---

---

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K/AAmendment No.1

|            |                                                   
|----------- | --------------------------------------------------
|(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, 2007          
|            | or                                                
|            |                                                   
| ̈           | 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                    |  | (I.R.S. Employer   
|of incorporation or organization)               |  | Identification No.)
|                                                |  |                    
|4916 North Royal Atlanta Drive, Tucker, Georgia |  | 30084              
|(Address of principal executive offices)        |  | (Zip Code)         
|                                                |  |                    

Registrant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:
Common Stock, $.01 par value
(Title of class)

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

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

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

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

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):

|                          |                      |                         
|------------------------- | -------------------- | ------------------------
|Large Accelerated Filer o | Accelerated
 Filer o | Non-accelerated
 filer x

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x

The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 29, 2006 was approximately $4.6 million.

The
number of shares outstanding of the registrants common stock, $.01 par value,
as of August 31, 2007 was 3,878,856 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.

---

---



EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-K/A to our Annual Report on
Form 10-K for the year ended June 30, 2007 (the Annual Report, originally
filed on September 21, 2007 to (i) include Part III, Items 10, 11, 12, 13 and 14
in the text of the Form 10-K rather than incorporating those items by reference
from our 2007 annual meeting proxy statement, the filing of which will be
delayed beyond 120 days, (ii) amend the cover of the Annual Report to indicate
by check mark that disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is contained herein to the best of our knowledge and (iii)
include as Exhibits 10.64 and 10.65, our 2007 Restricted Stock Plan and the
final form of Restricted Stock Plan Agreement, respectively. No other material
changes have been made to this Annual Report on Form 10-K/A. This amendment is
not intended to update other information presented in this annual report on Form
10-K as originally filed.

---



TABLE OF
CONTENTS

|           |                                                                                                        |  |      | 
|---------- | ------------------------------------------------------------------------------------------------------ |  | ---- | 
|           |                                                                                                        |  | Page
|           |                                                                                                        |  |     
|           | PART I                                                                                                 |  |      | 
|Item 1.    | Business                                                                                               |  | 2    | 
|Item 1A.   | Risk Factors                                                                                           |  | 6    | 
|Item 1B.   | Unresolved Staff Comments                                                                              |  | 9    | 
|Item 2.    | Properties                                                                                             |  | 9    | 
|Item 3.    | Legal Proceedings                                                                                      |  | 10   | 
|Item 4.    | Submission of Matters to a Vote of
 Security Holders                                                   |  | 11   | 
|           |                                                                                                        |  |      | 
|           | PART II                                                                                                |  |      | 
|Item 5.    | Market Price of the Companys Common
 Stock, Related Shareholder Matters and Issuer Purchases of Stock |  | 11   | 
|Item 6.    | Selected Financial Data Five Year
 Financial Summary                                                   |  | 13   | 
|Item 7.    | Managements Discussion and Analysis
 of Financial Condition and Results of Operations                 |  | 13   | 
|Item 7A.   | Quantitative and Qualitative
 Disclosures About Market Risk                                            |  | 22   | 
|Item 8.    | Financial Statements and
 Supplementary Data                                                           |  | 23   | 
|           | Report of Independent Registered
 Public Accounting Firm                                               |  | 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                  |  | 41   | 
|Item 9A.   | Controls and Procedures                                                                                |  | 41   | 
|Item 9B.   | Other Information                                                                                      |  | 41   | 
|           |                                                                                                        |  |      | 
|           | PART III                                                                                               |  |      | 
|Item 10.   | Directors, Executive Officers and
 Corporate Governance                                                |  | 41   | 
|Item 11.   | Executive Compensation                                                                                 |  | 43   | 
|Item 12.   | Security Ownership of Certain
 Beneficial Owners and Management and Related Stockholder Matters        |  | 52   | 
|Item 13.   | Certain Relationships and Related
 Transactions, and Director Independence                             |  | 54   | 
|Item 14.   | Principal Accounting Fees and
 Services                                                                |  | 55   | 
|           |                                                                                                        |  |      | 
|           | PART IV                                                                                                |  |      | 
|Item 15.   | Exhibits and Financial Statement
 Schedules                                                            |  | 56   | 
|           |                                                                                                        |  |      | 
|Signatures |                                                                                                        |  | 61   | 

FORWARD LOOKING STATEMENT
INFORMATION

Certain statements made in this Annual Report on Form
10-K/A are forward-looking statements regarding the plans and objectives of
management for future operations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any
of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this report will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein particularly in view of the current
state of our operations, the inclusion of such information should not be
regarded as a statement by us or any other person that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements include, but
are not limited to, the factors set forth herein under the headings Business,
Risk Factors and Managements Discussion and Analysis of Financial Condition
and Results of Operations. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason.

---



PART I

Item 1. Business

(a) General Development of Business

SED
International Holdings, Inc., a Georgia corporation (SED Holdings), and its
wholly-owned operating subsidiary, SED International, Inc., a Georgia
corporation (SED International) (Collectively, SED Holdings and its
subsidiaries, including SED International, are referred to herein as SED,
Company, we, our or us), were both initially incorporated in Delaware
in 1986 to take over the operations of the business of Southern Electronics
Distributors, Inc., a Georgia corporation engaged in the wholesale distribution
of consumer electronic products. In fiscal 1999, both SED Holdings and SED
International, reincorporated as Georgia corporations.

SED
is a distributor of microcomputer products, including mass storage, imaging,
display, wireless products and consumer electronics throughout the United
States and Latin America. SED offers an active base of over 6,500 reseller
customers and a broad inventory of more than 3,500 products from approximately
170 vendors (direct and indirect), including such market leaders as Acer,
Epson, Hewlett-Packard, Microsoft, Seagate and Western Digital, through a
dedicated sales force. SED distributes products in the United States from its strategically
located warehouses in Atlanta, Georgia; Miami, Florida; City of Industry,
California; and Richardson, Texas; and Tampa, Florida. SED 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.

In
2004, SED re-entered the wholesale consumer electronics distribution business.
In addition to its current customers, SED offers consumer electronic products
to the rent-to-own, e-commerce and retail channels. SED is offering consumer
electronics products from leading vendors including Olevia, Panasonic, Pioneer,
Syntax, and Westinghouse.

SED
also distributes wireless telephone products in the United States. SED is an
indirect distributor for leading wireless telephone product vendors such as LG
Infocomm, Motorola, Nokia, and Samsung. In fiscal 2007, SEDs net sales of
microcomputer products, including handling revenue, generated approximately
86.8% of SEDs total net sales, consumer electronics products represented 11.3%
and wireless telephone products represented the remaining 1.9%.

In
February 2003, SED approved a plan to discontinue commercial operations of its
Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda.
Accordingly, since the third quarter of fiscal 2003, the operating results of
SED International do Brasil Distribuidora, Ltda. have been classified as a
discontinued operation for all periods presented in SEDs consolidated
statements of operations. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Discontinued Operations and
Note 12 of SEDs Consolidated Financial Statements.

2

---



(b) Financial Information about Industry
Segments

SED
operates in only one business segment. Revenues generated from operations,
measures of profit or loss or loss and total assets of SED are reported in
Item 8. Financial Statements and Supplementary Data.

(c) Narrative Description of Business

Products and Vendors

SED
offers its customers a broad inventory of more than 3,500 products from
approximately 170 vendors (direct and indirect), including such market leaders
as Acer, Epson, Hewlett-Packard, Microsoft, Seagate and Western Digital. SED is
a distributor for leading consumer electronics product vendors such as Olevia,
Panasonic, Pioneer, Syntax and Westinghouse. SED is an indirect distributor for
leading wireless telephone product vendors such as LG Infocomm, Motorola,
Nokia, and Samsung. Microcomputer related products, including handling revenue,
accounted for $354.6 million or 86.8% of SEDs net sales for fiscal 2007,
$350.4 million or 85.0% of SEDs net sales for fiscal 2006, $312.0 million or
81.9% of net sales in fiscal 2005. Approximately $46.2 million or 11.3% of
SEDs net sales for fiscal 2007, $32.5 million or 7.9% of SED net sales for
fiscal 2006, $23.4 million or 6.1% of SEDs net sales for fiscal 2005,
consisted of consumer electronics. Approximately $7.6 million or 1.9% of SEDs
net sales for fiscal 2007, $29.5 million or 7.1% of SEDs net sales for fiscal
2006, $45.5 million or 12.0% of net sales for fiscal 2005, consisted of
wireless telephone products. SED continually evaluates its product mix and
inventory levels and maintains flexibility by adjusting its product offerings
based on demand. SEDs vendors generally warrant the products distributed by
SED and allow the return of defective products.

As
a distributor, SED incurs the risk that the value of its inventory will be
affected by industry-wide forces. Rapid technological change is commonplace in
the microcomputer, consumer electronics 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, SED 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 SED can
negotiate such provisions in each of its agreements or that such industry
practice will continue.

SED
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 2007, 2006, and 2005, Acer
accounted for 18.5%, 19.9%, and 15.4%, respectively, and Hewlett-Packard
accounted for 20.0%, 18.6% and 16.1%, respectively, of SEDs purchases. Maxtor
accounted for 11.3% in fiscal 2006, and 16.3% in fiscal 2005, of SEDs
purchases.

There
can be no assurance that SED will be able to maintain its existing vendor
relationships or secure additional vendors as needed. SED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 SED is permitted to distribute
the products. The loss of a major vendor, the deterioration of SED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 SED to establish good relationships with
major new vendors could have a material adverse effect on SEDs business,
financial condition and results of operations.

Product
orders typically are processed and shipped from SED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. SED 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 SEDs Colombia and Argentina facilities. Generally, SEDs
inventory level of products has been adequate to permit SED to be responsive to
its customers purchase requirements. From time to time, however, SED
experiences temporary shortages of certain products as its vendors experience
increased demand or manufacturing difficulties with respect to their products,
resulting in smaller allocations of such products to SED.

3

---



Sales and Marketing

SEDs
sales are generated by a telemarketing sales force, which, on June 30, 2007,
consisted of approximately 135 people in sales offices located in Atlanta,
Georgia; Miami, Florida; City of Industry, California; Richardson, Texas;
Tampa, Florida; Bogota, Colombia and Buenos Aires, Argentina. Of the total number
of salespersons on June 30, 2007, 80 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.
SEDs Atlanta sales office maintains a separate telemarketing sales force for
the sale of wireless telephone products to retailers and authorized dealer
agents located throughout the United States.

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. SEDs salespeople
are able to analyze quickly SED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.

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

Compensation
incentives are provided to SED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 SED. Customer communication is also conducted via electronic
mail and instant messaging. In addition, salespeople initiate calls to
introduce SED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, SED regularly sponsors shows for its resellers where it
demonstrates new product offerings and discusses industry developments. Also,
SEDs in-house marketing staff prepares catalogs that list available
microcomputer, consumer electronics and wireless telephone products and
routinely produces marketing materials and advertisements. In addition, the
in-house marketing staff promotes products and services through SEDs Internet
web page (www.sedonline.com)
providing 24-hour access to on-line order entry. SED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.

SED
prides itself on being service oriented and has a number of on-going
value-added services intended to benefit both SEDs vendors and reseller
customers. For example, SED 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 SED. SED 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 SED.

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

SED
offers various credit terms including, open account, prepay, credit card,
third-party floor plan and COD to qualifying customers. SED 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, SED participates in national and international credit
associations that exchange credit rating information on

4

---



customers. SED
reviews customers credit worthiness based on sales trends, industry trends in
geography, and other factors. SED establishes reserves for estimated credit
losses in the normal course of business.

Customers

SED
serves an active, nonexclusive customer base of over 6,500 customers of
microcomputer, consumer electronics and wireless handset products. Customers
include value-added resellers, corporate resellers, retailers and etailers. SED
believes the multi-billion dollar microcomputer, consumer electronics and
wireless telephone wholesale distribution industries serve customers primarily
on a nonexclusive basis, which provides SED with significant growth
opportunities. During fiscal 2007, no single customer accounted for more than
10% of the total net sales of SED. SED believes that most of its customers rely
on distributors as their principal source of microcomputer, consumer
electronics and wireless telephone products.

Competition

The
microcomputer, consumer electronics 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, SED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 SED also
requires SED to react quickly and appropriately to short and long-term trends,
price its products competitively, increase its net sales and maintain economies
of scale.

SEDs
competitors include regional, national and international microcomputer,
consumer electronics and wireless distributors, many of which have
substantially greater technical, financial and other resources than SED, 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, Bell Micro, D&H, ASI, Brightpoint, Inc., and Synnex
Information Technologies, Inc. in the United States; and MPS Mayorista in
Colombia and Util-Of S.A.C.I. in Argentina. From time to time, these competitors
may be used as vendors.

Seasonality

SED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.

Employees

As
of June 30, 2007, SED had 358 full-time employees, 135 of whom were engaged in
telemarketing and sales, 112 in administration and 111 in warehouse management
and shipping. Management believes SEDs relations with its employees are good
and SED has never experienced a strike or work stoppage. There are no
collective bargaining agreements covering any of SEDs employees.

5

---



(d) Financial Information about Foreign and
Domestic Operations and Export Sales

During
the fiscal year ended June 30, 1998, SED began selling directly to customers in
Colombia through SEDs facilities in Bogota, Colombia. During the fiscal year
ended June 30, 1999, SED also began selling directly to customers in Argentina
through SEDs facilities in Buenos Aires. Sales are denominated in the
respective local currencies of these countries. For the fiscal years ended June
30, 2007, 2006 and 2005, approximately 39.5%, 34.1% and 29.8%, respectively, of
SED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 9 and
12 to the consolidated financial statements of SED for additional information
concerning SEDs domestic and foreign operations.

(e) Available Information

SEDs
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments are available on the U.S. Securities and Exchange
Commissions internet website at www.sec.gov.

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

The
public may read and copy any materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. As noted above, the SEC also maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers such as us that file electronically with
the SEC.

|         |             
|-------- | ------------
|Item 1A. | Risk Factors

The
following are certain risk factors that could affect our business, financial
position and results of operations. These risk factors should be considered in
connection with evaluating the forward-looking statements contained in this
Annual Report on Form 10-K because these factors could cause the actual results
and conditions to differ materially from those projected in the forward-looking
statements. Before you buy our common stock or other securities, you should
know that making such an investment involves risks, including the risks
described below. The risks that have been highlighted below are not the only
risks of our business. If any of the risks actually occur, our business,
financial condition or results of operations could be negatively affected. In
that case, the trading price of our common stock or other securities could
decline, and you may lose all or part of your investment. Certain risk factors
that could cause actual results to differ materially from our forward-looking
statements include the following:

Risks
and Uncertainties  SED 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 sales and profit margins and reducing
administrative and overhead costs. There is no assurance SED will be successful
in connection with these efforts. Failure to effectively improve operating
metrics could materially adversely affect SEDs profitability and financial
condition.

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

| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuation of distribution agreements 
 SED operates under formal but cancelable distribution agreements with certain
 of its suppliers. If these agreements were cancelled, SED would be forced to
 obtain its products through wholesalers. This would reduce SEDs profit
 margin on the affected products.
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | Availability of certain products  From time
 to time, due to production limitations or heavy demand, SED may only be able
 to purchase a limited amount of popular products from its suppliers.                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | Product margins  SED operates in a very
 competitive business environment. Accordingly, product margins are
 continually under pricing pressure. From time to time, SED receives price
 protection and                                                                                                          

6

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | other
 considerations from its vendors. While SED has no reason to believe such
 vendor consideration will not continue, no assurance can be given that such
 price protection and other considerations will continue to be received in the
 future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Vendor credit  SED significantly relies on
 its suppliers for trade credit. Changes by the suppliers in their credit
 terms could force SED to obtain less favorable financing for its purchases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Product obsolescence  SED offers a broad
 line of products that are subject to fast technological obsolescence, which
 increases the risk of inventory markdown. Through its vendor agreements, SED
 has certain stock return privileges, which vary from supplier to supplier.
 SED believes stock return programs will continue in the future, but can give
 no assurance about whether these programs will continue.                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Consumer electronicsSED has re-entered into the distribution
 of consumer electronics, which is highly competitive. Some of SEDs
 competitors have substantially greater financial, marketing and distribution
 resources than SED and SED may be unable to successfully compete with
 these companies. Failure to successfully penetrate this market could have an
 adverse impact on SEDs cash flows, financial position and operating results.                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Credit decisions and losses  SED maintains
 an experienced customer credit staff and relies on customer payment history
 and third party data to make customer credit decisions. Nevertheless, SED may
 experience customer credit losses in excess of its expectations. SED
 maintains credit insurance policies for certain customers located in the
 United States and select Latin American countries (subject to certain terms
 and conditions). However, the terms of the credit insurance agreement require
 SED to maintain certain minimum standards and policies with respect to
 extending credit to customers. If SED does not adhere to such policies, the
 insurance companies may not pay claims submitted by SED.              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Proportionate control of general and administrative costs
  SED attempts to control its overhead costs to keep such costs in line with
 its sales volume. As sales volumes fluctuate, SED must continually monitor
 its overhead costs and make adjustments timely and appropriately. Failure to
 control overhead costs could have an adverse impact on SEDs cash flows,
 financial position and operating results.                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Uncertain and possibly volatile economic and political environment in
 Latin America  The general economic and political
 environment in both of the countries in which SED operates in Latin America
 is uncertain and, at times, volatile. As a result of these conditions, SED
 could experience unexpected costs from its operations in these countries.                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Availability of credit facilities  SED has
 operated under a formal credit facility with a bank for many years that was
 subject to certain collateral limitations and contained certain covenants.
 During September 2005 a new credit facility was obtained. No assurance can be
 given that SED 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 SEDs
 ability to obtain vendor credit and the overall business operations. The
 principal credit facility, which expires in September 2011, is further
 described in Note 4 to SEDs Consolidated Financial Statements.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Cash flows While not presently expected,
 SEDs continued operations in Latin America may require additional capital
 infusion (in the form of advance notes from the parent company or other debt
 borrowings by a subsidiary). The credit facility restricts the future funding
 by the parent company of Latin American operations. Operating needs and
 regulatory matters may restrict SEDs ability to repatriate cash flows from
 the foreign subsidiaries to the United States.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Competition SED
 operates in a highly competitive environment. The computer wholesale
 distribution industry is characterized by intense competition, based
 primarily on product availability, credit availability, price, speed of
 delivery, quality and depth of product lines and training, service and
 support. Weakness in demand in the market intensifies the competitive
 environment in which the SED operates. SED competes with a variety of
 regional, national and international wholesale distributors, some of which
 have greater financial resources than SED. SED also faces competition from
 companies                                                                                                                  

7

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | entering or
 expanding into the logistics and product fulfillment and e-commerce supply
 chain services market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Loss of Significant Customers
 Customers do not have an obligation to make purchases from SED. In some
 cases, SED has made adjustments to its systems, vendor offerings, and
 processes, and made staffing decisions, in order to accommodate the needs of
 a significant customer. In the event a significant customer decides to make
 its purchases from another distributor, experiences a significant change in
 demand from its own customer base, becomes financially unstable, or is
 acquired by another company, SEDs receipt of revenues may be significantly
 affected, resulting in an adverse effect on SEDs business.                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Dependence on Information Systems
 SED is highly dependent upon its internal computer and telecommunication systems
 to operate its business. There can be no assurance that SEDs information
 systems will not fail or experience disruptions, that SED will be able to
 attract and retain qualified personnel necessary for the operation of such
 systems, that SED will be able to expand and improve its information systems,
 that SED will be able to convert to new systems efficiently, or that SED will
 be able to integrate new programs effectively with its existing programs. Any
 of such problems could have an adverse effect on SEDs business.                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Dependence on Independent Shipping
 Companies SED relies on arrangements with
 independent shipping companies, such as Federal Express and United Parcel
 Service, for the delivery of its products from vendors and to customers. The failure
 or inability of these shipping companies to deliver products, or the
 unavailability of their shipping services, even temporarily, could have a
 material adverse effect on SEDs business. SED may also be adversely affected
 by an increase in freight surcharges due to rising fuel costs and added
 security. There can be no assurance that SED will be able to pass along the
 full effect of an increase in these surcharges to its customers.                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Foreign Currency Exchange Risks; Exposure
 to Foreign Markets SED conducts business in
 countries outside of the United States, which exposes SED to fluctuations in
 foreign currency exchange rates. SED may enter into short-term forward
 exchange or option contracts to hedge this risk; nevertheless, fluctuations
 in foreign currency exchange rates could have an adverse effect on SEDs
 business. In particular, the value of SEDs equity investment in foreign
 countries may fluctuate based upon changes in foreign currency exchange
 rates. These fluctuations, which are recorded in a cumulative translation
 adjustment account, may result in losses in the event a foreign subsidiary is
 sold or closed at a time when the foreign currency is weaker than when SED
 initially invested in the country.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | SEDs
 international operations are subject to other risks such as the imposition of
 governmental controls, export license requirements, restrictions on the
 export of certain technology, political instability, trade restrictions,
 tariff changes, difficulties in staffing and managing international
 operations, changes in the interpretation and enforcement of laws (in
 particular related to items such as duty and taxation), difficulties in
 collecting accounts receivable, longer collection periods and the impact of
 local economic conditions and practices. There can be no assurance that these
 and other factors will not have an adverse effect on SEDs business.                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Changes in Income Tax and Other Regulatory
 Legislation SED operates in compliance with
 applicable laws and regulations. When new legislation is enacted with minimal
 advance notice, or when new interpretations or applications of existing laws
 are made, SED may need to implement changes in its policies or structure. SED
 makes plans for its structure and operations based upon existing laws and
 anticipated future changes in the law.                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | SED is
 susceptible to unanticipated changes in legislation, especially relating to
 income and other taxes, import/export laws, hazardous materials and
 electronic waste recovery legislation, and other laws related to trade,
 accounting, and business activities. Such changes in legislation, both
 domestic and international, may have a significant adverse effect on SEDs
 business.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Changes in Accounting Rules
 SED prepares its financial statements in conformity with accounting
 principles generally accepted in the United States. These accounting
 principles are subject to interpretation by the Financial Accounting
 Standards Board, the Securities and Exchange Commission,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

8

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the American
 Institute of Certified Public Accountants and various other bodies formed to
 interpret and create appropriate accounting policies. A change in these
 policies or a new interpretation of an existing policy could have a
 significant effect on our reported results and may affect our reporting of
 transactions before a change is announced.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Exposure to Natural Disasters, War, and
 Terrorism SEDs headquarters facilities and some
 of its logistics centers as well as certain vendors and customers are located
 in areas prone to natural disasters such as floods, hurricanes, tornadoes, or
 earthquakes. In addition, demand for SEDs services is concentrated in major
 metropolitan areas. Adverse weather conditions, major electrical failures or
 other natural disasters in these major metropolitan areas may disrupt SEDs
 business should its ability to distribute products be impacted by such an
 event.                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   | SED operates
 in multiple geographic markets, several of which may be susceptible to acts
 of war and terrorism. SEDs business could be adversely affected should its
 ability to distribute products be impacted by such events.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   | SED and many
 of its suppliers receive parts and products from Asia and operate in many
 parts of the world that may be susceptible to disease or epidemic that may
 disrupt SEDs ability to receive or deliver products or other disruptions in
 operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Volatility of Common Stock Price
 Because of the foregoing factors, as well as other variables affecting SEDs
 operating results, past financial performance should not be considered a
 reliable indicator of future performance, and investors should not use
 historical trends to anticipate results or trends in future periods. In
 addition, SEDs participation in a highly dynamic industry often results in
 significant volatility of the common stock price. Some of the factors that
 may affect the market price of the common stock, in addition to those
 discussed above, are changes in investment recommendations by securities
 analysts, changes in market valuations of competitors and key vendors, and
 fluctuations in the overall stock market, but particularly in the technology
 sector.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Our Common
 Stock Has Been Thinly Traded, Liquidity Is Limited
 Our common stock is now traded on the Pink Sheets® LLC over the counter
 market, which provides significantly less liquidity than a securities
 exchange (such as the American or New York Stock Exchange) or an automated
 quotation system (such as the Nasdaq National Market or SmallCap Market).
 Often there is currently a limited volume of trading in our common stock, and
 on many days there has been no trading activity at all. Purchasers of shares
 of our common stock may find it difficult to resell their shares at prices
 quoted in the market or at all.                                                                                                                                                                       

|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments

None.

Item 2. Properties

SED
maintains its executive offices, Atlanta sales and warehouse facility, at 4916
North Royal Atlanta Drive in Tucker, Georgia. SED leases its executive,
administrative, sales and warehouse office from Diamond Chip Group, L.L.C., a
Georgia limited liability company owned by certain minority shareholders and
officers of SED, previously doing business as Royal Park Company, a Georgia
general partnership. The lease commenced in April 1999 and expires in September
2009. The facility consists of approximately 30,000 square feet, with an annual
rental rate of approximately $302,000 effective October 1, 2005, with annual
increases of three percent through September 30, 2009. SED has a right of first
refusal to purchase the facility should it be offered for sale.

SED
maintains additional warehouse facilities in City of Industry, California;
Miami, Florida; Richardson, Texas; Tampa, Florida; Bogota, Colombia and Buenos
Aires, Argentina.

SED
leases its sales and distribution facility in Miami, Florida under a lease
agreement due to expire on March 31, 2012. This facility consists of
approximately 31,300 square feet and the annual rental rate is approximately
$252,000 effective April 1, 2007.

9

---



SED
also leases an approximately 23,100 square foot facility in City of Industry,
California. The City of Industry facility serves as a distribution center and
sales center for SED. The annual rental rate under the lease is approximately
$187,000. Pursuant to its terms, the lease will expire on April 30, 2010.

SED
has 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 SED. Aggregate space is
approximately 5,300 square feet. Payments total approximately $100,000
annually. The leases expire at various dates until May, 2010.

On
December 1, 1997, SED began leasing an approximately 20,000 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 SED. The annual rental rate under
the lease is approximately $67,000 per year. The lease will expire on June 30,
2008.

On
May 1, 2003, SED began leasing an approximately 25,700 square feet facility in
Richardson, Texas. The facility serves as a sales office and distribution
center to service SEDs customers in the Dallas area. SED is obligated for
lease payments of approximately $116,000 per year through July 31, 2009.

On
February 1, 2007, SED renewed a lease for approximately 17,400 square feet of
distribution warehouse space in Tucker, Georgia. SEDs annual rental obligation
under this lease is approximately $57,000 through January 31, 2008.

On
October 1, 2006, SED began leasing an approximately 2,400 square foot sales and
distribution facility in Tampa, Florida. SEDs annual rental obligation under
this lease is approximately $18,000 through April 30, 2008.

Item 3. Legal
Proceedings

On March
15, 2007, Mark Diamond (Mr. Diamond) filed a suit in the Superior Court of Fulton County, State
of Georgia, captioned Mark Diamond v. SED International Holdings, Inc. et
al., Civil Action file no. 2007-CV-131027. From 1999 to 2005 Mr. Diamond
was president and chief operating officer, and from 2003 to 2005 he was also
chief executive officer of SED Holdings; from 2004 to 2005 he was president,
chief executive and chief operating officer of SED International; and from 1996
to 2005 he was also a director of SED Holdings. Prior to filing this lawsuit,
on March 5, 2007, Mr. Diamond terminated a prior lawsuit he implemented against
SED Holdings on November 3, 2005 in the Superior Court of Dekalb County, State of Georgia captioned Mark Diamond
vs. SED International Holdings, Inc., et al., Civil Action file no.
05-CV-12452-7. Similar to that lawsuit, in this lawsuit, Mr. Diamond alleges
that SED Holdings breached his employment agreement and makes multiple other
claims pursuant to which he is demanding attorneys fees and an award of
monetary damages under the theory of quantum meruit. Mr. Diamond claims he is
due wages and other compensation in the amount of approximately $1.7 million,
un-reimbursed expenses of approximately $85,000, director fees of an
unspecified total, interest on all such amounts, and reimbursement of legal
fees and expenses of an unspecified amount. The parties are currently engaged
in written discovery. SED Holdings believes that it has meritorious
defenses and will vigorously defend
this matter.

On
June 19, 2006 SED Holdings through its subsidiary, SED International,
instituted an action in the Superior Court of Fulton County, State of Georgia
captioned SED International, Inc. vs. Michael Levine, Civil Action file no.
2006-CV-118591. In the action, SED Holdings asserts that Mr. Levine breached
the terms of the Termination Agreement with SED International and requests that
the court grant injunctive relief. In response, Mr. Levine has denied SED
Holdings assertions, filed a third party complaint against SED Holdings and
asserted counterclaims against SED International, alleging breach and
infliction of emotional distress. In connection with the third party complaint
and the counterclaims, Mr. Levine has asked that the court award him costs,
fees and punitive damages. In October 2006, SED Holdings filed an Answer to his
third party complaint and discovery commenced. Since that time, Mr. Levine has
dismissed, without prejudice, all counterclaims filed by him against SED
International and discovery has essentially been completed. SED Holdings is
vigorously prosecuting this action and has filed a motion for summary judgment
to his third party complaint.

On
August 19, 2005, Mr. Diamond sent a complaint (received August 24, 2005)
against SED International, SED Holdings operating subsidiary, with the United
States Department of Labor, Case No. 2006-SOX-000444,

10

---



alleging that
SED International violated the employee protection provisions of Title VIII of
the Sarbanes-Oxley Act of 2002 when it terminated him from his executive
officer positions. He has asked the Department of Labor to award him damages in
the form of back-pay (rate of $375,000 per year plus benefits), attorney fees
and expenses, and reinstatement as an executive officer of SED International.
On December 13, 2005 the Department of Labor issued a decision in favor of SED
International. Mr. Diamond appealed that decision and SED International filed a
motion for summary judgment in its favor. In October 2006, the Department of
Labor denied the motion for summary judgment in connection with his appeal. A
trial was held on the issues from October 31, 2006 through November 3, 2006. In
connection with the trial, both sides respectively submitted post-hearing
briefs in January, March and July 2007. The parties are currently waiting for a
ruling from the Administrative Law Judge. SED International believes that it
has meritorious defenses to his complaint and is vigorously defending this
matter.

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

No
matters were submitted to a vote of SEDs shareholders during the fourth
quarter of fiscal 2007. Subsequently, in August 2007, SED held a Special
Meeting of Shareholders and filed on August 23, 2007 a Current Report on Form
8-K to disclose the voting results. The information contained in such report is
incorporated herein by reference.

PART II

|        |                                                                                                             
|------- | ------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Companys Common Stock, Related Shareholder Matters and Issuer
Purchases of Equity Securities

SEDs
common stock is not listed on any stock exchange. SEDs common stock is
currently quoted on the Pink Sheets over-the-counter electronic quotation
service (Pink Sheets) under the symbol SECX. The following table sets forth
the high and low bid information for the common stock for each quarter within
the last two fiscal years, as reported by the Pink Sheets. The bid information
reflects inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.

|                 |  |           |      |     |   |     | 
|---------------- |  | --------- | ---- | --- | - | --- | 
|                 |  | Bid Price |     
|                 |  |           |     
|                 |  | High      |      | Low |  
|                 |  |           |      |     |  
|Fiscal year 2007 |  |           |      |     |   |     | 
|First            |  | $         | 1.00 |     | $ | .55 | 
|Second           |  |           | 1.40 |     |   | .63 | 
|Third            |  |           | 1.40 |     |   | .85 | 
|Fourth           |  |           | 1.60 |     |   | .92 | 
|Fiscal year 2006 |  |           |      |     |   |     | 
|First            |  |           | .55  |     |   | .35 | 
|Second           |  |           | .53  |     |   | .35 | 
|Third            |  |           | .80  |     |   | .39 | 
|Fourth           |  |           | 1.03 |     |   | .55 | 

As
of August 31, 2007, the closing bid price per share for SED common stock, as
reported on the Pink Sheets was $1.30 and SED had approximately 480
shareholders of record.

SED
has never declared or paid cash dividends on its common stock. SED 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 SED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 SED are parties to a revolving credit agreement
which contains certain financial covenants that may impact SEDs ability to pay
dividends in the event SED 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.

Information
concerning SEDs equity compensation plans required by Item 201(d) of
Regulation S-K appears in Part III, Item 12 hereof and in Note 7 to SEDs
Consolidated Financial Statements.

11

---



FIVE YEAR PERFORMANCE GRAPH

The
following graph presents a comparison of the cumulative total shareholder
return on SEDs common stock with the Russell Microcap Index and the average
performance of a group consisting of SEDs peer corporations on a line of
business basis. The companies comprising the peer issuers group are Arrow
Electronics, Inc; Avnet, Inc.; Ingram Micro Inc.; Merisel, Inc.; and Tech Data
Corporation. This graph assumes that $100 was invested, on June 30, 2002, on
SEDs common stock and in the other indices and that all dividends were
reinvested. The peer corporations were weighted on a market capitalization
basis at the time of each reported data point. The stock price performance
shown below is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR
CUMULATIVE TOTAL RETURN*Among SED International
Holdings, Inc., The Russell MicroCap Index
And A Peer Group

(LINE GRAPH)

| |                                                                                    
| | -----------------------------------------------------------------------------------
| | *
 $100 invested on 6/30/02 in stock or index-including reinvestment of
 dividends.
| | Fiscal
 year ending June 30.                                                       

|                                 |  |                    |        |              |  |              |  |              |        |              |  |              |  |  |        |  |  |        | 
|-------------------------------- |  | ------------------ | ------ | ------------ |  | ------------ |  | ------------ | ------ | ------------ |  | ------------ |  |  | ------ |  |  | ------ | 
|                                 |  | Base
 Period
 6/02 |        | Return
 6/03 |  | Return
 6/04 |  | Return
 6/05 |        | Return
 6/06 |  | Return
 6/07 | 
|                                 |  |                    |        |              |  |              |  |              |        |              |  |              | 
|SED INTERNATIONAL HOLDINGS, INC. |  |                    | 100.00 |              |  | 73.72        |  |              | 156.11 |              |  | 36.43        |  |  | 85.00  |  |  | 138.77 | 
|RUSSELL MICROCAP                 |  |                    | 100.00 |              |  | 104.78       |  |              | 145.62 |              |  | 151.71       |  |  | 173.37 |  |  | 198.00 | 
|PEER GROUP                       |  |                    | 100.00 |              |  | 69.92        |  |              | 110.01 |              |  | 110.85       |  |  | 118.91 |  |  | 160.68 | 
|                                 |  |                    |        |              |  |              |  |              |        |              |  |              |  |  |        |  |  |        | 

12

---



Item 6.Selected Financial Data Five Year Financial Summary

|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|------------------------------------------------------------ |  | -------------------- | ----------- | ---- | - | ----------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                             |  | Year
 ended June 30, |            
|                                                             |  |                      |            
|                                                             |  | 2007                 |             | 2006 |   | 2005        |  | 2004 |             | 2003 |  
|                                                             |  |                      |             |      |   |             |  |      |             |      |  
|Statement of operations data:                                |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Net sales                                                    |  | $                    | 408,435,000 |      | $ | 412,371,000 |  | $    | 380,864,000 |      | $ | 371,741,000 |   | $ | 413,148,000 |  
|Cost of sales                                                |  |                      | 386,515,000 |      |   | 390,968,000 |  |      | 364,091,000 |      |   | 355,168,000 |   |   | 393,724,000 |  
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Gross profit                                                 |  |                      | 21,920,000  |      |   | 21,403,000  |  |      | 16,773,000  |      |   | 16,573,000  |   |   | 19,424,000  |  
|Selling, general and administrative expenses                 |  |                      | 20,254,000  |      |   | 17,958,000  |  |      | 17,195,000  |      |   | 18,536,000  |   |   | 24,961,000  |  
|Depreciation and amortization expense                        |  |                      | 413,000     |      |   | 422,000     |  |      | 868,000     |      |   | 1,233,000   |   |   | 1,614,000   |  
|Foreign currency transaction (gain) loss                     |  |                      | (876,000    | )    |   | 512,000     |  |      | (244,000    | )    |   | 14,000      |   |   | 581,000     |  
|Loss (gain) on disposal of assets                            |  |                      |            |      |   |            |  |      | 31,000      |      |   | (30,000     | ) |   | (3,000      | )
|Impairment charges                                           |  |                      |            |      |   |            |  |      |            |      |   |            |   |   | 39,000      |  
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Operating income (loss)                                      |  |                      | 2,129,000   |      |   | 2,511,000   |  |      | (1,077,000  | )    |   | (3,180,000  | ) |   | (7,768,000  | )
|Interest expense  net                                       |  |                      | 1,574,000   |      |   | 1,389,000   |  |      | 691,000     |      |   | 246,000     |   |   | 470,000     |  
|Other income  net                                           |  |                      |            |      |   |            |  |      |            |      |   |            |   |   | 10,513,000  |  
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Income (loss) before income taxes from continuing
operations |  |                      | 555,000     |      |   | 1,122,000   |  |      | (1,768,000  | )    |   | (3,426,000  | ) |   | 2,275,000   |  
|Income tax expense                                           |  |                      | 1,368,000   |      |   | 931,000     |  |      | 680,000     |      |   | 801,000     |   |   | 613,000     |  
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|(Loss) income from continuing operations                     |  |                      | (813,000    | )    |   | 191,000     |  |      | (2,448,000  | )    |   | (4,227,000  | ) |   | 1,662,000   |  
|(Loss) income from discontinued operations                   |  |                      | (70,000     | )    |   | 193,000     |  |      | (154,000    | )    |   | (42,000     | ) |   | (4,742,000  | )
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Net (loss) income                                            |  | $                    | (883,000    | )    | $ | 384,000     |  | $    | (2,602,000  | )    | $ | (4,269,000  | ) | $ | (3,080,000  | )
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Basic and diluted (loss) income per share:                   |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|From continuing operations                                   |  | $                    | (.21        | )    | $ | .05         |  | $    | (.63        | )    | $ | (1.10       | ) | $ | 0.43        |  
|From discontinued operations                                 |  |                      | (.02        | )    |   | .05         |  |      | (.04        | )    |   | (.01        | ) |   | (1.24       | )
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Basic and diluted (loss) income per share                    |  | $                    | (.23        | )    | $ | .10         |  | $    | (.67        | )    | $ | (1.11       | ) | $ | (0.81       | )
|                                                             |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Weighted average number of shares outstanding:               |  |                      |             |      |   |             |  |      |             |      |   |             |   |   |             |  
|Basic                                                        |  |                      | 3,877,000   |      |   | 3,872,000   |  |      | 3,871,000   |      |   | 3,856,000   |   |   | 3,816,000   |  
|Diluted                                                      |  |                      | 3,877,000   |      |   | 3,884,000   |  |      | 3,871,000   |      |   | 3,856,000   |   |   | 3,816,000   |  

|                     |  |              |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|-------------------- |  | ------------ | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|                     |  | At June
 30, |           
|                     |  |              |           
|                     |  | 2007         |            | 2006 |   | 2005       |  | 2004 |            | 2003 |  
|                     |  |              |            |      |   |            |  |      |            |      |  
|Balance sheet data:  |  |              |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Working capital      |  | $            | 21,055,000 |      | $ | 20,528,000 |  | $    | 20,632,000 |      | $ | 22,001,000 |  | $ | 25,514,000 | 
|Total assets         |  |              | 93,222,000 |      |   | 75,315,000 |  |      | 70,783,000 |      |   | 69,219,000 |  |   | 86,170,000 | 
|Shareholders equity |  |              | 22,159,000 |      |   | 21,469,000 |  |      | 21,823,000 |      |   | 23,606,000 |  |   | 27,716,000 | 

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 SED 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

During
fiscal 2007, SEDs consolidated net sales decreased approximately 1.0% when
compared to fiscal 2006. This can be attributed to a 9.1% decrease in domestic
sales offset by a 14.7% increase in Latin America and export sales. Sales in
Latin America and export sales from the United States represented 39.5% of
sales in fiscal 2007 compared to 34.1% in fiscal 2006.

The
revenue increase in Latin America and export sales from fiscal 2006 along with
product mix changes resulted in an improvement of in gross profit during fiscal
2007. Gross profit as a percentage of net sales increased to 5.4% in fiscal
2007, compared to 5.2% in fiscal 2006.

Selling,
general and administrative expenses, excluding depreciation and amortization
expense, increased to $20.3 million or 5.0% of net sales in 2007 compared to
$18.0 million or 4.4% in fiscal 2006.

SED
had a net loss of $.9 million in fiscal 2007, compared to a net income of $.4
million in fiscal 2006. SED had a loss from discontinued operations of $70,000
in fiscal 2007 compared to a gain of $193,000 in fiscal 2006. Operating income
in Latin American subsidiaries was $3.2 million in fiscal 2007 and $2.1 million
in fiscal

13

---



2006 while
operating loss in the United States was $1.1 million in fiscal 2007 compared to
operating income of $.4 million in fiscal 2006.

SED
experienced a slight decline in net sales in fiscal 2007 compared to fiscal
2006 and recognized operating income in both fiscal 2007 and 2006. SED incurred
an operating loss in fiscal 2005. Company management is continuing to focus on
increasing sales and profit margins and reducing administrative and overhead
costs. There is no assurance SED will be successful in its efforts. Failure to
improve margins and reduce overhead could adversely affect SEDs profitability
and financial condition.

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Continuation of distribution agreements 
 SED operates under formal but cancelable distribution agreements with certain
 of its suppliers. If these agreements were cancelled, SED would be forced to
 obtain its products through wholesalers. This would reduce SEDs profit
 margin on the affected products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Availability of certain products  From time
 to time, due to production limitations or heavy demand, SED may only be able
 to purchase a limited amount of popular products from its suppliers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Product margins  SED operates in a very
 competitive business environment. Accordingly, product margins are
 continually under pricing pressure. From time to time, SED receives price
 protection and other considerations from its vendors. While SED has no reason
 to believe such vendor consideration will not continue, no assurance can be
 given that such price protection and other considerations will continue to be
 received in the future.                                                                                                                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Vendor credit  SED significantly relies on
 its suppliers for trade credit. Changes by the suppliers in their credit
 terms could force SED to obtain less favorable financing for its purchases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Product obsolescence  SED offers a broad
 line of products that are subject to fast technological obsolescence, which
 increases the risk of inventory markdown. Through its vendor agreements, SED
 has certain stock return privileges, which vary from supplier to supplier.
 SED believes stock return programs will continue in the future, but can give
 no assurance about whether these programs will continue.                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Consumer Electronics SED has entered into
 the distribution of consumer electronics in fiscal 2004, which is highly
 competitive. Some of SEDs competitors have substantially greater financial,
 marketing and distribution resources than SED and SED may be unable to
 successfully compete with these companies. Failure to successfully penetrate
 this market could have an adverse impact on SEDs cash flows, financial
 position and operating results.                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Credit decisions and losses  SED maintains
 an experienced customer credit staff and relies on customer payment history
 and third party data to make customer credit decisions. Nevertheless, SED may
 experience customer credit losses in excess of its expectations. From time to
 time, depending on credit risk assessment and coverage costs, SED maintains
 credit insurance for customers located in the United States and maintains
 insurance in many Latin American countries (subject to certain terms and
 conditions). However, the terms of the credit insurance agreement require SED
 to maintain certain minimum standards and policies with respect to extending
 credit to customers. If SED does not adhere to such policies, the insurance
 companies may not pay claims submitted by SED.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Proportionate control of general and administrative costs
  SED attempts to control its overhead costs to keep such costs in line with
 its sales volume. As sales volumes fluctuate, SED 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 SED operates in Latin America is
 uncertain and, at times, volatile. As a result of these conditions, SED could
 experience unexpected costs from its operations in these countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Availability of credit facilities  SED
 operates under a formal credit facility with a bank obtained in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

14

---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | September
 2005. The agreement was amended in March 2007 to extend the maturity to
 September 2011. This credit facility is subject to certain collateral
 limitations and certain covenants. SED from time to time has violated the
 financial covenants associated with previous credit agreements, but was
 successful in negotiating waivers of such violations. No assurance can be
 given that SED 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 SEDs
 ability to obtain vendor credit and the overall business operations. The
 principal credit facility, which expires in September2011, is further
 described in Note 4 to SEDs Consolidated Financial Statements.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Cash flows  While not presently
 anticipated, SED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 September 2005 credit facility
 places certain restrictions on the future funding of Latin American operations
 (see Note 4 to SEDs Consolidated Financial Statements).                                                                                                                                                                                                                                                                                                                                                                                                                                           

For
SEDs domestic operations, all purchases and sales are denominated in United
States dollars. For SED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.

Results of Continuing Operations

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

|                                                              |  |                     |     |        |   |        |    
|------------------------------------------------------------- |  | ------------------- | --- | ------ | - | ------ | ---
|                                                              |  | Year Ended June 30, |    
|                                                              |  |                     |    
|                                                              |  | 2007                |     | 2006   |   | 2005   |    
|                                                              |  |                     |     |        |   |        |    
|Net sales                                                     |  | 100.00              | %   | 100.00 | % | 100.00 | %  
|Cost of sales, including buying and
 occupancy expense        |  | 94.63               | %   | 94.81  | % | 95.60  | %  
|                                                              |  |                     |     |        |   |        |    
|Gross profit                                                  |  | 5.37                | %   | 5.19   | % | 4.40   | %  
|Selling, general and administrative
 expenses                 |  | 4.96                | %   | 4.35   | % | 4.51   | %  
|Depreciation and amortization expense                         |  | .10                 | %   | .10    | % | .23    | %  
|Foreign currency transactions (gain) loss                     |  | (.21                | ) % | .13    | % | (.06   | ) %
|                                                              |  |                     |     |        |   |        |    
|Operating income (loss)                                       |  | .52                 | %   | .61    | % | (.28   | ) %
|Interest expense                                              |  | .38                 | %   | .34    | % | .18    | %  
|                                                              |  |                     |     |        |   |        |    
|Income (loss) before income taxes from
 continuing operations |  | .14                 | %   | .27    | % | (.46   | ) %
|Income tax expense                                            |  | .34                 | %   | .22    | % | .18    | %  
|                                                              |  |                     |     |        |   |        |    
|(Loss) income from continuing operations                      |  | (.20                | ) % | .05    | % | (.64   | ) %
|                                                              |  |                     |     |        |   |        |    

Fiscal 2007 Compared
to Fiscal 2006

Net
sales from continuing operations decreased 1.0%, or $4.0 million, to $408.4
million in fiscal 2007 compared to $412.4 million in fiscal 2006. Microcomputer
product sales, excluding handling revenue, increased 1.3% to $353.6 million
compared to $349.1 million in fiscal 2006 due to an increase in Hewlett Packard
product sales. Consumer electronics sales in fiscal 2007 increased 42.2% to
$46.2 million compared to $32.5 million in fiscal 2006 due to an increase in
sales of Westinghouse product and the addition of other consumer product lines.
Wireless revenues in fiscal 2007 declined 74.1% to $7.6 million compared to
$29.5 million in fiscal 2006 due to a decrease in LG Infocomm and Audiovox
products available to SED.

15

---



Net
sales from continuing operations decreased 1.0%, or $4.0 million, to $408.4
million in fiscal 2007 compared to $412.4 million in fiscal 2006. Information
concerning SEDs domestic and foreign sales is summarized below:

|                |  |                      |       |        |   |        |  |         |       |   |  |      |   
|--------------- |  | -------------------- | ----- | ------ | - | ------ |  | ------- | ----- | - |  | ---- | --
|                |  | Year Ended
 June 30, |       | Change |  
|                |  |                      |       |        |  
|                |  | 2007                 |       | 2006   |   | Amount |  | Percent |      
|                |  |                      |       |        |   |        |  |         |      
|                |  | ($ in Millions)      |      
|United
 States: |  |                      |       |        |   |        |  |         |       |   |  |      |   
|Domestic        |  | $                    | 247.1 |        | $ | 271.8  |  | $       | (24.7 | ) |  | (9.1 | %)
|Export          |  |                      | 73.9  |        |   | 64.1   |  |         | 9.8   |   |  | 15.3 | % 
|Latin
 America  |  |                      | 90.0  |        |   | 76.5   |  |         | 13.5  |   |  | 17.6 | % 
|Elimination     |  |                      | (2.6  | )      |   |       |  |         | (2.6  | ) |  | N/A  |   
|                |  |                      |       |        |   |        |  |         |       |   |  |      |   
|Consolidated    |  | $                    | 408.4 |        | $ | 412.4  |  | $       | (4.0  | ) |  | (1.0 | %)
|                |  |                      |       |        |   |        |  |         |       |   |  |      |   

Domestic
sales were $247.1 million and $271.8 million in fiscal 2007 and fiscal 2006,
respectively. The decrease in domestic sales was due to a $20.8 million
decrease in cellular products and an $11.0 million decrease in computer
products offset by a $7.1 million increase in consumer electronics products.
Latin America and export sales were $161.3 million and $140.6 million in fiscal
2007 and fiscal 2006, respectively. The increase in Latin America and export
sales was due to an increase in sales of computer products, printers and
consumable printer products.

Sales
of microcomputer products, including handling revenue, represented
approximately 86.8% of SEDs net sales in fiscal 2007 compared to 85.0% for
fiscal 2006. Sales of consumer electronics products accounted for approximately
11.3% of SEDs net sales in fiscal 2007 compared to 7.9% for fiscal 2006. Sales
of wireless telephone products accounted for approximately 1.9% of SEDs net
sales in fiscal 2007 compared to 7.1% for fiscal 2006. Sales of wireless
telephone products declined due to LG product availability issues caused by a
discontinued vendor relationship with LG.

Gross
profit increased $.5 million to $21.9 million in fiscal 2007, compared to $21.4
million in fiscal 2006. Gross profit as a percentage of net sales increased to
5.4% from 5.2% for fiscal 2007 compared to 2006. The gross profit increase
resulted from a more favorable mix of products sold in the United States which
offset a margin decline in Latin America. Gross profit in Latin America
declined principally due to changes in product cost related to unfavorable
exchange rates which caused product cost to rise. Overall, SED continues to
experience pricing pressure in selling products.

Selling,
general and administrative expenses, excluding depreciation and amortization
expense, for fiscal 2007 increased 12.8% to $20.3 million, compared to $18.0
million in fiscal 2006. These expenses as a percentage of net sales increased
to 5.0% in 2007 compared to 4.4% in fiscal 2006. The increase in selling,
general and administrative expenses was primarily due to several factors
including (i) an increase of approximately $130,000 in employee and contract
labor, (ii) an increase of $550,000 in credit and collection expense, (iii) an
increase of $440,000 in occupancy and security expense, and (iv) an increase of
$260,000 in professional fees. Other general expenses increased in fiscal 2007
compared to fiscal 2006 due to the non-recurrence of credits totaling $600,000
recorded in fiscal 2006 for sales tax and escheat credit settlements.

Depreciation
and an amortization was $.4 million in both fiscal 2007 and fiscal 2006.

SED
has significant U.S. dollar denominated liabilities in Latin American
subsidiaries. The revaluation resulted in foreign currency transaction gains
totaling approximately $.9 million in fiscal 2007 as compared to a loss of
approximately $.5 million in fiscal 2006. See Item 7A for further discussion.

Interest
expense was $1.6 million in fiscal 2007 compared to $1.4 million in fiscal
2006. This change resulted primarily from rising interest rates and a higher
average loan balance.

Income
tax expense was approximately $1.4 million in fiscal 2007 compared to $.9
million in fiscal 2006. At June 30, 2007, SED has a gross net operating loss
carried forward for U.S. federal tax purposes of approximately $63.0 million
and state tax purposes of approximately $53.6 million; expiring at various
dates through 2027. At

16

---



June 30, 2007
and 2006, SED has recorded valuation allowances for principally all deferred
tax assets, except for those relating to Intermaco S.R.L. (Argentina), as it is
not more likely than not that these assets will be realized.

Fiscal 2006 Compared
to Fiscal 2005

Net
sales from continuing operations increased 8.3%, or $31.5 million, to $412.4
million in fiscal 2006 compared to $380.9 million in fiscal 2005. Microcomputer
product sales, excluding handling revenue, increased 12.4% to $349.1 million
compared to $310.7 million in fiscal 2005 due to an increase in Acer and
Hewlett Packard product sales. Wireless revenues in fiscal 2006 declined 35.2%
to $29.5 million compared to $45.5 million in fiscal 2005 due to a decrease in
LG Infocomm and Audiovox products available to SED. Consumer electronics sales
in fiscal 2006 increased 38.9% to $32.5 million compared to $23.4 million in
fiscal 2005 due to an increase in sales of Panasonic product and the addition
of other consumer product lines.

Information
concerning SEDs domestic and foreign sales is summarized below:

|                |  |                      |       |        |   |        |  |         |      |  |  |      |  
|--------------- |  | -------------------- | ----- | ------ | - | ------ |  | ------- | ---- |  |  | ---- | -
|                |  | Year Ended
 June 30, |       | Change |  
|                |  |                      |       |        |  
|                |  | 2006                 |       | 2005   |   | Amount |  | Percent |     
|                |  |                      |       |        |   |        |  |         |     
|                |  | ($ in Millions)      |      
|United
 States: |  |                      |       |        |   |        |  |         |      |  |  |      |  
|Domestic        |  | $                    | 271.8 |        | $ | 267.5  |  | $       | 4.3  |  |  | 1.6  | %
|Export          |  |                      | 64.1  |        |   | 59.5   |  |         | 4.6  |  |  | 7.7  | %
|Latin
 America  |  |                      | 76.5  |        |   | 53.9   |  |         | 22.6 |  |  | 41.9 | %
|                |  |                      |       |        |   |        |  |         |      |  |  |      |  
|Consolidated    |  | $                    | 412.4 |        | $ | 380.9  |  | $       | 31.5 |  |  | 8.3  | %
|                |  |                      |       |        |   |        |  |         |      |  |  |      |  

Domestic
sales were only slightly higher in fiscal 2006 compared to fiscal 2005. The
increase in U.S. export sales was primarily due to an improvement in the sale
of desktops, notebooks, printers and printer consumables while sales in our
Latin American subsidiaries increased due to the slightly improving economies
in Argentina and Colombia.

Sales
of microcomputer products represented approximately 85.0% of SEDs net sales in
fiscal 2006 compared to 81.9% for fiscal 2005. Sales of wireless telephone
products accounted for approximately 7.1% of SEDs net sales in fiscal 2006
compared to 12.0% for fiscal 2005. Sales of consumer electronics products
accounted for approximately 7.9% of SEDs net sales in fiscal 2006 compared to
6.1% for fiscal 2005.

Gross
profit increased $4.6 million to $21.4 million in fiscal 2006, compared to
$16.8 million in fiscal 2005. Gross profit as a percentage of net sales
increased to 5.2% in fiscal 2006 compared to 4.4% in 2005. The increase in
gross profit margin is primarily a result of volume and higher margin sales.
SEDs margins may be affected by several factors including (i) the mix of
products sold, (ii) the price of products sold and provided and (iii) increased
competition. Overall, SED continues to experience pricing pressure in selling
products.

Selling,
general and administrative expenses for fiscal 2006 increased 4.4% to $18.0
million, compared to $17.2 million in fiscal 2005. These expenses as a
percentage of net sales decreased to 4.4% in 2006 compared to 4.5% in fiscal
2005. The increase in expense from the prior year is attributed to several
factors including (i) approximately $.9 million in employee related expenses
for salaries and commissions related to increased sales volumes and margins,
and (ii) a net decline of $.1 million in other expenses.

The
results of operations of SED are subject to and can be adversely affected by
the inflationary conditions in Latin America and the fluctuations of the
Argentine and Colombian currencies. Since SED has significant U.S. dollar
denominated liabilities in Latin American subsidiaries, the devaluation
resulted in foreign currency transaction losses totaling approximately $.5
million in fiscal 2006 as compared to gains of approximately $.2 million in
fiscal 2005. See Item 7A for further discussion.

Net
interest expense was $1.4 million in fiscal 2006 compared to $.7 million in
fiscal 2005 resulting from increased borrowings and rising interest rates.

17

---



Income
tax expense was approximately $.9 million in fiscal year 2006 compared to $.7
million in 2005. The income tax expense is primarily related to income
generated by SEDs Latin American subsidiaries. At June 30, 2006, SED has a
gross net operating loss carried forward for U.S. federal tax purposes of
approximately $58.5 million and state tax purposes of approximately $52.1
million; expiring at various dates through 2026. At June 30, 2006 and 2005, SED
has recorded valuation allowances for principally all deferred tax assets,
except for those relating to Intermaco S.R.L. (Argentina), as it is uncertain
that these assets will be realized.

Discontinued Operations

In
February 2003, SED resolved to discontinue commercial operations of its
Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda. (the
Brazil Operation). Accordingly, the operating results of SED International do
Brasil Distribuidora, Ltda. have been classified as a discontinued operation
for all periods presented in SEDs consolidated statements of operations. See
Note 12 to SEDs Consolidated Financial Statements.

SED
International do Brasil Distribuidora, Ltda. has been transitioned from a commercial
operating company into dormancy. During the dormancy period, SED may incur
ongoing operating expenses for attorney fees, statutory bookkeeping and
reporting services. Please refer to Note 12 to SEDs Consolidated Financial
Statements for further information regarding the results of operations for the
reporting periods.

SED
International do Brasil Distribuidora Ltda. has various litigations related to
additional income taxes and social taxes allegedly due from the fiscal years
1998 through 2004. These legal claims were filed during the years 2002 and
2003. The legal claims range from $3,000 to $219,000 each or $522,000 in the
aggregate. During fiscal 2007 SED incurred $70,000 in costs related to Brazil.
After recording this cost, SED has an accrued liability of $270,000 at June 30,
2007 to cover potential losses related to these claims.

Quarterly Data

The
following table sets forth certain unaudited quarterly historical consolidated
financial data for each of SEDs last eight fiscal quarters ended June 30,
2007. This unaudited quarterly information has been prepared on the same basis
as the annual information presented elsewhere herein and, in SEDs opinion,
includes all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the selected quarterly information. This information
should be read in conjunction 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 30,2005                          |         | Dec 31,2005 |   | Mar 31,2006 |  | June 30,2006 |         | Sept 30,2006 |   | Dec 31,2006 |  | Mar 31,2007 |        | June 30,2007 |  
|                                           |  |                                       |         |             |   |             |  |              |         |              |   |             |  |             |        |              |  
|                                           |  | (In thousands, except per share data) |        
|Net sales                                  |  | $                                     | 102,298 |             | $ | 102,986     |  | $            | 109,557 |              | $ | 97,530      |  | $           | 96,621 |              | $ | 93,009 |  | $ | 107,692 |  | $ | 111,113 |  
|Gross profit                               |  |                                       | 4,484   |             |   | 5,275       |  |              | 5,666   |              |   | 5,978       |  |             | 5,124  |              |   | 5,364  |  |   | 6,030   |  |   | 5,402   |  
|Operating income (loss)                    |  |                                       | 1       |             |   | 756         |  |              | 1,069   |              |   | 685         |  |             | 760    |              |   | 750    |  |   | 825     |  |   | (206    | )
|(Loss) income from continuing operations   |  |                                       | (459    | )           |   | 158         |  |              | 441     |              |   | 51          |  |             | 113    |              |   | 27     |  |   | 21      |  |   | (974    | )
|(Loss) income from discontinued operations |  |                                       | (7      | )           |   |            |  |              |        |              |   | 200         |  |             |       |              |   |       |  |   |        |  |   | (70     | )
|                                           |  |                                       |         |             |   |             |  |              |         |              |   |             |  |             |        |              |   |        |  |   |         |  |   |         |  
|Net (loss) income                          |  | $                                     | (466    | )           | $ | 158         |  | $            | 441     |              | $ | 251         |  | $           | 113    |              | $ | 27     |  | $ | 21      |  | $ | (1,044  | )
|                                           |  |                                       |         |             |   |             |  |              |         |              |   |             |  |             |        |              |   |        |  |   |         |  |   |         |  
|(Loss) income per share:                   |  |                                       |         |             |   |             |  |              |         |              |   |             |  |             |        |              |   |        |  |   |         |  |   |         |  
|From continuing operations                 |  | $                                     | (.12    | )           | $ | .04         |  | $            | .11     |              | $ | .02         |  | $           | .03    |              | $ | .01    |  | $ |        |  | $ | (.25    | )
|From discontinued operations               |  |                                       |        |             |   |            |  |              |        |              |   | .05         |  |             |       |              |   |       |  |   |        |  |   | (.02    | )
|                                           |  |                                       |         |             |   |             |  |              |         |              |   |             |  |             |        |              |   |        |  |   |         |  |   |         |  
|Total (loss) income per share              |  | $                                     | (.12    | )           | $ | .04         |  | $            | .11     |              | $ | .07         |  | $           | .03    |              | $ | .01    |  | $ |        |  | $ | (.27    | )
|                                           |  |                                       |         |             |   |             |  |              |         |              |   |             |  |             |        |              |   |        |  |   |         |  |   |         |  

Contractual Obligations

The
following table summarized SEDs contractual obligations, as discussed in the
Notes to the Consolidated Financial Statements as of June 30, 2007.

|                        |  |                        |           |      |   |           |  |      |           |      |   |         |  |   |         |  |   |         | 
|----------------------- |  | ---------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | ------- |  | - | ------- |  | - | ------- | 
|                        |  | Payments Due By Period |          
|                        |  |                        |           |      |   |           |  |      |           |      |   |         | 
|Contractual Obligations |  | TOTAL                  |           | 2008 |   | 2009      |  | 2010 |           | 2011 |   | 2012    | 
|                        |  |                        |           |      |   |           |  |      |           |      |   |         | 
|                        |  |                        |           |      |   |           |  |      |           |      |   |         | 
|Operating Leases        |  | $                      | 3,589,000 |      | $ | 1,119,000 |  | $    | 1,113,000 |      | $ | 755,000 |  | $ | 392,000 |  | $ | 210,000 | 

18

---



Off-Balance Sheet Arrangements

An off-balance
sheet arrangement is any contractual arrangement involving an unconsolidated
entity under which a company has (a) made guarantees, (b) a retained or a
contingent interest in transferred assets, (c) any obligation under certain
derivative instruments or (d) any obligation under a material variable interest
in an unconsolidated entity that provides financing, liquidity, market risk, or
credit risk support to SED, or engages in leasing, hedging, or research and
development services within SED.

SED does not
have any off-balance sheet financing arrangements or unconsolidated special
purpose entities.

Liquidity and Capital Resources

SEDs
liquidity requirements arise primarily from the funding of working capital
needs, including inventories and trade accounts receivable. As a percentage of total assets exclusive of
other receivables, accounts receivable and inventories were approximately 89.9%
and 91.0% in fiscal 2007 and 2006, respectively. It has been SEDs experience
that in periods of revenue growth, investments in accounts receivable and inventories
grow, and SEDs need for financing may increase. In the periods in which
revenue declines, investments in accounts receivable and inventories generally
decrease and cash is generated. At June 30, 2007, accounts receivable and
inventories, net of payables, increased by $8.6 million, or 24.8%, compared
with June 30, 2006. In fiscal 2006, accounts receivable and inventories, net of
payables, increased by 2.3%, or $.8 million, compared with fiscal 2005.

Historically,
SED has financed its liquidity needs largely through internally generated
funds, borrowings under its credit agreement and vendor lines of credit. SED
derives a substantial portion of its operating income and reported cash flows
from its foreign subsidiaries and, due to certain bank and regulatory
regulations, relies on such cash flows to satisfy its foreign obligations.
While SED continues operations in Latin America, management believes that
domestic banking agreements and international monetary restrictions may limit
SEDs ability to transfer cash between its domestic and international
subsidiaries.

At
June 30, 2007, SED had cash and cash equivalents of $3.4 million, of which $1.9
million is held in Latin American banks by SEDs subsidiaries in Argentina and
Colombia. The funds held in Latin American banks are generally not available
for use domestically without withholding taxes. At June 30, 2007, SEDs
principal source of liquidity is its $3.4 million of cash, and its revolving
credit facility. SEDs availability under the Wachovia Agreement was $8.4
million at June 30, 2007, net of $3.6 million in reserves for outstanding
stand-by letters of credit.

The
net amount of cash used in SEDs operating activities in fiscal 2007 was $8.4
million, principally as a result of changes in working capital requirements.
The net amount of cash used in investing activities in fiscal 2007 was $.5
million. The net amount of cash provided by financing activities in fiscal 2007
was $7.0 million.

The
net amount of cash used in operating activities in fiscal 2006 was $2.0
million, principally reflecting changes in working capital requirements. The
net amount of cash used in investing activities in fiscal 2006 was $.2 million.
The net amount of
cash provided by financing activities in fiscal 2006 was $3.9 million and
reflects additional borrowings under our short-term revolving credit.

The net amount of cash used in SEDs operating
activities in fiscal 2005 was $3.7 million, principally as a result of changes
in working capital requirements. The net amount of cash used for investing
activities in fiscal 2005 was $.5 million. The net amount of cash provided by
financing activities in fiscal 2005 was $2.7 million reflecting additional
borrowings under our revolving credit facility.

SEDs
cash flows in fiscal 2007 were positively affected by the favorable changes in
exchange rates in the Latin American countries in which SED does business. The
exchange rate changes had the effect of providing approximately $.8 million in
cash for the year ended June 30, 2007 as compared to using $.4 million in
fiscal 2006 and providing $.4 million in fiscal 2005.

On
March 1, 2007, SED signed a three-year extension on a credit facility with
Wachovia Bank, National Association (the Wachovia Agreement) which extended
the maturity to September 21, 2011. The Wachovia

19

---



agreement was
originally entered into on September 21, 2005 with a term of three years. On
July 17, 2007, SED elected to increase its line of credit to $40.0 million from
$35.0 million as allowed under the Wachovia agreement. On August 23, 2007, the
Wachovia line of credit was increased temporarily for 60 days to $50.0 million
to accommodate a $9.0 million purchase from one vendor for a televised product
offering by one of SEDs customers. After the 60 day period, the line of credit
will revert back to $40.0 million. The Wachovia agreement provides for
revolving borrowings based on SEDs eligible accounts receivable and inventory
as defined therein, and the line of credit may be increased to $50.0 million,
on a non-temporary basis, in $5.0 million increments at SEDs direction, if
certain additional criteria are met.

Borrowings
under the Wachovia 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 LIBOR, plus a margin ranging from 1.25% to 2.00%,
to the prime rate. SED is also subject to a commitment fee of .25% on the
unused portion of the facility. Interest is payable monthly. Borrowings under
the Wachovia Agreement are collateralized by substantially all domestic assets
of SED and 65% of each of SEDs shares in its foreign subsidiaries,
respectively.

The
Wachovia Agreement contains certain covenants which, among other things,
require that SED maintain availability of $5 million or more during the
agreement to make advances to SEDs Latin American subsidiaries. SEDs advances
to its Latin American subsidiaries are restricted. The Wachovia Agreement also
contains a covenant which requires that if SEDs availability is less than $3.5
million ($5.0 million prior to amendment) at any time during the agreement,
then maintenance of a minimum fixed charge coverage ratio is required, as
defined. The Wachovia Agreement also restricts SEDs ability to distribute
dividends.

Available
borrowings under this agreement, based on collateral limitations at June 30,
2007 were $8.4 million. Average borrowings, maximum borrowings and weighted
average interest rate for fiscal 2007 were $21.1 million, $26.6 million and
7.1%, respectively. The weighted average interest rate on outstanding
borrowings under credit facilities was 7.1% at June 30, 2007. Average
borrowings, maximum borrowings and weighted average interest rate for fiscal
2006 were $20.5 million, $25.1 million and 6.6%, respectively.

The
carrying value of all bank debt at June 30, 2007 approximates its fair value
based on the variable market rates of interest on such bank debt. Outstanding
Letters of Credit under the Wachovia Agreement totaled $ 3.6 million at June
30, 2007.

On
January 26, 2007, the Company entered into a 3 year interest rate
swap contract to reduce the impact of the fluctuations in the interest rate on
$5.0 million notional amount of the revolving credit facility.
The contract effectively converted the variable rate to a fixed rate
of 5.20%. On June 8, 2007, the three year swap agreement was amended to a
notional amount of $10.0 million with a fixed rate of 5.37%. The Company
utilizes derivative financial instruments to reduce interest rate risk. The
Company does not hold or issue derivative financial instruments for trading
purposes. Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), establishes
accounting and reporting standards for derivative instruments and hedging
activities. As required by SFAS 133, the Company recognizes all
derivatives as either assets or liabilities in the balance sheet and measures
those instruments at fair value. Changes in the fair value of those instruments
are reported in earnings or other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The accounting
for gains and losses associated with changes in the fair value of the
derivative and the effect on the financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting changes
in the fair value of cash flows of the asset or liability hedged. The fair
value of the interest rate swap contract was not material at June 30, 2007.

There
have been no material changes to obligations and/or commitments since year-end.
Purchase orders or contracts for the purchase of inventory and other goods and
services are not included in managements estimates. Management is not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. SEDs purchase orders are based on its
current distribution needs and are fulfilled by its vendors within short time
horizons. SED does not have significant agreements for the purchase of
inventory or other goods specifying minimum quantities or set prices that
exceed our expected requirements for the year ended June 30, 2007.

Management
believes that SEDs credit agreements together with vendor lines of credit and
internally generated funds will be sufficient to satisfy its working capital
needs during fiscal 2008. However, no assurance can be given that SED will be
able to remain in compliance with the financial covenants associated with the
Wachovia

20

---



Agreement, or
that SED will be able to continue to obtain credit from its vendors in the
future. Failure to maintain compliance under the Wachovia Agreement or obtain
vendor lines of credit could significantly and adversely affect SED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. The overall determination of the
allowance also considers credit insurance coverage and deductibles, which SED
has maintained from time to time. SED maintains credit insurance, which
protects SED from credit losses exceeding certain deductibles for certain
domestic sales and certain export shipments from the United States. SED
maintains credit insurance in many Latin American countries (subject to certain
terms and conditions). See Note 11 to SEDs Consolidated Financial Statements
for a summary of the movement of the allowance for doubtful accounts.

Inventories  Slow Moving, Obsolescence, and
Lower of Cost or Market

Most
of SEDs vendors allow for either return of goods within a specified period
(usually 45-90 days) or for credits related to price protection. However, for other
vendor relationships and inventories, SED 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 SED from inventory
losses, including price protections, the risk of loss associated with obsolete,
slow moving or impaired inventories would increase. SEDs reserve for obsolete
and slowing moving inventories was approximately $945,000 at June 30, 2007 or
2.2% of gross inventories.

Financial
Instruments

SEDs
principal financial instruments consist of cash, accounts receivable, accounts
payable and revolving credit facilities. The carrying value of these financial
instruments approximate fair value based upon the short-term nature of the
instruments, and the variable rates on credit facilities.

The
functional currency for SED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 accumulated other comprehensive loss. It
is SEDs policy not to enter into derivative contracts for speculative trading
purposes.

SEDs
revolving credit facility is currently a variable rate facility. During fiscal
2007, SED entered into a three year interest rate swap contract to reduce the
impact of the fluctuations in the interest rate on $10.0 million notional
amount of the obligation under its revolving credit facility.

Inflation and Price
Levels

Inflation
has not had a significant impact on SEDs overall business because of the
typically decreasing costs of products sold by SED. SED also receives vendor
price protection for a significant portion of its inventory. In the event a
vendor or competitor reduces its prices for goods purchased by SED prior to
SEDs sale of such goods, SED 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 credit.

21

---



The
Latin American countries in which SED 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 SEDs Latin
American business operations in the immediate future (See Item 7A).

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

SED
is subject to market risk arising from adverse changes in interest rates and
foreign exchange rates. SED 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

SED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 affect interest earned and paid by SED. Changes in the interest
rates are not expected to have a material impact on SEDs results of
operations.

The
Company utilizes derivative financial instruments to reduce interest rate risk
as described in the Liquidity and Capital Resources section.
The Company does not hold or issue derivative financial instruments for trading
purposes.

Foreign Currency Exchange

The
functional currency for SED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 an 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, SED recorded foreign currency translation gain as a
component of comprehensive income of approximately $1,626,000 for the fiscal
year ended June 30, 2007.

SED
distributes many of its products in foreign countries, primarily in Latin
America. Approximately 39.5% of SEDs total net sales were generated from sales
made to resellers located in Latin American countries during the twelve-month
period ended June 30, 2007. SEDs foreign subsidiaries procure inventory
payable in U.S. dollars for resale in their respective countries. Upon
settlement of the receivables and payables, SED 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, 2007, SED recorded transaction gains of
approximately $876,000. At June 30, 2007, SEDs foreign subsidiaries had
approximately $7.6 million in U.S. dollar denominated liabilities. In the
aggregate, if the value of the dollar against the foreign denominated currency
strengthens by 10%, SED would record a transaction loss of approximately
$760,000. Conversely, if the value of the dollar declines by 10%, SED would
record a transaction gain of approximately $760,000.

The
information included in SEDs Annual Report does not include the potential
impact that might arise from any decline in foreign currency in Latin America
after June 30, 2007 or those declines which may occur in the future and,
accordingly, should be analyzed considering that circumstance.

Since
January 1, 2002, the Argentine economy has experienced inflation. During fiscal
2007, the inflation rate was 8.4% compared to 10.6% in fiscal 2006. 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 U.S. dollar. Any of the foregoing events and a continuation
of the Argentine recession may have a material adverse effect on SEDs business,
results of operations, financial condition, and ability to make payments on
SEDs indebtedness and on SEDs common stock market price. The information
included in SED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.

22

---



Item 8. Financial Statements and
Supplementary Data

Report
of Independent Registered Public Accounting Firm

The Board of Directors
and Shareholders
SED International Holdings, Inc. and Subsidiaries

We have
audited the consolidated balance sheets of SED International Holdings, Inc. and
Subsidiaries as of June 30, 2007 and 2006, and the related consolidated
statements of operations, shareholders equity and cash flows for each of the
years in the three-year period ended June 30, 2007. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SED International
Holdings, Inc. and Subsidiaries as of June 30, 2007 and 2006, and their results
of operations and cash flows for each of the years in the three-year period
ended June 30, 2007, in conformity with accounting principles generally
accepted in the United States of America.

/s/
J.H. Cohn LLP

Roseland, New
Jersey
September 20, 2007

23

---



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                               |  |          |             |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                               |  | June 30, |            
|                                                                                                                                                                               |  |          |            
|                                                                                                                                                                               |  | 2007     |             | 2006 |  
|                                                                                                                                                                               |  |          |             |      |  
|ASSETS                                                                                                                                                                         |  |          |             |      |   |             |  
|Current assets:                                                                                                                                                                |  |          |             |      |   |             |  
|Cash and cash equivalents                                                                                                                                                      |  | $        | 3,356,000   |      | $ | 4,426,000   |  
|Trade accounts receivable, less allowance
  for doubtful accounts of $348,000 (2007) and $437,000 (2006)                                                                       |  |          | 42,059,000  |      |   | 33,584,000  |  
|Inventories, net                                                                                                                                                               |  |          | 41,751,000  |      |   | 32,720,000  |  
|Deferred income taxes, net                                                                                                                                                     |  |          | 23,000      |      |   | 58,000      |  
|Other current assets                                                                                                                                                           |  |          | 4,929,000   |      |   | 3,586,000   |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Total current assets                                                                                                                                                           |  |          | 92,118,000  |      |   | 74,374,000  |  
|Property and equipment, net                                                                                                                                                    |  |          | 1,104,000   |      |   | 941,000     |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Total assets                                                                                                                                                                   |  | $        | 93,222,000  |      | $ | 75,315,000  |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                         |  |          |             |      |   |             |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Current liabilities:                                                                                                                                                           |  |          |             |      |   |             |  
|Trade accounts payable                                                                                                                                                         |  | $        | 40,342,000  |      | $ | 31,480,000  |  
|Accrued and other current liabilities                                                                                                                                          |  |          | 6,177,000   |      |   | 4,834,000   |  
|Revolving credit facility                                                                                                                                                      |  |          | 24,544,000  |      |   | 17,532,000  |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Total liabilities                                                                                                                                                              |  |          | 71,063,000  |      |   | 53,846,000  |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Commitments and contingencies                                                                                                                                                  |  |          |             |      |   |             |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Shareholders equity:                                                                                                                                                          |  |          |             |      |   |             |  
|Preferred stock, $1.00 par value; 129,500
  shares authorized, none issued                                                                                                     |  |          |            |      |   |            |  
|Common stock, $.01 par value; 100,000,000
  shares authorized, 5,573,347 (2007) and 5,583,347 (2006) shares issued, 3,878,856
  (2007) and 3,888,856 (2006) shares outstanding |  |          | 56,000      |      |   | 56,000      |  
|Additional paid-in capital                                                                                                                                                     |  |          | 68,531,000  |      |   | 68,584,000  |  
|Accumulated deficit                                                                                                                                                            |  |          | (30,479,000 | )    |   | (29,596,000 | )
|Accumulated other comprehensive loss                                                                                                                                           |  |          | (2,862,000  | )    |   | (4,488,000  | )
|Treasury stock, 1,694,491 shares, at cost                                                                                                                                      |  |          | (13,087,000 | )    |   | (13,087,000 | )
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Total shareholders equity                                                                                                                                                     |  |          | 22,159,000  |      |   | 21,469,000  |  
|                                                                                                                                                                               |  |          |             |      |   |             |  
|Total liabilities and shareholders
equity                                                                                                                                     |  | $        | 93,222,000  |      | $ | 75,315,000  |  
|                                                                                                                                                                               |  |          |             |      |   |             |  

See notes to consolidated financial statements.

24

---



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|----------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | ---- | - | ----------- |  | - | ----------- | -
|                                                                                                |  | For the
  Year Ended June 30, |            
|                                                                                                |  |                               |            
|                                                                                                |  | 2007                          |             | 2006 |   | 2005        | 
|                                                                                                |  |                               |             |      |   |             | 
|Net sales                                                                                       |  | $                             | 408,435,000 |      | $ | 412,371,000 |  | $ | 380,864,000 |  
|Cost of sales                                                                                   |  |                               | 386,515,000 |      |   | 390,968,000 |  |   | 364,091,000 |  
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Gross profit                                                                                    |  |                               | 21,920,000  |      |   | 21,403,000  |  |   | 16,773,000  |  
|Selling, general and administrative
  expenses, excluding depreciation and amortization expense |  |                               | 20,254,000  |      |   | 17,958,000  |  |   | 17,195,000  |  
|Depreciation and amortization expense                                                           |  |                               | 413,000     |      |   | 422,000     |  |   | 868,000     |  
|Foreign currency transactions (gain) loss                                                       |  |                               | (876,000    | )    |   | 512,000     |  |   | (244,000    | )
|Loss on disposal of assets                                                                      |  |                               |            |      |   |            |  |   | 31,000      |  
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Operating income (loss)                                                                         |  |                               | 2,129,000   |      |   | 2,511,000   |  |   | (1,077,000  | )
|Interest expense                                                                                |  |                               | 1,574,000   |      |   | 1,389,000   |  |   | 691,000     |  
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Income (loss) before income taxes from
  continuing operations                                  |  |                               | 555,000     |      |   | 1,122,000   |  |   | (1,768,000  | )
|Income tax expense                                                                              |  |                               | 1,368,000   |      |   | 931,000     |  |   | 680,000     |  
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|(Loss) income from continuing operations                                                        |  |                               | (813,000    | )    |   | 191,000     |  |   | (2,448,000  | )
|(Loss) income from discontinued operations                                                      |  |                               | (70,000     | )    |   | 193,000     |  |   | (154,000    | )
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Net (loss) income                                                                               |  | $                             | (883,000    | )    | $ | 384,000     |  | $ | (2,602,000  | )
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Basic and diluted (loss) income per share:                                                      |  |                               |             |      |   |             |  |   |             |  
|From continuing operations                                                                      |  | $                             | (.21        | )    | $ | .05         |  | $ | (.63        | )
|From discontinued operations                                                                    |  |                               | (.02        | )    |   | .05         |  |   | (.04        | )
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Basic and diluted (loss) income per share                                                       |  | $                             | (.23        | )    | $ | .10         |  | $ | (.67        | )
|                                                                                                |  |                               |             |      |   |             |  |   |             |  
|Weighted average number of shares
  outstanding:                                                |  |                               |             |      |   |             |  |   |             |  
|Basic                                                                                           |  |                               | 3,877,000   |      |   | 3,872,000   |  |   | 3,871,000   |  
|Diluted                                                                                         |  |                               | 3,877,000   |      |   | 3,884,000   |  |   | 3,871,000   |  

See notes to consolidated financial statements.

25

---



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY

|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|---------------------------------------------------------------------- |  | -------------- | --------- | --------- | --------------------- | ------ |  | ------------------------------ | ---------- | -------------------------------------- | ---- | ------------------------------ | ------------------------------------------ | - | ---------- | - |  | --------- |  | - | ----------- | - | - | ------- | - | - | ---------- | -
|                                                                       |  |                |           |           |                       |        |  | Additional
  Paid-In
  Capital |            |                                        |      |                                | Accumulated
  Other
  Comprehensive
  Loss |   |            |   |  |           |  |   |             |   |   |         |  
|                                                                       |  | Common
  Stock |           |           |                       |        |  | Treasury
  Stock               |            | Unearned
  Compensation
  Stock Awards |      | Total
  Shareholders
  Equity |                                           
|                                                                       |  |                |           |           | Accumulated
  Deficit |        |  |                                |            |                                        |     
|                                                                       |  | Shares         |           | Par Value |                       |        |  |                                | Shares     |                                        | Cost |                                |                                            |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           | 
|BALANCE JUNE 30,
  2004                                                |  |                | 5,569,872 |           | $                     | 56,000 |  | $                              | 68,574,000 |                                        | $    | (27,378,000                    | )                                          | $ | (4,510,000 | ) |  | 1,690,701 |  | $ | (13,083,000 | ) | $ | (53,000 | ) | $ | 23,606,000 |  
|Amortization of
  stock awards                                         |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   | 20,000  |   |   | 20,000     |  
|Stock-based
  compensation                                             |  |                |           |           |                       |        |  |                                | 18,000     |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 18,000     |  
|Exercise of stock
  options                                            |  |                | 6,666     |           |                       |        |  |                                | 3,000      |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 3,000      |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|Net loss                                                               |  |                |           |           |                       |        |  |                                |            |                                        |      | (2,602,000                     | )                                          |   |            |   |  |           |  |   |             |   |   |         |   |   | (2,602,000 | )
|Translation
  adjustments                                              |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   | 778,000    |   |  |           |  |   |             |   |   |         |   |   | 778,000    |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|Comprehensive
  loss                                                   |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | (1,824,000 | )
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|BALANCE JUNE 30,
  2005                                                |  |                | 5,576,538 |           |                       | 56,000 |  |                                | 68,595,000 |                                        |      | (29,980,000                    | )                                          |   | (3,732,000 | ) |  | 1,690,701 |  |   | (13,083,000 | ) |   | (33,000 | ) |   | 21,823,000 |  
|Reclassification
  of unvested stock awards  adoption of SFAS 123 (R) |  |                |           |           |                       |        |  |                                | (33,000    | )                                      |      |                                |                                            |   |            |   |  |           |  |   |             |   |   | 33,000  |   |   |            |  
|Stock-based
  compensation                                             |  |                |           |           |                       |        |  |                                | 20,000     |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 20,000     |  
|Treasury shares
  purchased                                            |  |                | 141       |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  | 3,790     |  |   | (4,000      | ) |   |         |   |   | (4,000     | )
|Exercise of stock
  options                                            |  |                | 6,668     |           |                       |        |  |                                | 2,000      |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 2,000      |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|Net income                                                             |  |                |           |           |                       |        |  |                                |            |                                        |      | 384,000                        |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 384,000    |  
|Translation
  adjustments                                              |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   | (756,000   | ) |  |           |  |   |             |   |   |         |   |   | (756,000   | )
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|Comprehensive loss                                                     |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | (372,000   | )
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|BALANCE JUNE 30,
  2006                                                |  |                | 5,583,347 |           |                       | 56,000 |  |                                | 68,584,000 |                                        |      | (29,596,000                    | )                                          |   | (4,488,000 | ) |  | 1,694,491 |  |   | (13,087,000 | ) |   |        |   |   | 21,469,000 |  
|Stock awards
  cancelled                                               |  |                | (10,000   | )         |                       |        |  |                                | (75,000    | )                                      |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | (75,000    | )
|Stock-based
  compensation                                             |  |                |           |           |                       |        |  |                                | 22,000     |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 22,000     |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|Net loss                                                               |  |                |           |           |                       |        |  |                                |            |                                        |      | (883,000                       | )                                          |   |            |   |  |           |  |   |             |   |   |         |   |   | (883,000   | )
|Translation
  adjustments                                              |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   | 1,626,000  |   |  |           |  |   |             |   |   |         |   |   | 1,626,000  |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|Comprehensive
  income                                                 |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   | 743,000    |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  
|BALANCE JUNE 30,
  2007                                                |  |                | 5,573,347 |           | $                     | 56,000 |  | $                              | 68,531,000 |                                        | $    | (30,479,000                    | )                                          | $ | (2,862,000 | ) |  | 1,694,491 |  | $ | (13,087,000 | ) | $ |        |   | $ | 22,159,000 |  
|                                                                       |  |                |           |           |                       |        |  |                                |            |                                        |      |                                |                                            |   |            |   |  |           |  |   |             |   |   |         |   |   |            |  

See notes to consolidated financial statements.

26

---



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                      |  | For the Year Ended June 30, |           
|                                                                                      |  |                             |           
|                                                                                      |  | 2007                        |            | 2006 |   | 2005       |  
|                                                                                      |  |                             |           
|Operating activities:                                                                 |  |                             |            |      |   |            |   |   |            |  
|Net (loss) income                                                                     |  | $                           | (883,000   | )    | $ | 384,000    |   | $ | (2,602,000 | )
|Adjustments to reconcile net (loss) income to net
cash used in
 operating activities: |  |                             |            |      |   |            |   |   |            |  
|Depreciation and amortization                                                         |  |                             | 413,000    |      |   | 422,000    |   |   | 868,000    |  
|Deferred tax assets                                                                   |  |                             | 35,000     |      |   | 4,000      |   |   | (2,000     | )
|Stock-based compensation                                                              |  |                             | (53,000    | )    |   | 20,000     |   |   | 38,000     |  
|Provision for losses on accounts
receivable                                           |  |                             | 658,000    |      |   | 475,000    |   |   | 560,000    |  
|Loss on disposal of assets                                                            |  |                             |           |      |   |           |   |   | 31,000     |  
|Changes in operating assets and liabilities:                                          |  |                             |            |      |   |            |   |   |            |  
|Trade accounts receivable                                                             |  |                             | (7,528,000 | )    |   | (3,944,000 | ) |   | (13,000    | )
|Other receivable                                                                      |  |                             |           |      |   |           |   |   | 500,000    |  
|Inventories, net                                                                      |  |                             | (7,494,000 | )    |   | 452,000    |   |   | (3,053,000 | )
|Other current assets                                                                  |  |                             | (836,000   | )    |   | (2,086,000 | ) |   | 238,000    |  
|Trade accounts payable                                                                |  |                             | 6,401,000  |      |   | 1,912,000  |   |   | (215,000   | )
|Accrued and other current liabilities                                                 |  |                             | 922,000    |      |   | 337,000    |   |   | (48,000    | )
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Net cash used in operating activities                                                 |  |                             | (8,365,000 | )    |   | (2,024,000 | ) |   | (3,698,000 | )
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Investing activities:                                                                 |  |                             |            |      |   |            |   |   |            |  
|Purchase of equipment                                                                 |  |                             | (538,000   | )    |   | (182,000   | ) |   | (463,000   | )
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Net cash used in investing activities                                                 |  |                             | (538,000   | )    |   | (182,000   | ) |   | (463,000   | )
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Financing activities:                                                                 |  |                             |            |      |   |            |   |   |            |  
|Net proceeds from issuance of stock                                                   |  |                             |           |      |   | 2,000      |   |   | 3,000      |  
|Net borrowings under revolving credit
facility                                        |  |                             | 7,012,000  |      |   | 3,942,000  |   |   | 2,742,000  |  
|Purchase of treasury stock                                                            |  |                             |           |      |   | (4,000     | ) |   |           |  
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Net cash provided by financing activities                                             |  |                             | 7,012,000  |      |   | 3,940,000  |   |   | 2,745,000  |  
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Effect of exchange rate changes on cash and cash
equivalents                          |  |                             | 821,000    |      |   | (390,000   | ) |   | 418,000    |  
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|(Decrease) increase in cash and cash equivalents                                      |  |                             | (1,070,000 | )    |   | 1,344,000  |   |   | (998,000   | )
|Cash and cash equivalents:                                                            |  |                             |            |      |   |            |   |   |            |  
|Beginning of year                                                                     |  |                             | 4,426,000  |      |   | 3,082,000  |   |   | 4,080,000  |  
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|End of year                                                                           |  | $                           | 3,356,000  |      | $ | 4,426,000  |   | $ | 3,082,000  |  
|                                                                                      |  |                             |            |      |   |            |   |   |            |  
|Supplemental Disclosures of Cash Flow Information  cash paid
during
 the year for:   |  |                             |            |      |   |            |   |   |            |  
|Interest paid                                                                         |  | $                           | 1,544,000  |      | $ | 1,438,000  |   | $ | 693,000    |  
|Income tax payments                                                                   |  | $                           | 909,000    |      | $ | 976,000    |   | $ | 679,000    |  

See notes to consolidated financial statements.

27

---



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2007, 2006 and 2005

1. Description of Business

SED
International Holdings, Inc., the parent company incorporated in Georgia, and
its wholly-owned operating subsidiary, SED International, Inc., a Georgia
corporation, are engaged in the wholesale distribution of microcomputer
products, including mass storage, imaging, display, consumer electronics and
wireless products throughout the United States and Latin America. SED
International Holdings, Inc. services Latin America through its wholly-owned
subsidiaries SED International de Colombia Ltda. (SED Colombia) in Bogota, Colombia and
Intermaco S.R.L. (Intermaco) in Buenos Aires, Argentina.

On September 30, 2004, SED
International Holdings, Inc. filed a Form 15 Certification and Notice of
Registration Under Section 12(g) of the Securities Exchange Act of 1934 or
Suspension of Duty to File Reports Under Sections 13 and 15(d) of the
Securities Exchange Act of 1934 with the United States Securities and Exchange
Commission (SEC).

On
the first day of its 2007 fiscal year, the Company exceeded 299 holders of
record. Accordingly, pursuant to Section 15(d) of the Exchange Act, beginning
with its Annual Report on Form 10-K for the fiscal year ended June 30, 2006,
the Company began filing reports under the Securities Exchange Act of 1934, as
amended.

2. 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 Colombia and
Intermaco, (collectively the Company). All intercompany accounts and
transactions have been eliminated in consolidation. The operations of SED
International do Brasil, Ltda. were discontinued during the third quarter of
fiscal 2003. See Note 12.

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 sales and 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 materially 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. From time to time, the Company receives
 price protection and other considerations from its vendors. While the Company
 has no reason to believe such vendor consideration will not continue, no assurance

28

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | can be given that such price protection and other considerations will
 continue to be received in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | 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. The Company believes stock return programs will
 continue in the future, but can give no assurance about whether these
 programs will continue.                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Consumer electronics The Company re-entered into the
 distribution of consumer electronics in fiscal 2004, which is highly
 competitive. Some of the Companys competitors have substantially greater
 financial, marketing and distribution resources than the Company and the
 Company may be unable to successfully compete with these companies.
 Failure to successfully penetrate this market could have an adverse impact on
 the Companys cash flows, financial position and operating results.                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | 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 maintains credit insurance policies for certain customers located
 in the United States and select Latin American countries (subject to certain
 terms and conditions). However, the terms of the credit insurance agreement
 require the Company to maintain certain minimum standards and policies with
 respect to extending credit to customers. If the Company does not adhere to
 such policies, the insurance companies may not pay claims submitted by the
 Company.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | 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. Failure to control overhead costs could have an adverse impact
 on the Companys cash flows, financial position and operating results.                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Uncertain and possibly volatile economic and political environment in
 Latin America  The general economic and political
 environment in both of 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 has operated under a formal credit facility with a bank for many
 years that was subject to certain collateral limitations and contained
 certain covenants. During September 2005 a new credit facility was obtained.
 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 principal credit
 facility, which expires in September 2011, is further described in Note 4.                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Cash flows While not presently expected,
 the Companys continued operations in Latin America may require additional
 capital infusion (in the form of advance notes from the parent company or
 other debt borrowings by a subsidiary). The credit facility restricts the
 future funding by the parent company of Latin American operations. Operating
 needs and regulatory matters may restrict the Companys ability to repatriate
 cash flows from the foreign subsidiaries to the United States.                                                                                                                                                                                                                                                                           

29

---



Revenue
Recognition  Revenue
is recognized once four criteria are met: (1) SED must have persuasive
evidence that an arrangement exists; (2) delivery must occur, which
generally happens at the point of shipment (this includes the transfer of both
title and risk of loss, provided that no significant obligations remain);
(3) the price must be fixed or determinable; and (4) collectibility
must be reasonably assured. Shipping revenue is included in net sales while the
related costs, including shipping and handling costs, are included in the cost
of products sold. SED allows its customers to return product for exchange or
credit subject to certain limitations. A provision for such returns is recorded
based upon historical experience.

Concentrations
of Credit Risk  Financial instruments that
potentially subject the Company to significant concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
The Company places its cash and cash equivalents with high credit quality
financial institutions. At times, such amounts exceed the current insured
amount under the Federal Deposit Insurance Corporation of $100,000. The funds
held in Latin American banks, which represent 57.4% of the Companys cash and
cash equivalents at June 30, 2007, are generally not available for use
domestically without withholding taxes. The Company has no single customer that
represents a significant portion of total net sales or accounts receivable and
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 of America 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 differences 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 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.

Inventories
 Inventories consist of finished goods and are stated at the lower of cost
(first-in, first-out method) or market and include in-transit inventory of
$7,153,000 at June 30, 2007 and $6,207,000 at June 30, 2006. Most of the
Companys vendors allow for either return of goods within a specified period
(usually 45 - 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, slow moving or impaired inventories would increase. The reserve for
obsolete and slow moving inventories was approximately $945,000 at June 30,
2007 and $1,037,000 at June 30, 2006 or 2.2% and 3.0% of gross inventories,
respectively.

30

---



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.

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, net of any
deferred income taxes. As of June 30, 2007 and 2006, the amount of deferred
income taxes recorded against cumulative translation losses is zero, because
the related deferred tax asset has been offset in full by a valuation
allowance. The results of foreign operations are translated at the average
exchange rates for the year. Gains or losses resulting from foreign currency
transactions are included in the consolidated statement of operations.

Income
Taxes 
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred tax assets relate primarily to differences in the financial reporting
basis and the tax basis of reserves, translation losses and depreciation of
fixed assets, in addition to net operating loss and tax credit carryforwards.
Deferred tax liabilities relate to U.S. taxes on unremitted foreign earnings.
As the likelihood of the full realization of the net operating losses, reserves
and translation losses is uncertain, the Company has provided a valuation
allowance for the future tax benefits that are not expected to be utilized.

Earnings
Per Common Share (EPS) Basic earnings per common
share is computed on the basis of the weighted average number of shares of
common stock outstanding during that period. Diluted earnings per common share
is computed on the basis of the weighted-average number of common shares plus
the effect of dilutive potential common shares outstanding during the period
using the treasury stock method. Approximately 50,000 stock options had the
effect of increasing the weighted average shares in fiscal 2006. Potentially
dilutive common shares represent additional common shares assumed to be issued.
For the years ended June 30, 2007, 2006 and 2005 options for approximately
506,000, 468,000, and 683,000 common shares, respectively, were excluded from
the diluted EPS calculation due to their antidilutive effect.

Stock-Based
Compensation Effective July 1, 2005, the Company
adopted Statement of Financial Accounting Standards No. 123(R) Share-Based
Compensation (SFAS 123(R)). Its predecessor, SFAS 123, (SFAS 123) was
previously adopted by the Company effective July 1, 2002. Prior to July 1,
2002, 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
interpretation in accounting for its employee stock-based compensation.SFAS 123(R) was adopted using the
modified prospective method. Under the modified prospective method, the effect
of SFAS 123(R) is recognized in the period of adoption and in future periods.
Prior periods have not been restated to reflect the impact of adopting SFAS
123(R).

The
adoption of SFAS 123(R) in fiscal 2006 did not have a material impact on
stock-based compensation expense for the fiscal year ended June 30, 2006. The
effect of estimating forfeitures was not material. Stock-based compensation
expense recognized during fiscal years ended June 30, 2007, 2006 and 2005
totaled approximately $5,000, $5,000 and $18,000, respectively. At June 30,
2007 there was no unrecognized compensation cost related to unvested
stock-based compensation arrangements granted under our plan.

31

---



The
following table illustrates the effect on net loss and loss per share had the
Company accounted for stock-based compensation in accordance with SFAS 123(R)
in 2005:

|                                                        |  |      |                        |  
|------------------------------------------------------- |  | ---- | ---------------------- | -
|                                                        |  |      | Year Ended
 
 June 30, |  
|                                                        |  |      |                       
|                                                        |  | 2005 |                       
|                                                        |  |      |                       
|Net loss, as reported                                   |  | $    | (2,602,000             | )
|Stock-based compensation included in
 reported net loss |  |      | 18,000                 |  
|Stock-based compensation under fair value
 reporting    |  |      | (64,000                | )
|                                                        |  |      |                        |  
|Pro forma net loss                                      |  | $    | (2,648,000             | )
|                                                        |  |      |                        |  
|Basic and diluted loss per share:                       |  |      |                        |  
|As reported                                             |  | $    | (.67                   | )
|                                                        |  |      |                        |  
|Pro forma                                               |  | $    | (.68                   | )
|                                                        |  |      |                        |  

No
stock options were granted in fiscal 2007 and 2006. The weighted average fair
value of options granted in fiscal 2005 was $.79, using the Black-Scholes
option pricing model with the following assumptions:

| |                          |  |      |   | 
| | ------------------------ |  | ---- | - | 
| |                          |  |      |  
| |                          |  | 2005 |  
| |                          |  |      |  
| | Dividend
 yield          |  | 0.0  | % | 
| | Expected
 volatility     |  | 80.2 | % | 
| | Risk-free
 interest rate |  | 3.6  | % | 
| | Expected
 life, in years |  | 5.0  |   | 

Recent
Accounting Pronouncements In July 2006, the
Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income
Taxes-An Interpretation of Financial Accounting Standards Board Statement No.
109. The interpretation prescribes a consistent recognition
threshold and measurement standard, as well as clear criteria for subsequently
recognizing, derecognizing, classifying and measuring tax positions for
financial statement purposes. The interpretation also requires expanded
disclosure with respect to uncertainties as they relate to income tax
accounting. FIN 48 will be adopted by the Company in the first quarter of the
fiscal year ending June 30, 2008, as required. Management is currently
evaluating the impact of FIN 48 on its consolidated financial statements. The
cumulative effect of the interpretation will be reflected as an adjustment to
beginning retained earnings upon adoption.

In
September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines
fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States of America and
expands disclosures about fair value measurements. The Company is required to
adopt the provisions of FAS 157 in the first quarter of fiscal 2008. The
Company is currently in the process of assessing what impact FAS 157 may have
on its consolidated financial position, results of operations or cash flows

In
September 2006, the Securities and Exchange Commission (the SEC) issued Staff
Accounting Bulletin No. 108 Considering the Effect of Prior Year Misstatements
When Quantifying Misstatements in Current year Financial Statements (SAB No.
108). SAB No. 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a potential current year misstatement. SAB No. 108 requires that
companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach.
The adoption of the provisions of SAB No. 108, effective as of the fiscal year
ended June 30, 2007, did not have any impact on the Companys consolidated
financial position, results of operations or cash flows.

32

---



3. Property and Equipment

Property and
equipment are comprised of the following:

| |                                                 |  |          |             |      |   |             |  
| | ----------------------------------------------- |  | -------- | ----------- | ---- | - | ----------- | -
| |                                                 |  | June 30, |            
| |                                                 |  |          |            
| |                                                 |  | 2007     |             | 2006 |  
| |                                                 |  |          |             |      |  
|
| | Furniture
 and equipment                        |  | $        | 10,896,000  |      | $ | 10,407,000  |  
| | Leasehold
 improvements                         |  |          | 2,253,000   |      |   | 2,109,000   |  
| | Other                                           |  |          | 215,000     |      |   | 119,000     |  
| |                                                 |  |          |             |      |   |             |  
| |                                                 |  |          | 13,364,000  |      |   | 12,635,000  |  
| | Less
 accumulated depreciation and amortization |  |          | (12,260,000 | )    |   | (11,694,000 | )
| |                                                 |  |          |             |      |   |             |  
| |                                                 |  | $        | 1,104,000   |      | $ | 941,000     |  
| |                                                 |  |          |             |      |   |             |  

Depreciation
and amortization expense for property and equipment totaled $413,000, $422,000
and $868,000 for the years ended June 30, 2007, 2006 and 2005, respectively.

4. Credit Facilities

On
March 1, 2007, SED signed a three-year extension on a credit facility with
Wachovia Bank, National Association (the Wachovia Agreement) which extended
the maturity to September 21, 2011. The Wachovia agreement was originally
entered into on September 21, 2005 with a term of three years. On July 17,
2007, SED elected to increase its line of credit to $40.0 million from $35.0
million as allowed under the Wachovia agreement. On August 23, 2007, the
Wachovia line of credit was increased temporarily for 60 days to $50.0 million
to accommodate a $9.0 million purchase from one vendor for a televised product
offering by one of SEDs customers. After the 60 day period, the line of credit
will revert back to $40.0 million. The Wachovia agreement provides for
revolving borrowings based on SEDs eligible accounts receivable and inventory
as defined therein, and the line of credit may be increased to $50.0 million,
on a non-temporary basis, in $5.0 million increments at SEDs direction, if
certain additional criteria are met.

Borrowings
under the Wachovia 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 LIBOR, plus a margin ranging from 1.25% to 2.00%,
to the prime rate. SED is also subject to a commitment fee of .25% on the
unused portion of the facility. Interest is payable monthly. Borrowings under
the Wachovia Agreement are collateralized by substantially all domestic assets
of SED and 65% of each of SEDs shares in its foreign subsidiaries,
respectively.

The
Wachovia Agreement contains certain covenants which, among other things,
require that SED maintain availability of $5 million or more during the
agreement to make advances to SEDs Latin American subsidiaries. SEDs advances
to its Latin American subsidiaries are restricted. The Wachovia Agreement also
contains a covenant which requires that if SEDs availability is less than $3.5
million ($5.0 million prior to amendment) at any time during the agreement,
then maintenance of a minimum fixed charge coverage ratio is required, as
defined. The Wachovia Agreement also restricts SEDs ability to distribute
dividends.

Available
borrowings under this agreement, based on collateral limitations at June 30,
2007 were $8.4 million. Average borrowings, maximum borrowings and weighted
average interest rate for fiscal 2007 were $21.1 million, $26.6 million and
7.1%, respectively. The weighted average interest rate on outstanding
borrowings under credit facilities was 7.1% at June 30, 2007. Average
borrowings, maximum borrowings and weighted average interest rate for fiscal
2006 were $20.5 million, $25.1 million and 6.6%, respectively.

33

---



The
carrying value of all bank debt at June 30, 2007 approximates its fair value
based on the variable market rates of interest on such bank debt. Outstanding
Letters of Credit under the Wachovia Agreement totaled $3.6 million at June 30,
2007.

On
January 26, 2007, the Company entered into a three-year interest rate
swap contract to reduce the impact of the fluctuations in the interest rate on
$5.0 million notional amount of the revolving credit facility.
The contract effectively converted the variable rate to a fixed rate
of 5.20%. On June 8, 2007, the three-year swap agreement was amended to a
notional amount of $10.0 million with a fixed rate of 5.37%. The Company
utilizes derivative financial instruments to reduce interest rate risk. The
Company does not hold or issue derivative financial instruments for trading
purposes. Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), establishes
accounting and reporting standards for derivative instruments and hedging
activities. As required by SFAS 133, the Company recognizes all
derivatives as either assets or liabilities in the balance sheet and measures
those instruments at fair value. Changes in the fair value of those instruments
are reported in earnings or other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The accounting
for gains and losses associated with changes in the fair value of the
derivative and the effect on the financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting changes
in the fair value of cash flows of the asset or liability hedged. The fair
value of the interest rate swap contract was not material at June 30, 2007.

5. 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, |            
|                                                      |  |          |            
|                                                      |  | 2007     |             | 2006 |  
|                                                      |  |          |             |      |  
|                                                     
|Net deferred
 tax assets and (liabilities):           |  |          |             |      |   |             |  
|U.S. federal and state operating loss
 carry-forwards |  | $        | 23,545,000  |      | $ | 22,810,000  |  
|Unremitted foreign earnings                           |  |          | (3,052,000  | )    |   | (2,794,000  | )
|Translation loss on unremitted foreign
 earnings      |  |          | 1,087,000   |      |   | 1,704,000   |  
|Depreciation and amortization                         |  |          | 186,000     |      |   | 210,000     |  
|Allowance for accounts receivable                     |  |          | 106,000     |      |   | 145,000     |  
|Inventories                                           |  |          | 470,000     |      |   | 486,000     |  
|Allowance for sales returns                           |  |          | 19,000      |      |   | 25,000      |  
|Employee benefits and compensation                    |  |          | 16,000      |      |   | 20,000      |  
|Reserves and accruals                                 |  |          | 218,000     |      |   | 212,000     |  
|Sales tax                                             |  |          | 1,000       |      |   | 11,000      |  
|Stock options                                         |  |          | 51,000      |      |   | 78,000      |  
|Available tax credits                                 |  |          | 328,000     |      |   | 328,000     |  
|Other                                                 |  |          | 6,000       |      |   | 102,000     |  
|                                                      |  |          |             |      |   |             |  
|                                                      |  |          | 22,981,000  |      |   | 23,337,000  |  
|Valuation allowance                                   |  |          | (22,958,000 | )    |   | (23,279,000 | )
|                                                      |  |          |             |      |   |             |  
|Net deferred
 tax assets                              |  | $        | 23,000      |      | $ | 58,000      |  
|                                                      |  |          |             |      |   |             |  

The
net deferred tax assets at June 30, 2007 and June 30, 2006 all are related to
Intermaco and were classified as current assets on the balance sheet. At June
30, 2007, the Company has gross net operating loss carry-forwards for federal
and state income tax purposes in the United States of approximately $63.0
million and $53.6 million, respectively, expiring at various dates through
2027. In addition, as of June 30, 2007 the Company has alternative minimum tax
credit carry forwards of approximately $328,000, which carry over until they
are used. At June 30, 2007 and 2006, the Company has recorded a valuation
allowance for principally all deferred tax assets, except for those relating to
Intermaco, as there is no assurance that these assets will be realized.

34

---



The
components of income (loss) from continuing operations before income taxes
consist of the following:

|               |  |                     |            |      |   |            |   |   |            |  
|-------------- |  | ------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|               |  | Year Ended June 30, |           
|               |  |                     |           
|               |  | 2007                |            | 2006 |   | 2005       |  
|               |  |                     |            |      |   |            |  
|United
 States |  | $                   | (2,676,000 | )    | $ | (1,011,000 | ) | $ | (3,682,000 | )
|Foreign        |  |                     | 3,231,000  |      |   | 2,133,000  |   |   | 1,914,000  |  
|               |  |                     |            |      |   |            |   |   |            |  
|Total          |  | $                   | 555,000    |      | $ | 1,122,000  |   | $ | (1,768,000 | )
|               |  |                     |            |      |   |            |   |   |            |  

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

|          |  |                     |           |      |   |         |  |   |         |  
|--------- |  | ------------------- | --------- | ---- | - | ------- |  | - | ------- | -
|          |  | Year Ended June 30, |          
|          |  |                     |          
|          |  | 2007                |           | 2006 |   | 2005    | 
|          |  |                     |           |      |   |         | 
|Current:  |  |                     |           |      |   |         |  |   |         |  
|State     |  | $                   | 9,000     |      | $ | 6,000   |  | $ | (3,000  | )
|Foreign   |  |                     | 1,324,000 |      |   | 921,000 |  |   | 685,000 |  
|          |  |                     |           |      |   |         |  |   |         |  
|          |  |                     | 1,333,000 |      |   | 927,000 |  |   | 682,000 |  
|          |  |                     |           |      |   |         |  |   |         |  
|Deferred: |  |                     |           |      |   |         |  |   |         |  
|Foreign   |  |                     | 35,000    |      |   | 4,000   |  |   | (2,000  | )
|          |  |                     |           |      |   |         |  |   |         |  
|          |  |                     | 35,000    |      |   | 4,000   |  |   | (2,000  | )
|          |  |                     |           |      |   |         |  |   |         |  
|          |  | $                   | 1,368,000 |      | $ | 931,000 |  | $ | 680,000 |  
|          |  |                     |           |      |   |         |  |   |         |  

The
Companys income taxes payable at June 30, 2007 and 2006 were $861,000 and
$402,000, respectively, and are included in accrued and other current
liabilities on the balance sheets.

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

|                                                                |  |                     |       |      |  |       |   |  |       |   
|--------------------------------------------------------------- |  | ------------------- | ----- | ---- |  | ----- | - |  | ----- | --
|                                                                |  | Year Ended June 30, |      
|                                                                |  |                     |      
|                                                                |  | 2007                |       | 2006 |  | 2005  |  
|                                                                |  |                     |       |      |  |       |  
|                                                               
|Statutory federal rates (benefit)                               |  |                     | 34.0  | %    |  | 34.0  | % |  | (34.0 | %)
|State income taxes net of federal income
 tax rate (benefit)    |  |                     | (0.3  | )    |  | 7.2   |   |  | (7.7  | ) 
|Non-deductible Items                                            |  |                     | 2.9   |      |  | 1.6   |   |  | 0.9   |   
|Permanent difference true-up                                    |  |                     |      |      |  | 1.8   |   |  |      |   
|U.S. tax on foreign earnings                                    |  |                     | 114.6 |      |  | 36.8  |   |  | 138.7 |   
|Valuation allowance                                             |  |                     | 48.3  |      |  | (24.0 | ) |  | (60.3 | ) 
|Foreign taxes in excess (deficiency) of
 federal statutory rate |  |                     | 46.9  |      |  | 17.7  |   |  | (1.2  | ) 
|Other                                                           |  |                     | 0.1   |      |  | 7.9   |   |  | 2.1   |   
|                                                                |  |                     |       |      |  |       |   |  |       |   
|Total                                                           |  |                     | 246.5 | %    |  | 83.0  | % |  | 38.5  | % 
|                                                                |  |                     |       |      |  |       |   |  |       |   

The
valuation allowance decreased during fiscal 2007 by $321,000, increased during
fiscal 2006 by $126,000, and decreased during fiscal 2005 by $735,000.

6. Lease Obligations

SED
International, Inc. leases its main office facility under an operating lease
expiring in September 2009 with an entity owned by certain minority
shareholders and one officer of the Company. Rent expense for this facility for
the fiscal years ended June 30, 2007, 2006 and 2005 was $309,000, $300,000 and
$291,000, respectively. This lease provides for annual increases of 3% through
September 2009. The Company leases additional distribution center and sales
office space and office equipment under other operating leases expiring through
April 2012. Rent expense under all operating leases for the years ended June
30, 2007, 2006 and 2005 was $1,089,000, $959,000 and $1,085,000, respectively.

35

---



As
of June 30, 2007, future minimum rental commitments under non-cancelable
operating leases are:

|                     |  |   |           | 
|-------------------- |  | - | --------- | 
|Year Ending June 30, |  |   |           | 
|                     |  |   |           | 
|2008                 |  | $ | 1,119,000 | 
|2009                 |  |   | 1,113,000 | 
|2010                 |  |   | 755,000   | 
|2011                 |  |   | 392,000   | 
|2012                 |  |   | 210,000   | 
|                     |  |   |           | 
|                     |  | $ | 3,589,000 | 
|                     |  |   |           | 

7.
Shareholders Equity

The
Company maintains four stock option plans, one which is currently active and
under which 801,591 shares of common stock have been reserved at June 30, 2007
for 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. The compensation cost that has been charged against
income for these stock option plans was $5,000, $5,000 and $18,000 for fiscal
2007, 2006 and 2005 respectively. No income tax benefit was recognized in the
income statement for stock-based compensation arrangements as we have large net
operating loss carry forwards with full valuation allowances. None of the
expense related to stock-based compensation arrangements was capitalized during
fiscal 2007, 2006 or 2005. There is no unrecognized compensation cost related
to non-vested stock options at June 30, 2007.

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

|                                              |  |        |         |                                    |   |                                                 |  |                             |     |  |  |   |        | 
|--------------------------------------------- |  | ------ | ------- | ---------------------------------- | - | ----------------------------------------------- |  | --------------------------- | --- |  |  | - | ------ | 
|                                              |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |    
|                                              |  |        |         |                                    |   |                                                 |  |                             |    
|                                              |  |        |         |                                    |   |                                                 |  |                             |     |  |  |   |        | 
|Outstanding at June 30,
 2006                 |  |        | 517,909 |                                    | $ | 2.60                                            |  |                             |     |  |  |   |        | 
|Forfeited or expired                          |  |        | (11,750 | )                                  | $ | 5.92                                            |  |                             |     |  |  |   |        | 
|                                              |  |        |         |                                    |   |                                                 |  |                             |     |  |  |   |        | 
|Outstanding at June 30,
 2007                 |  |        | 506,159 |                                    | $ | 2.52                                            |  |                             | 4.4 |  |  | $ | 89,000 | 
|                                              |  |        |         |                                    |   |                                                 |  |                             |     |  |  |   |        | 
|                                              |  |        |         |                                    |   |                                                 |  |                             |     |  |  |   |        | 
|Vested and expected to vest
 at June 30, 2007 |  |        | 506,159 |                                    | $ | 2.52                                            |  |                             | 4.4 |  |  | $ | 89,000 | 
|Exercisable at June 30,
 2007                 |  |        | 497,934 |                                    | $ | 2.52                                            |  |                             | 4.4 |  |  | $ | 84,000 | 
|Available for grant at June
 30, 2007         |  |        | 801,591 |                                    |   |                                                 |  |                             |     |  |  |   |        | 

The
total intrinsic value of options exercised during the fiscal years ended June
30, 2006 and 2005 were $2,000 and $3,000, respectively. There were no options
exercised during fiscal 2007. The total fair value of shares vested during each
of the fiscal years ended June 30, 2006 and 2005 was $17,000 and $45,000, respectively.

36

---



The
following table summarizes information pertaining to all options outstanding
and exercisable at June 30, 2007:

|                          |  |                      |         |                                    |  |                     |         |                                               |  |                                    |  |  |  |     |  |  |   |         | 
|------------------------- |  | -------------------- | ------- | ---------------------------------- |  | ------------------- | ------- | --------------------------------------------- |  | ---------------------------------- |  |  |  | --- |  |  | - | ------- | 
|                          |  | Outstanding
 Options |         | Exercisable
 Options               | 
|                          |  |                      |         |                                    | 
|Range of
 Exercise Prices |  | Number
 Outstanding  |         | Weighted
 Average
 Exercise
 Price |  | Number
 Exercisable |         | Average
 Remaining
 Contractual
 Life (Years) |  | Weighted
 Average
 Exercise
 Price | 
|                          |  |                      |         |                                    |  |                     |         |                                               |  |                                    | 
|$0.0000 -
 $  1.0130      |  |                      | 92,500  |                                    |  | $                   | .6395   |                                               |  | 86,000                             |  |  |  | 5.7 |  |  | $ | 0.6198  | 
|$1.0131 -
 $  2.0260      |  |                      | 255,000 |                                    |  | $                   | 1.9494  |                                               |  | 255,000                            |  |  |  | 4.3 |  |  | $ | 1.9494  | 
|$2.0261 -
 $  3.0390      |  |                      | 78,000  |                                    |  | $                   | 2.4428  |                                               |  | 78,000                             |  |  |  | 5.5 |  |  | $ | 2.4428  | 
|$5.0651 -
 $  6.0780      |  |                      | 55,334  |                                    |  | $                   | 5.8800  |                                               |  | 55,334                             |  |  |  | 2.1 |  |  | $ | 5.8800  | 
|$6.0781 -
 $  7.0910      |  |                      | 5,250   |                                    |  | $                   | 6.8200  |                                               |  | 5,250                              |  |  |  | 2.7 |  |  | $ | 6.8200  | 
|$7.0911 - $  8.1040       |  |                      | 16,300  |                                    |  | $                   | 7.8728  |                                               |  | 14,575                             |  |  |  | 3.0 |  |  | $ | 7.8648  | 
|$9.1171 - $10.1300        |  |                      | 3,775   |                                    |  | $                   | 10.1068 |                                               |  | 3,775                              |  |  |  | .4  |  |  | $ | 10.1068 | 
|                          |  |                      |         |                                    |  |                     |         |                                               |  |                                    |  |  |  |     |  |  |   |         | 
|                          |  |                      | 506,159 |                                    |  |                     |         |                                               |  | 497,934                            |  |  |  |     |  |  |   |         | 
|                          |  |                      |         |                                    |  |                     |         |                                               |  |                                    |  |  |  |     |  |  |   |         | 

Restricted
Stock  The Companys stock option plan established in 1999
also permits the grant of restricted stock awards. Restricted stock activity is
as follows:

| |                                              |  |                      |        |      |  |        |   |  |        |  
| | -------------------------------------------- |  | -------------------- | ------ | ---- |  | ------ | - |  | ------ | -
| |                                              |  | Year Ended
 June 30, |       
| |                                              |  |                      |       
| |                                              |  | 2007                 |        | 2006 |  | 2005   |  
| |                                              |  |                      |        |      |  |        |  
| |                                              |  |                      |        |      |  |        |  
| | Shares of restricted stock-beginning of year |  |                      | 12,750 |      |  | 17,000 |   |  | 21,250 |  
| | Vested                                       |  |                      | (5,250 | )    |  | (4,250 | ) |  | (4,250 | )
| | Canceled                                     |  |                      | (7,500 | )    |  |       |   |  |       |  
| |                                              |  |                      |        |      |  |        |   |  |        |  
| | Shares of restricted stock-end of year       |  |                      |       |      |  | 12,750 |   |  | 17,000 |  
| |                                              |  |                      |        |      |  |        |   |  |        |  

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 weighted average grant-date fair value of shares outstanding at the
beginning of fiscal 2007 and vested during fiscal 2007 was $7.50.

8.
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. SED International may provide matching contributions for its
employees at the discretion of the Board of Directors. Vesting in matching
contributions, if any, is ratable over 7 years based on years of continuous
service. There were no matching contributions for fiscal years 2007, 2006 and
2005.

9.
Segment Information

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

37

---



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

|                                          |  |                |             |                |   |              |  |              |             |   |   |             |  
|----------------------------------------- |  | -------------- | ----------- | -------------- | - | ------------ |  | ------------ | ----------- | - | - | ----------- | -
|                                          |  | United
 States |             | Latin
 America |   | Eliminations |  | Consolidated |            
|                                          |  |                |             |                |   |              |  |              |            
|Fiscal
 2007                              |  |                |             |                |   |              |  |              |             |   |   |             |  
|Net sales to unaffiliated
 customers      |  | $              | 321,012,000 |                | $ | 90,065,000   |  | $            | (2,642,000  | ) | $ | 408,435,000 |  
|Gross profit                              |  | $              | 15,006,000  |                | $ | 6,914,000    |  |              |            |   | $ | 21,920,000  |  
|(Loss) income from
 continuing operations |  | $              | (1,102,000  | )              | $ | 3,231,000    |  |              |            |   | $ | 2,129,000   |  
|Total assets at year-end                  |  | $              | 79,694,000  |                | $ | 26,430,000   |  | $            | (12,902,000 | ) | $ | 93,222,000  |  
|Fiscal
 2006                              |  |                |             |                |   |              |  |              |             |   |   |             |  
|Net sales to unaffiliated
 customers      |  | $              | 335,824,000 |                | $ | 76,547,000   |  |              |            |   | $ | 412,371,000 |  
|Gross profit                              |  | $              | 15,112,000  |                | $ | 6,291,000    |  |              |            |   | $ | 21,403,000  |  
|Income from continuing
 operations        |  | $              | 371,000     |                | $ | 2,140,000    |  |              |            |   | $ | 2,511,000   |  
|Total assets at year-end                  |  | $              | 68,555,000  |                | $ | 19,002,000   |  | $            | (12,242,000 | ) | $ | 75,315,000  |  
|Fiscal
 2005                              |  |                |             |                |   |              |  |              |             |   |   |             |  
|Net sales to unaffiliated
 customers      |  | $              | 327,006,000 |                | $ | 53,858,000   |  |              |            |   | $ | 380,864,000 |  
|Gross profit                              |  | $              | 12,025,000  |                | $ | 4,748,000    |  |              |            |   | $ | 16,773,000  |  
|(Loss) income from
 continuing operations |  | $              | (3,142,000  | )              | $ | 2,065,000    |  |              |            |   | $ | (1,077,000  | )
|Total assets at year-end                  |  | $              | 87,400,000  |                | $ | 14,387,000   |  | $            | (31,004,000 | ) | $ | 70,783,000  |  

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:

|                    |  |                       |             |                             |   |                             |  |                 |            |       |   |           |  |   |             | 
|------------------- |  | --------------------- | ----------- | --------------------------- | - | --------------------------- |  | --------------- | ---------- | ----- | - | --------- |  | - | ----------- | 
|Year Ended June 30, |  | MicrocomputerProducts |             | ConsumerElectronicsProducts |   | Wireless
 TelephoneProducts |  | HandlingRevenue |            | Total |  
|                    |  |                       |             |                             |   |                             |  |                 |            |       |  
|2007                |  | $                     | 353,616,000 |                             | $ | 46,175,000                  |  | $               | 7,640,000  |       | $ | 1,004,000 |  | $ | 408,435,000 | 
|2006                |  | $                     | 349,126,000 |                             | $ | 32,466,000                  |  | $               | 29,508,000 |       | $ | 1,271,000 |  | $ | 412,371,000 | 
|2005                |  | $                     | 310,747,000 |                             | $ | 23,374,000                  |  | $               | 45,541,000 |       | $ | 1,202,000 |  | $ | 380,864,000 | 

Approximately
39.5%, 34.1% and 29.8% in the fiscal years ended June 30, 2007, 2006, and 2005,
respectively, consisted of sales to customers for export principally into Latin
America and direct sales to customers in Colombia and Argentina.

10.
Significant Vendors

During
the year ended June 30, 2007, the Company purchased approximately 38.5% of its
product from two vendors. During the year ended June 30, 2006, the Company
purchased approximately 49.8% of its product from three vendors. During the
year ended June 30, 2005, the Company purchased approximately 47.8% of its
product from three vendors.

11.
Supplemental Disclosures

An
analysis of allowances for doubtful accounts is as follows:

|                     |  |                            |         |                             |   |                |  |                       |          |   |   |         | 
|-------------------- |  | -------------------------- | ------- | --------------------------- | - | -------------- |  | --------------------- | -------- | - | - | ------- | 
|Year Ended
 June 30, |  | Balance atBeginningof Year |         | Charged toCosts andExpenses |   | Deductions (1) |  | Balance atEnd of Year |         
|                     |  |                            |         |                             |   |                |  |                       |         
|2007                 |  | $                          | 437,000 |                             | $ | 658,000        |  | $                     | (747,000 | ) | $ | 348,000 | 
|2006                 |  | $                          | 535,000 |                             | $ | 475,000        |  | $                     | (573,000 | ) | $ | 437,000 | 
|2005                 |  | $                          | 616,000 |                             | $ | 560,000        |  | $                     | (641,000 | ) | $ | 535,000 | 

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

38

---



An
analysis of allowances for obsolete and slow moving inventories is as follows:

|                     |  |                            |           |                             |   |                |   |                       |   |  |   |           | 
|-------------------- |  | -------------------------- | --------- | --------------------------- | - | -------------- | - | --------------------- | - |  | - | --------- | 
|Year Ended
 June 30, |  | Balance atBeginningof Year |           | Charged toCosts andExpenses |   | Deductions (1) |   | Balance atEnd of Year |  
|                     |  |                            |           |                             |   |                |   |                       |  
|2007                 |  | $                          | 1,037,000 |                             | $ | (92,000        | ) | $                     |  |  | $ | 945,000   | 
|2006                 |  | $                          | 1,060,000 |                             | $ | (23,000        | ) | $                     |  |  | $ | 1,037,000 | 
|2005                 |  | $                          | 916,000   |                             | $ | 144,000        |   | $                     |  |  | $ | 1,060,000 | 

|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | Deductions represent actual write-offs or mark-downs
 of inventories.

12.
Discontinued Operations

In
February 2003, the Company resolved to discontinue commercial operations of its
Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda.
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 consolidated balance sheets as of June 30,
2007, 2006 and 2005. As of June 30, 2007 and 2006, the assets of SED
International do Brasil Distribuidora, Ltda. had no net realizable value.

The
Brazil Operation had no recognized gain or loss from discontinued operations in
fiscal 2007 and had a gain from discontinued operation of $193,000 in fiscal
2006, and a loss of $154,000 in fiscal year 2005. The Brazil operation sales
activity ceased during fiscal year 2003. The gain in fiscal 2006 resulted from
a reduction in liabilities for suppliers and administrative services. The loss
from discontinued operations in fiscal years 2005 and 2004 was attributed to
the following: (i) foreign currency exchange losses, (ii) professional fees and
(iii) the favorable settlement of certain liabilities offset by additional
provisions for the tax claims asserted by the Brazilian government.

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

SED
International do Brasil Distribuidora Ltda. has various litigations related to
additional income taxes and social taxes allegedly due from the fiscal years
1998 through 2004. These legal claims were filed during the years 2002 and
2003. The legal claims range from $3,000 to $219,000 each or $522,000 in the
aggregate. During fiscal 2007 SED incurred $70,000 in cost related to Brazil. After
recording this cost, SED has an accrued liability of $270,000 at June 30, 2007
to cover potential losses related to these claims.

13.
Legal Proceedings

On
March 15, 2007, Mark Diamond (Mr. Diamond) filed a suit in the Superior Court
of Fulton County, State of Georgia, captioned Mark Diamond v. SED
International Holdings, Inc. et al., Civil Action file no. 2007-CV-131027.
From 1999 to 2005 Mr. Diamond was president and chief operating officer, and
from 2003 to 2005 he was also chief executive officer of the Company; from 2004
to 2005 he was president, chief executive and chief operating officer of SED
International; and from 1996 to 2005 he was also a director of the Company.
Prior to filing this lawsuit, on March 5, 2007, Mr. Diamond terminated a prior
lawsuit he implemented against the Company on November 3, 2005 in the Superior
Court of Dekalb County, State of Georgia captioned Mark Diamond vs. SED
International Holdings, Inc., et al., Civil Action file no. 05-CV-12452-7.
Similar to that lawsuit, in this lawsuit, Mr. Diamond alleges that the Company
breached his employment agreement and makes multiple other claims pursuant to
which he is demanding attorneys fees and an award of monetary damages under
the theory of quantum meruit. Mr. Diamond claims he is due wages and other
compensation in the amount of approximately $1.7 million, un-reimbursed
expenses of approximately $85,000, director fees of an unspecified total,
interest on all such

39

---



amounts, and
reimbursement of legal fees and expenses of an unspecified amount. The parties
are currently engaged in written discovery. The Company believes that it has
meritorious defenses and will vigorously defend this matter.

On
June 19, 2006 the Company through its subsidiary, SED International, instituted
an action in the Superior Court of Fulton County, State of Georgia captioned
SED International, Inc. vs. Michael Levine, Civil Action file no.
2006-CV-118591. In the action, the Company asserts that Mr. Levine breached the
terms of the Termination Agreement with SED International and requests that the
court grant injunctive relief. In response, Mr. Levine has denied the Companys
assertions, filed a third party complaint against the Company and asserted
counterclaims against SED International, alleging breach and infliction of
emotional distress. In connection with the third party complaint and the
counterclaims, Mr. Levine has asked that the court award him costs, fees and
punitive damages. In October 2006, the Company filed an Answer to his third
party complaint and discovery commenced. Since that time, Mr. Levine has
dismissed, without prejudice, all counterclaims filed by him against SED
International and discovery has essentially been completed. The Company is
vigorously prosecuting this action and has filed a motion for summary judgment
to his third party complaint.

On
August 19, 2005, Mr. Diamond sent a complaint (received August 24, 2005)
against SED International, the Companys operating subsidiary, with the United
States Department of Labor, Case No. 2006-SOX-000444, alleging that SED
International violated the employee protection provisions of Title VIII of the
Sarbanes-Oxley Act of 2002 when it terminated him from his executive officer
positions. He has asked the Department of Labor to award him damages in the
form of back-pay (rate of $375,000 per year plus benefits), attorney fees and
expenses, and reinstatement as an executive officer of SED International. On
December 13, 2005 the Department of Labor issued a decision in favor of SED
International. Mr. Diamond appealed that decision and SED International filed a
motion for summary judgment in its favor. In October 2006, the Department of
Labor denied the motion for summary judgment in connection with his appeal. A
trial was held on the issues from October 31, 2006 through November 3, 2006. In
connection with the trial, both sides respectively submitted post-hearing
briefs in January, March and July 2007. The parties are currently waiting for a
ruling from the Administrative Law Judge. SED International believes that it
has meritorious defenses to his complaint and is vigorously defending this
matter.

On
October 25, 2005, the Company was named in a lawsuit filed by Rockland Credit
Finance, LLC, a Maryland limited liability company (Rockland), in the
Superior Court of New Jersey, County of Essex captioned Rockland Credit
Finance, LLC vs. Nikada Inc., et al., Docket no. ESX-L-00-8310-05. In the
lawsuit, Rockland alleged that the Company is indebted to them as a result of
the Companys relationship with Nikada, Inc., a New Jersey corporation and a
former product supplier to the Company, and sought money damages in the amount
of approximately $700,000 plus interest, costs and attorneys fees. The Company
denied all the allegations. The Company brought a third party claim against
Nikada and its owner for misrepresentations and filed a Motion to Dismiss. The
Company settled the lawsuit for an undisclosed amount in May 2007.

40

---



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

None.

Item 9A. Controls
and Procedures

Our
management, with the participation of our principal executive and financial
officers, have evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this report. Based on that evaluation, our
principal executive and financial officers have concluded that, as of the end
of such period, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is (i) recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms; and
(ii) accumulated and communicated to management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.

There
have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended June 30, 2007 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

Item 9B. Other
Information

None.

PART III

Item 10. Directors,
Executive Officers and Corporate Governance

DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY

The
following table sets forth the names, ages and principal positions of the
Companys directors executive officers as of October 12, 2007:

|                      |  |     |  |                                                
|--------------------- |  | --- |  | -----------------------------------------------
|Name                  |  | Age |  | Position with the Company                      
|                      |  |     |  |                                                
|Jean Diamond*         |  | 66  |  | Chairman of
 Board, Chief Executive Officer    
|Jonathan Elster*      |  | 35  |  | Executive
 Vice President                      
|Barry Diamond*        |  | 65  |  | Vice
 President  Product Management & Wireless
|Charles Marsh*        |  | 51  |  | Senior Vice
 - President Purchasing            
|Mark DiVito*          |  | 48  |  | Vice
 President of Operations                  
|Lyle Dickler*         |  | 38  |  | Vice
 President of Finance                     
|Stewart I Aaron(1)(2) |  | 67  |  | Board of
 Directors                            
|Melvyn I Cohen(1(2))  |  | 67  |  | Board of
 Directors                            
|Joseph Segal(1)       |  | 64  |  | Board of
 Directors                            

|    |                                       
|--- | --------------------------------------
|   
|*   | Named
 Executive Officers             
|    |                                       
|(1) | Member of
 the Audit Committee.       
|    |                                       
|(2) | Member of
 the Compensation Committee.

The
principal occupation and business experience for at least the last five years
for each director and executive officer is set forth below.

41

---



Stewart I. Aaron has
been a director of the Company since November 1994. Mr. Aaron has served for
over 20 years as President of LABS, Inc., a silk plant manufacturer based in
Atlanta, Georgia

Melvyn I. Cohen has
been a director of the Company since November 1999. Mr. Cohen has been the sole
member of M. Cohen and Company LLC, a certified public accounting firm in the
State of New Jersey, since December 1994. Mr. Cohen has been a member of the
American Institute of Certified Public Accountants and a member of the New
Jersey Society of Certified Public Accountants since 1968. Mr. Cohen has been a
Certified Public Accountant for over 35 years.

Barry Diamond has
been Vice-President of the Company since 1987. Mr. Diamond currently serves as
Vice-President of Product Management and responsible for the management of the
Wireless business within the Company. Mr. Diamond has been in the Wireless and
Electronics Business for over thirty years. Mr. Diamond was Vice-President of
Purchasing for All Brands/Brands Mart from 1970-1980. Mr. Diamond was President
of Great Sounds of New York, a consumer electronics business, from 1980-1987. .
Barry Diamond is Jean Diamonds brother-in-law.

Jean A. Diamond was
appointed to the Board in January of 2003, and was appointed Chairman of the
Board of the Company on July 2, 2003. Mrs. Diamond was appointed Chief
Executive Officer of the Company on June 21, 2005. Mrs. Diamond is a co-founder
of the Company and has been an integral part of the Company since its inception.
She also serves as Chief Executive Officer, with operational responsibilities
in SED International, Inc., a Georgia corporation and a wholly-owned subsidiary
of the Company (SED International).

Lyle Dickler joined
the Company in June 2005 as Corporate Controller and assumed the positions as
Secretary and Treasurer effective August 11, 2005. Mr. Dickler was appointed
Vice President of Finance on July 1, 2006. Prior to joining the Company Mr.
Dickler served from May 2003 to June 2005 as Controller for Okabashi Brands,
Inc. From 2001 to 2003 Mr. Dickler served as Controller for PAI Industries,
Inc.

Mark DiVito joined
the Company in September 1996 as Director of Corporate Security. In July 1998,
he was appointed to the position of Director of Human Resources. Mr. DiVito was
appointed Vice-President of Human Resources in August 1999 and in January 2005
he was appointed Vice-President of Operations.

Jonathan Elster has
been with the Company since 1995. Mr. Elster currently serves as Executive Vice
President of for SED International. Mr. Elster began his career with the
Company as a sales representative in 1995. He has served as a Sales Manager
from 1997 to 1999 and as Vice President-Sales from 1999 to 2000. In 2000, Mr.
Elster was promoted to Senior Vice-President of Sales and Marketing and is
responsible for sales and marketing operations of the Company. Mr. Elster has
held the position of Executive Vice President since January 2004. Jonathan
Elster is Jean Diamonds son-in-law.

Charles Marsh has
over 29 years of experience in the consumer electronics, computer and
distribution industry and re-joined the Company in January 2004 as
Vice-President-Consumer Electronics. In February of 2004, Mr. Marsh assumed the
position of Senior Vice President-Purchasing. Mr. Marsh began his distribution
career in 1982 at SED International, where he held executive positions of
increasing responsibility in sales, purchasing, and marketing for nearly 13
years. Before departing in 1994, Marsh served as Senior Executive Vice President.
Prior to re-joining the Company Mr. Marsh spent seven years as President,
Executive Vice President and Board of Directors member of BDI-Laguna
Corporation, a leading, privately held national distributor of consumer
electronics and computer products to the rent-to-own and e-commerce fulfillment
channel. Prior to BDI-Laguna Corporation Mr. Marsh was Senior Vice President of
Liuski International, Inc. a manufacturer and international distributor of
computers and peripherals. From 1976 to1982, Mr. Marsh was Vice President of
Channel One Entertainment Systems, Inc. a privately held tri-state retailer of
consumer electronics.

42

---



Joseph Segal was
appointed to the Board in September 2005. Since 1998, Mr. Segal has served as
managing partner in Cornerstone Capital Partners, LLC, a real estate investment
firm operating in Georgia and Florida. Mr. Segal previously served as Chairman
of the Board and Chief Operating Officer of Phoenix Communications, a
commercial printing and publishing firm, until December 1997.

Audit Committee Financial Expert

The
Board has determined that Melvyn I. Cohen qualifies as the Companys audit
committee financial expert, as that term is defined in Item 407(d)(5) of
Regulation S-K, and independent under Nasdaqs listing standards and Section
10A(m)(3) of the Securities Exchange Act of 1934, as amended (the Exchange
Act).

Section 16(a) Beneficial Ownership Reporting
Compliance

Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than ten percent of a registered class of our equity securities, to
file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten-percent stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to us, or written
representations that no Forms 5 were required, we believe that all Section
16(a) filing requirements applicable to our officers and directors were
complied with during the fiscal year ended June 30, 2007, except that each of
executive officers and directors failed to timely file a Form 3 after the
Company re-registered its Common Stock with the SEC in accordance with Section
12(g)(1)(B) of the Exchange Act.

Code of Ethics

We
have adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer and other persons performing similar functions, as
well as all of our other employees and directors. The Code of Ethics is posted
on our Web site at www.sedonline.com
and is filed as Exhibit 14 to this report.

Item 11. Executive
Compensation

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

General

The Company
provides what it believes is a competitive total compensation package to its
executive management team through various combinations of base salary, a
long-term equity incentive compensation plan and broad-based benefits programs.

This
Compensation Discussion and Analysis explains the Companys compensation
philosophy, policies and practices with respect to the Named Executive Officers
(the individuals set forth below in the section entitled Summary Compensation
Table).

The Objectives of the Companys Executive
Compensation Program

Provide compensation
packages consistent with the Companys competition.

To attract and
retain executives with the ability and the experience necessary to lead the
Company and deliver strong performance and value to its shareholders, the
Company strive to provide a total compensation package that is competitive with
total compensation generally provided to executives in the Companys industry
and general industry companies of similar size in terms of revenue and market
capitalization. Those are the organizations against whom the Company generally
competes for executive talent.

43

---



If performance
on Company, team or individual goals exceeds targeted levels, the Companys
executives have the opportunity, through bonuses and long-term equity incentive
compensation plans, to receive total compensation that may exceed the median
pay for the Companys industry and general industry. The Company believes that
its executive compensation packages are reasonable when considering its
business strategy, its compensation philosophy and the competitive market pay.
For each executive officer, the Company considers the relevance of following:

| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | The
 Companys business need for the executive officers skills;                                                               
| |   |                                                                                                                                
| |  | The
 contributions that the executive officer has made or the Company believes
 will make to its success;                      
| |   |                                                                                                                                
| |  | The
 transferability of the executive officers managerial skills to other
 potential employers;                               
| |   |                                                                                                                                
| |  | The
 relevance of the executive officers experience to other potential employers,
 particularly in the Companys industry; and
| |   |                                                                                                                                
| |  | The
 readiness of the executive officer to assume a more significant role with
 another potential employer.                    

Offer comprehensive
benefits package to all full-time employees.

The Company
provides a competitive benefits package to all full-time employees including
health and welfare benefits such as medical, dental, vision care, disability
insurance, life insurance benefits, and a 401(k) savings plan. The Company
provides its Chief Executive Officer a Company vehicle but have no other
structured executive perquisite benefits (e.g., club memberships or sports
tickets) for any executive officer, including the Named Executive Officers, and
it currently does not provide any deferred compensation programs or supplemental
pensions to any executive officer, including the Named Executive Officers.

Provide fair and
equitable compensation.

The Company
provides a total compensation program that it believes will be perceived by
both its executive officers and its shareholders as fair and equitable. In
addition to market pay levels and considering individual circumstances related
to each executive officer, the Company also considers the pay of each executive
officer relative to each other executive officer and relative to other members
of the management team. The Company has designed the total compensation
programs to be consistent for its executive management team.

What the Companys Executive Compensation
Program is Designed to Award

The Companys
executive compensation program emphasizes pay for performance. Performance is
measured based on achievement of company, team and individual performance
goals. The goals for the Company are established so that target attainment is
not assured. The attainment of payment for performance at target or above will
require significant effort on the part of the Companys executives.

The Companys Executive Compensation Process

The
Compensation Committee is responsible for establishing and administering its
policies governing the compensation for the Companys executive officers. The
Compensation Committee is composed entirely of non-employee directors. The
Companys executive officers are elected by our Board. The following
discussions are generally the Companys and the Boards historical practices
which the Compensation Committee expects to adopt until such time as
modifications are recommended and approved by the committee. Where appropriate
certain procedures described below reflect the Compensation Committees
intentions as it replaces the Board in oversight and governance of the
compensation process.

Based on the
Compensation Committees understanding of executive compensation for comparable
positions at similarly situated companies, experience in making these types of
decisions and judgment regarding the appropriate amounts and types of executive
compensation to pay and in part on recommendations where appropriate, from the
Chief Executive Officer, along with other considerations discussed below, the
Compensation Committee will approve the annual compensation package of the
Companys executive officers.

44

---



The
Compensation Committee meets outside the presence of all of the Companys
executive officers, including the Named Executive Officers, to consider
appropriate compensation for the Companys Chief Executive Officer. For all
other Named Executive Officers, the Compensation Committee meets outside the
presence of all executive officers except the Companys Chief Executive Officer
who may be invited to attend. The Companys Chief Executive Officer, Jean
Diamond, periodically reviews each of the Named Executive Officers performance
with the committee and makes recommendations to it with respect to the
appropriate base salary, payments to be made under the Companys cash incentive
plans, and the grants of long-term equity incentive awards for all other
executive officers.

The annual
performance review of the Companys executive officers is considered by the
Compensation Committee when making decisions on setting base salary, targets
for and payments under the Companys bonus opportunity and grants of long-term
equity incentive awards. When making decisions on setting base salary, targets
for and payments under the Companys bonus opportunity and initial grants of
long-term equity incentive awards for new executive officers, the Compensation
Committee considers the importance of the position to the Company, the past
salary history of the executive officer and the contributions to be made by the
executive officer to the Company. The Compensation Committee also reviews any
analyses and recommendations from other sources retained or consulted by the
committee and may approve these recommendations with modifications as deemed
appropriate by the Compensation Committee.

The Companys Executive Compensation Programs

Overall, the
Companys executive compensation programs are designed to be consistent with
the objectives and principles set forth above. The basic elements of our
executive compensation programs are summarized in the table below, followed by
a more detailed discussion of each compensation program.

|                                                         |  |                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Element                                                  |  | Characteristics                                                                                                                                                                                 |  | Purpose                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                         |  |                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Base salary                                              |  | Fixed annual
 cash compensation; all executives are eligible for periodic increases in base
 salary based on performance and market pay levels.                                                 |  | Keep annual
 compensation competitive with the market for skills and experience necessary
 to meet the requirements of the executives role with the Company.                                                                                                                                                                                                                                                                                                                   
|                                                         |  |                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Cash
 incentive bonuses                                  |  | Performance-based
 annual cash incentive earned based on company, team and individual
 performance against target performance levels and market pay levels.                                     |  | Motivate and
 reward for the achievement and over- performance of critical financial and
 strategic goals of the Company. Amounts earned for achievement of target
 performance levels based on the Companys annual budget is designed to
 provide a market- competitive pay package; potential for lesser or greater
 amounts are intended to motivate participants to achieve or exceed our
 financial performance goals and to not reward if performance goals are not
 met.
|                                                         |  |                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Long-term
 equity incentive
 plan awards (stock options) |  | Performance-based
 equity award which has value to the extent the Common Stock price increases
 over time; targeted at the market pay level and/or
 competitive practices at similar companies. |  | Align interest
 of management with shareholders; motivate and reward management to increase
 the shareholder value of the Company over the long term.                                                                                                                                                                                                                                                                                                                           

45

---



|                                |  |                                                                                                                                                                                                                           |  |                                                                                                                                                                
|------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Retirement
 savings opportunity |  | Tax-deferred
 plan in which all employees can choose to defer compensation for retirement.
 We provide no matching or other contributions; The Company does not allow
 employees to invest these savings in Common Stock. |  | Provide
 employees the opportunity to save for their retirement. Account balances are
 affected by contributions and investment decisions made by the employee.
|                                |  |                                                                                                                                                                                                                           |  |                                                                                                                                                                
|Health &
 welfare benefits      |  | Fixed
 component. The same/comparable health and welfare benefits (medical, dental,
 vision, disability insurance and life insurance) are available for all
 full-time employees.                                         |  | Provides
 benefits to meet the health and welfare needs of employees and their
 families.                                                                      

Other Material Policies and Information

All pay
elements are cash-based except for the long-term equity incentive program,
which is an equity-based (stock options and restricted Common Stock) award. The
Company considers market pay practices and practices of comparable companies in
determining the amounts to be paid, what components should be paid in cash
versus equity, and how much of a Named Executive Officers compensation should
be short-term versus long-term.

Compensation
opportunities for the Companys executive officers, including the Named
Executive Officers, are designed to be competitive with comparable companies.

In determining
whether to increase or decrease compensation to the Companys executive
officers, including the Named Executive Officers, annually the Company takes
into account the changes (if any) in the market pay levels, the contributions
made by the executive officer, the performance of the executive officer, the
increases or decreases in responsibilities and roles of the executive officer,
the business needs for the executive officer, the transferability of managerial
skills to another employer, the relevance of the executive officers experience
to other potential employers and the readiness of the executive officer to
assume a more significant role with another organization. In addition, the
Company considers the executive officers current base salary in relation to
the market pay of similar companies.

Compensation
or amounts realized by executives from prior compensation from the Company,
such as gains from previously awarded stock options, are taken into account in
setting other elements of compensation, such as base pay, incentive bonus
payments, or awards of stock options under our long-term equity incentive
program. With respect to new executive officers, the Company takes into account
their prior base salary and annual cash incentive, as well as the contribution
expected to be made by the new executive officer, the business needs and the
role of the executive officer with the Company. The Company believes that its
executive officers should be fairly compensated each year relative to market
pay levels of similar companies. Moreover, the Company believes that its
long-term incentive compensation program furthers its significant emphasis on
pay for performance compensation.

Annual Cash Compensation

To attract and
retain executives with the ability and the experience necessary to lead the
Company and deliver strong performance to its shareholders, the Company
provides a competitive total compensation package. Base salaries and total
compensation are targeted at market levels of similar companies, considering individual performance and experience,
to ensure that each executive is appropriately compensated.

46

---



Base Salary

Annually, the
Company reviews salary ranges and individual salaries for its executive
officers. The Company establishes the base salary for each executive officer
based on consideration of market pay levels of similar companies and internal
factors, such as the individuals performance and experience, and the pay of
others on the executive team.

The Company
considers market pay levels among individuals in comparable positions with
transferable skills within its industry and comparable companies in general
industry. When establishing the base salary of any executive officer, the
Company also considers business requirements for certain skills, individual
experience and contributions, the roles and responsibilities of the executive
and other factors. The Company believes that a competitive base salary is
necessary to attract and retain an executive management team with the
appropriate abilities and experience required to lead it.

The base
salaries paid to the Named Executive Officers are set forth below in the
Summary Compensation Table - See Summary of Compensation. For the fiscal year
ended June 30, 2007, cash compensation to the Named Executive Officers was
approximately $1,261,255, with the Chief Executive Officer receiving
approximately $281,285 of that. The Company believes that the base salary paid
to its executive officers during 2007 achieves its executive compensation
objectives, compares favorably to similar companies and is within its objective
of providing a base salary at market levels.

Long-term Equity Incentive Compensation

The Company
can award long-term equity incentive grants to executive officers and
directors, including Named Executive Officers, as part of the total
compensation package. These awards are consistent with its pay for performance
principles and align the interests of the executive officers to the interests
of shareholders. The Compensation Committee reviews and recommends to the Board
the amount of each award to be granted to each Named Executive Officer and the
Board approves each award. Long-term equity incentive awards are made under the
Plans.

Long-term
equity incentive compensation is currently in the form of options to acquire
Common Stock. The value of the stock options awarded is dependent upon the
Common Stock price. The Compensation Committee, Board and management believe
that stock option awards currently are an appropriate vehicle to provide
long-term incentive compensation to executive officers. Other types of
long-term equity incentive compensation may be considered in the future as the
Companys business strategy evolves.

Stock options
provide the Companys executive officers with the right to purchase shares of
its Common Stock at a fixed exercise price for a period of up to ten years
under the current Plans. Stock options are awarded on the basis of anticipated
service to the Company and will vest as determined by the Compensation
Committee.

Like the
Companys other pay components, long-term equity incentive award grants are
determined based on competitive market levels of comparable companies.

Generally, the
Company does not consider an executive officers stock holdings or previous
stock option grants in determining the number of stock options to be granted.
The Company believes that its executive officers should be fairly compensated
each year relative to market pay levels of comparable companies and relative to
its other executive officers. Moreover, the Company believes that its long-term
incentive compensation program furthers its significant emphasis on pay for
performance compensation. The Company does not have any requirement that
executive officers hold a specific amount of its Common Stock or stock options.

The
Compensation Committee retains discretion to make stock option awards to
executive officers at other times, including in connection with the hiring of a
new executive officer, the promotion of an executive officer, to reward
executive officers, for retention purposes or for other circumstances
recommended by management or the compensation committee. The exercise price of
any such grant is the fair market value of the Common Stock on the grant date.

For accounting
purposes, the Company applies the guidance in Statement of Financial Accounting
Standard 123 (revised December 2004), or SFAS 123(R), to record
compensation expense for stock option grants. SFAS 123(R) is used to
develop the assumptions necessary and the model appropriate to value the

47

---



awards as well
as the timing of the expense recognition over the requisite service period,
generally the vesting period, of the award.

Executive
officers recognize taxable income from stock option awards when a vested option
is exercised. The Company generally receives a corresponding tax deduction for
compensation expense in the year of exercise. The amount included in the
executive officers wages and the amount the Company may deduct is equal to the
Common Stock price when the stock options are exercised less the exercise price
multiplied by the number of stock options exercised. The Company currently does
not pay or reimburse any executive officer for any taxes due upon exercise of a
stock option.

Overview of Fiscal 2007 Compensation

The
Company believes that the total compensation paid to the Named Executive
Officers for the fiscal year ended June 30, 2007 achieves the overall
objectives of its executive compensation program. The total compensation and
elements thereof paid to each of our Named Executive Officers during 2007 is
set forth below in the Summary Compensation Table. See Summary of
Compensation.

Other Benefits

Retirement Savings
Opportunity

The
Company continues to maintain a 401(k) Plan. All of the Companys employees who
are at least 21 years of age are eligible to participate in the plan after
completing one year of service. Under the plan, an eligible employee can elect
to defer a minimum from 1% to 20% of his salary. The Company may, at its sole
discretion, contribute and allocate to a plan participants account, a
percentage of the plan participants contribution. The Company did not make any
contributions to this plan in fiscal 2007.

Health and Welfare
Benefits

All
full-time employees, including the Named Executive Officers, may participate in
the Companys health and welfare benefit programs, including medical, dental
and vision care coverage, disability insurance and life insurance.

Employment Agreements, Severance Benefits and
Change in Control Provisions

The
Company previously entered into employment agreements with Ms. Jean Diamond,
its chief executive officer, and Mr. Jonathan Elster, its executive vice
president, to ensure they would perform their respective roles for an extended
period of time (see Agreements with Certain Executive Officers for more
detailed discussion).

Stock Ownership Guidelines

Stock
ownership guidelines have not been implemented by the compensation committee
for the Companys executive officers. The committee will continue to
periodically review best practices and re-evaluate its position with respect to
stock ownership guidelines.

Securities Trading Policy

The
Companys securities trading policy states that executive officers, including
the Named Executive Officers, and directors may not purchase or sell puts or
calls to sell or buy its stock, engage in short sales with respect to its
stock, or buy its securities on margin.

48

---



Tax Deductibility of Executive Compensation

Limitations
on deductibility of compensation may occur under Section 162(m) of the Internal
Revenue Code which generally limits the tax deductibility of compensation paid
by a public company to its Chief Executive Officer and certain other highly
compensated executive officers to $1 million in the year the compensation
becomes taxable to the executive officer. There is an exception to the limit on
deductibility for performance-based compensation that meets certain
requirements.

Although
deductibility of compensation is preferred, tax deductibility is not a primary
objective of the Companys compensation programs. The Company believes that
achieving its compensation objectives set forth above is more important than
the benefit of tax deductibility and reserves the right to maintain flexibility
in how it compensates its executive officers that may result in limiting the
deductibility of amounts of compensation from time to time.

Summary of Compensation

The
following table sets forth certain information with respect to compensation for
the fiscal year ended June 30, 2007 earned by or paid to the Companys chief
executive officer (principal executive officer), vice president of finance
(principal financial officer) and four other most highly compensated executive
officers whose total salary exceeded $100,000 in fiscal 2007 (the Named
Executive Officers):

|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|------------------------------------------------- |  | ----------------- | ---- | --------- |  | -------------- |  | ------------------ | ------ | ----------------------------- |  | -------- |  | ------ |  |  |  | ------- | 
|Name and Principal Position                       |  | Fiscal
 Year
 (3) |      | Salary
 $ |  | Cash
 Bonus
 $ |  | Options
 Awards
 $ |        | All Other
 Compensation
 $(2) |  | Total
 $ | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Jean A.
 Diamond                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Chairman of the Board and Chief Executive Officer |  |                   | 2007 |           |  | 281,285        |  |                    |       |                               |  |         |  | 19,880 |  |  |  | 301,165 | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Barry
 Diamond                                    |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Vice President of Wireless and Purchasing         |  |                   | 2007 |           |  | 199,996        |  |                    |       |                               |  |         |  | 11,417 |  |  |  | 211,413 | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Jonathan
 Elster                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Executive Vice President                          |  |                   | 2007 |           |  | 259,990        |  |                    | 16,650 | (1)                           |  |         |  | 16,406 |  |  |  | 293,046 | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Charles
 Marsh                                    |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Senior Vice President                             |  |                   | 2007 |           |  | 249,990        |  |                    |       |                               |  |         |  | 10,800 |  |  |  | 260,790 | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Mark DiVito                                       |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Vice President of Operations                      |  |                   | 2007 |           |  | 149,994        |  |                    |       |                               |  |         |  | 6,600  |  |  |  | 156,594 | 
|                                                  |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Lyle Dickler                                      |  |                   |      |           |  |                |  |                    |        |                               |  |          |  |        |  |  |  |         | 
|Vice President-Finance Secretary Treasurer        |  |                   | 2007 |           |  | 120,000        |  |                    |       |                               |  |         |  |       |  |  |  | 120,000 | 

|    |                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | This amount
 was paid in fiscal 2008.                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                              
|(2) | Auto expense
 reimbursement or auto use benefit                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                              
|(3) | There is a
 transition period for a phased-in implementation of the amended Summary
 Compensation Table over a three-year period for Regulation S-K companies.
 During this phase-in period, companies will not be required to present prior
 years compensation disclosure.

49

---



Discussion
of Summary Compensation and Plan-Based Awards

The
Company executive compensation policies and practices, pursuant to which the
compensation set forth in the Summary Compensation Table was paid or awarded,
are described above under Compensation Discussion and Analysis. A summary of
certain material terms of the Companys compensation plans and arrangements is
set forth below.

Agreements
with Certain Executive Officers

The
Company has employment agreements with Jean Diamond and Jonathan Elster.

The
employment agreement with Jean Diamond is evergreen and automatically renews
annually until it is terminated by the Company or Ms. Diamond pursuant to the
terms thereof. Her agreement, as amended to date, (i) provides for an annual
base salary of $295,350 (as of July 1, 2007), increased annually in an amount
equal to the greater of five percent of her then current salary or the
percentage increase in the Consumer Price Index for the month of June relative
to the same prior year period, (ii) provides for an automobile allowance, and
(iii) does not provide for an annual bonus. The agreement also provides that if
a Change of Control occurs during her employment term and her employment is
terminated (i) subsequently by the Company, or by her upon the occurrence of
certain events, or (b) by her in her sole discretion concurrently with the, or
within 30 days of the, date of the occurrence of the Change of Control, she
will be entitled to a cash payment in an amount equal to all annual salary and
other benefits owing to her for the period from the date of termination through
the remainder of the term of her employment under the agreement. However, in no
event shall the amount of any such cash payment be less than the aggregate of
her then annual salary plus the value of all other benefits payable to her on
an annualized basis under her employment agreement, as amended. A Change of
Control is deemed to have occurred when, during the term of Ms. Diamonds
employment pursuant to her employment agreement, (i) any individual, entity,
group or association becomes the beneficial owner of securities of the Company
representing 30% or more of the combined voting power of the Companys or SED
Internationals then-outstanding securities entitled to vote generally in the
election of directors; (ii) a change in a majority of directors of the Board
and such new directors were not appointed, approved or nominated by the Board;
(iii) all or substantially all of the assets of the Company or SED
International are sold, conveyed, transferred or otherwise disposed of, in one
or more transactions, without being the approval of the Board or the board of
directors of SED International, as the case may be.

The
employment agreement with Jonathan Elster, effective as of July 1, 2004, is for
a term of five years. Mr. Elsters annual compensation includes an annual base
salary of $260,000 plus an annual bonus in an amount equal to three
percent (3%) of the Companys Pre-tax Adjusted Annual Income. The Companys Pretax Adjusted Annual
Income means with respect to a given fiscal year (a) the sum of earnings
before taxes as reported on its audited consolidated statement of operations
for such fiscal year, excluding extraordinary non-operational costs and
profits. He is also entitled to participate in all of the Companys
employee benefit programs available to management executives, including health
and long-term disability insurance. The
Company may terminate Mr. Elsters employment for good cause, as defined in
his employment agreement. In addition, upon termination of this agreement, Mr.
Elster has agreed not to solicit customers of SED International for a period of
a one (1) year from the date of termination.

50

---



Outstanding
Equity Awards

The
following table sets forth certain information with respect to outstanding
equity awards at June 30, 2007 with respect to the Named Executive Officers.

|                                               |  |        |                                                                                   |  |                               |  |                            |            |  |  |  | 
|---------------------------------------------- |  | ------ | --------------------------------------------------------------------------------- |  | ----------------------------- |  | -------------------------- | ---------- |  |  |  | 
|Outstanding
  Equity Awards at Fiscal Year-End | 
|                                              
|                                               | 
|Option Awards                                  | 
|                                               | 
|Name                                           |  |        | Number of Securities
  Underlying Unexercised
  Options
  (#)
  Exercisable
  (1) |  | Option Exercise
  Price
  ($) |  | Option
  Expiration
  Date |           
|                                               |  |        |                                                                                   |  |                               |  |                            |           
|                                              
|Jean Diamond                                   |  | 50,000 |                                                                                   |  | 1.96                          |  |                            | 10/15/2011 |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|Total                                          |  | 50,000 |                                                                                   |  |                               |  |                            |            |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|Jonathan Elster                                |  | 62,500 |                                                                                   |  | 1.96                          |  |                            | 10/15/2011 |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|Total                                          |  | 62,500 |                                                                                   |  |                               |  |                            |            |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|Barry Diamond                                  |  | 40,000 |                                                                                   |  | 1.96                          |  |                            | 10/15/2011 |  | 
|                                               |  | 50,000 |                                                                                   |  | .44                           |  |                            | 1/15/2013  |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|Total                                          |  | 90,000 |                                                                                   |  |                               |  |                            |            |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|                                              
|Mark DiVito                                    |  | 27,500 |                                                                                   |  | 1.96                          |  |                            | 10/15/2011 |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 
|Total                                          |  | 27,500 |                                                                                   |  |                               |  |                            |            |  | 
|                                               |  |        |                                                                                   |  |                               |  |                            |            |  | 



---

|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Represents stock option grants at fair
  market value on the date of grant.

Director Compensation

Our
independent directors receive a quarterly fee of $1,000 and $2,500 for each
regularly scheduled board meeting attended. For fiscal 2007, independent
directors received $1,000 for non-regularly scheduled board meetings attended.
Commencing fiscal 2008, independent directors will receive $2,500 for any board
meeting attended. In addition, the Chairman of the Audit Committee received a
quarterly fee of $1,500 for the first three quarters of fiscal 2007 and
commencing in the fourth quarter the fee was increased to $6,500. All other
members of the Audit Committee receive $750 each quarter for their
participation. The Chairman of the Compensation Committee receives $300 and
another member receives $250 for each meeting attended.

During
the fiscal year ended June 30, 2007, Messrs. Aaron, Cohen and Segal each received
aggregate cash compensation for serving on the Board and attending regular
Board meetings of $18,550, $29,000 and $17,000, respectively. In addition to
compensation for regular Board Meeting attendance, Messrs. Aaron, Cohen and
Segal were paid $9,690, $38,515 and $1,380, respectively, for advisory
services. The Company also pays ordinary and necessary travel expenses for
independent directors to attend Board and any committee meetings. No stock
options were granted to directors in fiscal 2007.

51

---



Compensation Committee

The
Compensation Committee of the Board currently consists of two members, Messrs.
Aaron and Cohen. The Compensation Committee met once in fiscal 2007, with all
members attending that meeting. The Compensation Committee is responsible for
setting annual and long-term performance goals for the Chief Executive Officer,
evaluating her performance against these goals, and recommending her salary,
bonus and long-term incentives. The Compensation Committee reviews the
performance of all of the executive officers of the Company and recommends to
the Board the amount and form of all compensation of executive officers of the
Company. The Board established the Compensation Committee on August 26, 1998.
The Compensation Committee does not have a charter.

Compensation
Committee Interlocks and Insider Participation

None
of the Companys executive officers serve as a member of the Board or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of the Board or Compensation Committee. None of the persons who are
members of the Compensation Committee have ever been employed by the Company.

REPORT OF THE COMPENSATION COMMITTEE

The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management and based on the review and discussion the
Compensation Committee recommended to the Board that the Compensation
Discussion and Analysis be included in this proxy statement.

This
report is respectfully submitteed on behalf of the members of the Compensation
Committee:

| |                              | 
| | ---------------------------- | 
| | Stewart
  I. Aaron, Chairman | 
| | Melvyn
  I. Cohen            | 

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS

The following table sets forth certain information as of October 26,
2007 regarding the beneficial ownership of Common Stock by (i) the Name
Executive Officers, (ii) the Company's directors and director nominees of the
Company, (iii) each person we know to beneficially own more than 5% of
outstanding Common Stock, and (iv) all directors and executive officers of the
Company as a group. All shares of Common Stock shown in the table reflect sole
voting and investment power except as otherwise noted.

|                                                                      |  |                                             |      |  |                    |       |  
|--------------------------------------------------------------------- |  | ------------------------------------------- | ---- |  | ------------------ | ----- | -
|Name of Beneficial Owner                                              |  | Amount and Nature
  of Beneficial Ownership |      |  | Percent
  of Class |      
|                                                                      |  |                                             |      |  |                    |      
|                                                                     
|Stewart I. Aaron                                                      |  | 35,000                                      | (1)  |  |                    | *     |  
|Melvyn I. Cohen                                                       |  | 351,426                                     | (2)  |  |                    | 7.63  | %
|Barry Diamond                                                         |  | 198,255                                     | (3)  |  |                    | 4.22  | %
|Jean Diamond                                                          |  | 199,500                                     | (4)  |  |                    | 4.28  | %
|Lyle Dickler                                                          |  | 50,000                                      | (5)  |  |                    | 1.08  | %
|Mark DiVito                                                           |  | 106,530                                     | (6)  |  |                    | 2.30  | %
|Jonathan Elster                                                       |  | 164,000                                     | (7)  |  |                    | 3.51  | %
|Charles Marsh                                                         |  | 50,008                                      | (8)  |  |                    | 1.09  | %
|Joseph Segal                                                          |  |                                            |      |  |                    |      |  
|All current directors and
  executive officers as a group (9 persons) |  | 1,154,719                                   | (9)  |  |                    | 23.86 | %
|                                                                      |  |                                             |      |  |                    |       |  
|5% Shareholders:                                                      |  |                                             |      |  |                    |       |  
|FMR Corp                                                              |  | 480,000                                     | (10) |  |                    | 10.41 | %
|Allyn R. Earl                                                         |  | 434,902                                     | (11) |  |                    | 9.03  | %
|                                                                      |  |                                             |      |  |                    |       |  

52

---





---

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    | Represents less than one percent of the outstanding Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(1)  | The shares owned consist entirely of exercisable options to purchase Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2)  | The shares indicated include 80,000 options for Mr. Cohen. The shares indicated
include 271,426 shares held by one trust for the benefit of Ms. Jean Diamond.
Mr. Cohen has voting power for the shares held in the trust.                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(3)  | The shares include 90,000 options and 100,000 restricted shares of common stock
granted on 10/23/2007 which are subject to vesting and forfeiture over a four
year period pursuant to the provisions of a restricted stock agreement.                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(4)  | The shares indicated include 50,000 options 125,000 restricted shares of common
stock granted on 10/23/2007 which are subject to vesting and forfeiture over a
four year period pursuant to the provisions of a restricted stock agreement. Ms.
Diamond has sole voting power over 24,500 shares. The shares indicated do not
include 271,426 shares held by a trust for the benefit of Ms. Diamond. Ms.
Diamond does not have voting power over shares held in trust for her benefit.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(5)  | The shares indicated include 50,000 restricted shares of common stock granted on
10/23/2007 which are subject to vesting and forfeiture over a four year period
pursuant to the provisions of a restricted stock agreement.                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(6)  | The shares include 27,500 options and 75,000 restricted shares of common stock
granted on 10/23/2007 which are subject to vesting and forfeiture over a four
year period pursuant to the provisions of a restricted stock agreement.                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(7)  | The shares include 62,500 options and 100,000 restricted shares of common stock
granted on 10/23/2007 which are subject to vesting and forfeiture over a four
year period pursuant to the provisions of a restricted stock agreement.                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(8)  | The shares include 50,000 restricted shares of common stock granted on
10/23/2007 which are subject to vesting and forfeiture over a four year period
pursuant to the provisions of a restricted stock agreement.                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(9)  | Includes 230,000 shares underlying outstanding options and 500,000 restricted
shares of common stock granted on 10/23/2007 which are subject to vesting and
forfeiture over a four year period pursuant to the provisions of a restricted
stock agreement.                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(10) | All of the shares indicated are deemed beneficially owned by Fidelity Management
& Research Company, a wholly-owned subsidiary of FMR Corp., as a result of its
serving as investment adviser to Fidelity Low-Priced Stock Fund, the owner of
the 480,000 shares. FMR Corp.'s address is 82 Devonshire Street, Boston,
Massachusetts 02109.                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(11) | All of the shares indicated are deemed beneficially owned by Allyn R. Earl. Mr.
Earls address is 38 Dwight Avenue, Clinton, New York 13323-1600.                                                                                                                                                                                                                                                                                                                                     

The business address and telephone number of each of Jean Diamond, Jonathan
Elster, Barry Diamond, Charles Marsh, Mark DiVito, Lyle Dickler, Stewart I.
Aaron, Melvyn I. Cohen and Joseph Segal are c/o SED International Holdings,
Inc., 4916 North Royal Atlanta Drive, Tucker, Georgia 30084 and (770) 491-8962.

Stock Options

The
Company has granted stock options under four Plans (the 1991 Plan, the 1995
Directors Plan, the 1997 Plan, and the 1999 Plan), which are utilized to
promote the long-term financial interest of the Company. The Compensation
Committee of the Board administers the stock option plans. In the aggregate,
the Plans authorize the grant of up to 2,441,500 shares of Common Stock to
directors, officers and key employees. The shareholders approved all of the
Plans, with the exception of the 1999 Plan or awards.

The
1999 Plan, established on July 20, 1999 for a term of ten years authorizes
the Company to grant up to 1,200,000 shares of Common Stock to employees,
Directors and Consultants of the Company and is intended to be a board-based
plan in that, at all times not more than fifty percent (50%) of the optionees
and recipients of the plan shall be officers or affiliates. Under the plan, the
Company may grant both nonqualified options and restricted stock awards and
have an option or award price of the fair market value of the Companys Common
Stock on the date of grant. Unless otherwise specified by the Compensation
Committee, options and restricted awards vest ratably over a four-year period.
All grants expire no later than 10 years from the date of grant. No stock
options or awards were granted in fiscal 2007.

The
following table sets forth information as of June 30, 2007, relating to all of
our equity compensation arrangements.

53

---



Equity
Compensation Plans Information

|                                                             |  |                                                                                                       |  |                                                                                       |  |                                                                                                                                                               |  |   |      |  |  |  |  |         |  | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---- |  |  |  |  | ------- |  | 
|Plan Category                                                |  | Number of Securities to
  be issued upon exercise
  of outstanding options,
  warrants and rights (a) |  | Weighted-average
  exercise price of
  outstanding options,
  warrants and rights (b) |  | Number of securities
  remaining available for 
  future issuance under
  equity compensation plans 
  (excluding securities 
  reflected in column (a)
  (c) | 
|                                                             |  |                                                                                                       |  |                                                                                       |  |                                                                                                                                                               | 
|Equity compensation plans approved by
  security holders     |  |                                                                                                       |  | 284,325                                                                               |  |                                                                                                                                                               |  | $ | 2.15 |  |  |  |  | 8,000   |  | 
|Equity compensation plans not approved by
  security holders |  |                                                                                                       |  | 221,834                                                                               |  |                                                                                                                                                               |  | $ | 3.02 |  |  |  |  | 793,591 |  | 
|                                                             |  |                                                                                                       |  |                                                                                       |  |                                                                                                                                                               |  |   |      |  |  |  |  |         |  | 
|                                                             |  |                                                                                                       |  |                                                                                       |  |                                                                                                                                                               |  |   |      |  |  |  |  |         |  | 
|Total                                                        |  |                                                                                                       |  | 506,159                                                                               |  |                                                                                                                                                               |  | $ | 2.52 |  |  |  |  | 801,591 |  | 
|                                                             |  |                                                                                                       |  |                                                                                       |  |                                                                                                                                                               |  |   |      |  |  |  |  |         |  | 

|         |                                                                            
|-------- | ---------------------------------------------------------------------------
|Item 13. | Certain
  Relationships and Related Transactions, and Director Independence

Policies and Corporate Governance

All
of the Companys transactions with related parties are reviewed and approved by
the Board. The Board has adopted a resolution providing that, in the future,
any transactions between the Company and another person or entity who is deemed
to be an affiliate or a related party must be approved by a majority of our
disinterested directors.

Transactions with Related Parties

Lease of
Headquarters

On
April 1, 1999 the Company signed a seven-year lease with one three-year renewal
option with the Diamond Chip Group LLC, successor owner of the premises used by
the Company for its headquarters. The Company exercised the renewal option on
March 20, 2006. The members of the Diamond Chip Group LLC are the Estate of
Gerald Diamond, Jean A. Diamond and JAD 2003 Trust, who own respectively 37.5%,
37.5%, and 25.0% of the outstanding interests in this entity. The beneficiaries
of the JAD 2003 Trust are all the descendents of Gerald and Jean Diamond. The
predecessor owner of the premises was Royal Park Company, a Georgia general
partnership whose partners were Gerald and Jean Diamond.

Rental
payments for headquarter premises for fiscal 2007 were $309,000. Rent escalates
each October at a rate of 3% per year. In addition to rental payments, the
Company pays all operating costs associated with the lease of its headquarters.
The lease expires on September 30, 2009.

The
lease also provides the Company with a right of first refusal to purchase the
premises in the event Diamond Chip Group LLC proposes to sell the facility
during the lease term.

Director Independence

The
Board has determined that Messrs. Aaron, Cohen and Segal are independent as that term is
defined in the listing standards of the Nasdaq. Messrs. Aaron, Cohen and Segal are the sole members of the Companys
audit committee, and Messrs.
Aaron and Cohen are the sole members of the Companys compensation
committee and are independent for such purposes.

54

---



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

INDEPENDENT PUBLIC
ACCOUNTANTS

The
firm of J. H. Cohn LLP has served as the Companys independent registered
public accounting firm since 2005.

Audit and Non-Audit Fees

The
following table presents fees for professional audit services rendered by J. H.
Cohn LLP for the audit of the Companys annual financial statements for the
fiscal years ended June 30, 2007 and 2006, respectively.

|                   |  |      |         |      |   |         | 
|------------------ |  | ---- | ------- | ---- | - | ------- | 
|                   |  | 2007 |         | 2006 |  
|                   |  |      |         |      |  
|Audit Fees         |  |      |         |      |   |         | 
|J. H. Cohn LLP (1) |  | $    | 231,115 |      | $ | 212,000 | 
|                   |  |      |         |      |   |         | 



---

|    |                                                   
|--- | --------------------------------------------------
|(1) | J. H. Cohn LLP fees for fiscal 2007 are estimated.

J.
H. Cohn LLP fees for fiscal 2007 include audit of the Companys Annual
financial statements and review of financial statements included in the
Companys Form 10-Q quarterly reports. J. H. Cohn LLP neither billed us any
fees nor provided any services other than the audit services and fees included
above.

The
Audit Committees current practice is to pre-approve all audit services and all
non-audit services to be provided to the Company by its independent auditor.

55

---



PART IV

Item 15. Exhibits
and Financial Statement Schedules

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

1.
Financial Statements. The
following financial statements and the report of SEDs independent auditor
thereon, are filed herewith.

| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | Report of
  Independent Registered Public Accounting Firm (J.H Cohn, LLP-2007, 2006 and
  2005)     
| |   |                                                                                                     
| |  | Consolidated
  Balance Sheets at June 30, 2007 and 2006                                             
| |   |                                                                                                     
| |  | Consolidated
  Statements of Operations for the years ended June 30, 2007, 2006 and 2005            
| |   |                                                                                                     
| |  | Consolidated
  Statements of Shareholders Equity for the years ended June 30, 2007, 2006
  and 2005
| |   |                                                                                                     
| |  | Consolidated
  Statements of Cash Flows for the years ended June 2007, 2006 and 2005                
| |   |                                                                                                     
| |  | Notes to
  Consolidated Financial Statements                                                        

2.
Financial Statement Schedules.

| |                                                                                                                                                                                                                  |   |                                                                                                                                                           
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                  |  | Schedule II: Valuation and Qualifying
  Accounts is filed herewith under Supplemental Disclosures in Note 11 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 (2).                                                                                                                                       
|                 |  |                                                                                                                                                                                     
|3.3              |  | Bylaws of
  the Company (3).                                                                                                                                                        
|                 |  |                                                                                                                                                                                     
|3.4              |  | Article 1,
  Section 1.2 of the Bylaws of SED International Holdings, Inc., as amended on
  September 18, 2007 (40).                                                                
|                 |  |                                                                                                                                                                                     
|4.1              |  | Form of
  Rights Agreement, dated as of October 31, 1996 between the Company and
  National City Bank (4).                                                                          
|                 |  |                                                                                                                                                                                     
|** 10.7          |  | Southern
  Electronics Corporation 1988 Restricted Stock Plan, together with related
  form of Restricted Stock Agreement (5).                                                      
|                 |  |                                                                                                                                                                                     
|** 10.8          |  | First
  Amendment dated November 7, 1989 to Southern Electronics Corporation 1988
  Restricted Stock Plan (6).                                                                      
|                 |  |                                                                                                                                                                                     
|** 10.9          |  | Second
  Amendment dated July 17, 1992 to Southern Electronics Corporation 1988
  Restricted Stock Plan (7).                                                                        
|                 |  |                                                                                                                                                                                     
|**10.10          |  | Form of
  Southern Electronics Corporation 1991 Stock Option Plan, together with
  related forms of Incentive Stock Option Agreement and Non-Qualified Stock
  Option Agreement (8).
|                 |  |                                                                                                                                                                                     
|** 10.11         |  | First
  Amendment dated July 17, 1992 to Southern Electronics Corporation 1991 Stock
  Option Plan (9).                                                                             
|                 |  |                                                                                                                                                                                     
|** 10.12         |  | Second
  Amendment dated August 30, 1996 to Southern Electronics Corporation 1991
  Stock Option Plan (10).                                                                         

56

---



|                 |  |                                                                                                                                                                                      
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number |  | Description                                                                                                                                                                          
|                 |  |                                                                                                                                                                                      
|** 10.14         |  | Employment
  Agreement dated November 7, 1989, between the Company, SED International and
  Jean Diamond (11), as amended by form of Amendment No. 1 dated September 24,
  1991 (12).
|                 |  |                                                                                                                                                                                      
|** 10.23         |  | Form of
  Non-Qualified Stock Option Agreement for Directors (13).                                                                                                                   
|                 |  |                                                                                                                                                                                      
|** 10.24         |  | 1995 Formula
  Stock Option Plan, together with related form of Non-Qualified Stock Option
  Agreement (14).                                                                         
|                 |  |                                                                                                                                                                                      
|** 10.26         |  | Third
  Amendment dated September 12, 1996 to the Southern Electronics Corporation
  Stock Option Plan (15).                                                                         
|                 |  |                                                                                                                                                                                      
|** 10.31         |  | Second
  Amendment to Employment Agreement effective July 1, 1998 between SED
  International and Jean Diamond (16).                                                                 
|                 |  |                                                                                                                                                                                      
|** 10.32         |  | 1999 Stock
  Option Plan dated July 20, 1999, together with related forms of Stock Option
  Agreement and Restriction Agreement (17).                                                
|                 |  |                                                                                                                                                                                      
|** 10.33         |  | Third
  Amendment to Employment Agreement effective December 16, 1998 between SED
  International and Jean Diamond (18).                                                             
|                 |  |                                                                                                                                                                                      
|** 10.35         |  | Fourth
  Amendment to Employment Agreement effective July 1, 1999 between SED
  International and Jean Diamond (19).                                                                 
|                 |  |                                                                                                                                                                                      
|** 10.38         |  | Form of
  Indemnification Agreement entered into with each of the directors of the
  Company and the Company (20).                                                                   
|                 |  |                                                                                                                                                                                      
|** 10.39         |  | Form of
  Indemnification Agreement entered into with each of the officers of the
  Company and the Company (21).                                                                    
|                 |  |                                                                                                                                                                                      
|10.40            |  | Form of
  Lease Agreement dated as of April 1, 1999 between Diamond Chip Group, L.L.C.
  and SED International (22).                                                                 
|                 |  |                                                                                                                                                                                      
|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. (23).                   
|                 |  |                                                                                                                                                                                      
|** 10.42         |  | Employment
  Agreement effective November 11, 1999 between SED International, Inc. and
  Barry Diamond (24).                                                                         
|                 |  |                                                                                                                                                                                      
|** 10.43         |  | First
  Amendment to Employment Agreement effective June 1, 2001 between SED
  International Inc. and Barry Diamond (25).                                                            
|                 |  |                                                                                                                                                                                      
|** 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(26).             
|                 |  |                                                                                                                                                                                      
|** 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(27).           
|                 |  |                                                                                                                                                                                      
|** 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 (28).            
|                 |  |                                                                                                                                                                                      
|** 10.55         |  | Employment
  Agreement effective July 1, 2005 between SED International, Inc. and Jonathan
  Elster (29).                                                                            
|                 |  |                                                                                                                                                                                      
|** 10.56         |  | Amendment to
  Employment Agreement between Barry Diamond and SED International, Inc. dated
  November 22, 2004 (30).                                                                
|                 |  |                                                                                                                                                                                      
|10.57            |  | Lease
  Agreement dated February 1, 2006 between Zenith LaborNet, Inc. and SED
  International, Inc. (31).                                                                           
|                 |  |                                                                                                                                                                                      
|10.58            |  | First
  Amendment of Lease for 4916 N. Royal Atlanta Drive, Tucker, GA 30084, dated
  September 19, 2005 (32).                                                                       
|                 |  |                                                                                                                                                                                      
|10.59            |  | Lease
  Agreement Extension for 4916 N. Royal Atlanta Drive, Tucker, GA 30084, dated
  March 20, 2006 (33).                                                                          
|                 |  |                                                                                                                                                                                      
|10.60            |  | Loan and
  Security Agreement between SED International, Inc. and Wachovia Bank National
  Association, dated September 21, 2005 (34).                                               
|                 |  |                                                                                                                                                                                      
|10.61            |  | Lease agreement dated
  October 1, 2006 between CRI Corporate Center, LLC and SED International, Inc.
  (35).                                                                        
|                 |  |                                                                                                                                                                                      
|10.62            |  | Seventh
  Addendum to Lease Dated March 13, 2007 for 1729 NW 84th Avenue,
  Doral, Florida 33126 (36).                                                                               

57

---



|                 |  |                                                                                                                                                                                                        
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number |  | Description                                                                                                                                                                                            
|                 |  |                                                                                                                                                                                                        
|10.63            |  | Third
  Amendment to Wachovia Loan and Security Agreement dated March 1, 2007 (37).                                                                                                                    
|                 |  |                                                                                                                                                                                                        
|**10.64          |  | 2007 Restricted Stock Plan.(41).                                                                                                                                                                       
|                 |  |                                                                                                                                                                                                        
|**10.65          |  | Final Form of Restricted Stock Agreement, dated as of October 23, 2007, between
the Company and each of Barry Diamond, Jean Diamond, Lyle Dickler, Mark DiVito,
Jonathan Elster and Charles Marsh.(41).
|                 |  |                                                                                                                                                                                                        
|14               |  | Code of
  Ethics dated September 2, 2002 (38).                                                                                                                                                         
|                 |  |                                                                                                                                                                                                        
|21               |  | Subsidiaries
  of the Company (39).                                                                                                                                                                    
|                 |  |                                                                                                                                                                                                        
|24               |  | Power of
  Attorney (see signature page to this Form 10-K/A).                                                                                                                                          
|                 |  |                                                                                                                                                                                                        
|31.1             |  | Rule
  13a-14(a)/15d-14(a) Certification by Principal Executive Officer.                                                                                                                               
|                 |  |                                                                                                                                                                                                        
|31.2             |  | Rule
  13a-14(a)/15d-14(a) Certification by Principal Financial Officer.                                                                                                                               
|                 |  |                                                                                                                                                                                                        
|32.1             |  | Section 1350
  Certification by Principal Executive Officer.                                                                                                                                           
|                 |  |                                                                                                                                                                                                        
|32.2             |  | Section 1350
  Certification by Principal Financial Officer.                                                                                                                                           

|                                                                                 |                                                                                                                                                                                                 
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                
|** Denotes
  compensatory plan, compensation arrangement or management contract.
|                                                                                 |                                                                                                                                                                                                 
|1)                                                                               | Incorporated
  herein by reference to Exhibit 3.1 from the Companys 1999 Form 10-K.                                                                                                            
|                                                                                 |                                                                                                                                                                                                 
|2)                                                                               | Incorporated
  herein by reference to Exhibit 3.2 from the Registrants Revised Definitive
  Proxy Soliciting Materials filed March 26, 2002 (SEC File No. 000-16345).                          
|                                                                                 |                                                                                                                                                                                                 
|3)                                                                               | Incorporated
  herein by reference to Exhibit 3.3 from the Companys 1999 Form 10-K.                                                                                                            
|                                                                                 |                                                                                                                                                                                                 
|4)                                                                               | Incorporated
  herein by reference to Exhibit 4.1 from the Companys Current Report on Form
  8-K dated October 30, 1996 (SEC File No. 0-16345).                                                
|                                                                                 |                                                                                                                                                                                                 
|5)                                                                               | Incorporated
  herein by reference to Exhibit 10.7 from Companys Annual Report on Form 10-K
  for the fiscal year ended June 30, 1988 (SEC File No. 0-16345).                                  
|                                                                                 |                                                                                                                                                                                                 
|6)                                                                               | Incorporated
  herein by reference to Exhibit 10.8 from Companys 1990 Form 10-K (SEC File
  No. 0-16345).                                                                                      
|                                                                                 |                                                                                                                                                                                                 
|7)                                                                               | Incorporated
  herein by reference to Exhibit 10.9 from Companys 1992 Form 10-K (SEC File No.
  0-16345).                                                                                      
|                                                                                 |                                                                                                                                                                                                 
|8)                                                                               | Incorporated
  herein by reference to Exhibit 10.10 from Companys Definitive Supplemental
  Proxy Statement dated October 18, 1991 (SEC File No. 0-16345).                                     
|                                                                                 |                                                                                                                                                                                                 
|9)                                                                               | Incorporated
  herein by reference to Exhibit 10.11 from Companys 1992 Form 10-K (SEC File
  No. 0-16345).                                                                                     
|                                                                                 |                                                                                                                                                                                                 
|10)                                                                              | Incorporated
  herein by reference to Exhibit 10.12 from Companys Proxy Statement
  pertaining to Companys 1995 Annual Meeting of Stockholders dated October 1,
  1995 (SEC File No. 0-16345).
|                                                                                 |                                                                                                                                                                                                 
|11)                                                                              | Incorporated
  herein by reference to Exhibit 10.14 from Companys Quarterly Report on Form
  10-Q for the quarterly period ended December 31, 1989 (SEC File No. 0-16345).                     
|                                                                                 |                                                                                                                                                                                                 
|12)                                                                              | Incorporated
  herein by reference to Exhibit 10.14 from Companys 1991 Form 10-K (SEC File
  No. 0-16345).                                                                                     
|                                                                                 |                                                                                                                                                                                                 
|13)                                                                              | Incorporated
  herein by reference to Exhibit 10.23 from Companys 1995 Form 10-K (SEC File
  No. 0-16345).                                                                                     
|                                                                                 |                                                                                                                                                                                                 
|14)                                                                              | Incorporated
  herein by reference to Exhibit 10.24 from Companys Proxy Statement
  pertaining to Companys 1995 Annual Meeting of Stockholders dated October 1,
  1995 (SEC File No. 0-16345).

58

---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15) | Incorporated
  herein by reference to Exhibit 10.26 from Companys Proxy Statement
  pertaining to Companys 1996 Annual Meeting of Stockholders dated October 1,
  1996 (SEC File No. 0-16345).
|    |                                                                                                                                                                                                 
|16) | Incorporated
  herein by reference to Exhibit 10.31 from Companys 1998 Form 10-K.                                                                                                              
|    |                                                                                                                                                                                                 
|17) | Incorporated
  herein by reference to Exhibit 10.32 from Companys 1999 Form 10-K.                                                                                                              
|    |                                                                                                                                                                                                 
|18) | Incorporated
  herein by reference to Exhibit 10.33 from the Companys Quarterly Report on
  Form 10-Q for the quarterly period ended December 31, 1998 (SEC File No.
  0-16345).               
|    |                                                                                                                                                                                                 
|19) | Incorporated
  herein by reference to Exhibit 10.35 from Companys 1999 Form 10-K.                                                                                                              
|    |                                                                                                                                                                                                 
|20) | Incorporated
  herein by reference to Exhibit 10.38 from Companys 1999 Form 10-K.                                                                                                              
|    |                                                                                                                                                                                                 
|21) | Incorporated
  herein by reference to Exhibit 10.39 from Companys 1999 Form 10-K.                                                                                                              
|    |                                                                                                                                                                                                 
|22) | Incorporated
  herein by reference to Exhibit 10.40 from 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).      
|    |                                                                                                                                                                                                 
|23) | Incorporated
  herein by reference to Exhibit 10.41 from the Registrants (SEC File No.
  000-16345) 2001 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|24) | Incorporated
  herein by reference to Exhibit 10.42 from the Registrants (SEC File No. 000-16345)
  2001 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|25) | Incorporated
  herein by reference to Exhibit 10.43 from the Registrants (SEC File No.
  000-16345) 2001 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|26) | Incorporated
  herein by reference to Exhibit 10.48 from the Registrants Quarterly Report
  on Form 10-Q for the quarterly period ended December 31, 2001 (SEC File No.
  000-16345).          
|    |                                                                                                                                                                                                 
|27) | Incorporated
  herein by reference to Exhibit 10.50 from the Registrants Quarterly Report
  on Form 10-Q for the quarterly period ended December 31, 2001 (SEC File No.
  000-16345).          
|    |                                                                                                                                                                                                 
|28) | Incorporated
  herein by reference to Exhibit 10.53 from Companys Annual Report on Form
  10-K for the fiscal year ended June 30, 2002.                                                        
|    |                                                                                                                                                                                                 
|29) | Incorporated
  herein by reference to Exhibit 10.55 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|30) | Incorporated
  herein by reference to Exhibit 10.56 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|31) | Incorporated
  herein by reference to Exhibit 10.57 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|32) | Incorporated
  herein by reference to Exhibit 10.58 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                                            
|    |                                                                                                                                                                                                 
|33) | Incorporated
  herein by reference to Exhibit 10.59 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                                            

59

---



|    |                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|34) | Incorporated
  herein by reference to Exhibit 10.60 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                       
|    |                                                                                                                                                                            
|35) | Incorporated
  by reference to Exhibit 10.61 from the Companys Quarterly Report on Form
  10-Q for the quarterly period ended December 31, 2006 (SED File No.
  000-16345)
|    |                                                                                                                                                                            
|36) | Incorporated
  by reference to Exhibit 10.62 from the Companys Quarterly Report on Form
  10-Q for the quarterly period ended March 31, 2007 (SED File No. 000-16345)     
|    |                                                                                                                                                                            
|37) | Incorporated
  by reference to Exhibit 10.63 from the Companys Quarterly Report on Form
  10-Q for the quarterly period ended March 31, 2007 (SED File No. 000-16345)     
|    |                                                                                                                                                                            
|38) | Incorporated
  herein by reference to Exhibit 14 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                          
|    |                                                                                                                                                                            
|39) | Incorporated
  herein by reference to Exhibit 21 from the Registrants (SEC File No.
  000-16345) 2006 Form 10-K.                                                          
|    |                                                                                                                                                                            
|40) | Incorporated
  herein by reference to Exhibit 3.1 from the Companys Current Report on Form
  8-K filed on September 19, 2007.                                             
|    |                                                                                                                                                                            
|41) | Filed as an exhibit to the Companys Current Report on Form 8-K filed on October
29, 2007 and incorporated herein by reference.                                            

60

---



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/ LYLE DICKLER                            
| |                                  |                                             
| |                                  | Lyle
 Dickler, Vice President  Finance     
| |                                  | (principal financial and accounting officer)

Date: October
29, 2007

KNOW
ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Jean Diamond, and Lyle Dickler, 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 on this October 29, 2007.

|                     |  |                                                                       
|-------------------- |  | ----------------------------------------------------------------------
|/s/ JEAN DIAMOND     |  | Chairman of the Board                                                 
|                     |  | Chief Executive Officer and Director                                  
|Jean Diamond         |  | (principal executive officer)                                         
|                     |  |                                                                       
|/s/ LYLE DICKLER     |  | Vice President  Finance
 (principal financial and accounting officer)
|                     | 
|Lyle Dickler         | 
|                     |  |                                                                       
|/s/ STEWART I. AARON |  | Director                                                              
|                     |  |                                                                       
|Stewart I. Aaron     |  |                                                                       
|                     |  |                                                                       
|/s/ MELVYN I. COHEN  |  | Director                                                              
|                     |  |                                                                       
|Melvyn I. Cohen      |  |                                                                       
|                     |  |                                                                       
|/s/ JOSEPH SEGAL     |  | Director                                                              
|                     |  |                                                                       
|Joseph Segal         |  |                                                                       

61

---