  |      |             |  |  |   |             |  |  |   | 8,500,000   | 
|Shareholders equity                       |  |             | 27,716,000 |      |  |      | 27,852,000 |      |  |      | 42,615,000  |  |  |   | 55,349,000  |  |  |   | 52,810,000  | 

All periods presented have been restated in
connection with the February 2003 discontinuance of operations
of SED International do Brasil Distribuidora, Ltda. If the
nonamortization provisions of SFAS No. 142 had been
applied to all periods presented, the 2001, 2000 and 1999 net
income would have increased or net loss would have decreased by
$433,000, $373,000, and $888,000. 2000 and 1999 have been
reclassified in connection with the fiscal 2001 adoption of a
new accounting pronouncement.

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

The following discussion should be read in
conjunction with the consolidated financial statements of the
Company and the notes thereto and the Selected Consolidated
Financial Data included elsewhere herein. Historical operating
results are not necessarily indicative of trends in operating
results for any future period.

Overview

The Company is an international distributor of
microcomputer products, including personal computers, printers
and other peripherals, supplies, and networking products
throughout the United States and Latin America. In fiscal 2003,
the Companys net sales to customers in the United States
represented approximately 77.5% of total net sales. Net sales
for export principally into Latin America and in-country net
sales in Colombia and Argentina represented approximately 22.5%
of total net sales for fiscal 2003. Net sales of microcomputer
products generated approximately 88.0% of total net sales and
wireless telephone products represented the remaining 12.0% for
fiscal 2003.

The Company incurred a net loss of
$3.1 million on net sales of $413.1 million in fiscal
2003. Net sales during fiscal 2002 and 2001 were
$423.9 million and $445.6 million, respectively. The
gross profit as a percentage of net sales was relatively flat at
4.7% for fiscal year 2003 as compared to 4.7% in fiscal 2002 and
was 5.6% in fiscal 2001. Selling, general and administrative
expenses as a percentage of net sales were 6.0% in fiscal 2003,
4.9% in fiscal 2002, and 5.4% in fiscal 2001.

The Company has incurred a decline in net sales
in the United States from fiscal 1999 to 2003. Although net
sales in the United States in 2003 compared to 2002 increased by
$8.2 million, the net sales improvement in the United
States was offset by a $19.0 million decrease in net sales
to export and Latin America. The Company has incurred operating
losses in both its domestic or certain of its foreign operations
at various times during the past five fiscal years. Company
management is continuing to focus on increasing profit margins
and reducing administrative and overhead costs. There is no
assurance the Company will be successful in its efforts. Failure
to improve margins and reduce overhead could adversely affect
the Companys profitability and financial condition.

Numerous factors and conditions impact the
Companys ability to adequately achieve its profit goals,
including, but not limited to, the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuation of distribution
    agreements The Company
    operates under formal but cancelable distribution agreements
    with certain of its suppliers. If these agreements were
    cancelled, the Company would be forced to obtain its products
    through wholesalers. This would reduce the Companys profit
    margin on the affected products.                                                                                                             
|
| |  | Availability of certain
    products From time to
    time, due to production limitations or heavy demand, the Company
    may only be able to purchase a limited amount of popular
    products from its suppliers.                                                                                                                                                                                                                                                    
|
| |  | Product
    margins The Company
    operates in a very competitive business environment.
    Accordingly, product margins are continually under pricing
    pressure.                                                                                                                                                                                                                                                                                                   
|
| |  | Vendor
    credit The Company
    significantly relies on its suppliers for trade credit. Changes
    by the suppliers in their credit terms could force the Company
    to obtain less favorable financing for its purchases.                                                                                                                                                                                                                                          
|
| |  | Product
    obsolescence The Company
    offers a broad line of products that are subject to fast
    technological obsolescence, which increases the risk of
    inventory markdown. Through its vendor agreements, the Company
    has certain stock return privileges, which vary from supplier to
    supplier.                                                                                                                                                     
|
| |  | Credit decisions and
    losses The Company
    maintains an experienced customer credit staff and relies on
    customer payment history and third party data to make customer
    credit decisions. Nevertheless, the Company may experience
    customer credit losses in excess of its expectations. The
    Company also maintains credit insurance for customers located in
    the United States and Latin America (subject to certain terms
    and conditions).

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Proportionate control of general and
    administrative costs The
    Company attempts to control its overhead costs to keep such
    costs in line with its sales volume. As sales volumes fluctuate,
    the Company must continually monitor its overhead costs and make
    adjustments timely and appropriately.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Uncertain and possibly volatile economic and
    political environment in Latin
    America The general
    economic and political environment in the countries in which the
    Company operates in Latin America is uncertain and, at times,
    volatile. As a result of these conditions, the Company could
    experience unexpected costs from its operations in these
    countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Availability of credit
    facilities The Company
    operated under a formal credit facility with a bank for many
    years that was subject to certain collateral limitations and
    contained certain covenants. During October 2002 a new credit
    facility was obtained. The new credit facility provides more
    flexibility compared to the prior agreement but also includes
    covenants and other provisions. The Company from time to time
    violated the financial covenants associated with the previous
    credit agreement, but was successful in negotiating waivers of
    such violations. No assurance can be given that the Company will
    be able to maintain compliance with financial covenants, or
    obtain waivers in the event of non-compliance, in the future.
    Failure to maintain compliance with the financial covenants
    could adversely affect the Companys ability to obtain
    vendor credit and the overall business operations. The credit
    facilities are further described in Note 8.
|
| |  | Cash
    flows While not presently
    anticipated, the Companys continued operation in Latin
    America may require additional capital infusion in the form of
    loans from the parent company or other debt borrowings by the
    subsidiary. The October 2002 credit facility places certain
    restrictions on the future funding of Latin American operations
    (See Note 8 to the audited consolidated financial
    statements).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

For the Companys domestic operations, all
purchases and sales are denominated in United States dollars.
For the Companys operations in Colombia and Argentina,
in-country transactions are conducted in the respective local
currencies of these two locations while import purchases are
generally denominated in United States dollars.

Discontinued Operations

In February 2003, the Company resolved to
discontinue commercial operations of its Brazilian subsidiary,
SED International do Brasil Distribuidora, Ltda.. As a result,
SED International do Brasil Distribuidora, Ltda. was reported as
a disposal of a segment of business in the third quarter 2003.
Accordingly, the operating results of SED International do
Brasil Distribuidora, Ltda. have been classified as a
discontinued operation for all periods presented in the
Companys consolidated statements of operations.
Additionally, the Company has reported all of SED International
do Brasil Distribuidora, Ltda. assets at their estimated net
realizable values in the Companys consolidated balance
sheet as of June 30, 2003 in accordance with Accounting
Principles Board Opinion No. 30. See Note 19 of the
Companys Consolidated Financial Statements.

During 2003, the Company recorded a loss from
discontinued operations of approximately $4.7 million
related to the discontinuance of SED International do Brasil
Distribuidora, Ltda. This loss consisted of operating losses
incurred in the segment of $1.4 million and an estimated
loss on disposal of the segment of $3.3 million which
includes charges for the following: (i) the write-off of
foreign currency translation losses of $2.6 million
previously recorded as a component of shareholders equity,
(ii) equipment, (iii) customer accounts receivable,
(iv) employee termination costs, (v) inventory, and
(vi) facility exit and lease termination costs.

At June 30, 2003, SED International do
Brasil Distribuidora, Ltda. had assets of $51,000 and third
party liabilities of $848,000. The assets include cash of
$22,000 and prepaid taxes of $20,000 and deposits of $9,000.
Liabilities include accounts payable related to inventory
purchases of $751,000, bank obligations of $15,000 and other
miscellaneous accrued liabilities of $82,000.

SED International do Brasil Distribuidora, Ltda.
has been transitioned from a commercial operating company into
dormancy. During the dormancy period, the Company will incur
ongoing operating expenses for attorney fees, statutory
bookkeeping and reporting services, document storage and
inventory storage cost until

12



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##### Table of Contents



liquidation of the inventory. Please refer to
Note 19 to the Companys Consolidated Financial
Statements for further information regarding the results of
operations for the reporting periods.


Results of Continuing Operations

The following table sets forth, for the years
presented, the percentage of net sales represented by certain
items in the Companys consolidated statements of
operations:

|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                                                                                                                      |  |                    
|                                                                                                                                      |  | Year Ended June 30,
|                                                                                                                                      |  |                    
|                                                                                                                                      |  | 2003                |        | 2002 |  | 2001
|                                                                                                                                      |  |                     |        |      |  |     
|Net sales                                                                                                                             |  |                     | 100.00 | %    |  |      | 100.00 | %  |  |  | 100.00 | % 
|Cost of sales, including buying and occupancy
    expense                                                                             |  |                     | 95.30  | %    |  |      | 95.26  | %  |  |  | 94.36  | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Gross profit                                                                                                                          |  |                     | 4.70   | %    |  |      | 4.74   | %  |  |  | 5.64   | % 
|Selling, general and administrative expenses                                                                                          |  |                     | 6.04   | %    |  |      | 4.87   | %  |  |  | 5.42   | % 
|Depreciation expense                                                                                                                  |  |                     | 0.39   | %    |  |      | 0.49   | %  |  |  | 0.60   | % 
|Foreign currency transactions (gain) loss                                                                                             |  |                     | 0.14   | %    |  |      | 0.00   | %  |  |  | 0.05   | % 
|(Gain) loss on disposal of assets                                                                                                     |  |                     | 0.00   | %    |  |      | 0.00   | %  |  |  | 0.05   | % 
|Impairment charges                                                                                                                    |  |                     | 0.01   | %    |  |      | 0.00   | %  |  |  | 1.38   | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Operating loss                                                                                                                        |  |                     | (1.88  | )%   |  |      | (0.62  | )% |  |  | (1.86  | )%
|Interest expense, net                                                                                                                 |  |                     | 0.11   | %    |  |      | 0.06   | %  |  |  | 0.01   | % 
|Other income                                                                                                                          |  |                     | 2.54   | %    |  |      |       |    |  |  |       |   
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|(Loss) income from continuing operations before
    income taxes and before cumulative effect of a change in
    accounting principle |  |                     | 0.55   | %    |  |      | (0.68  | )% |  |  | (1.87  | )%
|Income tax (benefit) expense                                                                                                          |  |                     | 0.15   | %    |  |      | (0.33  | )% |  |  | 0.08   | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Basic and diluted (loss) income per share:                                                                                            |  |                     |        |      |  |      |        |    |  |  |        |   
|(Loss) before cumulative effect of a change in
    accounting principle                                                               |  |                     | 0.40   | %    |  |      | (0.35  | )% |  |  | (1.95  | )%
|Cumulative effect of a change in accounting
    principle, net of $75,000 tax benefit                                                 |  |                     | 0.00   | %    |  |      | 1.49   | %  |  |  | 0.00   | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Net income (loss) from continuing operations                                                                                          |  |                     | 0.40   | %    |  |      | (1.84  | )% |  |  | (1.95  | )%
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   



| |                                        
| | ---------------------------------------
| | Fiscal 2003 Compared to Fiscal
    2002

Net sales from continuing operations decreased
2.5%, or $10.8 million, to $413.1 million in fiscal
2003 compared to $423.9 million in fiscal 2002. Information
concerning the Companys domestic and foreign sales is
summarized below:

|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |       |   
|-------------- | -------- | ---------- | ----- | ------ |  | ------ | ----- | ------- |  | - | ----- | ----- | - |  | ---- | ----- | --
|               |          |            |       |        |  |       
|               |          | Year Ended |       |       
|               |          | June 30,   |       | Change
|               |          |            |       |       
|               |          | 2003       |       | 2002   |  | Amount |       | Percent
|               |          |            |       |        |  |        |       |        
|United States: |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |      
|               | Domestic |            | $     | 320.1  |  |        | $     | 311.3   |  |   | $     | 8.8   |   |  |      | 2.8   | % 
|               | Export   |            |       | 55.3   |  |        |       | 75.5    |  |   |       | (20.2 | ) |  |      | (26.8 | )%
|Latin America  |          |            | 37.7  |        |  |        | 38.0  |         |  |   | (.3   | )     |   |  | (.9  | )%   
|Elimination    |          |            | (0.0  | )      |  |        | (0.9  | )       |  |   | 0.9   |       |   |  | 33.3 | %    
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |      
|Consolidated   |          | $          | 413.1 |        |  | $      | 423.9 |         |  | $ | (10.8 | )     |   |  | (2.5 | )%   
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |      

Domestic sales were $320.1 million and
$311.3 million in fiscal 2003 and fiscal 2002,
respectively. The increase in domestic sales was due primarily
to an increase in wireless product sales of $24.5 million
offset by a decline in the sales of printers, printer
consumables, computer processors and mass storage products. The
overall sales decline resulted from a decrease in net sales to
customers for export principally to Latin America.

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The decrease in U.S. export sales was primarily
due to the economic downturn in the Latin American countries the
Company does business in.


Sales of microcomputer products represented
approximately 88.0% of the Companys net sales in fiscal
2003 compared to 94.0% for fiscal 2002. Sales of wireless
telephone products accounted for approximately 12.0% of the
Companys net sales in fiscal 2003 compared to 6.0% for
fiscal 2002.

Gross profit decreased $0.7 million to
$19.4 million in fiscal 2003, compared to
$20.1 million in fiscal 2002. Gross profit as a percentage
of net sales remained flat at 4.7% for fiscal 2003 and 2002.
Overall, the Company continues to experience pricing pressure in
selling products.

Selling, general and administrative expenses for
fiscal 2003 increased 21.0% to $25.0 million, compared to
$20.6 million in fiscal 2002. These expenses as a
percentage of net sales increased to 6.0% in 2003 compared to
4.9% in fiscal 2002. The increase in selling, general and
administrative expenses was primarily due to an increase in bad
debt expenses of $0.7 million, professional fees
$0.2 million, sales tax liabilities of $1.2 million,
and obligations of $3.4 million that arose under the terms
of Mr. Gerald Diamonds employment agreement as a
result of his June 2003 death. See Note 18 of the
Companys Consolidated Financial Statements.

The 2002 cumulative effect adjustment was
determined based on an analysis of the Companys goodwill
and the estimated future cash flows of operations associated
with such impairment. See Note 3 to the Companys 2003
consolidated financial statements.

Depreciation was $1.6 million in fiscal 2003
as compared to $2.1 million in fiscal 2002.

The results of operations of the Company were
adversely affected by the continuing inflationary conditions in
Latin America and the fluctuations of the Argentine and
Colombian currencies. Since the Company has significant U.S.
dollar denominated liabilities in Latin American subsidiaries,
the devaluation resulted in foreign currency transaction losses
totaling approximately $606,000 in fiscal 2003 as compared to
approximately $400,000 in fiscal 2002. See Item 7A for
further discussion.

Net interest expense was $.5 million in
fiscal 2003 compared to interest expense of $.3 million in
fiscal 2002. This net change resulted primarily from a increase
in working capital requirements in fiscal 2003 which in turn
resulted in additional borrowings under the Companys
credit facility.

Other income was $10.5 million at
June 30, 2003, and included $10.0 million in proceeds
due under two key man life insurance policies held on the life
of Gerald Diamond, the Companys founder and former
Chairman and Chief Executive Officer. The insurance proceeds
were received in July and August of 2003. Additionally, in
December of 2002, the Company entered into a confidential
settlement agreement for claims arising out of a disagreement
with a former insurance broker. The net proceeds of $512,932
were recorded net of attorneys fees of $96,420.

Income tax expense was approximately $613,000 in
fiscal year 2003 compared to a benefit of $1.4 million in
2002. In 2002, the Company realized an income tax benefit of
$1.9 million resulting from the adjustment of certain
income tax liabilities and refunds received in the fourth
quarter of 2002 related to recent United States tax legislation
which provided for an extension of the period in which net
operating losses could be carried back, offset in part by income
taxes in Colombia and Argentina. At June 30, 2003, the
Company has a gross net operating loss carried forward for U.S.
federal tax purposes of approximately $28.7 million and
state tax purposes of approximately $34.3 million; expiring
at various dates through 2023 and gross net operating loss carry
forwards for foreign income tax purposes of approximately
$12 million in Brazil, which generally do not expire. At
June 30, 2003 and 2002, the Company has recorded valuation
allowances for principally all deferred tax assets, except for
those relating to Intermaco S.R.L. (Argentina), as there is no
assurance that these assets will be realized.



| |                                        
| | ---------------------------------------
| | Fiscal 2002 Compared to Fiscal
    2001

Net sales from continuing operations decreased
4.9%, or $21.7 million, to $423.9 million in fiscal
2002 compared to $445.6 million in fiscal 2001.

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Information concerning the Companys
domestic and foreign sales from continuing operations is
summarized below:

|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |       |   
|-------------- | -------- | ---------- | ----- | ------ |  | ------ | ----- | ------- |  | - | ----- | ----- | - |  | ----- | ----- | --
|               |          |            |       |        |  |       
|               |          | Year Ended |       |       
|               |          | June 30,   |       | Change
|               |          |            |       |       
|               |          | 2002       |       | 2001   |  | Amount |       | Percent
|               |          |            |       |        |  |        |       |        
|United States: |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |      
|               | Domestic |            | $     | 311.3  |  |        | $     | 295.9   |  |   | $     | 15.4  |   |  |       | 5.2   | % 
|               | Export   |            |       | 75.5   |  |        |       | 105.4   |  |   |       | (29.9 | ) |  |       | (28.4 | )%
|Latin America  |          |            | 38.0  |        |  |        | 45.9  |         |  |   | (7.9  | )     |   |  | (17.2 | )%   
|Elimination    |          |            | (0.9  | )      |  |        | (1.6  | )       |  |   | 0.7   |       |   |  | 43.4  | %    
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |      
|Consolidated   |          | $          | 423.9 |        |  | $      | 445.6 |         |  | $ | (21.7 | )     |   |  | (4.9  | )%   
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |      

The overall sales decline resulted from an
increase in United States domestic net sales and a decline in
net sales to customers for export principally to Latin America
and a decrease in in-country net sales in Colombia (commenced
operations in May 1998 and operating as SED International de
Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired in
November 1998). In addition, the 74.2% decrease in the value of
the Argentine peso and the 4.2% decline in the value of the
Colombian peso contributed to the decline in net sales.

The increase in sales in the United States was
primarily due to an increase in sales to large system
integrators and the addition of 1,700 new customers. The
decrease in U.S. export sales was due primarily to lower sales
of printers and printer consumables. Sales of microcomputer
products represented approximately 94.0% of the Companys
net sales in fiscal 2002 compared to 92.0% for fiscal 2001.
Sales of wireless telephone products accounted for approximately
6.0% of the Companys net sales in fiscal 2002 compared to
8.0% for fiscal 2001.

Gross profit decreased $5.0 million to
$20.1 million in fiscal 2002, compared to
$25.1 million in fiscal 2001. Gross profit as a percentage
of net sales decreased to 4.7% in fiscal 2002 from 5.6% in
fiscal 2001. The change in gross profit as a percentage of sales
was primarily due to lower margins on sales in Latin America and
the change in the mix of products sold. Overall, the Company
continues to experience pricing pressure in selling products.

Selling, general and administrative expenses
decreased 14.6% to $20.6 million, compared to
$24.2 million in fiscal 2001. These expenses as a
percentage of net sales decreased to 4.9% in 2002 compared to
5.4% in fiscal 2001.

The 2002 cumulative effect adjustment and the
2001 non-cash impairment charges were determined based on an
analysis of the Companys goodwill and long-lived assets
and the estimated future cash flows of operations associated
with such impairment. See Notes 3 and 7 to the
Companys 2003 consolidated financial statements.

Depreciation and amortization expense was
$2.1 million in fiscal 2002 compared to $2.7 million
in fiscal 2001.

The Company recorded a non-cash impairment charge
of $6.1 million in fiscal 2001. The non-cash accounting
charge was determined based on a detailed analysis of the
Companys long-lived assets and their estimated future cash
flows. The analysis resulted in the identification and
measurement of an impairment loss of $5,947,000 in goodwill and
approximately $200,000 in property and equipment. Substantially
all of the goodwill impairment related to the Companys
acquired export distribution rights in connection with the
fiscal 1996 acquisition of substantially all of the net assets
of U.S. Computer of North America, Inc. This impairment resulted
from a gradual, but, significant, decline in sales volumes and
adverse changes in the competitive environment for the
distribution of the corresponding product lines. The goodwill
was not considered recoverable through other means. The
impairment loss of approximately $200,000 related to the
Companys property and equipment in certain domestic
assets. Management estimated the undiscounted cash

15



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flows to be generated by the assets for the
respective operations and compared them to their carrying
values. Since the estimated undiscounted future cash flows were
less than the carrying value of the assets, the carrying values
were adjusted to estimated fair values.


The results of operations in fiscal 2001 were
adversely affected by inflationary conditions in Latin America.
In fiscal 2001, the company recorded transaction losses of
$220,000 related to U.S. denominated liabilities.

Net interest expense was $0.3 million in
fiscal 2002 compared to interest expense of $60,000 in fiscal
2001. This net change resulted primarily from an increase in
working capital requirements in fiscal 2002.

In fiscal 2002, the Company realized an income
tax benefit of $1.9 million resulting from the adjustment
of certain income tax liabilities and refunds received in the
fourth quarter of 2002 related to recent United States tax
legislation which provided for an extension of the period in
which net operating losses could be carried back, offset in part
by income taxes in Colombia and Argentina. At June 30, 2001
and 2002, the Company had a gross net operating loss carried
forward for U.S. federal tax purposes of approximately
$23 million and state income tax purposes of $28 million
expiring at various dates through 2022 and gross net operating
loss carry forwards for foreign income tax purposes of
approximately $10 million in Brazil, which generally do not
expire. At June 30, 2002 and 2001, the Company has recorded
valuation allowances for principally all deferred tax assets,
except for those relating to Intermaco S.R.L., as there is no
assurance that these assets will be realized. Income tax expense
was $0.3 million in fiscal 2001 and was primarily related
to income taxes in the Companys Latin American operations.



| |               
| | --------------
| | Quarterly Data

The following table sets forth certain unaudited
quarterly historical consolidated financial data for each of the
Companys last eight fiscal quarters ended June 30,
2003. This unaudited quarterly information has been prepared on
the same basis as the annual information presented elsewhere
herein and, in the Companys opinion, includes all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the selected quarterly
information. The Companys interim financial statements for
the quarter ended September 30, 2001 have been restated in
connection with the Companys adoption of Statement of
Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets, subsequent to the issuance of the
September 30, 2001 interim financial statements. The net
loss as reported was $3,137,000 as compared to a net loss of
$9,434,000 as restated. In addition, all per share amounts in
the following table give retroactive effect to the one-for-two
reverse stock split on April 26, 2002. This information
should be read in conjunction

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with the consolidated financial statements and
Notes thereto included elsewhere herein. The operating results
for any quarter shown are not necessarily indicative of results
for any future period.


|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |          |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |       |  
|----------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------- | - | ------- | ------- | -------- | - | -------- | ------- | ------- | - | ------- | ------ | -------- | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                                            |                                       |                                      
|                                                            |                                       | Quarter Ended                        
|                                                            |                                       |                                      
|                                                            |                                       | Sept 30,                              |         | Dec 31, |   | Mar 31, |         | June 30, |   | Sept 30, |         | Dec 31, |   | Mar 31, |        | June 30,
|                                                            |                                       | 2001                                  |         | 2001    |   | 2002    |         | 2002     |   | 2002     |         | 2002    |   | 2003    |        | 2003    
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |         
|                                                            |                                       |                                      
|                                                            |                                       | (In thousands, except per share data)
|Net sales                                                   |                                       | $                                     | 111,037 |         |   | $       | 102,545 |          |   | $        | 110,932 |         |   | $       | 99,367 |          |   | $ | 113,581 |       |   | $ | 110,431 |       |   | $ | 94,444 |       |   | $ | 94,692 |      
|Gross profit                                                |                                       |                                       | 5,389   |         |   |         | 5,496   |          |   |          | 4,769   |         |   |         | 4,435  |          |   |   | 5,223   |       |   |   | 5,557   |       |   |   | 3,777  |       |   |   | 4,867  |      
|Operating income (loss)                                     |                                       |                                       | (1,085  | )       |   |         | 207     |          |   |          | (544    | )       |   |         | (1,202 | )        |   |   | 244     |       |   |   | 323     |       |   |   | (1,529 | )     |   |   | (6,806 | )    
|Net income (loss) from continuing operations                |                                       |                                       | (1,215  | )       |   |         | 19      |          |   |          | (761    | )       |   |         | 458    |          |   |   | (116    | )     |   |   | 434     |       |   |   | (1,705 | )     |   |   | 3,049  |      
|Net loss from discontinued operations                       |                                       |                                       | (1,922  | )       |   |         | (149    | )        |   |          | (385    | )       |   |         | (553   | )        |   |   | (873    | )     |   |   | (202    | )     |   |   | (3,585 | )     |   |   | (82    | )    
|Net income (loss) before change in
    accounting principle |                                       |                                       | (3,137  | )       |   |         | (130    | )        |   |          | (1,146  | )       |   |         | (95    | )        |   |   | (989    | )     |   |   | 232     |       |   |   | (5,290 | )     |   |   | 2,967  |      
|Net income (loss)                                           |                                       | $                                     | (9,434  | )       |   | $       | (130    | )        |   | $        | (1,146  | )       |   | $       | (95    | )        |   | $ | (989    | )     |   | $ | 232     |       |   | $ | (5,290 | )     |   | $ | 2,967  |      
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |          |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |      
|Income (loss) per share:                                    |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |          |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |      
|                                                            | From continuing operations            |                                       |         | (0.31   | ) |         |         | 0.00     |   |          |         | (0.20   | ) |         |        | 0.10     |   |   |         | (0.03 | ) |   |         | 0.11  |   |   |        | (0.44 | ) |   |        | 0.80  |  
|                                                            | From discontinued operations          |                                       |         | (0.50   | ) |         |         | (0.03    | ) |          |         | (0.10   | ) |         |        | (0.12    | ) |   |         | (0.23 | ) |   |         | (0.05 | ) |   |        | (0.94 | ) |   |        | (0.02 | )
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |          |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |      
|                                                            | Before change in accounting principle |                                       | $       | (0.81   | ) |         | $       | (0.03    | ) |          | $       | (0.30   | ) |         | $      | (0.02    | ) |   | $       | (0.26 | ) |   | $       | 0.06  |   |   | $      | (1.38 | ) |   | $      | 0.78  |  
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |          |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |      
|                                                            | After change in accounting principle  |                                       | $       | (2.44   | ) |         | $       | (0.03    | ) |          | $       | (0.30   | ) |         | $      | (0.02    | ) |   | $       | (0.26 | ) |   | $       | 0.06  |   |   | $      | (1.38 | ) |   | $      | 0.78  |  
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |         |         |   |         |        |          |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |      



| |                           
| | --------------------------
| | Fourth Quarter Adjustments

In the fourth quarter of fiscal 2003, the Company
recorded certain expense adjustments related to changes in
estimates of obligations related to sales and use tax
liabilities of $1.2 million; bad debt expense of
$2.1 million, $3.4 million related to benefits due
under Mr. Diamonds employment agreement (See Note 18
of the Companys Consolidated Financial Statements) and
income for insurance proceeds of $10.0 million. These
fourth quarter adjustments resulted in a decrease to the net
loss of approximately $.86 per share for fiscal year 2003.

In the fourth quarter of fiscal 2002, the Company
recorded certain adjustments related to changes in estimates
associated with unclaimed property liabilities
($1.2 million), and the adjustment of income tax
liabilities and the accrual of refunds receivable under recently
enacted tax legislation ($1.9 million). These fourth
quarter adjustments resulted in a reduction of the net loss of
approximately $777,000 or $.20 per share for fiscal year 2002.

Liquidity and Capital Resources

The Companys liquidity requirements arise
primarily from the funding of working capital needs, including
inventories and trade accounts receivable. Historically, the
Company has financed its liquidity needs largely through
internally generated funds, borrowings under its credit
agreement and vendor lines of credit. The Company derives all of
its operating income and cash flow from its subsidiaries and
relies on payments from its subsidiaries to generate the funds
necessary to meet its obligations. As the Company continues
operations in Latin America, management believes that capital
requirements in Latin America may limit the ability of the
Companys subsidiaries in those countries to make payments
to the Company.

Operating activities used, ($.6) million of cash
in fiscal 2003 and provided $1.0 million and
$2.3 million of cash in fiscal 2002 and 2001, respectively.
The cash used in operating activities in fiscal 2003 resulted
primarily from an increase in other receivables of
$10.0 million, other assets of $.1 million, and
accounts payable and accrued liabilities of $.7 million
which were partially offset by decreases in restricted cash of
$.8 million, trade receivables of $1.2 million,
inventories of $3.1 million, other non-cash items of
$6.9 million and the net loss of $3.1 million. In
fiscal year 2002, the Company had net cash flows from operating
activities in spite of the $10.8 million loss which was the
result of a non-cash impairment charge of $6.4 million
affecting fiscal 2002, while the net effect of changes in
operating accounts provided an additional $5.8 million

17



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##### Table of Contents



in cash flow. In fiscal year 2001, the Company
had net cash flows from operating activities in spite of the
$11.8 million loss which was the result of significant
non-cash charges affecting fiscal 2001, while the net effect of
changes in operating accounts had no significant effect on cash
flows. Net cash provided by operations in 2001 resulted
primarily from decreases of $4.5 million in accounts
receivable and $1.1 million in accrued and other
liabilities, which was partially offset by a $4.8 million
increase in inventory and $0.4 million increase in accounts
payable.


Investing activities used $.2 million,
$.3 million and $2.3 million of cash in fiscal 2003,
2002 and 2001, respectively. The primary use of cash in fiscal
2003 and 2002 was for the purchase of equipment for
$.2 million and $.3 million respectively. The use of
cash in fiscal 2001 was primarily for the purchase of computer
equipment for $.8 million and for additional payments
related to the purchase of Intermaco S.R.L. amounting to
$1.5 million.

Financing activities provided $5.9 million
of cash in fiscal 2003, provided $4.5 million of cash in
fiscal 2002 and used $.4 million of cash in fiscal 2001.
The net cash provided in fiscal 2003 and 2002 was primarily
related to bank borrowings on the revolving line of credit. The
net cash used in financing activities in fiscal 2001 primarily
related to repayment of short-term borrowings by subsidiaries.

The Companys cash flows were adversely
affected by the unfavorable changes in exchange rates in the
Latin American countries in which the Company does business in
fiscal years 2003, 2002 and 2001. The exchange rate changes had
the effect of using approximately $4.5 million in cash for
the year ended June 30, 2003 as compared to using
$5.1 million in fiscal 2002 and $2.0 million in fiscal
2001.

Subsequent to June 30, 2002, the Company
terminated its credit agreement with Wachovia Bank N.A.
(Wachovia), as amended, from time to time, which
provided for borrowing under a line of credit of up to
$25 million ($35 million at June 30, 2001). At
June 30, 2002 and 2001, the Company had borrowings of
$4.9 million and no borrowings, respectively, outstanding
under this facility. Maximum borrowings under the Wachovia
credit agreement were generally based on eligible accounts
receivable and inventory (as defined in the credit agreement)
less a $9.5 million reserve. This reserve could be drawn
upon, if necessary, to finance obligations to IBM Credit
Corporation (IBM), which financed the Companys
purchases from certain vendors. Available borrowings under this
agreement, based on collateral limitations at June 30, 2002
and 2001 were $9.9 million and $23.5 million, respectively
($9.5 million of which would only be available to finance
obligations due to IBM for both years, if necessary).

The Wachovia agreement was secured by accounts
receivable and inventory of SED International, Inc. and required
maintenance of certain minimum working capital and other
financial ratios and had certain dividend restrictions. The
Company was able to borrow at Wachovias prime rate (4.75%
as of June 30, 2002) plus .50% or the Company was able to
fix the interest rate for periods of 30 to 180 days under
various interest rate options. The credit agreement required a
commitment fee of .50% of the unused commitment and would have
expired on November 1, 2002. Average borrowings, maximum
borrowings, and the weighted average interest rate for fiscal
2002 were $5.0 million, $19.1 million, and 5.67%,
respectively. Average borrowings, maximum borrowings, and the
weighted average interest rate for fiscal 2001 were
$1.2 million, $10.0 million, and 6.75%, respectively.
At June 30, 2002, the Company was not in compliance with
certain agreement covenants; however, the Company was not
negatively affected because the Company was successful in
negotiating a new $35 million credit facility with Fleet
Capital Corporation and replaced the credit agreement with
Wachovia.

On October 7, 2002, the Company entered into
a three year, $35 million credit facility with Fleet
Capital Corporation (the Fleet Agreement). The Fleet
Agreement provides for revolving borrowings up to
$35 million based upon the Companys eligible domestic
accounts receivable and inventory as defined therein. Borrowings
under the Fleet Agreement accrue interest based upon a variety
of interest rate options depending upon the computation of
availability as defined therein. The interest rates range from
the prime rate to the prime rate plus a margin of .5% or LIBOR
plus a margin ranging from 2% to 2.75%. The Company is also
subject to a commitment fee ranging from .25% to .5% on the
unused portion of the facility. Interest is payable monthly.
Borrowings under the Fleet Agreement are secured by
substantially all domestic assets of the Company and 65% of each
of the Companys shares in its foreign subsidiaries,
respectively.

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The Fleet Agreement also contains certain
covenants which, among other things, requires that if the
Companys availability is less than $5.0 million at
anytime during the agreement, the Company must restrict or limit
capital expenditures and advances to the Companys Latin
American subsidiaries. Also, if the $5.0 million threshold
is breached the Fleet Agreement requires the maintenance of
certain levels of earnings before interest, taxes, depreciation,
and amortization, requires maintenance of minimum fixed charge
coverage ratio beginning in the second quarter of fiscal 2004,
and requires the maintenance of minimum tangible net worth, as
defined, of negative $5 million. The Company has maintained
at least $5 million in availability under the Fleet
Agreement since its inception on October 7, 2002. The
Companys availability under the Fleet Agreement net of
reserves of $2.1 million for outstanding Letters of Credit
was $9.6 million on October 3, 2003. Average
borrowings, maximum borrowings, and weighted average interest
rate for fiscal 2003 were $14.1 million, $23.7 million
and 3.85% respectively.

At June 30, 2003, the Company would not have
been in compliance with certain financial covenants under the
Fleet Agreement had it breached the $5.0 million
availability threshold. In the future, if the Company were to
breach the $5.0 million threshold and fail to comply with
the required financial covenants, Fleet may declare an event of
default and could demand repayment of all outstanding borrowings
and discontinue the agreement. If Fleet were to declare an event
of default, the Companys liquidity and business operations
could be adversely affected.

The Companys subsidiary, SED International
do Brasil Distribuidora Ltda., operations of which have been
discontinued, operated under line of credit agreements with
several Brazilian banks. Interest rates on borrowings were
negotiated at the time of borrowing. The credit agreements were
secured by the subsidiarys accounts receivable and require
the maintenance of certain financial ratios. At June 30,
2003, the Company had $15,000 of borrowings outstanding under
these facilities. For the year ended June 30, 2003, average
borrowings, maximum borrowings and the weighted average monthly
interest rate under these loan agreements for fiscal 2003 were
$.9 million, $2.5 million, and 25.8% respectively.

At June 30, 2003, the Companys
subsidiary, SED International de Colombia Ltda. had no bank
borrowings. In addition, the Colombian subsidiary had no
significant borrowings at any time during fiscal 2003.

The carrying value of all bank debt at
June 30, 2003 and 2002 approximates its fair value based on
floating market interest rates under these debt agreements.

Future rent obligations under operating leases is
approximately $2.4 million over the next four years. See
Note 10 to the 2003 consolidated financial statements.

Management believes that its credit agreements
together with vendor lines of credit and internally generated
funds, will be sufficient to satisfy its working capital needs
during fiscal 2004. However, no assurance can be given that the
Company will be able to remain in compliance with the financial
covenants associated with the Fleet Agreement, or that the
Company will be able to continue to obtain credit from its
vendors in the future. Failure to maintain compliance under the
Fleet Agreement or obtain vendor lines of credit could
significantly and adversely affect the Companys business
operations.

Critical
Accounting Policies and Estimates

Allowance
for Doubtful Accounts  Methodology

An allowance for uncollectible accounts has been
established based on collection experience and an assessment of
the collectibility of specific accounts. Management evaluates
the collectibility of accounts receivable based on a combination
of factors. Initially, management estimates an allowance for
doubtful accounts as a percentage of accounts receivable based
on historical collections experience. This initial estimate is
periodically adjusted when management becomes aware of a
specific customers inability to meet its financial
obligations (e.g., bankruptcy filing) or as a result of changes
in the overall aging of accounts receivable. Management does not
believe the estimate of the allowance for doubtful accounts is
likely to be adversely affected by any individual customer,
since the Company is protected by credit insurance on its

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significant customers, subject to certain
limitations. See Note 15 under Item 8 for a summary of
the movement of the allowance for doubtful accounts.


Inventories 
Slow Moving and Obsolescence

Most of the Companys vendors allow for
either return of goods within a specified period (usually
90 days) or for credits related to price protection.
However, for other vendor relationships and inventories, the
Company is not protected by vendors from the risk of inventory
loss. Therefore, in determining the net realizable value of
inventories, management identifies slow moving or obsolete
inventories that (1) are not protected by vendor agreements
from risk of loss, and (2) are not eligible for return
under various vendor return programs. Based upon these factors,
management estimates the net realizable value of inventories and
records any necessary adjustments as a charge to cost of sales.
If inventory return privileges were discontinued in the future,
or if vendors were unable to honor the provisions of certain
contracts which protect the Company from inventory losses,
including price protections, the risk of loss associated with
obsolete or slowing moving inventories would increase. The
Companys reserve for obsolete and slowing moving
inventories was approximately $1,052,000 at June 30, 2003
or 3.08% of gross inventories.

Accrued
Liabilities

The Company has recorded liabilities for certain
sales tax liabilities, escheat liabilities, and employment
agreement obligations. The recording of these liabilities
requires the Company to make judgments and estimates. Certain of
the estimates are highly subjective and may be subject to change
in the future. At June 30, 2003 the Company has accrued its
best estimate of the amounts which will ultimately be required
to be paid in connection with such matters.

Financial
Instruments

The functional currency for the Companys
international subsidiaries is the local currency for the country
in which the subsidiaries own their primary assets. The
translation of the applicable currencies into U.S. dollars is
performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during
the period. Any related translation adjustments are recorded
directly to shareholders equity as a component of
comprehensive income.

In January 2001, the Company entered into
non-deliverable forward contracts covering Brazilian
R$2,047,000, or US $1,000,000. These contracts were
accounted for as speculative forward contracts. These contracts
were settled in March 2001 at a gain of $33,000. The Company has
no future plans to enter into foreign exchange forward or option
contracts to hedge foreign currency transactions. These were
isolated transactions. Generally, it is the Companys
policy not to enter into derivative contracts for speculative
trading purposes.

Inflation and
Price Levels

Inflation has not had a significant impact on the
Companys business because of the typically decreasing
costs of products sold by the Company. The Company also receives
vendor price protection for a significant portion of its
inventory. In the event a vendor reduces its prices for goods
purchased by the Company prior to the Companys sale of
such goods, the Company generally has been able either to
receive a credit from the vendor for the price differential or
to return the goods to the vendor for a credit against the
purchase price.

The Latin American countries in which the Company
operates have experienced high rates of inflation and
hyperinflation from time to time in the past. At this time,
management estimates that inflation may have a material impact
on the Companys Latin American business operations in the
immediate future (See Item 7A).

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Forward-Looking
Statements

The matters discussed herein and in the Letter to
Shareholders accompanying this Annual Report on Form 10-K
contain certain forward-looking statements that represent the
Companys expectations or beliefs, including, but not
limited to, statements concerning future revenues and future
business plans. When used by or on behalf of the Company, the
words may, could, should,
would, believe, anticipate,
estimate, intend, plan and
similar expressions are intended to identify forward-looking
statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the
Companys control. The Company cautions that various
factors, including the factors described under the captions
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations contained in the Companys Registration
Statement on Form S-3 (SEC File No. 333-35069) as well
as general economic conditions and industry trends, foreign
currency fluctuations, the level of acquisition opportunities
available to the Company and the Companys ability to
negotiate the terms of such acquisitions on a favorable basis, a
dependence upon and/or loss of key vendors or customers, the
transition to indirect distribution relationships for some
products, the loss of strategic product shipping relationships,
customer demand, product availability, competition (including
pricing and availability), concentrations of credit risks,
distribution efficiencies, capacity constraints and
technological difficulties could cause actual results or
outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf
of the Company. The Company undertakes no obligation to update
any forward-looking statement.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The Company is subject to market risk arising
from adverse changes in interest rates and foreign exchange. The
Company does not enter into financial investments for
speculation or trading purposes and is not a party to any
financial or commodity derivatives.

Interest Rate Risk

The Companys cash equivalents and
short-term investments and its outstanding debt bear variable
interest rates which adjust to market conditions. Changes in the
market rate affects interest earned and paid by the Company. The
Company does not use derivative instruments to offset the
exposure to changes in interest rates. Changes in the interest
rates are not expected to have a material impact on the
Companys results of operations.

Foreign Currency Exchange

The functional currency for the Companys
international subsidiaries is the local currency for the country
in which the subsidiaries own their primary assets. The
translation of the applicable currencies into U.S. dollars is
performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during
the period. Any related translation adjustments are recorded
directly to shareholders equity as a component of
comprehensive income. As a result of the change in currency, the
Company recorded foreign currency translation gain as a
component of comprehensive income of approximately
$0.2 million for the fiscal year ended June 30, 2003.

The Company distributes many of its products in
foreign countries, primarily in Latin America. Approximately
22.5% of the Companys total net sales were generated from
sales made to resellers located in Latin American countries
during the twelve-month period ended June 30, 2003. The
Company manages its risk to foreign currency rate changes by
maintaining foreign currency bank accounts in currencies in
which it regularly transacts business. Additionally, the
Companys foreign subsidiaries procure inventory payable in
U.S. dollars for resale in their respective countries. Upon
settlement of the payables, the Company may be required to
record transaction gains or losses resulting form currency
fluctuations from the time the subsidiary entered into the
agreement to settlement date of the liability. During the year
ended June 30, 2003, the Company recorded transaction
losses of approximately $581,000. At June 30, 2003, the
Companys foreign subsidiaries had approximately
$2.4 million in U.S. dollar denominated liabilities. In the
aggregate, if the

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value of the dollar against the foreign
denominated currency strengthens by 10%, the Company would
record a transaction loss of approximately ($240,000).
Conversely, if the value of the dollar declines by 10%, the
Company would record a transaction gain of approximately
$240,000. The Company was not a party to any hedge transactions
as of June 30, 2003.


The information included in the Companys
financial statements, and other documentation, does not include
the potential impact that might arise from any decline in
foreign currency in Latin American after June 30, 2003 or
those declines which may occur in the future and, accordingly,
should be analyzed considering that circumstance.

Since January 1, 2002, Argentina has
experienced annual inflation rates of approximately 10.0%. While
the Argentine government together with the International
Monetary Fund is seeking remedies, no assurance can be given
that the economic situation in Argentina will stabilize. The
devaluation, which commenced in January 2002, could make it more
difficult for Argentine companies to service their commercial
and financial obligations due in or tied to the USD. Any of the
foregoing events and a continuation of the Argentine recession
may have a material adverse effect on the Companys
business, results of operations, financial condition, and
ability to make payments on the Companys indebtedness and
on the Companys common stock market price. The information
included in the Companys financial statements, and other
documentation, does not contain the potential impact that might
arise from the situation described above and, accordingly,
should be analyzed considering that circumstance. Please refer
to Note 17 of the Companys Consolidated Financial
Statements.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data






REPORT OF INDEPENDENT AUDITORS


Board of Directors

SED International Holdings, Inc.


We have audited the accompanying consolidated
balance sheets of SED International Holdings, Inc. and
subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of operations, shareholders equity
and cash flows for each of the three years in the period ended
June 30, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of SED International Holdings,
Inc. and subsidiaries as of June 30, 2003 and 2002, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended June 30,
2003, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 3, effective July 1,
2001, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Atlanta, Georgia

October 3, 2003


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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |             |            | 
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ---------- |  | --------- | ----------- | ---------- | 
|                                         |                                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                                        | June 30,                                  
|                                         |                                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                                        | 2003                                       |            | 2002       
|                                         |                                                                                                                                                                                        |                                            |            |            
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         | Cash and cash equivalents                                                                                                                                                              |                                            | $          | 4,849,000   |            |  | $         | 4,371,000   |           
|                                         | Restricted cash                                                                                                                                                                        |                                            |            |             |            |  |           | 800,000     |           
|                                         | Trade accounts receivable, less allowance for
    doubtful accounts of $2,749,000 (2003) and $1,455,000 (2002)                                                                         |                                            |            | 34,261,000  |            |  |           | 33,393,000  |           
|                                         | Other receivables                                                                                                                                                                      |                                            |            | 10,029,000  |            |  |           |             |           
|                                         | Inventories                                                                                                                                                                            |                                            |            | 33,098,000  |            |  |           | 36,732,000  |           
|                                         | Deferred income taxes                                                                                                                                                                  |                                            |            | 153,000     |            |  |           | 113,000     |           
|                                         | Other current assets                                                                                                                                                                   |                                            |            | 1,578,000   |            |  |           | 1,364,000   |           
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total current assets                       |            |             | 83,968,000 |  |           |             | 76,773,000 | 
|Property and equipment  net             |                                                                                                                                                                                        |                                            | 2,202,000  |             |            |  | 3,789,000 |            
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total assets                               |            | $           | 86,170,000 |  |           | $           | 80,562,000 | 
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         | Trade accounts payable                                                                                                                                                                 |                                            | $          | 37,470,000  |            |  | $         | 41,024,000  |           
|                                         | Accrued and other current liabilities (including
    $3,400,000 to a related party in 2003)                                                                                            |                                            |            | 8,146,000   |            |  |           | 4,390,000   |           
|                                         | Short term subsidiary bank debt                                                                                                                                                        |                                            |            | 15,000      |            |  |           | 2,396,000   |           
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total current liabilities                  |            |             | 45,631,000 |  |           |             | 47,810,000 | 
|Revolving credit facility                |                                                                                                                                                                                        |                                            | 12,823,000 |             |            |  | 4,900,000 |            
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total liabilities                          |            |             | 58,454,000 |  |           |             | 52,710,000 | 
|Shareholders equity:                    |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         | Preferred stock, $1.00 par value; 129,500 shares
    authorized, none issued                                                                                                           |                                            |            |             |            |  |           |             |           
|                                         | Common stock, $.01 par value; 100,000,000 shares
    authorized, 5,563,206 (2003) and 5,563,206
    (2002) shares issued, 3,875,861 (2003) and 3,929,510
    (2002) shares outstanding |                                            |            | 56,000      |            |  |           | 56,000      |           
|                                         | Additional paid-in capital                                                                                                                                                             |                                            |            | 68,442,000  |            |  |           | 68,407,000  |           
|                                         | Accumulated deficit                                                                                                                                                                    |                                            |            | (23,109,000 | )          |  |           | (20,029,000 | )         
|                                         | Accumulated other comprehensive loss                                                                                                                                                   |                                            |            | (4,531,000  | )          |  |           | (7,499,000  | )         
|                                         | Treasury stock, 1,687,345 (2003) and
    1,633,696 (2002) shares, at cost                                                                                                              |                                            |            | (13,052,000 | )          |  |           | (12,861,000 | )         
|                                         | Unearned compensation  stock awards                                                                                                                                                   |                                            |            | (90,000     | )          |  |           | (222,000    | )         
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total shareholders equity                 |            |             | 27,716,000 |  |           |             | 27,852,000 | 
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total liabilities and shareholders equity |            | $           | 86,170,000 |  |           | $           | 80,562,000 | 
|                                         |                                                                                                                                                                                        |                                            |            |             |            |  |           |            

See notes to consolidated financial statements.

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |           |  
|------------------------------------------------------------------------------------------------------ | ---------------------------- | --------------------------- | ----------- | --------- | - | ---- | ----------- | --------- | - | - | ----------- | --------- | -
|                                                                                                       |                              |                            
|                                                                                                       |                              | For the Year Ended June 30,
|                                                                                                       |                              |                            
|                                                                                                       |                              | 2003                        |             | 2002      |   | 2001
|                                                                                                       |                              |                             |             |           |   |     
|Net sales                                                                                              |                              | $                           | 413,148,000 |           |   | $    | 423,881,000 |           |   | $ | 445,580,000 |          
|Cost of sales                                                                                          |                              |                             | 393,724,000 |           |   |      | 403,792,000 |           |   |   | 420,441,000 |          
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Gross profit                                                                                           |                              |                             | 19,424,000  |           |   |      | 20,089,000  |           |   |   | 25,139,000  |          
|Selling, general and administrative expenses                                                           |                              |                             | 24,961,000  |           |   |      | 20,628,000  |           |   |   | 24,153,000  |          
|Depreciation and amortization expense                                                                  |                              |                             | 1,614,000   |           |   |      | 2,081,000   |           |   |   | 2,687,000   |          
|Foreign currency transactions loss (gain)                                                              |                              |                             | 581,000     |           |   |      | (9,000      | )         |   |   | 220,000     |          
|(Gain) loss disposal of assets                                                                         |                              |                             | (3,000      | )         |   |      | 13,000      |           |   |   | 224,000     |          
|Impairment charges                                                                                     |                              |                             | 39,000      |           |   |      |             |           |   |   | 6,147,000   |          
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Operating loss                                                                                         |                              |                             | (7,768,000  | )         |   |      | (2,624,000  | )         |   |   | (8,292,000  | )        
|Interest expense  net                                                                                 |                              |                             | 470,000     |           |   |      | 265,000     |           |   |   | 60,000      |          
|Other income, net                                                                                      |                              |                             | 10,513,000  |           |   |      |             |           |   |   |             |          
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|(Loss) income before income taxes and before
    cumulative effect of a change in accounting principle |                              |                             | 2,275,000   |           |   |      | (2,889,000  | )         |   |   | (8,352,000  | )        
|Income tax expense (benefit)                                                                           |                              |                             | 613,000     |           |   |      | (1,390,000  | )         |   |   | 344,000     |          
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|(Loss) income from continuing operations                                                               |                              |                             | 1,662,000   |           |   |      | (1,499,000  | )         |   |   | (8,696,000  | )        
|Loss from discontinued operations                                                                      |                              |                             | (4,742,000  | )         |   |      | (3,009,000  | )         |   |   | (3,149,000  | )        
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Loss before cumulative effect of a change in
    accounting principle                                  |                              |                             | (3,080,000  | )         |   |      | (4,508,000  | )         |   |   | (11,845,000 | )        
|Cumulative effect of a change in accounting
    principle, net of income tax benefit of $75,000        |                              |                             |             |           |   |      | 6,297,000   |           |   |   |             |          
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Net loss                                                                                               |                              | $                           | (3,080,000  | )         |   | $    | (10,805,000 | )         |   | $ | (11,845,000 | )        
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Basic and diluted (loss) income per share:                                                             |                              |                             |             |           |   |      |             |           |   |   |             |          
|                                                                                                       | From continuing operations   |                             | $           | 0.43      |   |      | $           | (0.39     | ) |   | $           | (2.40     | )
|                                                                                                       | From discontinued operations |                             |             | (1.24     | ) |      |             | (0.78     | ) |   |             | (0.87     | )
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Before cumulative effect of a change in
    accounting principle                                       |                              |                             | (0.81       | )         |   |      | (1.17       | )         |   |   | (3.27       | )        
|Cumulative effect of a change in accounting
    principle, net of tax                                  |                              |                             |             |           |   |      | (1.63       | )         |   |   |             |          
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Basic and diluted loss per share                                                                       |                              | $                           | (0.81       | )         |   | $    | (2.80       | )         |   | $ | (3.27       | )        
|                                                                                                       |                              |                             |             |           |   |      |             |           |   |   |             |          
|Weighted average number of shares outstanding:                                                         |                              |                             |             |           |   |      |             |           |   |   |             |          
|                                                                                                       | Basic                        |                             |             | 3,816,000 |   |      |             | 3,862,000 |   |   |             | 3,618,000 |  
|                                                                                                       | Diluted                      |                             |             | 3,816,000 |   |      |             | 3,862,000 |   |   |             | 3,618,000 |  

See notes to consolidated financial statements.

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---------- |  | -------- | ------ | ------------ |  | -------------- | ---------- | -------- |  | ------------ | ----------- | ------------- |  | ------ | ---------- | - |  |  | --------- | - |  | - | ----------- | - |  | - | -------- | - |  | - | ----------- | -
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |              
|                                                                                                      |  | Common Stock |           |            |  |          |        |              |  |                |            |          |  |              |             |              
|                                                                                                      |  |              |           |            |  | Retained |        | Accumulated  |  |                |            |          |  |             
|                                                                                                      |  |              |           | Additional |  | Earnings |        | Other        |  | Treasury Stock |            | Unearned |  | Total       
|                                                                                                      |  |              |           | Par        |  | Paid-In  |        | (Accumulated |  | Comprehensive  |            |          |  | Compensation |             | Stockholders
|                                                                                                      |  | Shares       |           | Value      |  | Capital  |        | Deficit)     |  | Loss           |            | Shares   |  | Cost         |             | Stock Awards  |  | Equity
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |       
|BALANCE JUNE 30, 2000                                                                                 |  |              | 5,563,456 |            |  | $        | 56,000 |              |  | $              | 70,600,000 |          |  | $            | 2,621,000   |               |  | $      | (1,583,000 | ) |  |  | 1,876,012 |   |  | $ | (15,515,000 | ) |  | $ | (830,000 | ) |  | $ | 55,349,000  |  
|Stock awards issued                                                                                   |  |              |           |            |  |          |        |              |  |                | (1,241,000 | )        |  |              |             |               |  |        |            |   |  |  | (203,978  | ) |  |   | 1,687,000   |   |  |   | (446,000 | ) |  |   |             |  
|Amortization of stock awards                                                                          |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   | 814,000  |   |  |   | 814,000     |  
|Stock awards cancelled                                                                                |  |              | (250      | )          |  |          |        |              |  |                | (2,000     | )        |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   | 4,000    |   |  |   |             |  
|Treasury shares purchased                                                                             |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  | 770       |   |  |   | (2,000      | ) |  |   |          |   |  |   | (22,000     | )
|Issuance of common stock for business acquired                                                        |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  | 9,924     |   |  |   | (22,000     | ) |  |   |          |   |  |   |             |  
|                                                                                                      |  |              |           |            |  |          |        |              |  |                | (940,000   | )        |  |              |             |               |  |        |            |   |  |  | (150,000  | ) |  |   | 1,240,000   |   |  |   |          |   |  |   | 300,000     |  
|Net loss                                                                                              |  |              |           |            |  |          |        |              |  |                |            |          |  |              | (11,845,000 | )             |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (11,845,000 | )
|Translation adjustments                                                                               |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        | (1,981,000 | ) |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (1,981,000  | )
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|Comprehensive earnings                                                                                |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (13,826,000 | )
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE JUNE 30, 2001                                                                                 |  |              | 5,563,206 |            |  |          | 56,000 |              |  |                | 68,417,000 |          |  |              | (9,224,000  | )             |  |        | (3,564,000 | ) |  |  | 1,532,728 |   |  |   | (12,612,000 | ) |  |   | (458,000 | ) |  |   | 42,615,000  |  
|Stock awards issued                                                                                   |  |              |           |            |  |          |        |              |  |                | (99,000    | )        |  |              |             |               |  |        |            |   |  |  | (16,000   | ) |  |   | 126,000     |   |  |   | (27,000  | ) |  |   |             |  
|Amortization of stock awards                                                                          |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   | 158,000  |   |  |   | 158,000     |  
|Stock awards cancelled                                                                                |  |              |           |            |  |          |        |              |  |                | 89,000     |          |  |              |             |               |  |        |            |   |  |  | 23,938    |   |  |   | (194,000    | ) |  |   | 105,000  |   |  |   |             |  
|Treasury shares purchased                                                                             |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  | 93,030    |   |  |   | (181,000    | ) |  |   |          |   |  |   | (181,000    | )
|Net loss                                                                                              |  |              |           |            |  |          |        |              |  |                |            |          |  |              | (10,805,000 | )             |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (10,805,000 | )
|Translation adjustments                                                                               |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        | (3,935,000 | ) |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (3,935,000  | )
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|Comprehensive loss                                                                                    |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (14,740,000 | )
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE JUNE 30, 2002                                                                                 |  |              | 5,563,206 |            |  |          | 56,000 |              |  |                | 68,407,000 |          |  |              | (20,029,000 | )             |  |        | (7,499,000 | ) |  |  | 1,633,696 |   |  |   | (12,861,000 | ) |  |   | (222,000 | ) |  |   | 27,852,000  |  
|Stock awards cancelled                                                                                |  |              |           |            |  |          |        |              |  |                | 31,000     |          |  |              |             |               |  |        |            |   |  |  | 15,185    |   |  |   | (163,000    | ) |  |   | 132,000  |   |  |   |             |  
|Stock based compensation                                                                              |  |              |           |            |  |          |        |              |  |                | 4,000      |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 4,000       |  
|Treasury shares purchased                                                                             |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  | 38,464    |   |  |   | (28,000     | ) |  |   |          |   |  |   | (28,000     | )
|Net loss                                                                                              |  |              |           |            |  |          |        |              |  |                |            |          |  |              | (3,080,000  | )             |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (3,080,000  | )
|Reclassification of cumulative translation
    adjustment reclassified to the statement of operations |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        | 2,756,000  |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 2,756,000   |  
|Translation adjustments                                                                               |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        | 212,000    |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 212,000     |  
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|Comprehensive loss                                                                                    |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (112,000    | )
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE JUNE 30, 2003                                                                                 |  |              | 5,563,206 |            |  | $        | 56,000 |              |  | $              | 68,442,000 |          |  | $            | (23,109,000 | )             |  | $      | (4,531,000 | ) |  |  | 1,687,345 |   |  | $ | (13,052,000 | ) |  | $ | (90,000  | ) |  | $ | 27,716,000  |  
|                                                                                                      |  |              |           |            |  |          |        |              |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  

See notes to consolidated financial statements.

26



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##### Table of Contents






SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |             |            |            |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ---------- | ----------- | --------- | ---------- | ----------- | ---------- | --------- | ---------- | ----------- | ---------- | ---------- | -
|                                                        |                                                                                                                           |                                      
|                                                        |                                                                                                                           | Year Ended June 30,                  
|                                                        |                                                                                                                           |                                      
|                                                        |                                                                                                                           | 2003                                  |                                                         | 2002       |             | 2001     
|                                                        |                                                                                                                           |                                       |                                                         |            |             |          
|Operating activities:                                   |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        | Net loss                                                                                                                  |                                       | $                                                       | (3,080.000 | )           |           | $          | (10,805,000 | )          |           | $          | (11,845,000 | )         
|                                                        | Adjustments to reconcile net loss to net cash
    provided by operating activities:                                       |                                       |                                                         |            |             |           |            |             |            |           |            |             |           
|                                                        | Impairment charges for long-lived assets,
    including cumulative effect of a change in accounting principle
    in 2002 |                                       |                                                         | 100,000    |             |           |            | 6,365,000   |            |           |            | 6,547,000   |           
|                                                        | Depreciation and amortization                                                                                             |                                       |                                                         | 1,666,000  |             |           |            | 2,146,000   |            |           |            | 2,824,000   |           
|                                                        | Compensation stock awards                                                                                                 |                                       |                                                         | 4,000      |             |           |            | 158,000     |            |           |            | 814,000     |           
|                                                        | Provision for losses on accounts receivable                                                                               |                                       |                                                         | 2,302,000  |             |           |            | 1,638,000   |            |           |            | 4,476,000   |           
|                                                        | Reclassification of cumulative translation
    adjustment                                                                 |                                       |                                                         | 2,756,000  |             |           |            |             |            |           |            |             |           
|                                                        | Changes in assets and liabilities                                                                                         |                                       |                                                         |            |             |           |            |             |            |           |            |             |           
|                                                        |                                                                                                                           | Restricted cash                       |                                                         |            | 800,000     |           |            |             | (100,000   | )         |            |             |            |           
|                                                        |                                                                                                                           | Trade accounts receivable             |                                                         |            | 1,158,000   |           |            |             | 2,661,000  |           |            |             | 4,471,000  |           
|                                                        |                                                                                                                           | Other receivable                      |                                                         |            | (10,029,000 | )         |            |             |            |           |            |             |            |           
|                                                        |                                                                                                                           | Inventories                           |                                                         |            | 3,096,000   |           |            |             | 707,000    |           |            |             | (4,774,000 | )         
|                                                        |                                                                                                                           | Deferred income taxes                 |                                                         |            |             |           |            |             | 242,000    |           |            |             | 5,000      |           
|                                                        |                                                                                                                           | Other assets                          |                                                         |            | (118,000    | )         |            |             | 1,661,000  |           |            |             | 537,000    |           
|                                                        |                                                                                                                           | Trade accounts payable                |                                                         |            | (2,636,000  | )         |            |             | (1,562,000 | )         |            |             | 373,000    |           
|                                                        |                                                                                                                           | Accrued and other current liabilities |                                                         |            | 3,336,000   |           |            |             | (2,106,000 | )         |            |             | (1,136,000 | )         
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        |                                                                                                                           |                                       | Net cash (used in) provided by operating
    activities |            |             | (645,000  | )          |             |            | 1,005,000 |            |             |            | 2,292,000  |  
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|Investing activities:                                   |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        | Purchase of equipment                                                                                                     |                                       |                                                         | (217,000   | )           |           |            | (349,000    | )          |           |            | (842,000    | )         
|                                                        | Purchase of businesses, net of cash acquired                                                                              |                                       |                                                         |            |             |           |            |             |            |           |            | (1,462,000  | )         
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        |                                                                                                                           |                                       | Net cash used in investing activities                   |            |             | (217,000  | )          |             |            | (349,000  | )          |             |            | (2,304,000 | )
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|Financing activities:                                   |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        | Net proceeds of revolving credit facility                                                                                 |                                       |                                                         | 7,923,000  |             |           |            | 4,900,000   |            |           |            | (2,304,000  | )         
|                                                        | Net repayments of short term bank debt of foreign
    subsidiaries                                                        |                                       |                                                         | (2,040,000 | )           |           |            | (174,000    | )          |           |            | (356,000    | )         
|                                                        | Purchase of treasury stock                                                                                                |                                       |                                                         | (28,000    | )           |           |            | (181,000    | )          |           |            | (22,000     | )         
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        |                                                                                                                           |                                       | Net cash provided by (used in) financing
    activities |            |             | 5,855,000 |            |             |            | 4,545,000 |            |             |            | (378,000   | )
|Effect of exchange rate changes on cash                 |                                                                                                                           |                                       | (4,515,000                                              | )          |             |           | (5,073,000 | )           |            |           | (1,981,000 | )          
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|Increase (decrease) in cash and cash
    equivalents    |                                                                                                                           |                                       | 478,000                                                 |            |             |           | 128,000    |             |            |           | (2,371,000 | )          
|Cash and cash equivalents                               |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        | Beginning of year                                                                                                         |                                       |                                                         | 4,371,000  |             |           |            | 4,243,000   |            |           |            | 6,614,000   |           
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        | End of year                                                                                                               |                                       | $                                                       | 4,849,000  |             |           | $          | 4,371,000   |            |           | $          | 4,243,000   |           
|                                                        |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|Supplemental Disclosures of Cash Flow
    Information  |                                                                                                                           |                                       |                                                         |            |             |           |            |             |            |           |            |            
|                                                        | Cash paid (received) during the year for                                                                                  |                                       |                                                         |            |             |           |            |             |            |           |            |             |           
|                                                        | Interest paid                                                                                                             |                                       | $                                                       | 758,000    |             |           | $          | 1,133,000   |            |           | $          | 514,000     |           
|                                                        | Income tax (refunds) payments                                                                                             |                                       | $                                                       | 613,000    |             |           | $          | (777,000    | )          |           | $          | 414,000     |           

See notes to consolidated financial statements.

27



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years ended June 30, 2003, 2002,
2001


1.     Summary Of
Significant Accounting Policies

Principles of
Consolidation The
consolidated financial statements include the accounts of SED
International Holdings, Inc. and its wholly-owned subsidiaries,
SED International, Inc. (formerly Southern Electronics
Distributors, Inc.), SED International do Brasil, Ltda.
(formerly SED Magna Distribuidora Ltda.), SED Magna (Miami),
Inc., SED International de Colombia Ltda., Intermaco S.R.L.,
(collectively the Company). All intercompany
accounts and transactions have been eliminated. The operations
of SED International do Brasil, Ltda. were discontinued in the
third quarter of fiscal 2003. See Note 19.

Description of
Business The Company
is a wholesale distributor of microcomputers, computer
peripheral products and wireless telephone products, serving
value-added resellers and dealers in the United States and Latin
America. The Company does not require collateral from its
customers.

Risks and
Uncertainties The
Company has at various times incurred a decline in net sales in
the United States since fiscal 1998 and has incurred operating
losses in either its domestic or certain of its foreign
operations at various times during the past five fiscal years.
Company management is continuing to focus on increasing profit
margins and reducing administrative and overhead costs. There is
no assurance the Company will be successful in connection with
these efforts. Failure to effectively implement the plan could
adversely affect the Companys profitability and financial
condition.

Numerous factors and conditions impact the
Companys ability to achieve its profit goals, including,
but not limited to, the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuation of distribution
    agreements The
    Company operates under formal but cancelable distribution
    agreements with certain of its suppliers. If these agreements
    were cancelled, the Company would be forced to obtain its
    products through wholesalers. This would reduce the
    Companys profit margin on the affected products.                                                                                                                             
|
| |  | Availability of certain
    products From time to
    time, due to production limitations or heavy demand, the Company
    may only be able to purchase a limited amount of popular
    products from its suppliers.                                                                                                                                                                                                                                                                    
|
| |  | Product
    margins The Company
    operates in a very competitive business environment.
    Accordingly, product margins are continually under pricing
    pressure.                                                                                                                                                                                                                                                                                                                   
|
| |  | Vendor
    credit The Company
    significantly relies on its suppliers for trade credit. Changes
    by the suppliers in their credit terms could force the Company
    to obtain less favorable financing for its purchases.                                                                                                                                                                                                                                                          
|
| |  | Product
    obsolescence The
    Company offers a broad line of products that are subject to fast
    technological obsolescence, which increases the risk of
    inventory markdown. Through its vendor agreements, the Company
    has certain stock return privileges, which vary from supplier to
    supplier.                                                                                                                                                                     
|
| |  | Credit decisions and
    losses The Company
    maintains an experienced customer credit staff and relies on
    customer payment history and third party data to make customer
    credit decisions. Nevertheless, the Company may experience
    customer credit losses in excess of its expectations. The
    Company also maintains credit insurance for customers located in
    the United States and most Latin American countries (subject to
    certain terms and conditions).
|
| |  | Proportionate control of general and
    administrative
    costs The Company
    attempts to control its overhead costs to keep such costs in
    line with its sales volume. As sales volumes fluctuate, the
    Company must continually monitor its overhead costs and make
    adjustments timely and appropriately.                                                                                                                                                               
|
| |  | Uncertain and possibly volatile economic and
    political environment in Latin
    America The general
    economic and political environment in all of the countries in
    which the Company operates in Latin                                                                                                                                                                                                                                                                       

28



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | America is uncertain and, at times, volatile. As
    a result of these conditions, the Company could experience
    unexpected costs from its operations in these countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Availability of credit
    facilities The
    Company operated under a formal credit facility with a bank for
    many years that was subject to certain collateral limitations
    and contained certain covenants. During October 2002 a new
    credit facility was obtained. The new credit facility provides
    more flexibility compared to the prior agreement but also
    includes covenants and other provisions. The Company
    consistently violated the financial covenants associated with
    the previous credit agreement, but was successful in negotiating
    waivers of such violations. No assurance can be given that the
    Company will be able to maintain compliance with financial
    covenants, or obtain waivers in the event of non-compliance, in
    the future. Failure to maintain compliance with the financial
    covenants could adversely affect the Companys ability to
    obtain vendor credit and the overall business operations. The
    credit facilities are further described in Note 8.
|
| |  | Cash
    flows While not
    presently expected, the Companys continued operation in
    Latin America may require additional capital infusion (in the
    form of advance notes from the parent company or other debt
    borrowings by the subsidiary). The October 2002 credit facility
    restricts the future funding by the parent company of Latin
    American operations. Operating needs and regulatory matters
    restrict the Companys ability to repatriate cash flows to
    the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Revenue
Recognition Sales are
recorded upon shipment. The Company allows its customers to
return product for exchange or credit subject to certain
limitations. Returns have historically not been significant.
Provision for estimated losses on such returns are recorded at
the time of sale. Funds received from vendors for product
rebates are accounted for as a reduction of product cost.
Shipping and handling revenues are included in net sales and
shipping and handling costs are included in cost of sales.

Concentrations of Credit
Risk Financial
instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and
trade accounts receivable. The Company generally does not
require collateral from its customers.

Use of
Estimates The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates, and those difference could be
significant.

Cash
Equivalents Cash
equivalents are short-term investments purchased with a maturity
of three months or less.

Accounts
Receivable Accounts
receivable are carried at the amount owed by customers less an
allowance for doubtful accounts.

Allowance for Doubtful
Accounts An allowance
for uncollectible accounts has been established based on our
collection experience and an assessment of the collectibility of
specific accounts. The Company evaluates the collectibility of
accounts receivable based on a combination of factors.
Initially, the Company estimates an allowance for doubtful
accounts as a percentage of accounts receivable based on
historical collections experience. This initial estimate is
periodically adjusted when the Company becomes aware of a
specific customers inability to meet its financial
obligations (e.g., bankruptcy filing) or as a result of changes
in the overall aging of accounts receivable. Management does not
believe the estimate of the allowance for doubtful accounts is
likely to be adversely affected by any individual customer,
since the Company is protected by credit insurance on its
significant customers, subject to certain deductible
limitations. Uncollectible accounts are written-off against the
allowance for doubtful accounts.

29



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories Inventories
are stated at the lower of cost (first-in, first-out method) or
market and include in-transit inventory of $11,136,000 at
June 30, 2003 and $3,383,000 at June 30, 2002. Most of
the Companys vendors allow for either return of goods
within a specified period (usually 90 days) or for credits
related to price protection. However, for other vendor
relationships and inventories, the Company is not protected from
the risk of inventory loss. Therefore, in determining the net
realizable value of inventories, the Company identifies slow
moving or obsolete inventories that (1) are not protected
by our vendor agreements from risk of loss, and (2) are not
eligible for return under various vendor return programs. Based
upon these factors, the Company estimates the net realizable
value of inventories and records any necessary adjustments as a
charge to cost of sales. If inventory return privileges or price
protection programs were discontinued in the future, or if
vendors were unable to honor the provisions of certain contracts
which protect the Company from inventory losses, the risk of
loss associated with obsolete and slow moving inventories would
increase.

Property and
Equipment Property
and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the
related asset, which generally range from three to seven years.
Leasehold improvements are amortized ratably over the lesser of
the useful lives of the improvements or the related lease terms.

Long-Lived Assets and
Impairment The
Company periodically reviews long-lived assets, for impairment
based on judgments as to the fair value of such assets primarily
based upon future undiscounted cash flows from related
operations. Based on the information available, an impaired
asset is written down to its estimated fair market value
generally measured by discounting estimated future cash flows.
See Note 3 and Note 7.

Foreign Currency
Translation The
assets and liabilities of foreign operations are translated at
the exchange rates in effect at the balance sheet date, with
related translation gains or losses reported as a separate
component of shareholders equity. The results of foreign
operations are translated at the weighted average exchange rates
for the year. Gains or losses resulting from foreign currency
transactions are included in the statement of operations. See
Note 17.

Earnings Per Common Share
(EPS) Basic EPS is
computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted EPS is computed using the weighted-average
number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares represent
additional common shares assumed to be issued. For the years
ended June 30, 2003, 2002, and 2001 (fiscal 2003, 2002, and
2001, respectively) options for approximately 801,000, 969,000,
and 321,000 common shares, respectively, were excluded from the
diluted EPS calculation due to their antidilutive effect.

Fair Value of Financial
Instruments Financial
instruments that are subject to fair value disclosure
requirements are carried in the consolidated financial
statements at amounts that approximate their fair value.

Reclassifications Certain
prior year balances have been reclassified to conform with the
current year presentation.

2.     Acquisitions

On November 1, 1998, the Company acquired
Intermaco S.R.L. (Intermaco), a Buenos Aires,
Argentina, distributor of Hewlett-Packard products and other
computer peripherals. Consideration for the acquisition
consisted of an initial cash payment at closing of $4,417,000,
and two subsequent payments based on a multiple of
Intermacos net earnings for each of the succeeding
twelve-month periods. For the first twelve-month period ended
October 31, 1999, the Company paid an additional
$2,030,000, consisting of $1,230,000 in cash and 200,000 shares
of the Companys common stock valued at $800,000 in
February 2000. For the second twelve-month period ended
October 31, 2000, the Company paid in April 2001 an
additional $1,400,000 in cash and issued 150,000 shares of the
Companys common stock valued at $300,000. This

30



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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquisition was recorded under the purchase
method of accounting. The operating results of the acquired
business is included in the Companys consolidated
statements of operations from the acquisition date.

3.     Recently
Issued Accounting Pronouncements

In November 2002, the FASB issued FASB
Interpretation Number 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45).
FIN 45 requires an entity to disclose in its interim and annual
financial statements information with respect to its obligations
under certain guarantees that it has issued. It also requires an
entity to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are
effective for interim and annual periods after December 15,
2002. The initial recognition and initial measurement
requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 had no significant effect on the Company.

In January 2003, the Emerging Issues Task Force
(EITF) of the Financial Accounting Standards Board
(FASB) issued EITF Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor(the
Issue). The Issue addresses accounting and reporting
issues related to how a reseller should account for cash
consideration received from vendors. Generally, cash
consideration received from vendors is presumed to be a
reduction of the prices of the vendors products or
services and should, therefore, be characterized as a reduction
of cost of sales when recognized in the customers income
statement. However, under certain circumstances this presumption
may be overcome and recognition as revenue or as a reduction of
other costs in the income statement may be appropriate. The
Issue is effective for fiscal periods beginning after
December 15, 2002. While the Company does receive cash
consideration from vendors subject to the provisions of the
Issue, the adoption of EITF Issue No. 02-16 had no
significant impact on the Company.

In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(SFAS 144), which
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations for a disposal of a segment
of a business. SFAS 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application
encouraged. The Company adopted SFAS 144 as of July 1, 2002
and the adoption of SFAS 144 has not had a significant impact on
the Companys financial position and results of operations.

In July 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS 146). SFAS 146
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies the
Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity including Certain Costs Incurred in a
Restructuring. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred, whereas EITF 94-3 had required
recognition of the liability at the commitment date to an exit
plan. The Company is required to adopt the provisions of
SFAS 146 effective for exit or disposal activities
initiated after December 31, 2002. The adoption of
SFAS 146 had no material impact on the Companys
financial statements.

Effective July 1, 2002, the Company adopted
the fair value method defined in SFAS No. 123,
Accounting for Stock-Based Compensation. (SFAS
No. 123). In December 2002, the FASB issued
SFAS 148, Accounting for Stock-Based
Compensation  Transition and
Disclosure an amendment of FASB Statement
No. 123. For information regarding the adoption of the fair
value method defined in SFAS No. 123,

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

refer to Note 11. The adoption of SFAS
No. 123 had no significant effect on the Companys
financial statements.

In July 2001, the FASB issued Statement
No. 141 (SFAS 141) Business
Combinations, and Statement No. 142 (SFAS
142), Goodwill and Other Intangible Assets. SFAS
141 prospectively prohibits the pooling of interests method of
accounting for business combinations initiated after
June 30, 2001. SFAS 142 requires companies to cease
amortizing goodwill that existed at June 30, 2001 and
establishes a new method for testing goodwill for impairment on
an annual basis (or an interim basis if an event occurs that
might reduce the fair value of a reporting unit below its
carrying value.) Any goodwill resulting from acquisitions
completed after June 30, 2001 is not amortized. SFAS 142
also requires that an identifiable intangible asset that is
determined to have an indefinite useful economic life not be
amortized, but separately tested for impairment using a fair
value based approach. The Company adopted SFAS 142 as of
July 1, 2001. However, the Company did not complete the
required transitional impairment tests until the second quarter
ended December 31, 2001. During the three month period
ended December 31, 2001, the Company tested goodwill
arising from the Intermaco acquisition described in Note 2
as of July 1, 2001 primarily utilizing a valuation
technique relying on the expected present value of future cash
flows. As a result of this valuation process as well as the
application of the remaining provisions of SFAS 142, the
Company recorded a pre-tax transitional impairment loss of
$6,372,000, representing the write-off of all of the
Companys existing goodwill. This write-off was reported as
a cumulative effect of a change in accounting principle, on a
net of tax basis, as of July 1, 2001 in the Companys
consolidated statement of operations. Prior to the adoption of
SFAS 142 on July 1, 2001, the Company amortized this
goodwill over an estimated useful life of 30 years.

If the Company accounted for goodwill consistent
with the provisions of SFAS 142 in prior periods, the
Companys net (loss) earnings as reported would have
been as follows after giving effect to the non-amortization
provisions of SFAS 142, net of income taxes:

|                                                                                                                |  |                     |             |      |  |   |             |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------- | ----------- | ---- |  | - | ----------- | -
|                                                                                                                |  |                    
|                                                                                                                |  | Year Ended June 30,
|                                                                                                                |  |                    
|                                                                                                                |  | 2002                |             | 2001
|                                                                                                                |  |                     |             |     
|Reported (loss) earnings before the cumulative
    effect of a change in accounting principle                   |  | $                   | (4,508,000  | )    |  | $ | (11,845,000 | )
|Add: amortization expense                                                                                       |  |                     |            |      |  |   | 433,000     |  
|                                                                                                                |  |                     |             |      |  |   |             |  
|Adjusted (loss) earnings before the
    cumulative effect of a change in accounting principle, net of
    taxes |  | $                   | (4,508,000  | )    |  | $ | 11,412,000  | )
|                                                                                                                |  |                     |             |      |  |   |             |  
|Adjusted net (loss) earnings                                                                                    |  | $                   | (10,805,000 | )    |  | $ | (11,412,000 | )
|                                                                                                                |  |                     |             |      |  |   |             |  
|Basic and dilutive (loss) earnings per share:                                                                   |  |                     |             |      |  |   |             |  
|Reported net (loss) earnings before the
    cumulative effect of a change in accounting principle               |  | $                   | (1.17       | )    |  | $ | (3.27       | )
|Add: amortization expense                                                                                       |  |                     |             |      |  |   | 0.12        |  
|                                                                                                                |  |                     |             |      |  |   |             |  
|Adjusted (loss) earnings before the
    cumulative effect of a change in accounting principle, net of
    taxes |  | $                   | (1.17       | )    |  | $ | (3.15       | )
|                                                                                                                |  |                     |             |      |  |   |             |  
|Adjusted net (loss) earnings                                                                                    |  | $                   | (2.80       | )    |  | $ | (3.15       | )
|                                                                                                                |  |                     |             |      |  |   |             |  

4.     Restricted
Cash

Restricted cash at June 30, 2002 consisted
of term deposits pledged as collateral to secure letters of
credit which expired during the first and second quarters of
fiscal year 2003.

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Other
Receivables and Income

In June 2003, the Company recorded income of
$10.0 million, plus accrued interest of $29,000 related to
proceeds due under two key man life insurance policies held on
the life of Gerald Diamond, the Companys founder and
former Chairman and Chief Executive Officer. The insurance
proceeds were received in July and August of 2003. In December
2002, the Company entered into a confidential settlement
agreement for claims arising out of a disagreement with a former
insurance broker. The net proceeds of $512,932 were recorded net
of attorneys fees of $96,420.

6.     Property and
Equipment

Property and equipment are comprised of the
following:

|                        |                               |          |            |           |  |   |            |            | 
|----------------------- | ----------------------------- | -------- | ---------- | --------- |  | - | ---------- | ---------- | 
|                        |                               |         
|                        |                               | June 30,
|                        |                               |         
|                        |                               | 2003     |            | 2002     
|                        |                               |          |            |          
|Property and equipment: |                               |          |            |           |  |   |            |           
|                        | Furniture and equipment       |          | $          | 9,864,000 |  |   | $          | 12,515,000 | 
|                        | Leasehold improvements        |          |            | 1,525,000 |  |   |            | 1,789,000  | 
|                        | Other                         |          |            | 175,000   |  |   |            | 598,000    | 
|                        |                               |          |            |           |  |   |            |           
|                        |                               |          | 11,564,000 |           |  |   | 14,902,000 |           
|                        | Less accumulated depreciation |          |            | 9,362,000 |  |   |            | 11,113,000 | 
|                        |                               |          |            |           |  |   |            |           
|                        |                               | $        | 2,202,000  |           |  | $ | 3,789,000  |           
|                        |                               |          |            |           |  |   |            |           

Depreciation expense for property and equipment
totalled $1,666,000, $2,006,000, and $2,391,000 for the years
ended June 30, 2003, 2002 and 2001, respectively.

7.     Exit Costs and
Impairment Charges

In January 2002, the Company decided to
discontinue the computer asset recovery operation of E-Store.com
started in fiscal year 2001. In connection with this decision,
the Company recorded expenses totalling $362,000 related to
lease termination of $249,000, severance costs of $60,000, and
loss on fixed asset disposal of $53,000. Loss on fixed asset
disposal, severance expenses, and the lease and utility
termination expenses have been classified as facility closure.
All inventory-related exit costs have been classified as cost of
goods sold in the accompanying consolidated statement of
operations. The net loss for the years ended June 30, 2002
and 2001 for the E-Store.com division was approximately
$1,282,000 and $362,000, respectively.

In the fourth quarter of the year ended
June 30, 2001, the Company recorded non-cash facility
closure and impairment charges totaling $6,547,000. The non-cash
accounting charge was determined based on a detailed analysis of
the Companys long-lived assets and their estimated future
cash flows. The analysis resulted in the identification and
measurement of an impairment loss of $5,947,000 in goodwill and
approximately $200,000 in property and equipment. Substantially
all of the goodwill impairment relates to the Companys
acquired export distribution rights in connection with the
fiscal 1996 acquisition of substantially all of the net assets
of U.S. Computer of North America, Inc. This impairment resulted
from a gradual, but significant, decline in sales volumes and
adverse changes in the competitive environment for the
distribution of the corresponding product lines. The goodwill
was not considered recoverable through other means. Management
estimated the undiscounted cash flows to be generated by the
assets for the respective operations and compared them to their
carrying values. Since the estimated undiscounted future cash
flows were less than the carrying values, the carrying values
were adjusted to estimated fair values.

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Credit
Facilities

On October 7, 2002, the Company entered into
a three year, $35 million credit facility with Fleet
Capital Corporation (the Fleet Agreement). The Fleet
Agreement provides for revolving borrowings up to
$35 million based upon the Companys eligible domestic
accounts receivable and inventory as defined therein. Borrowings
under the Fleet Agreement accrue interest based upon a variety
of interest rate options depending upon the computation of
availability as defined therein. The interest rates range from
the prime rate to the prime rate plus a margin of .5%, or the
Federal funds rate plus a margin of .5%, or LIBOR plus a margin
ranging from 2% to 2.75%. The Company is also subject to a
commitment fee ranging from .25% to .5% on the unused portion of
the facility. Interest is payable monthly. Borrowings under the
Fleet Agreement are secured by substantially all domestic assets
of the Company and 65% of each of the Companys shares in
its foreign subsidiaries, respectively. The Fleet Agreement
matures on October 7, 2005.

The Fleet Agreement also contains certain
covenants which, among other things, require that if the
Companys availability is less than $5 million at any
time during the agreement, the Company must restrict or limit
capital expenditures and advances to the Companys Latin
American subsidiaries. Also, if the $5 million threshhold is
breached, the Fleet Agreement requires the maintenance of
certain levels of earnings before interest, taxes, depreciation,
and amortization, requires maintenance of minimum fixed charge
coverage ratio beginning in the second quarter of fiscal 2004,
and requires the maintenance of minimum tangible net worth, as
defined, of negative $5 million. Based upon the
Companys experience in fiscal 2002 and through the date of
entering into the Fleet Agreement, the Company has continuously
maintained at least $5 million in availability under the
Fleet Agreement. The Companys availability under the Fleet
Agreement net of reserves of $2.1 million for outstanding
Letters of Credit was $9.6 million on October 3, 2003.

Until October 2002, the Company had a credit
agreement with Wachovia Bank N.A. (Wachovia), which
provided for borrowings under a line of credit of up to
$25 million and $35 million at June 30, 2002 and
2001, respectively. At June 30, 2002, the Company had
$4.9 million outstanding under this facility. Maximum
borrowings under the credit agreement were generally based on
eligible accounts receivable and inventory. Available borrowings
under this agreement, based on collateral limitations at
June 30, 2002 were $9.9 million ($9.5 million of which
would only be available to finance obligations due to IBM Global
Financing, if necessary).

The Wachovia credit agreement required
maintenance of certain minimum working capital and other
financial ratios and has certain dividend restrictions. The
credit agreement required a commitment fee of .50% of the unused
commitment. Average borrowings, maximum borrowings and the
weighted average interest rate for fiscal 2002 were $4,961,000,
$19,100,000, and 5.67% respectively. At June 30, 2002 the
Company was not in compliance with certain financial covenants
under the Wachovia agreement. However, the Company subsequently
obtained a new revolving credit agreement as previously
discussed. Since the June 30, 2002 borrowings outstanding
under the Wachovia agreement were subsequently refinanced on a
long-term basis under the Fleet Agreement, all such borrowings
have been classified as non-current in the June 30, 2002 balance
sheet.

Subsidiary Bank
Debt The
Companys subsidiary, SED International do Brasil
Distribuidora Ltda. (operations of which have been
discontinued), operated under line of credit agreements with
several Brazilian banks. Interest rates on borrowings were
negotiated at the time of borrowing. The credit agreements were
secured by an $800,000 certificate of deposit and the
subsidiarys accounts receivable and required the
maintenance of certain financial ratios. At June 30, 2003
and 2002, there were $15,000, and $2,396,000 respectively, of
outstanding borrowings under these lines of credit. Average
borrowings, maximum borrowings and the weighted average monthly
interest rate under these loan agreements for fiscal 2003 were
$948,000, $2,520,000, and 26%, respectively. Average borrowings,
maximum borrowings and the weighted average monthly interest
rate under these loan agreements for fiscal 2002 were
$2,749,000, $3,685,000, and 1.94%, respectively.

34



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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The carrying value of all bank debt at
June 30, 2003 approximates its fair value based on the
variable market rates of interest on such bank debt.

9.     Income
Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The tax effects of significant
items comprising the Companys deferred tax assets are as
follows:

|                                                        |  |          |             |      |  |   |             |  
|------------------------------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                                        |  |         
|                                                        |  | June 30,
|                                                        |  |         
|                                                        |  | 2003     |             | 2002
|                                                        |  |          |             |     
|U.S. federal and state operating loss
    carryforwards |  | $        | 11,836,000  |      |  | $ | 10,998,000  |  
|Foreign operating loss carryforwards                    |  |          | 4,087,000   |      |  |   | 3,474,000   |  
|Reserves not currently deductible                       |  |          | 3,436,000   |      |  |   | 1,520,000   |  
|Valuation allowance                                     |  |          | (19,206,000 | )    |  |   | (15,879,000 | )
|                                                        |  |          |             |      |  |   |             |  
|                                                        |  | $        | 153,000     |      |  | $ | 113,000     |  
|                                                        |  |          |             |      |  |   |             |  

At June 30, 2003, the Company has gross net
operating loss carryforwards for federal and state income tax
purposes in the United States of approximately
$28.7 million and $34.3 million, respectively,
expiring at various dates through 2023 and gross net operating
loss carryforwards for income tax purposes in Brazil of
approximately $12.0 million which generally do not expire.
At June 30, 2003 and 2002, the Company has recorded a
valuation allowance for principally all deferred tax assets,
except for those relating to Intermaco S.R.L., as there is no
assurance that these assets will be realized.

Components of income tax expense
(benefit) are as follows:

|          |         |                     |         |         |   |      |            |            |   |   |         |         | 
|--------- | ------- | ------------------- | ------- | ------- | - | ---- | ---------- | ---------- | - | - | ------- | ------- | 
|          |         |                    
|          |         | Year Ended June 30,
|          |         |                    
|          |         | 2003                |         | 2002    |   | 2001
|          |         |                     |         |         |   |     
|Current:  |         |                     |         |         |   |      |            |            |   |   |         |        
|          | Federal |                     |         |         |   |      | $          | (1,882,000 | ) |   |         |         | 
|          | State   |                     |         |         |   |      |            |            |   |   |         |         | 
|          | Foreign |                     | $       | 634,000 |   |      |            | 175,000    |   |   | $       | 339,000 | 
|          |         |                     |         |         |   |      |            |            |   |   |         |        
|          |         |                     | 634,000 |         |   |      | (1,707,000 | )          |   |   | 339,000 |        
|          |         |                     |         |         |   |      |            |            |   |   |         |        
|Deferred: |         |                     |         |         |   |      |            |            |   |   |         |        
|          | Federal |                     |         |         |   |      |            |            |   |   |         |         | 
|          | State   |                     |         |         |   |      |            |            |   |   |         |         | 
|          | Foreign |                     |         | (21,000 | ) |      |            | 242,000    |   |   |         | 5,000   | 
|          |         |                     |         |         |   |      |            |            |   |   |         |        
|          |         |                     | (21,000 | )       |   |      | 242,000    |            |   |   | 5,000   |        
|          |         |                     |         |         |   |      |            |            |   |   |         |        
|          |         | $                   | 613,000 |         |   | $    | (1,465,000 | )          |   | $ | 344,000 |        
|          |         |                     |         |         |   |      |            |            |   |   |         |        

35



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys effective tax rates for income
(loss) from continuing operations differ from statutory
rates as follows:

|                                                          |  |                     |        |      |  |      |       |    |  |  |       |   
|--------------------------------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                          |  |                    
|                                                          |  | Year Ended June 30,
|                                                          |  |                    
|                                                          |  | 2003                |        | 2002 |  | 2001
|                                                          |  |                     |        |      |  |     
|Statutory federal rate (benefit)                          |  |                     | 34.0   | %    |  |      | (34.0 | )% |  |  | (34.0 | )%
|State income taxes net of federal income tax
    benefits |  |                     | .9     |      |  |      | (15.4 | )  |  |  | (4.4  | ) 
|Non-deductible goodwill amortization                      |  |                     |        |      |  |      |       |    |  |  | 20.8  |   
|Life insurance proceeds                                   |  |                     | (166.4 | )    |  |      |       |    |  |  |       |   
|Net operating loss carryback                              |  |                     |        |      |  |      | (26.9 | )  |  |  |       |   
|Valuation allowance                                       |  |                     | 156.1  |      |  |      | 27.0  |    |  |  | 21.2  |   
|Other                                                     |  |                     | 2.3    |      |  |      | 1.2   |    |  |  | .5    |   
|                                                          |  |                     |        |      |  |      |       |    |  |  |       |   
|                                                          |  |                     | 26.9   | %    |  |      | (48.1 | )% |  |  | 4.1   | % 
|                                                          |  |                     |        |      |  |      |       |    |  |  |       |   

The valuation allowance increased during fiscal
2003, 2002, and 2001 by $3,327,000, $1,804,000, and $1,844,000,
respectively.

10.     Lease
Obligations

SED International leases its main office facility
under an operating lease with an entity owned by certain
minority shareholders and officers of the Company. Rent expense
for this facility for the years ended June 30, 2003, 2002,
and 2001 was $275,000, $267,000, and $259,000 respectively. This
lease, as of October 2003, provides for an annual rent of
$277,000 with annual increases of 3% through September 2006. The
Company leases additional distribution center and sales office
space under other operating leases. Rent expense, net of
sublease rental income, under all operating leases for the years
ended June 30, 2003, 2002, and 2001 was $1,741,000,
$1,505,000, and $1,622,000, respectively.

The Company was obligated under lease agreements
for its closed Harrisburg distribution center through March of
2003 and portions of other distribution centers which were not
being utilized by the Company. Most of such distribution space
has been sublet to third parties. Sublease rental income was
$377,000, $494,000, and $738,000 for the years ended
June 30, 2003, 2002, 2001, respectively.

As of June 30, 2003, future minimum rental
commitments under noncancelable operating leases are:

|                     |  |        |           | 
|-------------------- |  | ------ | --------- | 
|                     |  | Future
|Year Ending June 30, |  | Rent  
|                     |  |       
|2004                 |  | $      | 1,286,000 | 
|2005                 |  |        | 617,000   | 
|2006                 |  |        | 396,000   | 
|2007                 |  |        | 76,000    | 
|                     |  |        |           | 
|                     |  | $      | 2,375,000 | 
|                     |  |        |           | 

11.     Shareholders
Equity

Common
Stock During fiscal
years 2003, 2002, and 2001, the Company repurchased 38,464,
93,030, and 9,924 shares, respectively, of its common stock in
open market and private transactions for $28,000, $181,000, and
$22,000, respectively.

Stock
Options Effective
July, 1, 2002, the Company adopted the fair value method of
recording stock-based compensation in accordance with the
provisions of SFAS No. 123, Accounting for
Stock-Based

36



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Compensation,which
is considered the preferable accounting method for stock-based
employee compensation. Historically, the Company had elected to
follow the Accounting Principles Board Opinion No. 25,
Accounting for Stock Based Compensation issued to
Employees (APB 25) and related Interpretations
in accounting for its employee stock-based compensation.
Accordingly, no compensation expense has been recognized for
stock option plans in the past. The Company has elected to
follow the prospective method and all employee awards granted,
modified or settled after July 1, 2002 will be expensed
over the vesting period based on the fair value at the date the
stock-based compensation is granted. Stock compensation expense
recognized in the year ended June 30, 2003 in connection
with the prospective adoption of SFAS No. 123 totaled
approximately $4,000. The following table illustrates the effect
on net income and earnings per share as if the fair value based
method had been applied to all outstanding and unvested awards
in each period.

|                                                                                                                                                        |             |                     |        |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------- | ------ | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                        |             |                    
|                                                                                                                                                        |             | Year Ended June 30,
|                                                                                                                                                        |             |                    
|                                                                                                                                                        |             | 2003                |        | 2002  |   | 2001
|(in thousands, except per share amounts)                                                                                                                |             |                     |        |       |   |     
|Net loss, as reported                                                                                                                                   |             | $                   | (3,080 | )     |   | $    | (10,805 | )     |   | $ | (11,845 | )    
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    less $4,000 recognized in 2003 |             |                     | (361   | )     |   |      | (775    | )     |   |   | (762    | )    
|                                                                                                                                                        |             |                     |        |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                                                      |             | $                   | (3,441 | )     |   | $    | (11,580 | )     |   | $ | (12,607 | )    
|                                                                                                                                                        |             |                     |        |       |   |      |         |       |   |   |         |      
|Loss per share:                                                                                                                                         |             |                     |        |       |   |      |         |       |   |   |         |      
|                                                                                                                                                        | As reported |                     | $      | (0.81 | ) |      | $       | (2.80 | ) |   | $       | (3.27 | )
|                                                                                                                                                        |             |                     |        |       |   |      |         |       |   |   |         |      
|                                                                                                                                                        | Pro forma   |                     | $      | (0.90 | ) |      | $       | (3.00 | ) |   | $       | (3.48 | )
|                                                                                                                                                        |             |                     |        |       |   |      |         |       |   |   |         |      

Fair
Value The weighted average
fair value of options granted in fiscal 2003, 2002, and 2001 was
$.62, $1.43, $4.70, respectively, using the Black-Scholes option
pricing model with the following assumptions:

|                        |  |                     |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                    
|                        |  | Year Ended June 30,
|                        |  |                    
|                        |  | 2003                |      | 2002 |  | 2001
|                        |  |                     |      |      |  |     
|Dividend yield          |  |                     | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Expected volatility     |  |                     | 63.1 | %    |  |      | 61.5 | % |  |  | 84.5 | %
|Risk free interest rate |  |                     | 3.94 | %    |  |      | 4.9  | % |  |  | 5.3  | %
|Expected life, in years |  |                     | 8.0  |      |  |      | 10.0 |   |  |  | 10.0 |  

The Company maintains stock option plans under
which 919,098 shares of common stock have been reserved at
June 30, 2003 for outstanding and future incentive and
nonqualified stock option grants as well as stock awards to
directors, officers, and key employees. Incentive stock options
must be granted at not less than the fair market value of the
common stock at the date of grant and expire 10 years from
the date of grant. Nonqualified stock options may be granted at
a price of not less than 85% of the fair market value of the
common stock at the date of grant and expire 20 years from
the date of grant. Options granted under the plans are
exercisable in installments ranging from 20% to 50% per year.
Upon the occurrence of a change of control (as
defined in the Companys stock option plans), all
outstanding options become immediately exercisable.

37



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock option activity, including options issued
to non-employee directors, and related information under these
plans is as follows:

|                                      |           |        |           |                |   |   |       |      | 
|------------------------------------- | --------- | ------ | --------- | -------------- | - | - | ----- | ---- | 
|                                      |           |        |           | Weighted      
|                                      |           |        |           | Average       
|                                      |           | Shares |           | Exercise Price
|                                      |           |        |           |               
|Shares under options at June 30, 2000 |           |        | 1,326,393 |                |   | $ | 10.18 |     
|                                      | Granted   |        |           | 83,550         |   |   |       | 5.45 | 
|                                      | Cancelled |        |           | (1,088,549     | ) |   |       | 8.58 | 
|                                      |           |        |           |                |   |   |       |     
|Shares under options at June 30, 2001 |           |        | 321,394   |                |   |   | 14.14 |     
|                                      | Granted   |        |           | 746,500        |   |   |       | 1.91 | 
|                                      | Cancelled |        |           | (99,300        | ) |   |       | 4.00 | 
|                                      |           |        |           |                |   |   |       |     
|Shares under options at June 30, 2002 |           |        | 968,594   |                |   |   | 3.17  |     
|                                      | Granted   |        |           | 37,500         |   |   |       | .90  | 
|                                      | Cancelled |        |           | (205,210       | ) |   |       | 3.91 | 
|                                      |           |        |           |                |   |   |       |     
|Shares under options at June 30, 2003 |           |        | 800,884   |                |   |   | 2.87  |     
|                                      |           |        |           |                |   |   |       |     
|Options exercisable at June 30:       |           |        |           |                |   |   |       |     
|                                      | 2001      |        |           | 103,868        |   |   | $     | 6.86 | 
|                                      | 2002      |        |           | 802,738        |   |   |       | 2.96 | 
|                                      | 2003      |        |           | 740,918        |   |   |       | 2.96 | 

The following table summarizes information
pertaining to all options outstanding and exercisable at
June 30, 2003:

|                   |  |                     |         |              |  |          |     |                     |  |          |         |  |  |  |         |  |  |   |         | 
|------------------ |  | ------------------- | ------- | ------------ |  | -------- | --- | ------------------- |  | -------- | ------- |  |  |  | ------- |  |  | - | ------- | 
|                   |  |                     |         |              |  |         
|                   |  | Outstanding Options |         |              |  |         
|                   |  |                     |         |             
|                   |  |                     |         | Weighted     |  |          |     | Exercisable Options
|                   |  |                     |         | Average      |  | Weighted |     |                    
|                   |  |                     |         | Remaining    |  | Average  |     |                     |  | Average 
|Range of           |  | Number              |         | Contractual  |  | Exercise |     | Number              |  | Exercise
|Exercise Prices    |  | Outstanding         |         | Life (Years) |  | Price    |     | Exercisable         |  | Price   
|                   |  |                     |         |              |  |          |     |                     |  |         
|$0.0000  $ 1.0130 |  |                     | 32,500  |              |  |          | 9.0 |                     |  | $        | 0.9000  |  |  |  |        |  |  |   |        | 
|$1.0131  $ 2.0260 |  |                     | 561,500 |              |  |          | 8.1 |                     |  | $        | 1.9377  |  |  |  | 546,636 |  |  | $ | 1.9531  | 
|$2.0261  $ 3.0390 |  |                     | 30,500  |              |  |          | 7.6 |                     |  | $        | 2.3439  |  |  |  | 22,533  |  |  | $ | 2.2853  | 
|$5.0651  $ 6.0780 |  |                     | 143,709 |              |  |          | 5.8 |                     |  | $        | 5.8800  |  |  |  | 143,709 |  |  | $ | 5.8800  | 
|$6.0781  $ 7.0910 |  |                     | 5,250   |              |  |          | 6.4 |                     |  | $        | 6.8200  |  |  |  | 5,250   |  |  | $ | 6.8200  | 
|$7.0911  $ 8.1040 |  |                     | 21,800  |              |  |          | 6.4 |                     |  | $        | 7.8856  |  |  |  | 17,250  |  |  | $ | 7.8713  | 
|$9.1171  $10.1300 |  |                     | 5,625   |              |  |          | 3.4 |                     |  | $        | 10.1061 |  |  |  | 5,540   |  |  | $ | 10.1087 | 

38



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Restricted
Stock The Companys
stock option plan established in 1999 also permits the grant of
restricted stock awards. Awards which have been granted under
this 1999 plan vest ratably over two to ten years. Restricted
stock activity is as follows:

|                                             |          |                     |        |         |   |      |         |         |   |  |         |          |  
|-------------------------------------------- | -------- | ------------------- | ------ | ------- | - | ---- | ------- | ------- | - |  | ------- | -------- | -
|                                             |          |                    
|                                             |          | Year Ended June 30,
|                                             |          |                    
|                                             |          | 2003                |        | 2002    |   | 2001
|                                             |          |                     |        |         |   |     
|Shares of restricted stock beginning of year |          |                     | 96,988 |         |   |      | 158,358 |         |   |  | 204,500 |         
|                                             | Issued   |                     |        | 0       |   |      |         | 16,000  |   |  |         | 203,978  |  
|                                             | Vested   |                     |        | (32,866 | ) |      |         | (53,432 | ) |  |         | (249,100 | )
|                                             | Canceled |                     |        | (15,185 | ) |      |         | (23,938 | ) |  |         | (1,020   | )
|                                             |          |                     |        |         |   |      |         |         |   |  |         |         
|Shares of restricted stock end of year       |          |                     | 48,937 |         |   |      | 96,988  |         |   |  | 158,358 |         
|                                             |          |                     |        |         |   |      |         |         |   |  |         |         

The value of restricted stock awards is
determined using the market price of the Companys common
stock on the grant date and is amortized over the vesting
period. The unamortized portion of such awards is deducted from
stockholders equity.

Stockholder Rights
Agreement In October 1996,
the Company adopted a stockholder rights agreement under which
one common stock purchase right is presently attached to and
trades with each outstanding share of the Companys common
stock. The rights become exercisable and transferable apart from
the common stock ten days after a person or group, without the
Companys consent, acquires beneficial ownership of 12% or
more of the Companys common stock or announces or
commences a tender or exchange offer that could result in 12%
ownership (the Change Date). Once exercisable, each
right entitles the holder to purchase shares of common stock in
number equal to eight multiplied by the product of the number of
shares outstanding on the Change Date divided by the number of
rights outstanding on the Change Date not owned by the person or
group and at a price of 20% of the per share market value as of
the Change Date. The rights have no voting power and, until
exercisable, no dilutive effect on net earnings per common
share. The rights expire in October 2006 and are redeemable at
the discretion of the Companys Board of Directors at $.01
per right.

Exchange
Plan In February 2001, the
Company made an offer to employees of the Company to exchange
stock options they previously received in exchange for awards of
restricted stock under the Companys 1997 and 1999 Stock
Option Plan. Under the exchange, an employee received one share
of restricted common stock for each option to purchase five
shares of common stock surrendered. A similar option exchange
offer was made to non-employee Directors. Based on the 5 for 1
exchange ratio, 1,019,889 options were exchanged for awards of
203,978 shares of restricted common stock. The exchanged options
had an exercise price from $5.25 to $10.13 and the average
exercise price for the exchanged options was $8.78. The total
valuation placed on the awards issued was approximately
$446,000, based on the closing price of the common stock of
$2.19 on February 28, 2001. The exchange increased the number of
shares of the Companys common stock outstanding by 5.5%,
but reduced potential dilutive impact on the Companys
common stock associated with the 1,019,889 options exchanged and
cancelled. Options returned became available for re-issuance.

The exchange valuation of $446,000 resulted in
non-cash deferred compensation in the amount of $413,000 for the
employees portion of the exchange, and expense of $33,000
for the immediate vesting of the outside Directors
restricted stock.

Subsequent to the exchange settlement, stock
awards issued to certain officers of the Company and its
subsidiary, SED International, Inc., were accelerated and
immediately vested. The accelerated vesting resulted in the
recognition of non-cash awards compensation expense of $462,000
in 2001.

39



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Employee
Benefit Plan

SED International, Inc. maintains the SED
International, Inc. 401(k) Plan, a voluntary retirement
benefit program. All employees of SED International, Inc. who
have attained the age of 21 are eligible to participate after
completing one year of service. Employees are immediately vested
in their own contributions. Prior to July 1, 2002, SED
International, Inc. matched a portion of employee contributions
to the plan. Effective July 1, 2002, SED International
revised the plan to provide 401K matching for its employees at
the discretion of the Board of Directors and is no longer
required to match 401K funds. Vesting in SED International,
Inc.s matching contributions, if any, is based on years of
continuous service. There were no matching contributions to the
401(k) plan in fiscal 2003. SED International, Inc.s
matching contribution expense for the years ended June 30,
2002 and 2001 was $93,000 and $125,000, respectively.

13.     Segment
Information

The Company operates in one business segment as a
wholesale distributor of microcomputer and wireless telephone
products. The Company operates and manages in two geographic
regions, the United States and Latin America.

Financial information for continuing operations
by geographic region is as follows:

|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |             |             | 
|---------------------------------------- | ---------------------- | ------------- | ----------- | ------------- | ----------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | ---------- | ---------- | - | ---------- | ----------- | ----------- | 
|                                         |                        | United States |             | Latin America |             | Eliminations |            | Consolidated
|                                         |                        |               |             |               |             |              |            |             
|Fiscal 2003                              |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|Net sales:                               |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|                                         | Unaffiliated customers |               | $           | 375,485,000   |             |              | $          | 37,663,000   |            |   |             |            |            |   | $          | 413,148,000 |            
|                                         | Foreign subsidiaries   |               |             | 19,000        |             |              |            |              |            |   | $           | (19,000    | )          |   |            |             |            
|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|                                         |                        | Total         |             | $             | 375,504,000 |              |            | $            | 37,663,000 |   |             | $          | (19,000    | ) |            | $           | 413,148,000 | 
|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|Gross profit                             |                        | $             | 14,878,000  |               |             | $            | 4,476,000  |              |            | $ | 70,000      |            |            | $ | 19,424,000 |            
|(Loss) income from continuing operations |                        |               | (9,446,000  | )             |             |              | 1,608,000  |              |            |   | 70,000      |            |            |   | (7,768,000 | )          
|Total assets at year-end                 |                        |               | 107,724,000 |               |             |              | 9,382,000  |              |            |   | (30,987,000 | )          |            |   | 86,119,000 |            
|Fiscal 2002                              |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|Net sales:                               |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|                                         | Unaffiliated customers |               | $           | 385,911,000   |             |              | $          | 37,970,000   |            |   |             |            |            |   | $          | 423,881,000 |            
|                                         | Foreign subsidiaries   |               |             | 913,000       |             |              |            |              |            |   | $           | (913,000   | )          |   |            |             |            
|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|                                         |                        | Total         |             | $             | 386,824,000 |              |            | $            | 37,970,000 |   |             | $          | (913,000   | ) |            | $           | 423,881,000 | 
|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|Gross profit                             |                        | $             | 14,719,000  |               |             | $            | 5,193,000  |              |            | $ | 177,000     |            |            | $ | 20,089,000 |            
|(Loss) income from continuing operations |                        |               | (4,799,000  | )             |             |              | 1,998,000  |              |            |   | 177,000     |            |            |   | (2,624,000 | )          
|Total assets at year-end                 |                        |               | 145,998,000 |               |             |              | 8,286,000  |              |            |   | (77,832,000 | )          |            |   | 76,452,000 |            
|Fiscal 2001                              |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|Net sales:                               |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|                                         | Unaffiliated customers |               | $           | 399,733,000   |             |              | $          | 45,847,000   |            |   |             |            |            |   | $          | 445,580,000 |            
|                                         | Foreign subsidiaries   |               |             | 1,585,000     |             |              |            |              |            |   | $           | (1,585,000 | )          |   |            |             |            
|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|                                         |                        | Total         |             | $             | 401,318,000 |              |            | $            | 45,847,000 |   |             | $          | (1,585,000 | ) |            | $           | 445,580,000 | 
|                                         |                        |               |             |               |             |              |            |              |            |   |             |            |            |   |            |            
|Gross profit                             |                        | $             | 19,703,000  |               |             | $            | 5,436,000  |              |            |   |             |            |            | $ | 25,139,000 |            
|(Loss) income from continuing operations |                        |               | (9,188,000  | )             |             |              | 896,000    |              |            |   |             |            |            |   | (8,292,000 | )          
|Total assets at year-end                 |                        |               | 98,017,000  |               |             |              | 17,119,000 |              |            | $ | (20,572,000 | )          |            |   | 94,564,000 |            

40



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Sales of products between the Companys
geographic regions are made at market prices and are eliminated
in consolidation. All corporate overhead is included in the
results of U.S. operations.

Net sales by product category for continuing
operations is as follows:

|                    |  |               |             |                    |  |          |            |       |  |   |           |  |  |   |             | 
|------------------- |  | ------------- | ----------- | ------------------ |  | -------- | ---------- | ----- |  | - | --------- |  |  | - | ----------- | 
|                    |  | Microcomputer |             | Wireless Telephone |  | Handling |            |      
|Year Ended June 30, |  | Products      |             | Products           |  | Revenue  |            | Total
|                    |  |               |             |                    |  |          |            |      
|2003                |  | $             | 363,343,000 |                    |  | $        | 48,543,000 |       |  | $ | 1,262,000 |  |  | $ | 413,148,000 | 
|2002                |  |               | 398,536,000 |                    |  |          | 24,014,000 |       |  |   | 1,331,000 |  |  |   | 423,881,000 | 
|2001                |  |               | 409,851,000 |                    |  |          | 33,827,000 |       |  |   | 1,902,000 |  |  |   | 445,580,000 | 

Approximately 9.1%, 9.0% and 10.3% in the fiscal
years ended June 30, 2003, 2002, and 2001, respectively,
consisted of sales to customers for export principally into
Latin America and direct sales to customers in Colombia and
Argentina.

14.     Significant
Vendors and Customers

During the years ended June 30, 2003, 2002
and 2001 the Company purchased approximately 52.9%, 50.1% and
39% of its product from two vendors. During the year ended
June 30, 2002, the Company sold approximately 11% of its
product to one customer.

15.     Supplemental
Disclosures

An analysis of allowances for doubtful accounts
is as follows:

|                    |  |            |           |            |  |                |           |             |  |   |            |   |  |   |           | 
|------------------- |  | ---------- | --------- | ---------- |  | -------------- | --------- | ----------- |  | - | ---------- | - |  | - | --------- | 
|                    |  | Balance at |           | Charged to |  |                |           |            
|                    |  | Beginning  |           | Costs and  |  |                |           | Balance at 
|Year Ended June 30, |  | of Year    |           | Expenses   |  | Deductions (1) |           | End of Year
|                    |  |            |           |            |  |                |           |            
|2003                |  | $          | 1,455,000 |            |  | $              | 2,302,000 |             |  | $ | (1,008,000 | ) |  | $ | 2,749,000 | 
|2002                |  |            | 5,631,000 |            |  |                | 1,638,000 |             |  |   | (5,814,000 | ) |  |   | 1,455,000 | 
|2001                |  |            | 3,761,000 |            |  |                | 4,476,000 |             |  |   | (2,606,000 | ) |  |   | 5,631,000 | 



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Deductions represent actual write-offs of
    specific accounts receivable charged against the allowance
    account, net of amounts recovered.

16.     Reverse Stock
Split

The shareholders of the Company approved a
one-for-two reverse stock split in a special meeting of
shareholders held on April 26, 2002. As a result of the
reverse split, substantially all holders of the Companys
common stock returned their current share certificates and
received new certificates which had the effect of reducing the
number of shares held on a 1 for 2 basis. The new certificates
have the same terms as the old certificates, and the holders of
the new certificates have the same rights under the new
certificates. All applicable amounts reflected herein give
retroactive effect to the reverse stock split.

17.     Latin America
Economic Situation and Devaluation

As a result of an ongoing economic crisis, the
Argentine government has implemented a number of monetary and
exchange control measures including restrictions on the
withdrawal of funds deposited with Argentine banks and the
practical impossibility of making transfers abroad. On
January 6, 2002, the Argentine Congress also approved Law
No. 25,561 on Public Emergency and Exchange System Reform
that eliminated the pegging of the ARS (Argentine peso) to the
US dollar on a one to one basis. In place of the pegged exchange
rate the Central Bank of Argentina established an
official and a freely floating exchange
market for transactions originating in Argentina. The
official exchange rate was fixed at ARS (Argentine
peso) 1.4

41



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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to USD (US Dollar) 1. The freely
floating exchange for the ARS as compared to the USD
decreased from 1.7 pesos to 1 dollar at January 11, 2002
(first day after exchange market was reopened) to 2.8 pesos to 1
dollar at June 30, 2003.

In connection with the de-dollarization of the
Argentine peso and other changes enacted by the Argentine
government, unfavorable consequences have resulted including,
but not limited to, (a) the default on public debt
payments, (b) the implementation of restrictions on the
withdrawal of funds deposited with financial institutions,
(c) the practical impossibility of making fund transfers
outside Argentina to serve financial obligations without the
approval of the Central Bank of Argentina, (d) raising
prices and inflation, (e) limited availability of credit,
(f) and declining domestic market demand within Argentina.

Since January 1, 2002, Argentina has
experienced annual inflation rate of approximately 10.0%. While
Argentinas government together with the International
Monetary Fund are seeking remedies, no assurance can be given
that the economic situation in Argentina will stabilize. The
devaluation, which commenced in January 2002, could make it more
difficult for Argentine companies to service their commercial
and financial obligations due in or tied to the USD. Any of the
foregoing events and a continuation of the Argentine recession
may have a material adverse effect on the Companys
business, results of operations, financial condition, and
ability to make payments on the Companys indebtedness and
on the Companys common stock market price. The information
included in the Companys financial statements, and other
documentation, does not contain the potential impact that might
arise from the situation described above and, accordingly,
should be analyzed considering that circumstance.

18.     Liabilities
Under Employment Agreement and Contingent Liabilities

The Company carried two key man life insurance
policies payable to the benefit of the Company on Gerald
Diamond, the Companys founder and Former Chairman and
Chief Executive Officer who passed away in June of 2003. At June
30, 2003, the Company recorded a liability of approximately
$3.4 million, which represents the Companys present
estimate of the amounts due as benefits to Mr. Diamonds
surviving spouse under Mr. Diamonds employment
contract. However, the Company may be contingently liable for
additional benefit payments depending on the resolution of
issues concerning additional death benefits potentially due to
Mr. Diamonds surviving spouse.

19.     Discontinued
Operations

In February 2003, the Company resolved to
discontinue commercial operations of its Brazilian subsidiary,
SED International do Brasil Distribuidora, Ltda. As a result,
SED International do Brasil Distribuidora, Ltda. was reported as
a disposal of a segment of business in the third quarter of
2003. Accordingly, the operating results of SED International do
Brasil Distribuidora, Ltda. (the Brazil Operation)
have been classified as a discontinued operation for all periods
presented in the Companys consolidated statements of
operations. Additionally, the Company has reported all of SED
International do Brasil Distribuidora, Ltda. assets at their
estimated net realizable values in the Companys condensed
consolidated balance sheet as of June 30, 2003 in
accordance with Accounting Principles Board Opinion No. 30.

Following is a summary of the results of
discontinued operations in (000s):

|                                         |  |                     |        |      |  |      |        |   |  |   |        |  
|---------------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |  |                    
|                                         |  | Year Ended June 30,
|                                         |  |                    
|                                         |  | 2003                |        | 2002 |  | 2001
|                                         |  |                     |        |      |  |     
|Net sales                                |  | $                   | 8,196  |      |  | $    | 32,507 |   |  | $ | 79,758 |  
|Loss from operations before income taxes |  |                     | (1,448 | )    |  |      | (3,009 | ) |  |   | (3,149 | )
|Loss on disposal                         |  |                     | (3,294 | )    |  |      |        |   |  |   |        |  
|                                         |  |                     |        |      |  |      |        |   |  |   |        |  
|Loss from discontinued operations        |  | $                   | (4,742 | )    |  | $    | (3,009 | ) |  | $ | (3,149 | )
|                                         |  |                     |        |      |  |      |        |   |  |   |        |  

42



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The net loss from discontinued operations
consists of operating losses incurred in the Brazil Operation
and estimated loss on disposal of the business which includes
charges for the following: (i) the write-off of foreign
currency translation losses of $2.6 million previously
recorded as a component of stockholders equity,
(ii) equipment, (iii) customer accounts receivable,
(iv) employee termination costs, (v) inventory, and
(vi) facility exit and lease termination costs. As of
June 30, 2003, SED International do Brasil Distribuidora,
Ltda. had assets of $51,000 and third party liabilities of
$848,000. The assets include cash of $22,000 and prepaid taxes
of $9,000. Liabilities include accounts payable related to
inventory purchases of $751,000, bank obligations of $15,000 and
other miscellaneous accrued liabilities of $82,000.

Interest expense for the Brazil operation for the
fiscal years 2003, 2002, and 2001 totaled $288,000, $868,000 and
$600,000, and was based on the actual borrowings from banks by
the Brazil operation.

SED International do Brasil Distribuidora, Ltda.
has been transitioned from a commercial operating company into
dormancy. During the dormancy period, the Company will incur
ongoing operating expenses for attorney fees, statutory
bookkeeping and reporting services, document storage and
inventory storage cost until liquidation of the inventory. These
ongoing expenses during the dormancy period are not expected to
be significant.

43



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We maintain systems of internal controls and
procedures for financial reporting (Internal
Controls) and disclosure controls and procedures
(Disclosure Controls) designed to provide reasonable
assurance as to the reliability of our financial and other
disclosures included in this report. As of the end of the period
covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and
operation of our Internal Controls and Disclosure Controls
(Controls Evaluation).

In the course of the Controls Evaluation, we
sought to identify errors, controls problems and/or acts of
fraud, and to confirm that appropriate corrective actions,
including process improvements, were being undertaken.

Our CEO and CFO have concluded that, subject to
the inherent limitations in all control systems, our Disclosure
Controls are effective in timely alerting them to material
information relating to the Company that is required to be
included in our periodic Securities and Exchange Commission
filings, and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly
presented in conformity with generally accepted accounting
principles.

There has been no change in the Companys
internal control over financial reporting that occurred during
our most recent fiscal quarter that has materially affected or
is reasonably likely to materially affect the Companys
internal control over financial reporting.

The Companys management, including the CEO
and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within the company.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Proposal 1  Election of
Directors contained in the definitive Proxy Statement to
be filed with the Securities and Exchange Commission no later
than one hundred twenty (120) days after the year ended
June 30, 2003 and delivered to stockholders in connection
with the annual meeting of stockholders to be held on
December 10, 2003






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information called for by this item is
incorporated herein by reference to the sections of the Proxy
Statement entitled Executive Compensation contained
in the definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than one hundred
twenty (120) days after the year ended June 30, 2003
and delivered to stockholders in connection with the annual
meeting of stockholders to be held on December 10, 2003.

44



---



##### Table of Contents








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Ownership of Shares contained in
the definitive Proxy Statement to be filed with the Securities
and Exchange Commission no later than one hundred twenty
(120) days after the year ended June 30, 2003 and
delivered to stockholders in connection with the annual meeting
of stockholders to be held on December 10, 2003.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Compensation Committee Interlocks and
Insider Participation contained in the definitive Proxy
Statement to be filed with the Securities and Exchange
Commission no later than one hundred twenty (120) days
after the year ended June 30, 2003 and delivered to
stockholders in connection with the annual meeting of
stockholders to be held on December 10, 2003.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Principal Accountant Fees and
Services contained in the definitive Proxy Statement to be
filed with the Securities and Exchange Commission no later than
one hundred twenty (120) days after the year ended June 30,
2003 and delivered to stockholders in connection with the annual
meeting of stockholders to be held on December 10, 2003.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 13. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) The following documents are filed as
part of this Report:

1. Financial Statements. The
following financial statements and the reports of the
Companys independent auditors thereon, are filed herewith.



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | Independent Auditors Report (Ernst &
    Young LLP  2003, 2002 and 2001)                          
|
| |  | Consolidated Balance Sheets at June 30, 2003
    and 2002                                           
|
| |  | Consolidated Statements of Operations for the
    years ended June 30, 2003, 2002 and 2001          
|
| |  | Consolidated Statements of Shareholders
    Equity for the years ended June 30, 2003, 2002 and 2001
|
| |  | Consolidated Statements of Cash Flows for the
    years ended June 2003, 2002 and 2001              
|
| |  | Notes to Consolidated Financial Statements                                                          

2. Financial Statement Schedules.



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Schedule II:Valuation and Qualifying is filed herewith under
    Supplemental Disclosures in Note 15 to the
    Consolidated Financial Statements.



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedules other than the schedule presented are
    omitted because the information required is not applicable or
    the required information is shown in the consolidated financial
    statements or notes thereto.

3. Exhibits Incorporated by Reference or
Filed with this Report.

|        |     |             |  |                                             
|------- | --- | ----------- |  | --------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 3.1 |             |  | Articles of Incorporation of the Company.(1)
|        | 3.2 |             |  | Amendment to Articles of Incorporation.(54) 

45



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                  
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.3   |             |  | Bylaws of the Company.(2)                                                                                                                                                                                                        
|        | 4.1   |             |  | Form of Rights Agreement, dated as of
    October 31, 1996 between the Company and National City
    Bank.(3)                                                                                                                    
|        | 10.1  |             |  | Form of Lease Agreement dated as of
    January 1, 1991 between Royal Park, Company and SED
    International, Inc. (Formerly Southern Electronics Distributors,
    Inc.) (SED International).(4)                             
|        | 10.2  |             |  | Lease Agreement dated May 16, 1990 between
    The Equitable Life Assurance Society of the United States and
    SED International(5), as amended March 20, 1992.(6)                                                             
|        | 10.3  |             |  | Southern Electronics Corporation 1986 Stock
    Option Plan dated September 3, 1986, together with related forms
    of Incentive Stock Option Agreement and NonQualified Stock
    Option Agreement.(7)/*/                      
|        | 10.4  |             |  | Form of First Amendment dated September 14,
    1989 to Southern Electronics Corporation 1986 Stock Option
    Plan.(8)/*/                                                                                                       
|        | 10.5  |             |  | Second Amendment dated November 7, 1989 to
    Southern Electronics Corporation 1996 Stock Option Plan.(9)/*/                                                                                                                    
|        | 10.6  |             |  | Third Amendment dated July 17, 1992 to
    Southern Electronics Corporation 1986 Stock Option Plan.(10)/*/                                                                                                                       
|        | 10.7  |             |  | Southern Electronics Corporation 1988 Restricted
    Stock Plan, together with related form of Restricted Stock
    Agreement.(11)/*/                                                                                            
|        | 10.8  |             |  | First Amendment dated November 7, 1989 to
    Southern Electronics Corporation 1988 Restricted Stock
    Plan.(12)/*/                                                                                                            
|        | 10.9  |             |  | Second Amendment dated July 17, 1992 to
    Southern Electronics Corporation 1988 Restricted Stock
    Plan.(13)/*/                                                                                                              
|        | 10.10 |             |  | Form of Southern Electronics Corporation 1991
    Stock Option Plan, together with related forms of Incentive
    Stock Option Agreement and NonQualified Stock Option Agreement.
    (14)/*/                                    
|        | 10.11 |             |  | First Amendment dated July 17, 1992 to
    Southern Electronics Corporation 1991 Stock Option Plan.(15)/*/                                                                                                                       
|        | 10.12 |             |  | Second Amendment dated August 30, 1996 to
    Southern Electronics Corporation 1991 Stock Option Plan.(16)/*/                                                                                                                    
|        | 10.13 |             |  | Form of NonQualified Stock Option Agreement dated
    as of August 28, 1992 between the Company and Cary
    Rosenthal.(17)/*/                                                                                                   
|        | 10.14 |             |  | Employment Agreements dated November 7,
    1989, between the Company, SED International and each of Gerald
    Diamond and Jean Diamond (18)/*/, each as amended by form of
    Amendment No. 1 dated September 24, 1991.(19)/*/
|        | 10.15 |             |  | SED International, Inc. Savings Plan effective as
    of January 1, 1991, together with Savings Plan Trust and
    Savings Plan Adoption Agreement.(20)/*/                                                                       
|        | 10.16 |             |  | Lease Agreement dated November 1992 between H.G.
    Pattillo and Elizabeth M. Pattillo and SED International.(21)                                                                                                               
|        | 10.17 |             |  | Lease Agreement dated August 9, 1993 between
    New World Partners Joint Venture and SED International and
    Addendum I thereto (NWPJV Lease).(22)                                                                          
|        | 10.18 |             |  | Second Addendum to NWPJV Lease dated
    January 10, 1996 among New World Partners Joint Venture,
    New World Partners Joint Venture Number Two and SED
    International. (23)                                                
|        | 10.19 |             |  | Third Addendum to NWPJV Lease dated July 24,
    1996 between New World Partners Joint Venture Number Two and SED
    International. (24)                                                                                        
|        | 10.20 |             |  | Amendment to Lease for 4775 N. Royal Atlanta
    Drive.(25)                                                                                                                                                                      
|        | 10.21 |             |  | Form of NonQualified Stock Option Agreement dated
    as of May 21, 1993 between the Company and Cary Rosenthal
    (see Exhibit 10.13)./*/                                                                                      
|        | 10.22 |             |  | Form of NonQualified Stock Option Agreement,
    dated as of September 13, 1994 between the Company and Cary
    Rosenthal (see Exhibit 10.13)./*/                                                                               
|        | 10.23 |             |  | Form of NonQualified Stock Option Agreement for
    Directors.(26)/*/                                                                                                                                                            

46



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.24 |             |  | 1995 Formula Stock Option Plan, together with
    related form of NonQualified Stock Option Agreement.(27)                                                                                                                                                                                                                                                 
|        | 10.25 |             |  | Adoption Agreement for Swerdlin & Company
    Regional Prototype Standardized 401(k) Profit Sharing Plan and
    Trust, as amended.(28)/*/                                                                                                                                                                                                                 
|        | 10.26 |             |  | Third Amendment dated September 12, 1996 to
    the Southern Electronics Corporation Stock Option Plan.(29)/*/                                                                                                                                                                                                                                             
|        | 10.27 |             |  | Industrial Real Estate Lease (Multi-Tenant
    Facility) dated as of March 6, 1997, between Majestic Realty Co.
    and Patrician Associates, Inc., as landlord (the
    Landlord), and SED International, as Tenant (the
    Tenant), together with Option to Extend Term dated
    as of March 26, 1997, between the Landlord and the
    Tenant.(30)
|        | 10.28 |             |  | Lease Agreement made August 11, 1997,
    between Gwinnett Industries, Inc. and SED International.(31)                                                                                                                                                                                                                                                     
|        | 10.29 |             |  | Lease Agreement made February 3, 1998,
    between First Industrial Harrisburg, L.P. and SED
    International.(32)                                                                                                                                                                                                                                        
|        | 10.30 |             |  | Second Amendment to Employment Agreement
    effective July 1, 1998 between SED International and Gerald
    Diamond.(33)/*/                                                                                                                                                                                                                               
|        | 10.31 |             |  | Second Amendment to Employment Agreement
    effective July 1, 1998 between SED International and Jean
    Diamond.(34)/*/                                                                                                                                                                                                                                 
|        | 10.32 |             |  | 1999 Stock Option Plan dated July 20, 1999,
    together with related forms of Stock Option Agreement and
    Restriction Agreement.(35)/*/                                                                                                                                                                                                                
|        | 10.33 |             |  | Third Amendment to Employment Agreement effective
    December 16, 1998 between SED International and Jean
    Diamond.(36)/*/                                                                                                                                                                                                                             
|        | 10.34 |             |  | Third Amendment to Employment Agreement effective
    July 1, 1999 between SED International and Gerald
    Diamond.(37)/*/                                                                                                                                                                                                                                
|        | 10.35 |             |  | Fourth Amendment to Employment Agreement
    effective July 1, 1999 between SED International and Jean
    Diamond.(38)/*/                                                                                                                                                                                                                                 
|        | 10.36 |             |  | Employment Agreement effective June 1, 1999,
    between SED International and Ronell Rivera.(39)/*/                                                                                                                                                                                                                                                       
|        | 10.37 |             |  | Form of Second Amended and Restated Credit
    Agreement dated as of August 31, 1999, among the Company and SED
    International as Borrowers and Wachovia Bank, N.A. as Agent.(40)                                                                                                                                                                       
|        | 10.38 |             |  | Form of Indemnification Agreement entered into
    with each of the directors of the Company and the Company.(41)/*/                                                                                                                                                                                                                                       
|        | 10.39 |             |  | Form of Indemnification Agreement entered into
    with each of the officers of the Company and the Company.(42)/*/                                                                                                                                                                                                                                        
|        | 10.40 |             |  | Form of Lease Agreement dated as of April 1,
    1999 between Diamond Chip Group, L.L.C. and SED
    International.(43)                                                                                                                                                                                                                                    
|        | 10.41 |             |  | Fourth Amendment to Second Amended and Restated
    Credit Agreement dated October 12, 2001 between SED
    International Holdings, Inc. and Wachovia Bank, N.A.(44)                                                                                                                                                                                       
|        | 10.42 |             |  | Employment Agreement effective November 11,
    1999 between SED International, Inc. and Barry Diamond.(45)/*/                                                                                                                                                                                                                                             
|        | 10.43 |             |  | First Amendment to Employment Agreement effective
    June 1, 2001 between SED International Inc. and Barry
    Diamond.(46)/*/                                                                                                                                                                                                                            
|        | 10.44 |             |  | Loan and Security Agreement between SED
    International, Inc. and Fleet Capital Corporation dated
    October 7, 2002.(57)                                                                                                                                                                                                                               

47



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                      
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.45 |             |  | Fifth Amendment to Second Amended and Restated
    Credit Agreement dated October 12, 2001 between SED
    International Holdings, Inc. and Wachovia Bank, N.A.(47)                  
|        | 10.46 |             |  | Sixth Amendment to Second Amended and Restated
    Credit Agreement dated October 12, 2001 between SED
    International Holdings, Inc. and Wachovia Bank, N.A.(48)                  
|        | 10.47 |             |  | Amendment to Employment Agreement between Gerald
    Diamond and SED International, Inc., dated September 1,
    1999. This amendment is effective as of November 1,
    2001.(49)/*/
|        | 10.48 |             |  | Amendment to Employment Agreement between Jean
    Diamond and SED International, Inc., dated September 1,
    1999. This amendment is effective as of November 1,
    2001.(50)/*/  
|        | 10.49 |             |  | Amendment to Employment Agreement between Mark
    Diamond and SED International, Inc., dated September 1,
    1999. This amendment is effective as of November 1,
    2001.(51)/*/  
|        | 10.50 |             |  | Amendment to Employment Agreement between Barry
    Diamond and SED International, Inc., dated September 11,
    1999. This amendment is effective as of November 1,
    2001.(52)/*/
|        | 10.51 |             |  | Amendment to Employment Agreement between Ronell
    Rivera and SED International, Inc., dated November 28,
    1999. This amendment is effective as of November 1,
    2001.(53)/*/ 
|        | 10.52 |             |  | Amendment to Employment Agreement between Gerald
    Diamond and SED International, Inc., dated September 11,
    2002. This amendment is effective as of January 1,
    2002.(55)/*/
|        | 10.53 |             |  | Amendment to Employment Agreement between Jean
    Diamond and SED International, Inc., dated September 11,
    2002. This amendment is effective as of January 1,
    2002.(56)/*/  
|        | 21    |             |  | Subsidiaries of the Company.                                                                                                                                                         
|        | 23    |             |  | Independent Auditors
    Consent  Ernst & Young LLP.                                                                                                                               
|        | 24    |             |  | Power of Attorney (see signature page to this
    Form 10-K).                                                                                                                        
|        | 31.1  |             |  | Rule 13a-14(a)/15d-14(a) Certification by
    Chief Executive Officer Mark Diamond.                                                                                                  
|        | 31.2  |             |  | Rule 13a-14(a)/15d-14(a) Certification by
    Chief Financial Officer Philip Flynt.                                                                                                  
|        | 32.1  |             |  | Section 1350 Certification by Chief
    Executive Officer Mark Diamond.                                                                                                              
|        | 32.2  |             |  | Section 1350 Certification by Chief
    Financial Officer Philip Flynt                                                                                                               



---



| |     |                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | /*/ | Management contract or compensatory plan or
    arrangement with one or more directors or executive officers.                                                                                    
|
| | (1) | Incorporated herein by reference to
    Exhibit 3.1 to the Companys 1999 Form 10-K.                                                                                                             
|
| | (2) | Incorporated herein by reference to
    Exhibit 3.2 to the Companys 1999 Form 10-K.                                                                                                             
|
| | (3) | Incorporated herein by reference to
    Exhibit 7 to the Companys Current Report on
    Form 8-K dated October 30, 1996 (SEC File
    No. 0-16345).                                             
|
| | (4) | Incorporated herein by reference to exhibit of
    same number to Companys Annual Report on Form 10-K
    for the fiscal year ended June 30, 1991 (SEC File
    No. 0-16345) (1991 Form 10-K).
|
| | (5) | Incorporated herein by reference to
    Exhibit 10.8 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1990 (SEC
    File No. 0-16345) (1990 Form 10-K).          
|
| | (6) | Incorporated herein by reference to
    Exhibit 10.5 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1992 (SEC
    File No. 0-16345) (1992 Form 10-K).          
|
| | (7) | Incorporated herein by reference to
    Exhibit 10.12 to Companys (Registration
    Statement) on Form S1, filed September 5, 1986
    (Reg. No. 338494).                                     
|
| | (8) | Incorporated herein by reference to
    Exhibit 10.22 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1988 (SEC
    File No. 0-16345).                            
|
| | (9) | Incorporated herein by reference to
    Exhibit 10.25 to Companys 1990 Form 10-K (SEC File
    No. 0-16345).                                                                                    



|     |                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------
|(10) | Incorporated herein by reference to
    Exhibit 10.12 to Companys 1992 Form 10-K(SEC File
    No. 0-16345).

48



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##### Table of Contents





|     |                                                                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Incorporated herein by reference to
    Exhibit 10.21 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1988 (SEC
    File No. 0-16345).                            
|    
|(12) | Incorporated herein by reference to
    Exhibit 10.26 to Companys 1990 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(13) | Incorporated herein by reference to
    Exhibit 10.15 to Companys 1992 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(14) | Incorporated herein by reference to Annex A to
    Companys Definitive Supplemental Proxy Statement dated
    October 18, 1991 (SEC File No. 0-16345).                                          
|    
|(15) | Incorporated herein by reference to
    Exhibit 10.17 to Companys 1992 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(16) | Incorporated herein by reference to
    Appendix A to Companys Proxy Statement pertaining to
    Companys 1995 Annual Meeting of Stockholders dated
    October 1, 1995 (SEC File No. 0-16345).
|    
|(17) | Incorporated herein by reference to
    Exhibit 10.18 to Companys 1992 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(18) | Incorporated herein by reference to
    Exhibit 6(a) to Companys Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    1989 (SEC File No. 0-16345).                 
|    
|(19) | Incorporated herein by reference to
    Exhibit 10.13 to Companys 1991 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(20) | Incorporated herein by reference to
    Exhibit 10.15 to Companys 1991 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(21) | Incorporated herein by reference to
    Exhibit 10.24 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1993 (SEC
    File No. 0-16345) (1993 Form 10-K).         
|    
|(22) | Incorporated herein by reference to
    Exhibit 10.25 to Companys 1993 Form 10-K (SEC File
    No. 0-16345).                                                                                    
|    
|(23) | Incorporated herein by reference to
    Exhibit 10.32 to Companys Annual Report on Form l0-K
    for the fiscal year ended June 30, 1996 (SEC File No.
    0-16345) (1996 Form 10-K).         
|    
|(24) | Incorporated herein by reference to
    Exhibit 10.33 to Companys 1996 Form 10-K(SEC File
    No. 0-16345).                                                                                     
|    
|(25) | Incorporated herein by reference to
    Exhibit 10.26 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1995 (SEC
    File No. 0-16345) (1995 Form 10-K).         
|    
|(26) | Incorporated herein by reference to
    Exhibit 10.29 to Companys 1995 Form 10-K(SEC File
    No. 0-16345).                                                                                     
|    
|(27) | Incorporated herein by reference to
    Appendix B to Companys Proxy Statement pertaining to
    Companys 1995 Annual Meeting of Stockholders dated
    October 1, 1995 (SEC File No. 0-16345).
|    
|(28) | Incorporated herein by reference to
    Exhibit 10.41 to Companys 1996 Form 10-K(SEC File
    No. 0-16345).                                                                                     
|    
|(29) | Incorporated herein by reference to
    Appendix A to Companys Proxy Statement pertaining to
    Companys 1996 Annual Meeting of Stockholders dated
    October 1, 1996 (SEC File No. 0-16345).
|    
|(30) | Incorporated herein by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    1997 (SEC File No. 0-16345).                
|    
|(31) | Incorporated herein by reference to
    Exhibit 10.40 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1997 (SEC
    File No. 0-16345).                            
|    
|(32) | Incorporated herein by reference to
    Exhibit 10.45 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1998 (SEC
    File No. 01-6345) (1998 Form 10-K).         
|    
|(33) | Incorporated herein by reference to
    Exhibit 10.48 to Companys 1998 Form 10-K.                                                                                                               
|    
|(34) | Incorporated herein by reference to
    Exhibit 10.49 to Companys 1998 Form 10-K.                                                                                                               
|    
|(35) | Incorporated herein by reference to
    Exhibit 10.39 to Companys 1999 Form 10-K.                                                                                                               

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|     |                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(36) | Incorporated herein by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    1998 (SEC File No. 0-16345).          
|    
|(37) | Incorporated herein by reference to
    Exhibit 10.34 of Companys 1999 Form 10-K.                                                                                                            
|    
|(38) | Incorporated herein by reference to
    Exhibit 10.35 of Companys 1999 Form 10-K.                                                                                                            
|    
|(39) | Incorporated herein by reference to
    Exhibit 10.36 of Companys 1999 Form 10-K.                                                                                                            
|    
|(40) | Incorporated herein by reference to
    Exhibit 10.37 of Companys 1999 Form 10-K.                                                                                                            
|    
|(41) | Incorporated herein by reference to
    Exhibit 10.38 of Companys 1999 Form 10-K.                                                                                                            
|    
|(42) | Incorporated herein by reference to
    Exhibit 10.39 of Companys 1999 Form 10-K.                                                                                                            
|    
|(43) | Incorporated herein by reference to
    Exhibit 10.40 to Amendment No. 1 to the Companys
    Annual Report on Form 10-K/A for the fiscal year ended June
    30, 1999 (SEC File No. 0-16345).
|    
|(44) | Incorporated herein by reference to
    Exhibit 10.41 to the Registrants (SEC File
    No. 000-16345) 2001 Form 10-K.                                                                        
|    
|(45) | Incorporated herein by reference to
    Exhibit 10.42 to the Registrants (SEC File
    No. 000-16345) 2001 Form 10-K.                                                                        
|    
|(46) | Incorporated herein by reference to
    Exhibit 10.43 to the Registrants (SEC File
    No. 000-16345) 2001 Form 10-K.                                                                        
|    
|(47) | Incorporated herein by reference to
    Exhibit 1.2 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).      
|    
|(48) | Incorporated herein by reference to
    Exhibit 1.3 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2002 (SEC File No. 000-16345).         
|    
|(49) | Incorporated herein by reference to
    Exhibit 2.3 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).      
|    
|(50) | Incorporated herein by reference to
    Exhibit 3.4 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).      
|    
|(51) | Incorporated herein by reference to
    Exhibit 4.5 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).      
|    
|(52) | Incorporated herein by reference to
    Exhibit 5.6 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).      
|    
|(53) | Incorporated herein by reference to
    Exhibit 6.7 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).      
|    
|(54) | Incorporated herein by reference to
    Exhibit 1.3 to the Registrants Revised Definitive
    Proxy Soliciting Materials filed March 26, 2002 (SEC File
    No. 000-16345).                  
|    
|(55) | Incorporated herein by reference to
    Exhibit 10.52 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2002.                                                    
|    
|(56) | Incorporated herein by reference to
    Exhibit 10.53 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2002.                                                    
|    
|(57) | Incorporated herein by reference to
    Exhibit 10.44 to the Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2002.                                                

(b)     Reports on
Form 8-K.

The Company filed the following three current
reports on Form 8-K during the fourth quarter of fiscal
2003:



| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The report filed on April 1, 2003
    disclosed that the Company had promoted Mr. Philip D. Flynt
    (to replace Michael Levine) from Corporate Controller to the
    positions of Chief Financial Officer, Vice
    President  Finance, Secretary and Treasurer.

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| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. The report filed on June 17, 2003
    disclosed that Mr. Gerald Diamond, the Companys
    founder, Chairman of the Board and Chief Executive Officer,
    passed away on June 12, 2003.                                                                           
|
| | 3. The report filed on July 8, 2003
    reported that the Board of Directors had appointed Jean Diamond
    the new Chairman of the Board of Directors of the Company and
    had promoted Mark Diamond to the position of Chief Executive
    Officer of the Company.

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SIGNATURES

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



| |                                 
| | --------------------------------
| | SED INTERNATIONAL HOLDINGS, INC.



| |     |                 
| | --- | ----------------
| | By: | /s/ PHILIP FLYNT

| |                                                
| | -----------------------------------------------
| |                                                
| | Philip Flynt                                   
| | Vice President  Finance, Chief
    Financial  
| | Officer, Secretary and Treasurer
    (principal
| | financial and accounting officer)              

Date: October 3, 2003

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POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each person
whose signature appears below constitutes and appoints Mark
Diamond, Jean Diamond, and Philip Flynt, and any of them, as his
true and lawful attorneys-in-fact, each acting alone, with full
powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any
and all amendments to the Annual Report on Form 10-K of SED
International Holdings, Inc., and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission and other
appropriate agencies, granting unto said attorneys-in-fact, and
any of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, or any of them, or their
substitutes, each acting alone, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Company and in the capacities
indicated this October 3, 2003.

|                                     |  |                                                                                                                                 |  | 
|------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------- |  | 
|                                    
|/s/ JEAN DIAMONDJean Diamond         |  | Chairman of the Board                                                                                                          
|                                    
|/s/ MARK DIAMONDMark Diamond         |  | Chief Executive Officer and Director (principal
    executive officer)                                                         
|                                    
|/s/ PHILIP FLYNTPhilip Flynt         |  | Vice President  Finance, Chief
    Financial Officer, Secretary and Treasurer (principal financial
    and accounting officer)
|                                    
|/s/ STEWART I. AARONStewart I. Aaron |  | Director                                                                                                                       
|                                    
|/s/ MELVYN I. COHENMelvyn I. Cohen   |  | Director                                                                                                                       
|                                    
|/s/ CARY ROSENTHALCary Rosenthal     |  | Director                                                                                                                       

53