##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 30,
    2004                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission file number 0-16345

SED International Holdings, Inc.

(Exact name of Company as specified in its
charter)


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

Companys telephone number, including
area code:

770-491-8962


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


None


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

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

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

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

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

The aggregate market value of the voting stock
held by non-affiliates of the Company was approximately
$6.5 million as of June 30, 2004 based upon the last
sale price of the Common Stock as reported on the Over the
Counter Bulletin Board on that day. There were 3,879,171shares of Common Stock, $.01 par value, outstanding at
June 30, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates information by
reference from portions of the Companys definitive proxy
statement for its 2004 annual meeting of shareholders scheduled
to be held on December 16, 2004, which will be filed no
later than 120 days after the close of the Companys
fiscal year ended June 30, 2004.



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TABLE OF CONTENTS

|                                             |  |                                                                                                         |    |      |    | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                             |  |                                                                                                         |    | Page
|                                             |  |                                                                                                         |    |     
|PART I                                      
|                                            
|Item 1.                                      |  | Business                                                                                                |    |      | 2  | 
|Item 2.                                      |  | Properties                                                                                              |    |      | 6  | 
|Item 3.                                      |  | Legal Proceedings                                                                                       |    |      | 7  | 
|Item 4.                                      |  | Submission of Matters to a
    Vote of Security Holders                                                 |    |      | 7  | 
|                                            
|PART II                                     
|                                            
|Item 5.                                      |  | Market of the Companys
    Common Stock, Related Shareholder Matters and Issuer Purchases
    of Stock |    |      | 7  | 
|Item 6.                                      |  | Selected Financial Data Five
    Year Financial Summary                                                 |    |      | 9  | 
|Item 7.                                      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations               |    |      | 11 | 
|Item 7A.                                     |  | Quantitative and Qualitative
    Disclosures About Market Risk                                          |    |      | 21 | 
|Item 8.                                      |  | Financial Statements and
    Supplementary Data                                                         |    |      | 23 | 
|                                             |  | Report of Independent
    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                |    |      | 43 | 
|Item 9A.                                     |  | Controls and Procedures                                                                                 |    |      |    | 
|                                            
|PART III                                    
|                                            
|Item 10.                                     |  | Directors and Executive
    Officers of the Company                                                     |    |      | 43 | 
|Item 11.                                     |  | Executive Compensation                                                                                  |    |      | 43 | 
|Item 12.                                     |  | Security Ownership of
    Certain Beneficial Owners and Management                                      |    |      | 43 | 
|Item 13.                                     |  | Certain Relationships and
    Related Transactions                                                      |    |      | 43 | 
|Item 14.                                     |  | Principal Accounting Fees
    and Services                                                              |    |      | 44 | 
|                                            
|PART IV                                     
|                                            
|Item 15.                                     |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                    |    |      | 44 | 
|Signatures                                   |  |                                                                                                         | 50 |     
|Power of Attorney                            |  |                                                                                                         | 51 |     
|Certifications                               |  |                                                                                                         | 52 |     
|EX-21 SUBSIDIARIES OF THE COMPANY           
|EX-23 CONSENT OF ERNST & YOUNG              
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO







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PART I






|        |         
|------- | --------
|Item 1. | Business

(a) General Development of
Business

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

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

The Company also distributes wireless telephone
products in the United States and to Latin America. The Company
is a direct distributor of wireless telephone products for LG
Infocomm and Audiovox and an indirect distributor for other
leading wireless telephone product vendors such as Motorola,
Nokia, and Samsung. In fiscal 2004, the Companys net sales
of microcomputer products generated approximately 82.0% of the
Companys total net sales and wireless telephone products
represented the remaining 18.0%.

In January of 2004 the Company announced that it
would re-enter the wholesale consumer electronics distribution
business and would offer such products to its current
information technology and wireless customers. In addition to
its current customers the Company offers consumer electronic
products to the rent-to-own, ecommerce and retail channels. The
Company is offering consumer electronics products from leading
vendors including SVA, Zenith, Cingular, Creative Labs and
Audiovox.

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

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

In February 2003, the Company 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 the Companys consolidated statements of operations. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations 
Discontinued Operations and Note 18 of the
Companys Consolidated Financial Statements.

2



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(b) Financial Information about Industry
Segments

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

(c) Narrative Description of
Business



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

The Company offers its customers a broad
inventory of more than 3,500 products from approximately
170 vendors (direct and indirect), including such market
leaders as Hewlett-Packard, Intel, Maxtor, Creative Labs, Acer,
Microsoft, Envision, and LG Electronics. The Company is a direct
distributor of wireless telephone products for LG Infocomm and
Audiovox and an indirect distributor for other leading wireless
telephone product vendors such as Motorola, Nokia, and Samsung.
Microcomputer related products accounted for $304.5 million
or 82.0% of the Companys net sales for fiscal 2004,
$364.6 million or 88.0% of the Companys net sales for
fiscal 2003, $399.9 million or 94.0% of net sales in fiscal
2002. Approximately $67.2 million or 18.0% of the
Companys net sales for fiscal 2004, $48.5 million or
12.0% of the Companys net sales for fiscal 2003,
$24.0 million or 6.0% of net sales for fiscal 2002,
consisted of wireless handsets and accessories. The Company
continually evaluates its product mix and inventory levels and
maintains flexibility by adjusting its product offerings based
on demand. The Companys vendors generally warrant the
products distributed by the Company and allow the return of
defective products. Generally, the Companys authorized
distributor agreements with its microcomputer and wireless
telephone products vendors permit the Company to sell these
vendors products in the United States and in designated
countries in Latin America.

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

The Company purchases goods from approximately
170 vendors (directly and indirectly) and has negotiated
favorable terms from certain vendors by purchasing a substantial
volume of those vendors products. In fiscal 2004, 2003,
and 2002, Maxtor accounted for 22.5%, 44.4%, and 40.0%,
respectively, and Hewlett Packard accounted for 17.4%, 8.8% and
10.1%, respectively, of the Companys purchases.

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

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

3



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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 the Company.




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

The Companys sales are generated by a
telemarketing sales force, which, on June 30, 2004,
consisted of approximately 109 people in sales offices located
in Atlanta, Georgia; Miami, Florida; City of Industry,
California; Richardson, Texas; San Juan, Puerto Rico;
Bogota, Colombia and Buenos Aires, Argentina. Of the total
number of salespersons on June 30, 2004, 52 people
focused on sales to customers for export to Latin America and on
sales in Colombia and Argentina. Substantially all of the export
and Latin American-based salespeople are fluent in Spanish or
Portuguese. The Companys Atlanta sales office maintains a
separate telemarketing sales force for the sale of wireless
telephone products to retailers and wireless telephone carriers
and their authorized agents located throughout the United States
and Latin America.

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

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

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

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

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

4



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for computer and wireless products, order
fulfillment and electronic ordering, and informational
assistance through the Companys web page
(www.sedonline.com).


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

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



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

The Company serves an active, nonexclusive
customer base of over 6,500 resellers of microcomputer, consumer
electronics and wireless handset products. Resellers include
value-added resellers, corporate resellers and retailers. The
Company believes the multi-billion dollar microcomputer and
wireless telephone wholesale distribution industries serve
customers primarily on a nonexclusive basis, which provides the
Company with significant growth opportunities. During fiscal
2004, no single customer accounted for more than 10% of the
total net sales of the Company. The Company believes that most
of its customers rely on distributors as their principal source
of microcomputer and wireless telephone products.



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

The microcomputer, 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, the Companys ability to
compete favorably is principally dependent upon its ability to
manage inventory and accounts receivable and to control other
operating costs. Successful management of the Company also
requires the Company to react quickly and appropriately to short
and long-term trends, price its products competitively, increase
its net sales and maintain economies of scale.

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



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

The Companys sales currently are not
subject to material seasonal fluctuations although no assurance
can be given that seasonal fluctuations will not develop,
especially during the holiday season in the United States and
Latin America.



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

As of June 30, 2004, the Company had
297 full-time employees, 109 of whom were engaged in
telemarketing and sales, 98 in administration and 90 in
warehouse management and shipping. Management

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believes the Companys relations with its
employees are good and the Company has never experienced a
strike or work stoppage. There are no collective bargaining
agreements covering any of the Companys employees.


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

During the fiscal year ended June 30, 1998,
the Company began selling directly to customers in Colombia
through the Companys facilities in Bogota, Colombia.
During the fiscal year ended June 30, 1999, the Company
also began selling directly to customers in Argentina through
the Companys facilities in Buenos Aires. Sales are
denominated in the respective local currencies of these
countries. For the fiscal year ended June 30, 2004, 2003
and 2002, approximately 28.5%, 22.5% and 26.6%, respectively, of
the Companys net sales were to customers for export
principally into Latin America and direct sales to customers in
Colombia and Argentina. See Item 8 and Notes 12, 16
and 18 to the consolidated financial statements of the Company
for additional information concerning the Companys
domestic and foreign operations.

(e) Available Information

The Company makes available all of its annual
reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to such reports
free of charge through its Internet website at
www.sedonline.com as soon as reasonably practicable after
they are filed with, or furnished to, the Securities and
Exchange Commission. These reports are also available on the
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, Inc.,
4916 North Royal Atlanta Drive, Tucker, Georgia 30084.






|        |           
|------- | ----------
|Item 2. | Properties

The Company maintains its executive offices,
Atlanta sales and warehouse facility, at 4916 North Royal
Atlanta Drive in Atlanta, Georgia. The Company 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 the
Company, previously doing business as Royal Park Company, a
Georgia general partnership. The lease commenced in April 1999
and expires in September 2006. The facility consists of
approximately 30,000 square feet, with an annual rental of
approximately $285,000 effective October 1, 2003, with
annual increases of three percent through September 30,
2006. The Company has a right of first refusal to purchase the
facility should it be offered for sale. The Company believes
that the lease of its executive offices is on terms no less
favorable than those available from unaffiliated parties. The
Company believes there is sufficient additional warehouse and
sales office space available for lease at reasonable prices near
its principal facility in the event the Companys growth
plans so require.

The Company maintains additional warehouse
facilities in City of Industry, California; Miami, Florida,
Richardson, Texas; San Juan, Puerto Rico; Bogota, Colombia
and Buenos Aires, Argentina.

The Company leases its sales and distribution
facility in Miami, Florida under a lease expiring March 31,
2007. This facility consists of approximately 31,000 square
feet at an annual rental of approximately $219,000 effective
April 1, 2004 and increasing to $228,000 effective
April 1, 2005.

The Company also leases an approximately
50,000 square foot facility in City of Industry,
California. The City of Industry facility serves as a
distribution center and sales center for the Company. Annual
rental under the lease is approximately $252,000. Pursuant to
its terms, the lease will expire on March 31, 2005.

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

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On December 1, 1997, the Company 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
the Company. Annual payments total approximately
$55,000 per year. The lease will expire on
November 30, 2006.

On November 1, 1998, the Company assumed the
lease obligations for several small facilities in Buenos Aires,
Argentina. These facilities consist of various spaces in the
Galeria business complex and are utilized for sales offices,
administrative offices and warehouses by Intermaco S.R.L., a
wholly owned subsidiary of the Company. Aggregate space is
approximately 5,000 square feet. Payments total
approximately $21,000 annually. The leases expire at various
dates until June 2006.

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

On January 1, 2001, the Company began
leasing an approximately 3,900 square feet sales and
distribution facility in Hato Rey, Puerto Rico. The space was
expanded to approximately 5,500 square feet in October 2002
and the Company is obligated for annual lease payments of
approximately $84,000. Subsequent to June 30, 2004, the
Company reached a decision to close the facility in Puerto Rico
and has negotiated a buyout of the lease for approximately
$22,000.

On January 1, 2004, the Company began
leasing approximately 12,000 square feet of additional
distribution warehouse space in Tucker, Georgia. The Company is
obligated for annual lease payments of approximately $16,700
through November 30, 2004.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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






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

No matters were submitted to a vote of the
Companys shareholders during the fourth quarter of fiscal
2004.




PART II






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

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

7



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The following table sets forth the high and low
sales prices for Companys common stock as reported for
each quarter of fiscal 2004 and 2003 as adjusted for the
1 for 2 recapitalization on April 26, 2002. The
quotations are inter-dealer prices without retail mark-ups,
mark-downs or commissions and may not represent actual
transactions.

|                 |  |             |      |     |  |   |      | 
|---------------- |  | ----------- | ---- | --- |  | - | ---- | 
|                 |  |            
|                 |  | Sales Price
|                 |  |            
|                 |  | High        |      | Low
|                 |  |             |      |    
|Fiscal year 2004 |  |             |      |     |  |   |      | 
|First            |  | $           | 1.00 |     |  | $ | 0.51 | 
|Second           |  | $           | 2.78 |     |  | $ | 0.80 | 
|Third            |  | $           | 2.63 |     |  | $ | 2.10 | 
|Fourth           |  | $           | 2.20 |     |  | $ | 1.31 | 
|Fiscal year 2003 |  |             |      |     |  |   |      | 
|First            |  | $           | 1.49 |     |  | $ | 0.37 | 
|Second           |  | $           | 0.66 |     |  | $ | 0.15 | 
|Third            |  | $           | 0.51 |     |  | $ | 0.29 | 
|Fourth           |  | $           | 1.00 |     |  | $ | 0.35 | 

There were 3,879,171 shares of common stock
outstanding, approximately 204 shareholders of record as of
September 17, 2004.

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

The Company did not repurchase any of its
securities during the fourth quarter of fiscal 2004.

Information concerning the Companys equity
compensation plans appears in Part III, Item 12 hereof
and in Note 10 to the Companys Consolidated Financial
Statements.

8



---



##### Table of Contents








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

|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |           |  
|-------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------------------- | ----------- | --------- | - | ---- | ----------- | --------- | - | ---- | ----------- | --------- | - | - | ----------- | --------- | - | - | ----------- | --------- | -
|                                                                                                                                       |                              |                    
|                                                                                                                                       |                              | Year ended June 30,
|                                                                                                                                       |                              |                    
|                                                                                                                                       |                              | 2004                |             | 2003      |   | 2002 |             | 2001      |   | 2000
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |     
|Statement of operations data:                                                                                                          |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Net sales                                                                                                                              |                              | $                   | 371,741,000 |           |   | $    | 413,148,000 |           |   | $    | 423,881,000 |           |   | $ | 445,580,000 |           |   | $ | 530,789,000 |          
|Cost of sales                                                                                                                          |                              |                     | 355,168,000 |           |   |      | 393,724,000 |           |   |      | 403,792,000 |           |   |   | 420,441,000 |           |   |   | 500,856,000 |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Gross profit                                                                                                                           |                              |                     | 16,573,000  |           |   |      | 19,424,000  |           |   |      | 20,089,000  |           |   |   | 25,139,000  |           |   |   | 29,933,000  |          
|Selling, general and admin expenses                                                                                                    |                              |                     | 18,536,000  |           |   |      | 24,961,000  |           |   |      | 20,628,000  |           |   |   | 24,153,000  |           |   |   | 23,617,000  |          
|Depreciation and amortization expense                                                                                                  |                              |                     | 1,233,000   |           |   |      | 1,614,000   |           |   |      | 2,081,000   |           |   |   | 2,687,000   |           |   |   | 2,395,000   |          
|Foreign currency transaction loss (gain)                                                                                               |                              |                     | 14,000      |           |   |      | 581,000     |           |   |      | (9,000      | )         |   |   | 220,000     |           |   |   | 96,000      |          
|(Gain) loss disposal of assets                                                                                                         |                              |                     | (30,000     | )         |   |      | (3,000      | )         |   |      | 13,000      |           |   |   | 224,000     |           |   |   | (3,000      | )        
|Impairment charges                                                                                                                     |                              |                     |            |           |   |      | 39,000      |           |   |      |            |           |   |   | 6,147,000   |           |   |   |            |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Operating (loss) income                                                                                                                |                              |                     | (3,180,000  | )         |   |      | (7,768,000  | )         |   |      | (2,624,000  | )         |   |   | (8,292,000  | )         |   |   | 3,828,000   |          
|Interest expense  net                                                                                                                 |                              |                     | 246,000     |           |   |      | 470,000     |           |   |      | 265,000     |           |   |   | 60,000      |           |   |   | 147,000     |          
|Other income  net                                                                                                                     |                              |                     |            |           |   |      | 10,513,000  |           |   |      |            |           |   |   |            |           |   |   |            |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|(Loss) income before income taxes and before
    cumulative effect of a change in accounting principle and
    discontinued operations |                              |                     | (3,426,000  | )         |   |      | 2,275,000   |           |   |      | (2,889,000  | )         |   |   | (8,352,000  | )         |   |   | 3,681,000   |          
|Income tax expense (benefit)                                                                                                           |                              |                     | 801,000     |           |   |      | 613,000     |           |   |      | (1,390,000  | )         |   |   | 344,000     |           |   |   | 578,000     |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|(Loss) income from continuing operations                                                                                               |                              |                     | (4,227,000  | )         |   |      | 1,662,000   |           |   |      | (1,499,000  | )         |   |   | (8,696,000  | )         |   |   | 3,103,000   |          
|Loss from discontinued operations                                                                                                      |                              |                     | (42,000     | )         |   |      | (4,742,000  | )         |   |      | (3,009,000  | )         |   |   | (3,149,000  | )         |   |   | (1,414,000  | )        
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|(Loss) income before cumulative effect of a
    change in accounting principle                                                         |                              |                     | (4,269,000  | )         |   |      | (3,080,000  | )         |   |      | (4,508,000  | )         |   |   | (11,845,000 | )         |   |   | 1,689,000   |          
|Cumulative effect of a change in accounting
    principle, net of income tax benefit of $75,000                                        |                              |                     |            |           |   |      |            |           |   |      | 6,297,000   |           |   |   |            |           |   |   |            |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Net (loss) income                                                                                                                      |                              | $                   | (4,269,000  | )         |   | $    | (3,080,000  | )         |   | $    | (10,805,000 | )         |   | $ | (11,845,000 | )         |   | $ | 1,689,000   |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Basic and diluted (loss) income per share:                                                                                             |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       | From continuing operations   |                     | $           | (1.10     | ) |      | $           | 0.43      |   |      | $           | (0.39     | ) |   | $           | (2.40     | ) |   | $           | 0.92      |  
|                                                                                                                                       | From discontinued operations |                     |             | (0.01     | ) |      |             | (1.24     | ) |      |             | (0.78     | ) |   |             | (0.87     | ) |   |             | (0.42     | )
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Before cumulative effect of a change in
    accounting principle                                                                       |                              |                     | (1.11       | )         |   |      | (0.81       | )         |   |      | (1.17       | )         |   |   | (3.27       | )         |   |   | 0.50        |          
|Cumulative effect of a change in accounting
    principle, net of tax                                                                  |                              |                     |            |           |   |      |            |           |   |      | (1.63       | )         |   |   |            |           |   |   |            |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Basic and diluted (loss) income per share                                                                                              |                              | $                   | (1.11       | )         |   | $    | (0.81       | )         |   | $    | (2.80       | )         |   | $ | (3.27       | )         |   | $ | 0.50        |          
|                                                                                                                                       |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|Weighted average number of shares outstanding                                                                                          |                              |                     |             |           |   |      |             |           |   |      |             |           |   |   |             |           |   |   |             |          
|                                                                                                                                       | Basic                        |                     |             | 3,856,000 |   |      |             | 3,816,000 |   |      |             | 3,862,000 |   |   |             | 3,618,000 |   |   |             | 3,364,000 |  
|                                                                                                                                       | Diluted                      |                     |             | 3,906,000 |   |      |             | 3,816,000 |   |      |             | 3,862,000 |   |   |             | 3,618,000 |   |   |             | 3,386,000 |  

9



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|                     |  |             |            |      |  |      |            |      |  |      |            |  |  |  |             |  |  |  |             | 
|-------------------- |  | ----------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ----------- |  |  |  | ----------- | 
|                     |  |            
|                     |  | At June 30,
|                     |  |            
|                     |  | 2004        |            | 2003 |  | 2002 |            | 2001 |  | 2000
|                     |  |             |            |      |  |      |            |      |  |     
|Balance sheet data:  |  |             |            |      |  |      |            |      |  |      |            |  |  |  |             |  |  |  |             | 
|Working capital      |  |             | 22,001,000 |      |  |      | 25,514,000 |      |  |      | 24,063,000 |  |  |  | 30,539,000  |  |  |  | 36,506,000  | 
|Total assets         |  |             | 69,219,000 |      |  |      | 86,170,000 |      |  |      | 80,562,000 |  |  |  | 107,466,000 |  |  |  | 121,319,000 | 
|Shareholders equity |  |             | 23,606,000 |      |  |      | 27,716,000 |      |  |      | 27,852,000 |  |  |  | 42,615,000  |  |  |  | 55,349,000  | 

All periods presented have been restated in
connection with the February 2003 discontinuance of operations
of SED International do Brasil Distribuidora, Ltda. In addition,
if the non-amortization provisions of SFAS No. 142 had
been applied to all periods presented, the 2001 and 2000 net
income would have increased or net loss would have decreased by
$433,000 and $373,000, respectively.

The Company has restated its Consolidated Balance
Sheet as of June 30, 2003 and 2002 to properly classify the
revolving credit facility with Fleet Capital Corporation,
(the Fleet Agreement) as a current liability in
accordance with Financial Accounting Standards Board Emerging
Issues Task Force Issue No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit
Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement(EITF 95-22). This
restatement had no impact on the Companys results of
operations, cash flows or compliance covenants under the Fleet
Agreement for the years ended June 30, 2003 and 2002. The
revolving credit facility is classified as a current liability
in accordance with EITF 95-22 since the Fleet Agreement
contains a subjective acceleration clause and contractual
provisions under a lock box arrangement that require the cash
receipts of the Company be used to repay amounts outstanding
under the revolving credit facility. As a result of the
reclassification of the revolving credit facility to a current
liability, working capital decreased $12,823,000 and $4,900,000
for the fiscal years ended June 30, 2003 and 2002,
respectively.

10



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##### Table of Contents








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

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

Overview

During fiscal 2004, our consolidated net sales
declined approximately 10.0% when compared to fiscal 2003. This
can be attributed to a decline in domestic sales, which
represented 71.5% of net sales during fiscal 2004 compared to
77.5% in fiscal 2003. Net sales in the United States were down
by 17.0% due to the continued economic slowdown, and competitive
market conditions. While sales in the United States declined,
sales in Latin America grew 22.0% over the prior year as we saw
slightly improving economies in Argentina and Colombia.

The revenue decline from fiscal 2003 along with
competitive market conditions resulted in a slight deterioration
of our margins during fiscal 2004. Gross margin as a percentage
of net sales decreased to 4.5%, compared to 4.7% in fiscal 2003.

Selling, general and administration expenses
decreased to $18.5 million or 5.0% in 2004 compared to
$25.0 million or 6.0% in fiscal 2003. Fiscal 2004 and 2003
expenses included several unusual items, which impacted our
results, which are discussed in more detail hereafter.

The Company incurred a net loss of
$4.3 million in fiscal 2004, compared to $3.1 million
in fiscal 2003, which included a net loss from discontinued
operations of $42,000 and $4.7 million in fiscal years 2004
and 2003 respectively. Operating income in our Latin American
subsidiaries increased 28.0% to $2.1 million from fiscal
2003 while operating losses in the United States decreased 44.5%
to $5.2 million, compared to $9.4 million fiscal 2003.

The Company has experienced a decline in net
sales over the last three years and has incurred operating
losses in each of the last three years. Company management is
continuing to focus on increasing profit margins and reducing
administrative and overhead costs. There is no assurance the
Company will be successful in its efforts. Failure to improve
margins and reduce overhead could adversely affect the
Companys profitability and financial condition.

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



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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 is entering into the
    distribution of consumer electronics, 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. The Company acquired
    significant levels of inventory during the fourth quarter of
    2004. 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 maintained credit insurance for customers located in the
    United States through February 1, 2004 and maintains
    insurance in most 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Uncertain and possibly volatile economic and
    political environment in Latin
    America The general
    economic and political environment in the countries in which the
    Company operates in Latin America is uncertain and, at times,
    volatile. As a result of these conditions, the Company could
    experience unexpected costs from its operations in these
    countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Availability of credit
    facilities The Company
    operated under a formal credit facility with a bank for many
    years that was subject to certain collateral limitations and
    contained certain covenants. During October 2002 a new credit
    facility was obtained. The new credit facility provides more
    flexibility compared to the prior agreement but also includes
    covenants and other provisions. The Company from time to time
    violated the financial covenants associated with the previous
    credit agreement, but was successful in negotiating waivers of
    such violations. No assurance can be given that the Company will
    be able to maintain compliance with financial covenants, or
    obtain waivers in the event of non-compliance, in the future.
    Failure to maintain compliance with the financial covenants
    could adversely affect the Companys ability to obtain
    vendor credit and the overall business operations. The principal
    credit facility, which expires in October 2005, is further
    described in Note 7 to the Companys Consolidated
    Financial Statements.
|
| |  | Cash
    flows While not presently
    anticipated, the Companys continued operation in Latin
    America may require additional capital infusion in the form of
    loans from the parent company or other debt borrowings by the
    subsidiary. The October 2002 credit facility places certain
    restrictions on the future funding of Latin American operations
    (See Note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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

12



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##### Table of Contents



Results of Continuing Operations

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

|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                                                                                                                      |  |                    
|                                                                                                                                      |  | Year Ended June 30,
|                                                                                                                                      |  |                    
|                                                                                                                                      |  | 2004                |        | 2003 |  | 2002
|                                                                                                                                      |  |                     |        |      |  |     
|Net sales                                                                                                                             |  |                     | 100.00 | %    |  |      | 100.00 | %  |  |  | 100.00 | % 
|Cost of sales, including buying and occupancy
    expense                                                                             |  |                     | 95.54  | %    |  |      | 95.30  | %  |  |  | 95.26  | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Gross profit                                                                                                                          |  |                     | 4.46   | %    |  |      | 4.70   | %  |  |  | 4.74   | % 
|Selling, general and administrative expenses                                                                                          |  |                     | 4.99   | %    |  |      | 6.04   | %  |  |  | 4.87   | % 
|Depreciation and amortization expense                                                                                                 |  |                     | 0.33   | %    |  |      | 0.39   | %  |  |  | 0.49   | % 
|Foreign currency transactions loss                                                                                                    |  |                     |       |      |  |      | 0.14   | %  |  |  | 0.00   | % 
|Impairment charges                                                                                                                    |  |                     |       |      |  |      | 0.01   | %  |  |  | 0.00   | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Operating loss                                                                                                                        |  |                     | (0.86  | )%   |  |      | (1.88  | )% |  |  | (0.62  | )%
|Interest expense, net                                                                                                                 |  |                     | 0.06   | %    |  |      | 0.11   | %  |  |  | 0.06   | % 
|Other income                                                                                                                          |  |                     |       |      |  |      | 2.54   | %  |  |  |       |   
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|(Loss) income from continuing operations before
    income taxes and before cumulative effect of a change in
    accounting principle |  |                     | (0.92  | )%   |  |      | 0.55   | %  |  |  | (0.68  | )%
|Income tax expense (benefit)                                                                                                          |  |                     | .22    | %    |  |      | 0.15   | %  |  |  | (0.33  | )%
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|(Loss) income before cumulative effect of a
    change in accounting principle                                                        |  |                     | (1.14  | )%   |  |      | (0.40  | )% |  |  | (0.35  | )%
|Cumulative effect of a change in accounting
    principle, net of $75,000 tax benefit                                                 |  |                     |       |      |  |      |       |    |  |  | 1.49   | % 
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   
|Net (loss) income from continuing operations                                                                                          |  |                     | (1.14  | )%   |  |      | (0.40  | )% |  |  | (1.84  | )%
|                                                                                                                                      |  |                     |        |      |  |      |        |    |  |  |        |   



| |                                        
| | ---------------------------------------
| | Fiscal 2004 Compared to Fiscal
    2003

Net sales from continuing operations decreased
10.0%, or $41.4 million, to $371.7 million in fiscal
2004 compared to $413.1 million in fiscal 2003.
Microcomputer product sales declined 16.0% to
$304.5 million compared to $364.6 million in fiscal
2003 due to the continued economic slowdown, competitive market
conditions and managements strategic decision to reduce
concentration and reliance on one major vendor in the hard drive
market. Wireless revenues in fiscal 2004 increased 39.0% to
$67.2 million compared to $48.5 million in fiscal 2003
as the Company continued to expand its product offerings in the
wireless market.

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

|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |       |   
|-------------- | -------- | ---------- | ----- | ------ |  | ------ | ----- | ------- |  | - | ----- | ----- | - |  | ---- | ----- | --
|               |          |            |       |        |  |       
|               |          | Year Ended |       |       
|               |          | June 30,   |       | Change
|               |          |            |       |       
|               |          | 2004       |       | 2003   |  | Amount |       | Percent
|               |          |            |       |        |  |        |       |        
|United States: |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |      
|               | Domestic |            | $     | 265.7  |  |        | $     | 320.1   |  |   | $     | (54.4 | ) |  |      | (17.0 | )%
|               | Export   |            |       | 60.0   |  |        |       | 55.3    |  |   |       | 4.7   |   |  |      | 8.5   | % 
|Latin America  |          |            | 46.0  |        |  |        | 37.7  |         |  |   | 8.3   |       |   |  | 22.0 | %    
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |      
|Consolidated   |          | $          | 371.7 |        |  | $      | 413.1 |         |  | $ | (41.4 | )     |   |  | 10.0 | %    
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |      |      

The decrease in domestic sales was due primarily
to a decline in the sales of mass storage products offset by
increases in printers, printer consumables, computer processors
and wireless product sales. The increase in U.S. export
sales was primarily due to an improvement in the sale of
printers and printer consumables while sales in our Latin
American subsidiaries increased due to the slightly improving
economies in Argentina and Colombia.

13



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Sales of microcomputer products represented
approximately 82.0% of the Companys net sales in fiscal
2004 compared to 88.0% for fiscal 2003. Sales of wireless
telephone products accounted for approximately 18.0% of the
Companys net sales in fiscal 2004 compared to 12.0% for
fiscal 2003.

Gross profit decreased $2.9 million to
$16.6 million in fiscal 2004, compared to
$19.4 million in fiscal 2003. Gross profit as a percentage
of net sales declined to 4.5% in fiscal 2004 compared to 4.7% in
2003. The decrease in gross profit margin is primarily a result
of volume, lower margin sales, and over all pricing pressures in
the market. The Company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, the Company continues
to experience pricing pressure in selling products.

Selling, general and administrative expenses for
fiscal 2004 declined 26.0% to $18.5 million, compared to
$25.0 million in fiscal 2003. These expenses as a
percentage of net sales decreased to 5.0% in 2004 compared to
6.0% in fiscal 2003. The decrease in expense from the prior year
is attributed to several factors including (i) a decrease
in credit and collection expenses of $1.1 million,
(ii) a $1.2 million provision in 2003 for certain
sales tax liabilities which will likely not be recovered from
customers, (iii) non-recurring expenses of
$2.4 million (net of $1.0 million incurred in fiscal
2004) recorded under the employment agreement of Gerald Diamond,
the Companys deceased founder and former Chairman and
Chief Executive Officer, (iv) and a decline in other
employee related and general expenses of $1.8 million.

Depreciation was $1.2 million in fiscal 2004
as compared to $1.6 million in fiscal 2003. The decline
reflects lower capital expenditures and a declining asset base.

The results of operations of the Company 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 the Company has
significant U.S. dollar denominated liabilities in Latin
American subsidiaries, the devaluation resulted in foreign
currency transaction losses totaling approximately $14,000 in
fiscal 2004 as compared to approximately $581,000 in fiscal
2003. See Item 7A for further discussion.

Net interest expense was $.2 million in
fiscal 2004 compared to interest expense of $.5 million in
fiscal 2003. The decrease in net interest expense is related to
interest income of $220,000 earned during fiscal 2004 on cash
balances on hand associated with the proceeds received by the
Company pursuant to two key man life insurance policies held on
the life of Gerald Diamond, the Companys founder and
former Chairman and Chief Executive Officer who passed away in
June of 2003.

Other income in fiscal 2003 was comprised of
$10.0 million in proceeds under the life insurance policies
described immediately above. The insurance proceeds were
received in July and August of 2003. Additionally, in fiscal
2003, the Company entered into a confidential settlement
agreement for claims arising out of a disagreement with a former
insurance broker. The net proceeds of $512,932 were recorded net
of attorneys fees of $96,420.

Income tax expense was approximately $801,000 in
fiscal year 2004 compared to $613,000 in 2003. The income tax
expense is primarily related to income generated by the
Companys Latin American subsidiaries. At June 30,
2004, the Company has a gross net operating loss carried forward
for U.S. federal tax purposes of approximately
$54.8 million and state tax purposes of approximately
$56.4 million; expiring at various dates through 2024 and
gross net operating loss carry forwards for foreign income tax
purposes of approximately $12 million in Brazil, which
generally do not expire. At June 30, 2004 and 2003, the
Company has recorded valuation allowances for principally all
deferred tax assets, except for those relating to Intermaco
S.R.L. (Argentina), as there is no assurance that these assets
will be realized.

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

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

|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |       |   
|-------------- | -------- | ---------- | ----- | ------ |  | ------ | ----- | ------- |  | - | ----- | ----- | - |  | ----- | ----- | --
|               |          |            |       |        |  |       
|               |          | Year Ended |       |       
|               |          | June 30,   |       | Change
|               |          |            |       |       
|               |          | 2003       |       | 2002   |  | Amount |       | Percent
|               |          |            |       |        |  |        |       |        
|United States: |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |      
|               | Domestic |            | $     | 320.1  |  |        | $     | 311.3   |  |   | $     | 8.8   |   |  |       | 2.8   | % 
|               | Export   |            |       | 55.3   |  |        |       | 75.5    |  |   |       | (20.2 | ) |  |       | (26.8 | )%
|Latin America  |          |            | 37.7  |        |  |        | 38.0  |         |  |   | (.3   | )     |   |  | (.9   | )%   
|Elimination    |          |            | (0.0  | )      |  |        | (0.9  | )       |  |   | 0.9   |       |   |  | 100.0 | %    
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |      
|Consolidated   |          | $          | 413.1 |        |  | $      | 423.9 |         |  | $ | (10.8 | )     |   |  | (2.5  | )%   
|               |          |            |       |        |  |        |       |         |  |   |       |       |   |  |       |      

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

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

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

Selling, general and administrative expenses for
fiscal 2003 increased 21.0% to $25.0 million, compared to
$20.6 million in fiscal 2002. These expenses as a
percentage of net sales increased to 6.0% in 2003 compared to
4.9% in fiscal 2002. The increase in selling, general and
administrative expenses was primarily due to an increase in bad
debt expenses of $0.7 million, professional fees
$0.2 million, sales tax liabilities of $1.2 million,
and obligations of $3.4 million that arose under the terms
of Mr. Gerald Diamonds employment agreement as a
result of his June 2003 death. See Note 17 of the
Companys Consolidated Financial Statements.

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

Depreciation was $1.6 million in fiscal 2003
as compared to $2.1 million in fiscal 2002. This reflects a
decline in capital expenditures.

The results of operations of the Company were
adversely affected by the continuing inflationary conditions in
Latin America and the fluctuations of the Argentine and
Colombian currencies. Since the Company has significant
U.S. dollar denominated liabilities in Latin American
subsidiaries, the devaluation resulted in foreign currency
transaction losses totaling approximately $581,000 in fiscal
2003 as compared to approximately $9,000 in fiscal 2002. See
Item 7A for further discussion.

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

Other income was $10.5 million at
June 30, 2003, and included $10.0 million in proceeds
due under two key man life insurance policies held on the life
of Gerald Diamond, the Companys founder and former

15



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Chairman and Chief Executive Officer. The
insurance proceeds were received in July and August of 2003.
Additionally, in December of 2002, the Company entered into a
confidential settlement agreement for claims arising out of a
disagreement with a former insurance broker. The net proceeds of
$512,932 were recorded net of attorneys fees of $96,420.


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

Discontinued Operations

In February 2003, the Company 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 the Companys consolidated statements of
operations. Additionally, the Company has reported all of SED
International do Brasil Distribuidora, Ltda. assets at their
estimated net realizable values in the Companys
consolidated balance sheet as of June 30, 2004 in
accordance with Accounting Principles Board Opinion No. 30.
See Note 18 to the Companys Consolidated Financial
Statements.

During fiscal 2004, the Company recorded a loss
from discontinued operations of approximately $42,000 primarily
due to the favorable settlement of certain liabilities which
were offset by a provision for potential tax claims asserted by
the Brazilian government.

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

SED International do Brasil Distribuidora, Ltda.
has been transitioned from a commercial operating company into
dormancy. During the dormancy period, the Company will incur
ongoing operating expenses for attorney fees, statutory
bookkeeping and reporting services, document storage and
inventory storage cost until liquidation of the inventory.
Please refer to Note 18 to the Companys Consolidated
Financial Statements for further information regarding the
results of operations for the reporting periods.



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

The following table sets forth certain unaudited
quarterly historical consolidated financial data for each of the
Companys last eight fiscal quarters ended June 30,
2004. This unaudited quarterly information has been prepared on
the same basis as the annual information presented elsewhere
herein and, in the Companys opinion, includes all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the selected quarterly
information. This information should be read in conjunction with
the

16



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##### Table of Contents



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


|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |       |  
|----------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------- | - | ------- | ------- | -------- | - | -------- | ------ | ------- | - | ------- | ------ | -------- | - | - | ------- | ----- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                                            |                                       |                                      
|                                                            |                                       | Quarter Ended                        
|                                                            |                                       |                                      
|                                                            |                                       | Sept 30,                              |         | Dec 31, |   | Mar 31, |         | June 30, |   | Sept 30, |        | Dec 31, |   | Mar 31, |        | June 30,
|                                                            |                                       | 2002                                  |         | 2002    |   | 2003    |         | 2003     |   | 2003     |        | 2003    |   | 2004    |        | 2004    
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |         
|                                                            |                                       |                                      
|                                                            |                                       | (In thousands, except per share data)
|Net sales                                                   |                                       | $                                     | 113,581 |         |   | $       | 110,431 |          |   | $        | 94,444 |         |   | $       | 94,692 |          |   | $ | 106,279 |       |   | $ | 82,275 |       |   | $ | 93,816 |       |   | $ | 89,371 |      
|Gross profit                                                |                                       |                                       | 5,223   |         |   |         | 5,557   |          |   |          | 3,777  |         |   |         | 4,867  |          |   |   | 4,730   |       |   |   | 3,647  |       |   |   | 3,838  |       |   |   | 4,358  |      
|Operating income (loss)                                     |                                       |                                       | 244     |         |   |         | 323     |          |   |          | (1,529 | )       |   |         | (6,806 | )        |   |   | (384    | )     |   |   | (622   | )     |   |   | (2,189 | )     |   |   | 15     |      
|Net (loss) income from continuing operations                |                                       |                                       | (116    | )       |   |         | 434     |          |   |          | (1,705 | )       |   |         | 3,049  |          |   |   | (539    | )     |   |   | (851   | )     |   |   | (2,468 | )     |   |   | (369   | )    
|Net (loss) income from discontinued operations              |                                       |                                       | (873    | )       |   |         | (202    | )        |   |          | (3,585 | )       |   |         | (82    | )        |   |   | (14     | )     |   |   | 42     |       |   |   | (51    | )     |   |   | (19    | )    
|Net (loss) income before change in accounting
    principle |                                       |                                       | (989    | )       |   |         | 232     |          |   |          | (5,290 | )       |   |         | 2,967  |          |   |   | (553    | )     |   |   | (809   | )     |   |   | (2,519 | )     |   |   | (388   | )    
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |      
|Net (loss) income                                           |                                       | $                                     | (989    | )       |   | $       | 232     |          |   | $        | (5,290 | )       |   | $       | 2,967  |          |   | $ | (553    | )     |   | $ | (809   | )     |   | $ | (2,519 | )     |   | $ | (388   | )    
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |      
|(Loss) income per share:                                    |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                                            | From continuing operations            |                                       |         | (0.03   | ) |         |         | 0.11     |   |          |        | (0.44   | ) |         |        | 0.80     |   |   |         | (0.14 | ) |   |        | (0.22 | ) |   |        | (0.64 | ) |   |        | (0.10 | )
|                                                            | From discontinued operations          |                                       |         | (0.23   | ) |         |         | (0.05    | ) |          |        | (0.94   | ) |         |        | (0.02    | ) |   |         | (0.00 | ) |   |        | 0.01  |   |   |        | (0.01 | ) |   |        | (0.01 | )
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                                            | Before change in accounting principle |                                       | $       | (0.26   | ) |         | $       | 0.06     |   |          | $      | (1.38   | ) |         | $      | 0.78     |   |   | $       | (0.14 | ) |   | $      | (0.21 | ) |   | $      | (0.65 | ) |   |        | (0.11 | )
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                                            | After change in accounting principle  |                                       | $       | (0.26   | ) |         | $       | 0.06     |   |          | $      | (1.38   | ) |         | $      | 0.78     |   |   | $       | (0.14 | ) |   | $      | (0.21 | ) |   | $      | (0.65 | ) |   |        | (0.11 | )
|                                                            |                                       |                                       |         |         |   |         |         |          |   |          |        |         |   |         |        |          |   |   |         |       |   |   |        |       |   |   |        |       |   |   |        |      



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

In the fourth quarter of fiscal 2003, the Company
recorded certain expense adjustments related to changes in
estimates of obligations related to sales and use tax
liabilities of $1.2 million; bad debt expense of
$2.1 million, $3.4 million related to benefits due
under Mr. Diamonds employment agreement (See
Note 17 of the Companys Consolidated Financial
Statements) and income for insurance proceeds of
$10.0 million. These fourth quarter adjustments resulted in
a decrease to the net loss of approximately $.86 per share
for fiscal year 2003.

Debt Obligations And Contractual
Obligations

The following table summarized the Companys
debt obligations and contractual obligations, as discussed in
the Notes to the Consolidated Financial Statements as of
June 30, 2004.

|                        |  |                        |            |      |  |      |            |      |  |   |         |  |  |   |         | 
|----------------------- |  | ---------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | - | ------- |  |  | - | ------- | 
|                        |  |                       
|                        |  | Payments Due By Period
|                        |  |                       
|Contractual Obligations |  | Total                  |            | 2005 |  | 2006 |            | 2007
|                        |  |                        |            |      |  |      |            |     
|Operating Leases        |  | $                      | 1,967,000  |      |  | $    | 966,000    |      |  | $ | 709,000 |  |  | $ | 292,000 | 
|Credit Facility         |  |                        | 10,848,000 |      |  |      | 10,848,000 |      |  |   |        |  |  |   |        | 
|                        |  |                        |            |      |  |      |            |      |  |   |         |  |  |   |         | 
|                        |  | $                      | 12,815,000 |      |  | $    | 11,814,000 |      |  | $ | 709,000 |  |  | $ | 292,000 | 
|                        |  |                        |            |      |  |      |            |      |  |   |         |  |  |   |         | 

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 the Company, or engages in
leasing, hedging, or research and development services within
the Company.

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

17



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##### Table of Contents



Liquidity and Capital Resources

The Company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 88.7% and 88.5% in fiscal
2004 and 2003, respectively. It has been the Companys
experience that in periods of revenue growth, investments in
accounts receivable and inventories grow, and the Company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,
2004, accounts receivable and inventories net of payables,
increased by $1.1 million, or 3.5%, compared with
June 30, 2003. In fiscal 2003, accounts receivable and
inventories, net of payables, increased by 2.7%, or
$.8 million, compared with fiscal 2002. At June 30,
2002, accounts receivable and inventories, net of payables,
decreased by $3.2 million, or 9.9%, compared with
June 30, 2001, due to decreased sales and improved asset
utilization.

Historically, the Company has financed its
liquidity needs largely through internally generated funds,
borrowings under its credit agreement and vendor lines of
credit. The Company derives 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 the Company continues operations in Latin
America, management believes that domestic banking agreements
and international monetary restrictions may limit the
Companys ability to transfer cash between its domestic and
international subsidiaries.

At June 30, 2004, the Company had cash and
cash equivalents of $4.1 million, of which
$3.1 million is held in Latin American banks by the
Company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, 2004,
the Companys principal source of liquidity is its
$4.1 million of cash, and its revolving credit facility.
The Companys availability under the Fleet Agreement was
$12.4 million at August 24, 2004, net of
$2.2 million in reserves for outstanding letters of credit.

The net amount of cash provided by the
Companys operating activities in fiscal 2004 was
$4.2 million, principally as a result of changes in working
capital requirements, the receipt of key man life insurance
proceeds offset by benefits paid to Mr. Gerald
Diamonds surviving spouse under his employment agreement
and the net loss from operations adjusted for non-cash items.
The net amount of cash used for investing activities in fiscal
2004 was $633,000 principally as a result of leasehold
improvements to our corporate office location in connection with
the January 2004 consolidation of the Companys Tucker,
Georgia warehouse and corporate office facilities. The net
amount of cash used for financing activities in fiscal 2004 was
$2.0 million reflecting repayments under our revolving
credit facility.

The net amount of cash used by operating
activities in fiscal 2003 was $.6 million, principally
reflecting changes in working capital requirements, the increase
in other receivables related to amounts due under two key man
life insurance policies held on the life of Mr. Gerald
Diamond, the Companys founder and former Chairman and
Chief Executive Officer, who passed away in June 2003, an
increase in accrued liabilities associated with amounts due to
Mr. Gerald Diamonds surviving spouse under his
employment agreement and the net loss from operations adjusted
for non-cash items. The net amount of cash used for investing
activities in fiscal 2003 was $217,000 primarily as a result of
expenditures for computer equipment. The net amount of cash
provided by financing activities in fiscal 2003 was
$5.9 million and reflects additional borrowings under our
short-term revolving credit facility of $7.9 million and
repayment of subsidiary bank debt of $2.0 million.

The net amount of cash provided by operating
activities in fiscal 2002 was $1.0 million, principally
reflecting lower working capital requirements and the net loss
from operations adjusted for non-cash items. The net amount of
cash used for investing activities in fiscal 2002 was $349,000
for various capital expenditures. The net amount of cash
provided by financing activities in 2002 was $4.5 million,
primarily reflecting additional borrowings under our short-term
revolving credit facility.

The Companys cash flows were adversely
affected by the unfavorable changes in exchange rates in the
Latin American countries in which the Company does business. The
exchange rate changes had the effect of

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using approximately $2.3 million in cash for
the year ended June 30, 2004 as compared to using
$4.5 million in fiscal 2003 and $5.1 million in fiscal
2002.


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

The Fleet Agreement also contains certain
covenants which, among other things, requires that if the
Companys availability is less than $5.0 million at
anytime during the agreement, the Company must restrict or limit
capital expenditures and advances to the Companys Latin
American subsidiaries. Also, if the $5.0 million threshold
is breached, the Fleet Agreement requires the maintenance of
certain levels of earnings before interest, taxes, depreciation,
and amortization, requires maintenance of minimum fixed charge
coverage ratio beginning in the second quarter of fiscal 2004,
and requires the maintenance of minimum tangible net worth, as
defined, of negative $1.8 million. The Company has
maintained at least $5 million in availability under the
Fleet Agreement since its inception on October 7, 2002. The
Companys availability under the Fleet Agreement net of
reserves of $2.2 million for outstanding Letters of Credit
was $12.4 million on August 24, 2004. Average
borrowings, maximum borrowings, and weighted average interest
rate for fiscal 2004 were $10.8 million, $20.9 million
and 3.58% respectively.

At June 30, 2004, the Company would not have
been in compliance with certain financial covenants under the
Fleet Agreement had it breached the $5.0 million
availability threshold. In the future, if the Company were to
breach the $5.0 million threshold and fail to comply with
the required financial covenants, Fleet may declare an event of
default and could demand repayment of all outstanding borrowings
and discontinue the agreement. If Fleet were to declare an event
of default, the Companys liquidity and business operations
could be materially adversely affected. The Company has
maintained at least $5.0 million in availability under the
Fleet Agreement since its inception on October 7, 2002.

At June 30, 2004, the Companys
subsidiary, SED International de Colombia Ltda. had no bank
borrowings. In addition, the Colombian subsidiary had no
significant borrowings at any time during fiscal 2004.

The carrying value of all bank debt at
June 30, 2004 and 2003 approximates its fair value based on
floating market interest rates under these debt agreements.

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. The Companys purchase orders are
based on its current distribution needs and are fulfilled by its
vendors within short time horizons. The Company 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 twelve months ended
June 30, 2004.

Management believes that the Companys
credit agreements together with vendor lines of credit and
internally generated funds, will be sufficient to satisfy its
working capital needs during fiscal 2005. However, no assurance
can be given that the Company will be able to remain in
compliance with the financial covenants associated with the
Fleet Agreement, or that the Company will be able to continue to
obtain credit from its vendors in the future. Failure to
maintain compliance under the Fleet Agreement or obtain vendor
lines of credit could significantly and adversely affect the
Companys business operations.

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##### Table of Contents





| |                                               
| | ----------------------------------------------
| | 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 the Company has maintained from
time to time. Through February 1, 2004, the Company
maintained credit insurance, which protected the Company from
credit losses exceeding certain deductibles for domestic sales
and certain export shipments from the United States. The company
maintains credit insurance in most Latin American countries
(subject to certain terms and conditions). See Note 14
under Item 8 for a summary of the movement of the allowance
for doubtful accounts.



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

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 by vendors from the risk of inventory
loss. Therefore, in determining the net realizable value of
inventories, management identifies slow moving or obsolete
inventories that (1) are not protected by vendor agreements
from risk of loss, and (2) are not eligible for return
under various vendor return programs. Based upon these factors,
management estimates the net realizable value of inventories and
records any necessary adjustments as a charge to cost of sales.
If inventory return privileges were discontinued in the future,
or if vendors were unable to honor the provisions of certain
contracts, which protect the Company from inventory losses,
including price protections, the risk of loss associated with
obsolete, slow moving or impaired inventories would increase.
The Companys reserve for obsolete and slowing moving
inventories was approximately $916,000 at June 30, 2004 or
2.9% of gross inventories.



| |                    
| | -------------------
| | Accrued Liabilities

The Company has recorded liabilities for certain
sales tax liabilities, escheat liabilities, end user rebate
programs for wireless phones and employment agreement
obligations. The recording of these liabilities requires the
Company to make judgments and estimates. Certain of the
estimates are highly subjective and may be subject to change in
the future. At June 30, 2004 the Company has accrued its
best estimate of the amounts which will ultimately be required
to be paid in connection with such matters.



| |                      
| | ---------------------
| | Financial Instruments

The Company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 the Companys
international subsidiaries is the local currency for the country
in which the subsidiaries own their primary assets. The
translation of the applicable currencies into U.S. dollars
is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during
the period. Any related translation adjustments are recorded
directly to shareholders equity as a component of
comprehensive income. The Company has no future plans to enter
into foreign exchange forward or option contracts to hedge
foreign currency transactions. These were isolated transactions.
Generally, it is the Companys policy not to enter into
derivative contracts for speculative trading purposes.

20



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##### Table of Contents



The Companys revolving credit facility is
currently a variable rate facility. The Company does not
currently hedge future interest payments with interest rate swap
agreements, and has no plans to do so in the future.



| |                           
| | --------------------------
| | Inflation and Price Levels

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

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



| |                           
| | --------------------------
| | Forward-Looking Statements

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






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

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

Interest Rate Risk

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

Foreign Currency Exchange

The functional currency for the Companys
international subsidiaries is the local currency for the country
in which the subsidiaries own their primary assets. The
translation of the applicable currencies into

21



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##### Table of Contents



U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Any related translation
adjustments are recorded directly to shareholders equity
as a component of comprehensive income. As a result of the
change in currency, the Company recorded foreign currency
translation gain as a component of comprehensive income of
approximately $21,000 for the fiscal year ended June 30,
2004.


The Company distributes many of its products in
foreign countries, primarily in Latin America. Approximately
28.5% of the Companys total net sales were generated from
sales made to resellers located in Latin American countries
during the twelve-month period ended June 30, 2004. The
Company manages its risk to foreign currency rate changes by
maintaining foreign currency bank accounts in currencies in
which it regularly transacts business. Additionally, the
Companys foreign subsidiaries procure inventory payable in
U.S. dollars for resale in their respective countries. Upon
settlement of the payables, the Company may be required to
record transaction gains or losses resulting form currency
fluctuations from the time the subsidiary entered into the
agreement to settlement date of the liability. During the year
ended June 30, 2004, the Company recorded transaction
losses of approximately $14,000. At June 30, 2004, the
Companys foreign subsidiaries had approximately
$3.2 million in U.S. dollar denominated liabilities.
In the aggregate, if the value of the dollar against the foreign
denominated currency strengthens by 10%, the Company would
record a transaction loss of approximately ($320,000).
Conversely, if the value of the dollar declines by 10%, the
Company would record a transaction gain of approximately
$320,000. The Company was not a party to any hedge transactions
as of June 30, 2004.

The information included in the Companys
Annual Report does not include the potential impact that might
arise from any decline in foreign currency in Latin American
after June 30, 2004 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 2004, the inflation
rate was 4.7% compared to 10.0% in fiscal 2003. While the
Argentine government together with the International Monetary
Fund is seeking remedies, no assurance can be given that the
economic situation in Argentina will stabilize. The devaluation,
which commenced in January 2002, could make it more difficult
for Argentine companies to service their commercial and
financial obligations due in or tied to the U.S. dollar.
Any of the foregoing events and a continuation of the Argentine
recession may have a material adverse effect on the
Companys business, results of operations, financial
condition, and ability to make payments on the Companys
indebtedness and on the Companys common stock market
price. The information included in the Companys financial
statements, and other documentation, does not contain the
potential impact that might arise from the situation described
above and, accordingly, should be analyzed considering that
circumstance. Please refer to Note 16 of the Companys
Consolidated Financial Statements.

22



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##### Table of Contents








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



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Board of Directors and Shareholders of

SED International Holdings, Inc.


We have audited the accompanying consolidated
balance sheets of SED International Holdings, Inc. and
subsidiaries as of June 30, 2004 and 2003, and the related
consolidated statements of operations, shareholders equity
and cash flows for each of the three years in the period ended
June 30, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
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 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of SED International Holdings,
Inc. and subsidiaries as of June 30, 2004 and 2003, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended June 30,
2004, in conformity with U.S. generally accepted accounting
principles.

As discussed in Note 7, the consolidated
balance sheet for the year ended June 30, 2003 has been
restated to reclassify borrowings under a revolving credit
facility from non-current liabilities to current liabilities.



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

Atlanta, Georgia

September 10, 2004


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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |             |            | 
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------- | ---------- |  | --------- | ----------- | ---------- | 
|                                         |                                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                                        | June 30,                                  
|                                         |                                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                                        | 2004                                       |           | 2003       
|                                         |                                                                                                                                                                                        |                                            |           |            
|                                         |                                                                                                                                                                                        |                                            |           | (Restated 
|                                         |                                                                                                                                                                                        |                                            |           | See Note 7)
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         | Cash and cash equivalents                                                                                                                                                              |                                            | $         | 4,080,000   |            |  | $         | 4,849,000   |           
|                                         | Trade accounts receivable, less allowance for
    doubtful accounts of $616,000 (2004) and $2,749,000 (2003)                                                                           |                                            |           | 30,737,000  |            |  |           | 34,261,000  |           
|                                         | Other receivables                                                                                                                                                                      |                                            |           | 500,000     |            |  |           | 10,029,000  |           
|                                         | Inventories                                                                                                                                                                            |                                            |           | 30,226,000  |            |  |           | 33,098,000  |           
|                                         | Deferred income taxes                                                                                                                                                                  |                                            |           | 60,000      |            |  |           | 153,000     |           
|                                         | Other current assets                                                                                                                                                                   |                                            |           | 2,011,000   |            |  |           | 1,578,000   |           
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total current assets                       |           |             | 67,614,000 |  |           |             | 83,968,000 | 
|Property and equipment  net             |                                                                                                                                                                                        |                                            | 1,605,000 |             |            |  | 2,202,000 |            
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total assets                               |           | $           | 69,219,000 |  |           | $           | 86,170,000 | 
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         | Trade accounts payable                                                                                                                                                                 |                                            | $         | 30,020,000  |            |  | $         | 37,470,000  |           
|                                         | Accrued and other current liabilities (including
    $3,400,000 to a related party in 2003)                                                                                            |                                            |           | 4,745,000   |            |  |           | 8,146,000   |           
|                                         | Revolving credit facility                                                                                                                                                              |                                            |           | 10,848,000  |            |  |           | 12,823,000  |           
|                                         | Short term subsidiary bank debt                                                                                                                                                        |                                            |           |            |            |  |           | 15,000      |           
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total liabilities                          |           |             | 45,613,000 |  |           |             | 58,454,000 | 
|Shareholders equity:                    |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         | Preferred stock, $1.00 par value;
    129,500 shares authorized, none issued                                                                                                           |                                            |           |             |            |  |           |             |           
|                                         | Common stock, $.01 par value;
    100,000,000 shares authorized, 5,569,872 (2004) and
    5,563,206 (2003) shares issued, 3,879,171 (2004) and
    3,875,861 (2003) shares outstanding |                                            |           | 56,000      |            |  |           | 56,000      |           
|                                         | Additional paid-in capital                                                                                                                                                             |                                            |           | 68,574,000  |            |  |           | 68,442,000  |           
|                                         | Accumulated deficit                                                                                                                                                                    |                                            |           | (27,378,000 | )          |  |           | (23,109,000 | )         
|                                         | Accumulated other comprehensive loss                                                                                                                                                   |                                            |           | (4,510,000  | )          |  |           | (4,531,000  | )         
|                                         | Treasury stock, 1,690,701 (2004) and
    1,687,345 (2003) shares, at cost                                                                                                              |                                            |           | (13,083,000 | )          |  |           | (13,052,000 | )         
|                                         | Unearned compensation  stock awards                                                                                                                                                   |                                            |           | (53,000     | )          |  |           | (90,000     | )         
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total shareholders equity                 |           |             | 23,606,000 |  |           |             | 27,716,000 | 
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            
|                                         |                                                                                                                                                                                        | Total liabilities and shareholders equity |           | $           | 69,219,000 |  |           | $           | 86,170,000 | 
|                                         |                                                                                                                                                                                        |                                            |           |             |            |  |           |            

See notes to consolidated financial statements.

24



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | --------------------------- | ----------- | --------- | - | ---- | ----------- | --------- | - | - | ----------- | --------- | -
|                                                                                                                                            |                              |                            
|                                                                                                                                            |                              | For the Year Ended June 30,
|                                                                                                                                            |                              |                            
|                                                                                                                                            |                              | 2004                        |             | 2003      |   | 2002
|                                                                                                                                            |                              |                             |             |           |   |     
|Net sales                                                                                                                                   |                              | $                           | 371,741,000 |           |   | $    | 413,148,000 |           |   | $ | 423,881,000 |          
|Cost of sales                                                                                                                               |                              |                             | 355,168,000 |           |   |      | 393,724,000 |           |   |   | 403,792,000 |          
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Gross profit                                                                                                                                |                              |                             | 16,573,000  |           |   |      | 19,424,000  |           |   |   | 20,089,000  |          
|Selling, general and administrative expenses
    (including $1,000,000 and $3,400,000 to a related party in 2004
    and 2003 respectively) |                              |                             | 18,536,000  |           |   |      | 24,961,000  |           |   |   | 20,628,000  |          
|Depreciation and amortization expense                                                                                                       |                              |                             | 1,233,000   |           |   |      | 1,614,000   |           |   |   | 2,081,000   |          
|Foreign currency transactions loss (gain)                                                                                                   |                              |                             | 14,000      |           |   |      | 581,000     |           |   |   | (9,000      | )        
|(Gain) loss disposal of assets                                                                                                              |                              |                             | (30,000     | )         |   |      | (3,000      | )         |   |   | 13,000      |          
|Impairment charges                                                                                                                          |                              |                             |            |           |   |      | 39,000      |           |   |   |            |          
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Operating loss                                                                                                                              |                              |                             | (3,180,000  | )         |   |      | (7,768,000  | )         |   |   | (2,624,000  | )        
|Interest expense  net                                                                                                                      |                              |                             | 246,000     |           |   |      | 470,000     |           |   |   | 265,000     |          
|Other income, net                                                                                                                           |                              |                             |            |           |   |      | 10,513,000  |           |   |   |            |          
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|(Loss) income before income taxes and before
    cumulative effect of a change in accounting principle and
    discontinued operations      |                              |                             | (3,426,000  | )         |   |      | 2,275,000   |           |   |   | (2,889,000  | )        
|Income tax expense (benefit)                                                                                                                |                              |                             | 801,000     |           |   |      | 613,000     |           |   |   | (1,390,000  | )        
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|(Loss) income from continuing operations                                                                                                    |                              |                             | (4,227,000  | )         |   |      | 1,662,000   |           |   |   | (1,499,000  | )        
|Loss from discontinued operations                                                                                                           |                              |                             | (42,000     | )         |   |      | (4,742,000  | )         |   |   | (3,009,000  | )        
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Loss before cumulative effect of a change in
    accounting principle                                                                       |                              |                             | (4,269,000  | )         |   |      | (3,080,000  | )         |   |   | (4,508,000  | )        
|Cumulative effect of a change in accounting
    principle, net of income tax benefit of $75,000                                             |                              |                             |            |           |   |      |            |           |   |   | 6,297,000   |          
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Net loss                                                                                                                                    |                              | $                           | (4,269,000  | )         |   | $    | (3,080,000  | )         |   | $ | (10,805,000 | )        
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Basic and diluted (loss) income per share:                                                                                                  |                              |                             |             |           |   |      |             |           |   |   |             |          
|                                                                                                                                            | From continuing operations   |                             | $           | (1.10     | ) |      | $           | 0.43      |   |   | $           | (0.39     | )
|                                                                                                                                            | From discontinued operations |                             |             | (0.01     | ) |      |             | (1.24     | ) |   |             | (0.78     | )
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Before cumulative effect of a change in
    accounting principle                                                                            |                              |                             | (1.11       | )         |   |      | (0.81       | )         |   |   | (1.17       | )        
|Cumulative effect of a change in accounting
    principle, net of tax                                                                       |                              |                             |            |           |   |      |            |           |   |   | (1.63       | )        
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Basic and diluted loss per share                                                                                                            |                              | $                           | (1.11       | )         |   | $    | (0.81       | )         |   | $ | (2.80       | )        
|                                                                                                                                            |                              |                             |             |           |   |      |             |           |   |   |             |          
|Weighted average number of shares outstanding:                                                                                              |                              |                             |             |           |   |      |             |           |   |   |             |          
|                                                                                                                                            | Basic                        |                             |             | 3,856,000 |   |      |             | 3,816,000 |   |   |             | 3,862,000 |  
|                                                                                                                                            | Diluted                      |                             |             | 3,906,000 |   |      |             | 3,816,000 |   |   |             | 3,862,000 |  

See notes to consolidated financial statements.

25



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---------- |  | ------- | ------ | ----------- |  | -------------- | ---------- | -------- |  | ------------ | ----------- | ------------- |  | ------ | ---------- | - |  |  | --------- | - |  | - | ----------- | - |  | - | -------- | - |  | - | ----------- | -
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |              
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |              
|                                                                                                      |  | Common Stock |           |            |  |         |        | Accumulated |  |                |            |          |  |             
|                                                                                                      |  |              |           | Additional |  |         |        | Other       |  | Treasury Stock |            | Unearned |  | Total       
|                                                                                                      |  |              |           | Par        |  | Paid-In |        | Accumulated |  | Comprehensive  |            |          |  | Compensation |             | Stockholders
|                                                                                                      |  | Shares       |           | Value      |  | Capital |        | Deficit     |  | Loss           |            | Shares   |  | Cost         |             | Stock Awards  |  | Equity
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |       
|BALANCE JUNE 30, 2001                                                                                 |  |              | 5,563,206 |            |  | $       | 56,000 |             |  | $              | 68,417,000 |          |  | $            | (9,224,000  | )             |  | $      | (3,564,000 | ) |  |  | 1,532,728 |   |  | $ | (12,612,000 | ) |  | $ | (458,000 | ) |  | $ | 42,615,000  |  
|Stock awards issued                                                                                   |  |              |           |            |  |         |        |             |  |                | (99,000    | )        |  |              |             |               |  |        |            |   |  |  | (16,000   | ) |  |   | 126,000     |   |  |   | (27,000  | ) |  |   |             |  
|Amortization of stock awards                                                                          |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   | 158,000  |   |  |   | 158,000     |  
|Stock awards cancelled                                                                                |  |              |           |            |  |         |        |             |  |                | 89,000     |          |  |              |             |               |  |        |            |   |  |  | 23,938    |   |  |   | (194,000    | ) |  |   | 105,000  |   |  |   |             |  
|Treasury shares purchased                                                                             |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  | 93,030    |   |  |   | (181,000    | ) |  |   |          |   |  |   | (181,000    | )
|Net loss                                                                                              |  |              |           |            |  |         |        |             |  |                |            |          |  |              | (10,805,000 | )             |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (10,805,000 | )
|Translation adjustments                                                                               |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        | (3,935,000 | ) |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (3,935,000  | )
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|Comprehensive loss                                                                                    |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (14,740,000 | )
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE JUNE 30, 2002                                                                                 |  |              | 5,563,206 |            |  |         | 56,000 |             |  |                | 68,407,000 |          |  |              | (20,029,000 | )             |  |        | (7,499,000 | ) |  |  | 1,633,696 |   |  |   | (12,861,000 | ) |  |   | (222,000 | ) |  |   | 27,852,000  |  
|Stock awards cancelled                                                                                |  |              |           |            |  |         |        |             |  |                | 31,000     |          |  |              |             |               |  |        |            |   |  |  | 15,185    |   |  |   | (163,000    | ) |  |   | 132,000  |   |  |   |             |  
|Stock based compensation                                                                              |  |              |           |            |  |         |        |             |  |                | 4,000      |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 4,000       |  
|Treasury shares purchased                                                                             |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  | 38,464    |   |  |   | (28,000     | ) |  |   |          |   |  |   | (28,000     | )
|Net loss                                                                                              |  |              |           |            |  |         |        |             |  |                |            |          |  |              | (3,080,000  | )             |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (3,080,000  | )
|Reclassification of cumulative translation
    adjustment reclassified to the statement of operations |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        | 2,756,000  |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 2,756,000   |  
|Translation adjustments                                                                               |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        | 212,000    |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 212,000     |  
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|Comprehensive loss                                                                                    |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (112,000    | )
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE JUNE 30, 2003                                                                                 |  |              | 5,563,206 |            |  |         | 56,000 |             |  |                | 68,442,000 |          |  |              | (23,109,000 | )             |  |        | (4,531,000 | ) |  |  | 1,687,345 |   |  |   | (13,052,000 | ) |  |   | (90,000  | ) |  |   | 27,716,000  |  
|Amortization of stock awards                                                                          |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   | 29,000   |   |  |   | 29,000      |  
|Stock awards cancelled                                                                                |  |              |           |            |  |         |        |             |  |                | 23,000     |          |  |              |             |               |  |        |            |   |  |  | 3,756     |   |  |   | (31,000     | ) |  |   | 8,000    |   |  |   |            |  
|Stock based compensation                                                                              |  |              |           |            |  |         |        |             |  |                | 106,000    |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 106,000     |  
|Exercise of stock options                                                                             |  |              | 6,666     |            |  |         |        |             |  |                | 3,000      |          |  |              |             |               |  |        |            |   |  |  | (400      | ) |  |   |             |   |  |   |          |   |  |   | 3,000       |  
|Net loss                                                                                              |  |              |           |            |  |         |        |             |  |                |            |          |  |              | (4,269,000  | )             |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (4,269,000  | )
|Translation adjustments                                                                               |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        | 21,000     |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | 21,000      |  
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|Comprehensive loss                                                                                    |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   | (4,248,000  | )
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  
|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  |  
|                                                                                                      |  |              |           |            |  |         |        |             |  |                |            |          |  |              |             |               |  |        |            |   |  |  |           |   |  |   |             |   |  |   |          |   |  |   |             |  

See notes to consolidated financial statements.

26



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |             |            |           |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ---------- | ---------- | ---------- | ---------- | ---------- | ----------- | --------- | ---------- | ----------- | ---------- | --------- | -
|                                                        |                                                                                                                           |                                      
|                                                        |                                                                                                                           | Year Ended June 30,                  
|                                                        |                                                                                                                           |                                      
|                                                        |                                                                                                                           | 2004                                  |                                                         | 2003       |            | 2002      
|                                                        |                                                                                                                           |                                       |                                                         |            |            |           
|Operating activities:                                   |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        | Net loss                                                                                                                  |                                       | $                                                       | (4,269,000 | )          |            | $          | (3,080,000 | )           |           | $          | (10,805,000 | )         
|                                                        | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:                             |                                       |                                                         |            |            |            |            |            |             |           |            |             |           
|                                                        | Impairment charges for long-lived assets,
    including cumulative effect of a change in accounting principle
    in 2002 |                                       |                                                         |           |            |            |            | 100,000    |             |           |            | 6,365,000   |           
|                                                        | Depreciation and amortization                                                                                             |                                       |                                                         | 1,233,000  |            |            |            | 1,666,000  |             |           |            | 2,146,000   |           
|                                                        | Stock compensation                                                                                                        |                                       |                                                         | 135,000    |            |            |            | 4,000      |             |           |            | 158,000     |           
|                                                        | Provision for losses on accounts receivable                                                                               |                                       |                                                         | 1,218,000  |            |            |            | 2,302,000  |             |           |            | 1,638,000   |           
|                                                        | Reclassification of cumulative translation
    adjustment                                                                 |                                       |                                                         |           |            |            |            | 2,756,000  |             |           |            |            |           
|Changes in assets and liabilities                       |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        |                                                                                                                           | Restricted cash                       |                                                         |            |           |            |            |            | 800,000     |           |            |             | (100,000   | )        
|                                                        |                                                                                                                           | Trade accounts receivable             |                                                         |            | 4,830,000  |            |            |            | 1,158,000   |           |            |             | 2,661,000  |          
|                                                        |                                                                                                                           | Other receivable                      |                                                         |            | 9,529,000  |            |            |            | (10,029,000 | )         |            |             |           |          
|                                                        |                                                                                                                           | Inventories                           |                                                         |            | 2,911,000  |            |            |            | 3,096,000   |           |            |             | 707,000    |          
|                                                        |                                                                                                                           | Deferred income taxes                 |                                                         |            |           |            |            |            |            |           |            |             | 242,000    |          
|                                                        |                                                                                                                           | Other assets                          |                                                         |            | (340,000   | )          |            |            | (118,000    | )         |            |             | 1,661,000  |          
|                                                        |                                                                                                                           | Trade accounts payable                |                                                         |            | (7,538,000 | )          |            |            | (2,636,000  | )         |            |             | (1,562,000 | )        
|                                                        |                                                                                                                           | Accrued and other current liabilities |                                                         |            | (3,539,000 | )          |            |            | 3,336,000   |           |            |             | (2,106,000 | )        
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        |                                                                                                                           |                                       | Net cash provided by (used in) operating
    activities |            |            | 4,170,000  |            |            |             | (645,000  | )          |             |            | 1,005,000 |  
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|Investing activities:                                   |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        | Purchase of equipment                                                                                                     |                                       |                                                         | (633,000   | )          |            |            | (217,000   | )           |           |            | (349,000    | )         
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        |                                                                                                                           |                                       | Net cash used in investing activities                   |            |            | (633,000   | )          |            |             | (217,000  | )          |             |            | (349,000  | )
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|Financing activities:                                   |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        | Net proceeds from issuance of stock                                                                                       |                                       |                                                         | 3,000      |            |            |            |           |             |           |            |            |           
|                                                        | Net (repayments) borrowings under revolving
    credit facility                                                           |                                       |                                                         | (1,975,000 | )          |            |            | 7,923,000  |             |           |            | 4,900,000   |           
|                                                        | Net repayments of short term bank debt of foreign
    subsidiaries                                                        |                                       |                                                         | (15,000    | )          |            |            | (2,040,000 | )           |           |            | (174,000    | )         
|                                                        | Purchase of treasury stock                                                                                                |                                       |                                                         |           |            |            |            | (28,000    | )           |           |            | (181,000    | )         
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        |                                                                                                                           |                                       | Net cash (used in) provided by financing
    activities |            |            | (1,987,000 | )          |            |             | 5,855,000 |            |             |            | 4,545,000 |  
|Effect of exchange rate changes on cash                 |                                                                                                                           |                                       | (2,319,000                                              | )          |            |            | (4,515,000 | )          |             |           | (5,073,000 | )          
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|(Decrease) Increase in cash and cash equivalents        |                                                                                                                           |                                       | (769,000                                                | )          |            |            | 478,000    |            |             |           | 128,000    |            
|Cash and cash equivalents                               |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        | Beginning of year                                                                                                         |                                       |                                                         | 4,849,000  |            |            |            | 4,371,000  |             |           |            | 4,243,000   |           
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        | End of year                                                                                                               |                                       | $                                                       | 4,080,000  |            |            | $          | 4,849,000  |             |           | $          | 4,371,000   |           
|                                                        |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|Supplemental Disclosures of Cash Flow
    Information  |                                                                                                                           |                                       |                                                         |            |            |            |            |            |             |           |            |            
|                                                        | Cash paid (received) during the year for                                                                                  |                                       |                                                         |            |            |            |            |            |             |           |            |             |           
|                                                        | Interest paid                                                                                                             |                                       | $                                                       | 465,000    |            |            | $          | 758,000    |             |           | $          | 1,133,000   |           
|                                                        | Income tax payments (refunds)                                                                                             |                                       | $                                                       | 649,000    |            |            | $          | 689,000    |             |           | $          | (777,000    | )         

See notes to consolidated financial statements.

27



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Years ended June 30, 2004, 2003,
2002




|   |                        
|-- | -----------------------
|1. | Description of Business

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



|   |                                               
|-- | ----------------------------------------------
|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 International de Colombia Ltda., Intermaco S.R.L.,
(collectively the Company). All intercompany
accounts and transactions have been eliminated. The operations
of SED International do Brasil, Ltda. were discontinued in the
third quarter of fiscal 2003. See Note 18.

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

28



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consumer Electronics The Company is entering into the
    distribution of consumer electronics, 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. The Company acquired
    significant levels of inventory during the fourth quarter of
    2004. 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 maintained credit insurance for customers located in the
    United States through February 1, 2004 and insurance in
    most 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Uncertain and possibly volatile economic and
    political environment in Latin
    America The general
    economic and political environment in all of the countries in
    which the Company operates in Latin America is uncertain and, at
    times, volatile. As a result of these conditions, the Company
    could experience unexpected costs from its operations in these
    countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Availability of credit
    facilities The Company
    operated under a formal credit facility with a bank for many
    years that was subject to certain collateral limitations and
    contained certain covenants. During October 2002 a new credit
    facility was obtained. The new credit facility provides more
    flexibility compared to the prior agreement but also includes
    covenants and other provisions. The Company from time to time
    violated the financial covenants associated with the previous
    credit agreement, but was successful in negotiating waivers of
    such violations. No assurance can be given that the Company will
    be able to maintain compliance with financial covenants, or
    obtain waivers in the event of non-compliance, in the future.
    Failure to maintain compliance with the financial covenants
    could adversely affect the Companys ability to obtain
    vendor credit and the overall business operations. The principal
    credit facility, which expires in October 2005, is further
    described in Note 7.
|
| |  | Cash
    flows While not presently
    expected, the Companys continued operation in Latin
    America may require additional capital infusion (in the form of
    advance notes from the parent company or other debt borrowings
    by the subsidiary). The October 2002 credit facility restricts
    the future funding by the parent company of Latin American
    operations. Operating needs and regulatory matters restrict the
    Companys ability to repatriate cash flows to the United
    States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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

Concentrations of Credit
Risk Financial instruments
that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and
trade accounts receivable. At June 30, 2004, cash totaling
$3.1 million was held in banks domiciled in Latin America.
The funds held in Latin American banks are generally not
available for use domestically without withholding taxes. The
Company has

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 U.S. generally
accepted accounting principles 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 our
collection experience and an assessment of the collectibility of
specific accounts. The Company evaluates the collectibility of
accounts receivable based on a combination of factors.
Initially, the Company estimates an allowance for doubtful
accounts as a percentage of accounts receivable based on
historical collections experience. This initial estimate is
periodically adjusted when the Company becomes aware of a
specific customers inability to meet its financial
obligations (e.g., bankruptcy filing) or as a result of changes
in the overall aging of accounts receivable. Through
February 1, 2004, the Company was protected by credit
insurance on its significant customers, subject to certain
deductible limitations. The credit insurance policy was for a
twelve-month period and provided for a policy limit of
$10.0 million with an annual aggregate deductible of
$2.0 million. The Company is currently exploring
opportunities to obtain credit insurance through another
insurance carrier. However, there can be no assurance the
Company will be successful in its efforts to renew or obtain
coverage. As of June 30, 2004, the Company had submitted
claims against the credit insurance policy of $3.4 million
and based on the terms of the policy, the Company estimated it
would recover approximately $750,000. However, the underwriters
have declined coverage for several of the claims submitted and
have offered $500,000 to settle all claims payable under the
policy. The Company believes that all claims submitted are valid
claims and will pursue all remedies available under the terms of
the policy including arbitration to recover the amounts
rightfully due. Based on the current outstanding offer from the
insurance company the Company has reasonably estimated its
recovery at $500,000, which has been considered in the
computation of the Companys bad debt expense and allowance
for doubtful accounts at June 30, 2004. The allowance for
doubtful accounts was approximately $616,000 at June 30,
2004 and $2.7 million at June 30, 2003 or 2.0% and
7.4% of gross accounts receivables, respectively. The decrease
in the allowance for doubtful accounts from June 30, 2003,
reflects the write off of uncollectible accounts for several of
the Companys customers that have experienced financial
difficulty including bankruptcy.

Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market and include in-transit inventory of $5,611,000
at June 30, 2004 and $11,286,000 at June 30, 2003.
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 $916,000 at June 30,
2004 and $1.1 million at June 30, 2003, or 2.9% and
3.1% of gross inventories, respectively. The reduction in the

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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys inventory reserves from
June 30, 2003 is attributed to a number of factors
including the liquidation of approximately $250,000 in aged
inventories and the decline in the inventory levels of
$2.9 million from June 30, 2003.

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

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

Foreign Currency
Translation The assets and
liabilities of foreign operations are translated at the exchange
rates in effect at the balance sheet date, with related
translation gains or losses reported as a separate component of
shareholders equity. The results of foreign operations are
translated at the weighted average exchange rates for the year.
Gains or losses resulting from foreign currency transactions are
included in the statement of operations. See Note 16.

Earnings Per Common Share
(EPS) Basic EPS is
computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted EPS is computed using the weighted-average
number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares represent
additional common shares assumed to be issued. Approximately
96,000 stock options had the effect of increasing the weighted
average shares including dilution for the year ended
June 30, 2004. For the years ended 2004, 2003 and 2002
options for approximately 610,000, 801,000, and 969,000 common
shares, respectively, were excluded from the diluted EPS
calculation due to their antidilutive effect.

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



|   |                                              
|-- | ---------------------------------------------
|3. | Recently Issued Accounting
    Pronouncements

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

In July 2001, the FASB issued Statement
No. 141 (SFAS 141) Business
Combinations,and Statement No. 142
(SFAS 142), Goodwill and Other Intangible
Assets. SFAS 141 prospectively prohibits the pooling of
interests method of accounting for business combinations
initiated after June 30, 2001. SFAS 142 requires
companies to cease amortizing goodwill that existed at
June 30, 2001 and establishes a new method for testing
goodwill for impairment on an annual basis (or an interim basis
if an event occurs that might reduce the fair value of a
reporting unit below its carrying value.) Any goodwill resulting
from

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquisitions completed after June 30, 2001
is not amortized. SFAS 142 also requires that an
identifiable intangible asset that is determined to have an
indefinite useful economic life not be amortized, but separately
tested for impairment using a fair value based approach. The
Company adopted SFAS 142 as of July 1, 2001. However,
the Company did not complete the required transitional
impairment tests until the second quarter ended
December 31, 2001. During the three month period ended
December 31, 2001, the Company tested goodwill arising from
the Intermaco acquisition as of July 1, 2001 primarily
utilizing a valuation technique relying on the expected present
value of future cash flows. As a result of this valuation
process as well as the application of the remaining provisions
of SFAS 142, the Company recorded a pre-tax transitional
impairment loss of $6,372,000, representing the write-off of all
of the Companys existing goodwill. This write-off was
reported as a cumulative effect of a change in accounting
principle, on a net of tax basis, as of July 1, 2001 in the
Companys consolidated statement of operations. Prior to
the adoption of SFAS 142 on July 1, 2001, the Company
amortized this goodwill over an estimated useful life of
30 years.



|   |                             
|-- | ----------------------------
|4. | Other Receivables and Income

At June 30, 2003 the Company recorded income
of $10.0 million, plus accrued interest of $29,000 related
to proceeds due under two key man life insurance policies held
on the life of Gerald Diamond, the Companys founder and
former Chairman and Chief Executive Officer. The insurance
proceeds were received in July and August of 2003. Separately,
in December 2002, the Company entered into a confidential
settlement agreement for claims arising out of a disagreement
with a former insurance broker. The net proceeds of $512,932
were recorded net of attorneys fees of $96,420. Other
receivables at June 30, 2004 represent amounts due from the
Companys insurance carrier for claims submitted under our
credit insurance policy during the fiscal year ended 2004.



|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment are comprised of the
following:

|                        |                               |          |            |            |  |   |            |           | 
|----------------------- | ----------------------------- | -------- | ---------- | ---------- |  | - | ---------- | --------- | 
|                        |                               |         
|                        |                               | June 30,
|                        |                               |         
|                        |                               | 2004     |            | 2003      
|                        |                               |          |            |           
|Property and equipment: |                               |          |            |            |  |   |            |          
|                        | Furniture and equipment       |          | $          | 10,027,000 |  |   | $          | 9,864,000 | 
|                        | Leasehold improvements        |          |            | 1,989,000  |  |   |            | 1,525,000 | 
|                        | Other                         |          |            | 100,000    |  |   |            | 175,000   | 
|                        |                               |          |            |            |  |   |            |          
|                        |                               |          | 12,116,000 |            |  |   | 11,564,000 |          
|                        | Less accumulated depreciation |          |            | 10,511,000 |  |   |            | 9,362,000 | 
|                        |                               |          |            |            |  |   |            |          
|                        |                               | $        | 1,605,000  |            |  | $ | 2,202,000  |          
|                        |                               |          |            |            |  |   |            |          

Depreciation expense for property and equipment
totaled $1,233,000, $1,666,000 and $2,006,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.



|   |           
|-- | ----------
|6. | Exit Costs

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

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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                  
|-- | -----------------
|7. | Credit Facilities

Subsequent to the issuance of the Companys
Consolidated Financial Statements for the fiscal year ended
June 30, 2003, the Company restated its Consolidated
Balance Sheet as of June 30, 2003 to properly classify the
revolving credit facility with Fleet Capital Corporation
(hereafter Fleet and the Fleet
Agreement) as a current liability in accordance with
Financial Accounting Standards Board Emerging Issues Task Force
Issue No. 95-22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements That
Include Both a Subjective Acceleration Clause and a
Lock-Box Arrangement(EITF 95-22). This
restatement had no impact on the Companys results of
operations, cash flows or compliance covenants under the Fleet
Agreement. The revolving credit facility is classified as a
current liability in accordance with EITF 95-22 since the Fleet
Agreement contains a subjective acceleration clause and
contractual provisions under a lock box arrangement that require
the cash receipts of the Company be used to repay amounts
outstanding under the revolving credit facility.

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

The Fleet Agreement also contains certain
covenants which, among other things, require that if the
Companys availability is less than $5 million at any
time during the agreement, the Company must restrict or limit
capital expenditures and advances to the Companys Latin
American subsidiaries. Also, if the $5 million threshold is
breached, the Fleet Agreement requires the maintenance of
certain levels of earnings before interest, taxes, depreciation,
and amortization, requires maintenance of minimum fixed charge
coverage ratio beginning in the second quarter of fiscal 2004,
and requires the maintenance of minimum tangible net worth, as
defined, of negative $1.8 million. The Fleet agreement also
restricts the Companys ability to distribute dividends.
Since entering into the Fleet Agreement, the Company has
continuously maintained at least $5 million in availability
under the Fleet Agreement. The Companys availability under
the Fleet Agreement net of reserves of $2.2 million for
outstanding Letters of Credit was $12.4 million on
August 24, 2004. Average borrowings, maximum borrowings,
and weighted average interest rate for fiscal 2004 were
$10.8 million, $20.9 million and 3.58% respectively.

At June 30, 2004, the Company would not have
been in compliance with certain financial covenants under the
Fleet Agreement had it breached the $5.0 million
availability threshold. In the future, if the Company were to
breach the $5.0 million threshold and fail to comply with
the required financial covenants, Fleet may declare an event of
default and could demand repayment of all outstanding borrowings
and discontinue the agreement. If Fleet were to declare an event
of default, the Companys liquidity and business operations
could be materially adversely affected. The Company has
maintained at least $5.0 million in availability under the
Fleet Agreement since its inception on October 7, 2002.

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

33



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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Wachovia credit agreement required
maintenance of certain minimum working capital and other
financial ratios and has certain dividend restrictions. The
credit agreement required a commitment fee of .50% of the unused
commitment. Average borrowings, maximum borrowings and the
weighted average interest rate for fiscal 2002 were $4,961,000,
$19,100,000, and 5.67% respectively. At June 30, 2002 the
Company was not in compliance with certain financial covenants
under the Wachovia agreement. However, the Company subsequently
obtained a new revolving credit agreement as previously
discussed.

The carrying value of all bank debt at
June 30, 2004 approximates its fair value based on the
variable market rates of interest on such bank debt.



|   |             
|-- | ------------
|8. | 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,
|                                                        |  |         
|                                                        |  | 2004     |             | 2003
|                                                        |  |          |             |     
|U.S. federal and state operating loss
    carryforwards |  | $        | 22,019,000  |      |  | $ | 11,836,000  |  
|Foreign operating loss carryforwards                    |  |          |            |      |  |   | 4,087,000   |  
|Reserves not currently deductible                       |  |          | 1,929,000   |      |  |   | 3,436,000   |  
|Valuation allowance                                     |  |          | (23,888,000 | )    |  |   | (19,206,000 | )
|                                                        |  |          |             |      |  |   |             |  
|                                                        |  | $        | 60,000      |      |  | $ | 153,000     |  
|                                                        |  |          |             |      |  |   |             |  

At June 30, 2004, the Company has gross net
operating loss carryforwards for federal and state income tax
purposes in the United States of approximately
$54.8 million and $56.4 million, respectively,
expiring at various dates through 2024. At June 30, 2004
and 2003, the Company has recorded a valuation allowance for
principally all deferred tax assets, except for those relating
to Intermaco S.R.L., as there is no assurance that these assets
will be realized. In 2004, the Company eliminated the deferred
tax assets and corresponding valuation allowance totaling
approximately $4.1 million associated with the Brazilian
net operating losses since there are no operations.

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

|          |         |                     |         |         |  |      |         |         |   |   |            |            |  
|--------- | ------- | ------------------- | ------- | ------- |  | ---- | ------- | ------- | - | - | ---------- | ---------- | -
|          |         |                    
|          |         | Year Ended June 30,
|          |         |                    
|          |         | 2004                |         | 2003    |  | 2002
|          |         |                     |         |         |  |     
|Current:  |         |                     |         |         |  |      |         |         |   |   |            |           
|          | Federal |                     | $       | 6,000   |  |      | $       |        |   |   | $          | (1,882,000 | )
|          | State   |                     |         | 18,000  |  |      |         |        |   |   |            |           |  
|          | Foreign |                     |         | 703,000 |  |      |         | 634,000 |   |   |            | 175,000    |  
|          |         |                     |         |         |  |      |         |         |   |   |            |           
|          |         |                     | 727,000 |         |  |      | 634,000 |         |   |   | (1,707,000 | )         
|          |         |                     |         |         |  |      |         |         |   |   |            |           
|Deferred: |         |                     |         |         |  |      |         |         |   |   |            |           
|          | Federal |                     |         |         |  |      |         |         |   |   |            |            |  
|          | State   |                     |         |         |  |      |         |         |   |   |            |            |  
|          | Foreign |                     |         | 74,000  |  |      |         | (21,000 | ) |   |            | 242,000    |  
|          |         |                     |         |         |  |      |         |         |   |   |            |           
|          |         |                     | 74,000  |         |  |      | (21,000 | )       |   |   | 242,000    |           
|          |         |                     |         |         |  |      |         |         |   |   |            |           
|          |         | $                   | 801,000 |         |  | $    | 613,000 |         |   | $ | (1,465,000 | )         
|          |         |                     |         |         |  |      |         |         |   |   |            |           

34



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                          |  |                     |        |      |  |      |        |   |  |  |       |   
|--------------------------------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | - |  |  | ----- | --
|                                                          |  |                    
|                                                          |  | Year Ended June 30,
|                                                          |  |                    
|                                                          |  | 2004                |        | 2003 |  | 2002
|                                                          |  |                     |        |      |  |     
|Statutory federal rate (benefit)                          |  |                     | (34.0  | )%   |  |      | 34.0   | % |  |  | (34.0 | )%
|State income taxes net of federal income tax
    benefits |  |                     | .5     |      |  |      | .9     |   |  |  | (15.4 | ) 
|Life insurance proceeds                                   |  |                     |       |      |  |      | (166.4 | ) |  |  |      |   
|Net operating loss carryback                              |  |                     |       |      |  |      |       |   |  |  | (26.9 | ) 
|Valuation allowance                                       |  |                     | 120.1  |      |  |      | 156.1  |   |  |  | 27.0  |   
|Brazil net operating loss write-off                       |  |                     | 119.3  |      |  |      |       |   |  |  |      |   
|Write-off of investment in Brazil                         |  |                     | (189.0 | )    |  |      |       |   |  |  |      |   
|Other                                                     |  |                     | 6.5    |      |  |      | 2.3    |   |  |  | 1.2   |   
|                                                          |  |                     |        |      |  |      |        |   |  |  |       |   
|                                                          |  |                     | 23.4   | %    |  |      | 26.9   | % |  |  | (48.1 | )%
|                                                          |  |                     |        |      |  |      |        |   |  |  |       |   

The valuation allowance increased during fiscal
2004, 2003, and 2002 by $4,682,000, $3,377,000, and $1,804,000,
respectively.



|   |                  
|-- | -----------------
|9. | Lease Obligations

SED International leases its main office facility
under an operating lease with an entity owned by certain
minority shareholders and officers of the Company. Rent expense
for this facility for the years ended June 30, 2004, 2003,
and 2002 was $283,000, $275,000, and $267,000 respectively. This
lease, as of October 2003, provides for an annual rent of
$285,000 with annual increases of 3% through September 2006. The
Company leases additional distribution center and sales office
space under other operating leases. Rent expense, net of
sublease rental income, under all operating leases for the years
ended June 30, 2004, 2003, and 2002 was $1,251,000,
$1,741,000, and $1,505,000, respectively.

The Company was obligated under lease agreements
for its closed Harrisburg, Pennsylvania distribution center
through March of 2003 and portions of other distribution centers
which were not being utilized by the Company. Most of such
distribution space has been sublet to third parties. Sublease
rental income was $0, $377,000, and $494,000, for the years
ended June 30, 2004, 2003, 2002, respectively.

As of June 30, 2004, future minimum rental
commitments under noncancelable operating leases are:

|                     |  |   |           | 
|-------------------- |  | - | --------- | 
|Year Ending June 30, |  |  
|                     |  |  
|2005                 |  | $ | 966,000   | 
|2006                 |  |   | 709,000   | 
|2007                 |  |   | 292,000   | 
|                     |  |   |           | 
|                     |  | $ | 1,967,000 | 
|                     |  |   |           | 



|    |                     
|--- | --------------------
|10. | Shareholders Equity

Common Stock During fiscal years 2003, and 2002,
the Company repurchased 38,464, and 93,030 shares,
respectively, of its common stock in open market and private
transactions for $28,000, and $181,000, respectively. There were
no repurchases of common stock in fiscal 2004.

Stock Options Effective July, 1, 2002, the
Company adopted the fair value method of recording stock-based
compensation in accordance with the provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation,which is considered the preferable accounting
method for stock-based employee compensa-

35



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SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

tion. Historically, the Company had elected to
follow the Accounting Principles Board Opinion No. 25,
Accounting for Stock Based Compensation issued to Employees(APB 25) and related Interpretations in
accounting for its employee stock-based compensation.
Accordingly, no compensation expense has been recognized for
stock option plans in the past. The Company has elected to
follow the prospective method and all employee awards granted,
modified or settled after July 1, 2002 will be expensed
over the vesting period based on the fair value at the date the
stock-based compensation is granted. Stock compensation expense
recognized during fiscal years ended 2004 and 2003 in connection
with the prospective adoption of SFAS No. 123 totaled
approximately $106,000 and $4,000, respectively. The following
table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all
outstanding and unvested awards in each period.

|                                                                                                                                                                                                |             |                     |        |       |   |      |        |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------- | ------ | ----- | - | ---- | ------ | ----- | - | - | ------- | ----- | -
|                                                                                                                                                                                                |             |                    
|                                                                                                                                                                                                |             | Year Ended June 30,
|                                                                                                                                                                                                |             |                    
|                                                                                                                                                                                                |             | 2004                |        | 2003  |   | 2002
|(in thousands, except per share amounts)                                                                                                                                                        |             |                     |        |       |   |     
|Net loss, as reported                                                                                                                                                                           |             | $                   | (4,269 | )     |   | $    | (3,080 | )     |   | $ | (10,805 | )    
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    less $106,000 and $4,000 recognized in 2004 and 2003,
    respectively |             |                     | (269   | )     |   |      | (361   | )     |   |   | (775    | )    
|                                                                                                                                                                                                |             |                     |        |       |   |      |        |       |   |   |         |      
|Pro forma net loss                                                                                                                                                                              |             | $                   | (4,538 | )     |   | $    | (3,441 | )     |   | $ | (11,580 | )    
|                                                                                                                                                                                                |             |                     |        |       |   |      |        |       |   |   |         |      
|Basic and diluted loss per share:                                                                                                                                                               |             |                     |        |       |   |      |        |       |   |   |         |      
|                                                                                                                                                                                                | As reported |                     | $      | (1.11 | ) |      | $      | (0.81 | ) |   | $       | (2.80 | )
|                                                                                                                                                                                                |             |                     |        |       |   |      |        |       |   |   |         |      
|                                                                                                                                                                                                | Pro forma   |                     | $      | (1.18 | ) |      | $      | (0.90 | ) |   | $       | (3.00 | )
|                                                                                                                                                                                                |             |                     |        |       |   |      |        |       |   |   |         |      

Fair
Value The weighted average
fair value of options granted in fiscal 2004, 2003, and 2002 was
$.90, $.62, and $1.43, respectively, using the Black-Scholes
option pricing model with the following assumptions:

|                        |  |                     |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                    
|                        |  | Year Ended June 30,
|                        |  |                    
|                        |  | 2004                |      | 2003 |  | 2002
|                        |  |                     |      |      |  |     
|Dividend yield          |  |                     | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Expected volatility     |  |                     | 75.7 | %    |  |      | 63.1 | % |  |  | 61.5 | %
|Risk free interest rate |  |                     | 3.54 | %    |  |      | 3.94 | % |  |  | 4.9  | %
|Expected life, in years |  |                     | 6.4  |      |  |      | 8.0  |   |  |  | 10.0 |  

The Company maintains stock option plans
established in 1997 and 1999 under which 842,441 shares of
common stock have been reserved at June 30, 2004 for
outstanding and future incentive and nonqualified stock option
grants as well as stock awards to directors, officers, and key
employees. Incentive stock options must be granted at not less
than the fair market value of the common stock at the date of
grant and expire 10 years from the date of grant.
Nonqualified stock options may be granted at a price of not less
than 85% of the fair market value of the common stock at the
date of grant and expire 20 years from the date of grant.
Options granted under the plans are exercisable in installments
ranging from 20% to 50% per year. Upon the occurrence of a
change of control (as defined in the Companys
stock option plans), all outstanding options become immediately
exercisable.

36



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                      |           |        |         |                |   |   |       |      | 
|------------------------------------- | --------- | ------ | ------- | -------------- | - | - | ----- | ---- | 
|                                      |           |        |         | Weighted      
|                                      |           |        |         | Average       
|                                      |           | Shares |         | Exercise Price
|                                      |           |        |         |               
|Shares under options at June 30, 2001 |           |        | 321,394 |                |   | $ | 14.14 |     
|                                      | Granted   |        |         | 746,500        |   |   |       | 1.91 | 
|                                      | Cancelled |        |         | (99,300        | ) |   |       | 4.00 | 
|                                      |           |        |         |                |   |   |       |     
|Shares under options at June 30, 2002 |           |        | 968,594 |                |   |   | 3.17  |     
|                                      | Granted   |        |         | 37,500         |   |   |       | .90  | 
|                                      | Cancelled |        |         | (205,210       | ) |   |       | 3.91 | 
|                                      |           |        |         |                |   |   |       |     
|Shares under options at June 30, 2003 |           |        | 800,884 |                |   |   | 2.87  |     
|                                      | Granted   |        |         | 125,000        |   |   |       | 1.81 | 
|                                      | Cancelled |        |         | (212,950       | ) |   |       | 2.61 | 
|                                      | Exercised |        |         | (7,066         | ) |   |       | .48  | 
|                                      |           |        |         |                |   |   |       |     
|Shares under options at June 30, 2004 |           |        | 705,868 |                |   |   | 2.69  |     
|                                      |           |        |         |                |   |   |       |     
|Options exercisable at June 30:       |           |        |         |                |   |   |       |     
|                                      | 2002      |        |         | 802,738        |   |   | $     | 2.96 | 
|                                      | 2003      |        |         | 740,918        |   |   |       | 2.96 | 
|                                      | 2004      |        |         | 628,604        |   |   |       | 2.88 | 

The following table summarizes information
pertaining to all options outstanding and exercisable at
June 30, 2004:

|                   |  |                     |         |              |  |          |     |                     |  |          |         |  |  |  |         |  |  |   |         | 
|------------------ |  | ------------------- | ------- | ------------ |  | -------- | --- | ------------------- |  | -------- | ------- |  |  |  | ------- |  |  | - | ------- | 
|                   |  |                     |         |              |  |         
|                   |  | Outstanding Options |         |              |  |         
|                   |  |                     |         |             
|                   |  |                     |         | Weighted     |  |          |     | Exercisable Options
|                   |  |                     |         | Average      |  | Weighted |     |                    
|                   |  |                     |         | Remaining    |  | Average  |     |                     |  | Average 
|Range of           |  | Number              |         | Contractual  |  | Exercise |     | Number              |  | Exercise
|Exercise Prices    |  | Outstanding         |         | Life (Years) |  | Price    |     | Exercisable         |  | Price   
|                   |  |                     |         |              |  |          |     |                     |  |         
|$0.0000  $ 1.0130 |  |                     | 95,834  |              |  |          | 8.5 |                     |  | $        | 0.5960  |  |  |  | 31,502  |  |  | $ | 0.5349  | 
|$1.0131  $ 2.0260 |  |                     | 392,500 |              |  |          | 7.3 |                     |  | $        | 1.9359  |  |  |  | 386,668 |  |  | $ | 1.9437  | 
|$2.0261  $ 3.0390 |  |                     | 78,000  |              |  |          | 8.5 |                     |  | $        | 2.4428  |  |  |  | 74,800  |  |  | $ | 2.4455  | 
|$5.0651  $ 6.0780 |  |                     | 108,459 |              |  |          | 5.1 |                     |  | $        | 5.8800  |  |  |  | 108,459 |  |  | $ | 5.8800  | 
|$6.0781  $ 7.0910 |  |                     | 5,250   |              |  |          | 5.7 |                     |  | $        | 6.8200  |  |  |  | 5,250   |  |  | $ | 6.8200  | 
|$7.0911  $ 8.1040 |  |                     | 20,550  |              |  |          | 5.7 |                     |  | $        | 7.8786  |  |  |  | 16,650  |  |  | $ | 7.8643  | 
|$9.1171  $10.1300 |  |                     | 5,275   |              |  |          | 2.7 |                     |  | $        | 10.1120 |  |  |  | 5,275   |  |  | $ | 10.1120 | 

37



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                             |  |                     |         |      |  |      |         |   |  |  |         |  
|-------------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                             |  |                    
|                                             |  | Year Ended June 30,
|                                             |  |                    
|                                             |  | 2004                |         | 2003 |  | 2002
|                                             |  |                     |         |      |  |     
|Shares of restricted stock beginning of year |  |                     | 48,937  |      |  |      | 96,988  |   |  |  | 158,358 |  
|Issued                                       |  |                     |        |      |  |      |        |   |  |  | 16,000  |  
|Vested                                       |  |                     | (23,931 | )    |  |      | (32,866 | ) |  |  | (53,432 | )
|Canceled                                     |  |                     | (3,756  | )    |  |      | (15,185 | ) |  |  | (23,938 | )
|                                             |  |                     |         |      |  |      |         |   |  |  |         |  
|Shares of restricted stock-end of year       |  |                     | 21,250  |      |  |      | 48,937  |   |  |  | 96,988  |  
|                                             |  |                     |         |      |  |      |         |   |  |  |         |  

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

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



|    |                      
|--- | ---------------------
|11. | Employee Benefit Plan

SED International, Inc. maintains the SED
International, Inc. 401(k) Plan, a voluntary retirement benefit
program. All employees of SED International, Inc. who have
attained the age of 21 are eligible to participate after
completing one year of service. Employees are immediately vested
in their own contributions. Prior to July 1, 2002, SED
International, Inc. matched a portion of employee contributions
to the plan. Effective July 1, 2002, SED International
revised the plan to provide matching contributions for its
employees at the discretion of the Board of Directors and is no
longer required to match employee contributions. Vesting in
matching contributions, if any, is ratable over 10 years
based on years of continuous service. There were no matching
contributions to the 401(k) plan in fiscal 2003. SED
International, Inc.s matching contribution expense for the
fiscal years 2004 and 2002 totaled $35,000 and $93,000,
respectively.



|    |                    
|--- | -------------------
|12. | Segment Information

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

38



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |             |             | 
|---------------------------------------- | ---------------------- | ------------- | ----------- | ------------- | ----------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | -------- | -------- | - | ---------- | ----------- | ----------- | 
|                                         |                        | United States |             | Latin America |             | Eliminations |            | Consolidated
|                                         |                        |               |             |               |             |              |            |             
|Fiscal 2004                              |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|Net sales:                               |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|                                         | Unaffiliated customers |               | $           | 325,641,000   |             |              | $          | 46,100,000   |            |   |             |         |          |   | $          | 371,741,000 |            
|                                         | Foreign subsidiaries   |               |             |              |             |              |            |             |            |   |             |         |          |   |            |            |            
|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|                                         |                        | Total         |             | $             | 325,641,000 |              |            | $            | 46,100,000 |   |             |          |         |   |            | $           | 371,741,000 | 
|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|Gross profit                             |                        | $             | 11,937,000  |               |             | $            | 4,636,000  |              |            |   |            |          |          | $ | 16,573,000 |            
|(Loss) income from continuing operations |                        | $             | (5,244,000  | )             |             | $            | 2,064,000  |              |            |   |            |          |          | $ | (3,180,000 | )          
|Total assets at year-end                 |                        | $             | 87,195,000  |               |             | $            | 12,856,000 |              |            | $ | (30,860,000 | )        |          | $ | 69,191,000 |            
|Fiscal 2003                              |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|Net sales:                               |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|                                         | Unaffiliated customers |               | $           | 375,485,000   |             |              | $          | 37,663,000   |            |   |             |         |          |   | $          | 413,148,000 |            
|                                         | Foreign subsidiaries   |               |             | 19,000        |             |              |            |             |            |   | $           | (19,000  | )        |   |            |            |            
|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|                                         |                        | Total         |             | $             | 375,504,000 |              |            | $            | 37,663,000 |   |             | $        | (19,000  | ) |            | $           | 413,148,000 | 
|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|Gross profit                             |                        | $             | 14,878,000  |               |             | $            | 4,476,000  |              |            | $ | 70,000      |          |          | $ | 19,424,000 |            
|(Loss) income from continuing operations |                        |               | (9,446,000  | )             |             |              | 1,608,000  |              |            |   | 70,000      |          |          |   | (7,768,000 | )          
|Total assets at year-end                 |                        |               | 107,724,000 |               |             |              | 9,382,000  |              |            |   | (30,987,000 | )        |          |   | 86,119,000 |            
|Fiscal 2002                              |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|Net sales:                               |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|                                         | Unaffiliated customers |               | $           | 385,911,000   |             |              | $          | 37,970,000   |            |   |             |         |          |   | $          | 423,881,000 |            
|                                         | Foreign subsidiaries   |               |             | 913,000       |             |              |            |             |            |   | $           | (913,000 | )        |   |            |            |            
|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|                                         |                        | Total         |             | $             | 386,824,000 |              |            | $            | 37,970,000 |   |             | $        | (913,000 | ) |            | $           | 423,881,000 | 
|                                         |                        |               |             |               |             |              |            |              |            |   |             |          |          |   |            |            
|Gross profit                             |                        | $             | 14,719,000  |               |             | $            | 5,193,000  |              |            | $ | 177,000     |          |          | $ | 20,089,000 |            
|(Loss) income from continuing operations |                        |               | (4,799,000  | )             |             |              | 1,998,000  |              |            |   | 177,000     |          |          |   | (2,624,000 | )          
|Total assets at year-end                 |                        |               | 145,998,000 |               |             |              | 8,286,000  |              |            |   | (77,832,000 | )        |          |   | 76,452,000 |            

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

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

|                    |  |               |             |                    |  |          |            |       |  |   |           |  |  |   |             | 
|------------------- |  | ------------- | ----------- | ------------------ |  | -------- | ---------- | ----- |  | - | --------- |  |  | - | ----------- | 
|                    |  | Microcomputer |             | Wireless Telephone |  | Handling |            |      
|Year Ended June 30, |  | Products      |             | Products           |  | Revenue  |            | Total
|                    |  |               |             |                    |  |          |            |      
|2004                |  | $             | 303,339,000 |                    |  | $        | 67,191,000 |       |  | $ | 1,211,000 |  |  | $ | 371,741,000 | 
|2003                |  |               | 363,343,000 |                    |  |          | 48,543,000 |       |  |   | 1,262,000 |  |  |   | 413,148,000 | 
|2002                |  |               | 398,536,000 |                    |  |          | 24,014,000 |       |  |   | 1,331,000 |  |  |   | 423,881,000 | 

Approximately 28.5%, 22.5% and 26.6% in the
fiscal years ended June 30, 2004, 2003, and 2002,
respectively, consisted of sales to customers for export
principally into Latin America and direct sales to customers in
Colombia and Argentina.

39



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                  
|--- | ---------------------------------
|13. | Significant Vendors and Customers

During the years ended June 30, 2004, 2003
and 2002 the Company purchased approximately 39.9%, 53.2% and
50.1% of its product from two vendors. During the year ended
June 30, 2002, the Company sold approximately 11% of its
product to one customer.



|    |                         
|--- | ------------------------
|14. | Supplemental Disclosures

An analysis of allowances for doubtful accounts
is as follows:

|                    |  |            |           |            |  |                |           |            |  |   |            |   |  |   |           | 
|------------------- |  | ---------- | --------- | ---------- |  | -------------- | --------- | ---------- |  | - | ---------- | - |  | - | --------- | 
|                    |  | Balance at |           | Charged to |  |                |           | Balance at
|                    |  | Beginning  |           | Costs and  |  |                |           | End of    
|Year Ended June 30, |  | of Year    |           | Expenses   |  | Deductions (1) |           | Year      
|                    |  |            |           |            |  |                |           |           
|2004                |  | $          | 2,749,000 |            |  | $              | 1,218,000 |            |  | $ | (3,351,000 | ) |  | $ | 616,000   | 
|2003                |  |            | 1,455,000 |            |  |                | 2,302,000 |            |  |   | (1,008,000 | ) |  |   | 2,749,000 | 
|2002                |  |            | 5,631,000 |            |  |                | 1,638,000 |            |  |   | (5,814,000 | ) |  |   | 1,455,000 | 



---



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



|    |                    
|--- | -------------------
|15. | Reverse Stock Split

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



|    |                                                     
|--- | ----------------------------------------------------
|16. | Latin America Economic Situation and
    Devaluation

As a result of an ongoing economic crisis, the
Argentine government has implemented a number of monetary and
exchange control measures including restrictions on the
withdrawal of funds deposited with Argentine banks and the
practical impossibility of making transfers abroad. On
January 6, 2002, the Argentine Congress also approved Law
No. 25,561 on Public Emergency and Exchange System Reform
that eliminated the pegging of the Argentine peso (ARS) to the
US dollar (USD) on a one to one basis. In place of the
pegged exchange rate the Central Bank of Argentina established
an official and a freely floating
exchange market for transactions originating in Argentina. The
official exchange rate was fixed at ARS 1.4 to
USD 1. The freely floating exchange for the ARS
as compared to the USD decreased from 1.7 pesos to 1 USD at
January 11, 2002 (first day after exchange market was
reopened) to 2.97 ARS to 1 USD at June 30, 2004.

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

Since January 1, 2002, the Argentine economy
has experienced inflation. Inflation during fiscal 2004 was 4.7%
compared to 10% in fiscal 2003. While Argentinas
government together with the International Monetary Fund is
seeking remedies, no assurance can be given that the economic
situation in Argentina will stabilize. The devaluation, which
commenced in January 2002, could make it more difficult for
Argentine companies to service their commercial and financial
obligations due in or tied to the USD. Any of the foregoing
events and a

40



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

continuation of the Argentine recession may have
a material adverse effect on the Companys business,
results of operations, financial condition, and ability to make
payments on the Companys indebtedness and on the
Companys common stock market price. The information
included in the Companys financial statements, and other
documentation, does not contain the potential impact that might
arise from the situation described above and, accordingly,
should be analyzed considering that circumstance.



|    |                                                                      
|--- | ---------------------------------------------------------------------
|17. | Liabilities Under Employment Agreement and
    Contingent Liabilities

The Company carried two key man life insurance
policies payable to the benefit of the Company on Gerald
Diamond, the Companys founder and Former Chairman and
Chief Executive Officer who passed away in June of 2003. At
June 30, 2003, the Company recorded a liability of
approximately $3.4 million, which represented the
Companys best estimate of the amounts due as benefits to
Mr. Diamonds surviving spouse under
Mr. Diamonds employment contract. The Company also
disclosed at June 30, 2003 that it may be contingently
liable for additional benefit payments depending on the
resolution of issues concerning additional benefits potentially
due to Mr. Diamonds surviving spouse. During the
quarter ended March 31, 2004, the Company reached a final
agreement with Mr. Diamonds surviving spouse, the
Companys current Chairman, Jean Diamond, to settle all
claims advanced under Mr. Diamonds employment
contract. Pursuant to the final settlement agreement, an
additional payment of $1.0 million, was made and charged to
selling, general and administrative expenses. All amounts due
were disbursed during the quarter ended March 31, 2004 and
the balance of the liability at June 30, 2004 was $0 as
compared to $3.4 million at June 30, 2003.



|    |                        
|--- | -----------------------
|18. | 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 sheet as of June 30, 2004 in
accordance with Accounting Principles Board Opinion No. 30.

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

|                                         |  |                     |     |      |  |      |        |   |  |   |        |  
|---------------------------------------- |  | ------------------- | --- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |  |                    
|                                         |  | Year Ended June 30,
|                                         |  |                    
|                                         |  | 2004                |     | 2003 |  | 2002
|                                         |  |                     |     |      |  |     
|Net sales                                |  | $                   |    |      |  | $    | 8,196  |   |  | $ | 32,507 |  
|                                         |  |                     |     |      |  |      |        |   |  |   |        |  
|Loss from operations before income taxes |  | $                   | (42 | )    |  | $    | (1,448 | ) |  | $ | (3,009 | )
|Loss on disposal                         |  |                     |    |      |  |      | (3,294 | ) |  |   |       |  
|                                         |  |                     |     |      |  |      |        |   |  |   |        |  
|Loss from discontinued operations        |  | $                   | (42 | )    |  | $    | (4,742 | ) |  | $ | (3,009 | )
|                                         |  |                     |     |      |  |      |        |   |  |   |        |  

The loss from discontinued operations in fiscal
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.

The loss from discontinued operations in fiscal
2003 consisted of operating losses incurred in the Brazil
Operation and estimated loss on disposal of the business which
includes charges for the following: (i) the write-off of
foreign currency translation losses of $2.6 million
previously recorded as a component of stockholders equity,
(ii) equipment, (iii) customer accounts receivable,
(iv) employee termination costs, (v) inventory, and
(vi) facility exit and lease termination costs. As of
June 30, 2004, SED International do Brasil Distribuidora,
Ltda. had assets of $28,000 and third party liabilities of
$370,000. Liabilities include

41



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accounts payable related to inventory purchases
of $120,000 and other miscellaneous accrued liabilities of
$250,000.

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

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

42



---



##### Table of Contents








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

None






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

At the end of the fiscal year ended June 30,
2004, the Companys principal executive and financial
officers performed an evaluation of our disclosure controls and
procedures, as that term is defined in Rules 13a-15(e) or
15d-15(e) of the Securities Exchange Act of 1934, as amended
(the Exchange Act). Based on that evaluation, said
officers concluded that, as of June 30, 2004, the
Companys disclosure controls and procedures were effective
to ensure that information required to be disclosed in the
Companys filings under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and regulations.

There have not been any changes in the
Companys internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act, during the fiscal year to which this report
relates that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over
financial reporting.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors And Executive Officers Of The
    Company

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Proposal 1  Election of
Directors contained in the definitive Proxy Statement to
be filed with the Securities and Exchange Commission no later
than one hundred twenty (120) days after the year ended
June 30, 2004 and delivered to stockholders in connection
with the annual meeting of stockholders to be held on
December 16, 2004.






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

The information called for by this item is
incorporated herein by reference to the sections of the Proxy
Statement entitled Executive Compensation contained
in the definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than one hundred
twenty (120) days after the year ended June 30, 2004
and delivered to stockholders in connection with the annual
meeting of stockholders to be held on December 16, 2004.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership Of Certain Beneficial
    Owners And Management

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Ownership of Shares contained in
the definitive Proxy Statement to be filed with the Securities
and Exchange Commission no later than one hundred twenty
(120) days after the year ended June 30, 2004 and
delivered to stockholders in connection with the annual meeting
of stockholders to be held on December 16, 2004.






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

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Compensation Committee Interlocks and
Insider Participation contained in the definitive Proxy
Statement to be filed with the Securities and Exchange
Commission no later than one hundred twenty (120) days
after the year ended June 30, 2004 and delivered to
stockholders in connection with the annual meeting of
stockholders to be held on December 16, 2004.

43



---



##### Table of Contents








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

The information called for by this item is
incorporated herein by reference to the section of the Proxy
Statement entitled Principal Accountant Fees and
Services contained in the definitive Proxy Statement to be
filed with the Securities and Exchange Commission no later than
one hundred twenty (120) days after the year ended June 30,
2004 and delivered to stockholders in connection with the annual
meeting of stockholders to be held on December 16, 2004.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

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

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



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Report of Independent Registered Public
    Accounting Firm (Ernst & Young LLP  2004,
    2003 and 2002)
|
| |  | Consolidated Balance Sheets at June 30, 2004
    and 2003                                                
|
| |  | Consolidated Statements of Operations for the
    years ended June 30, 2004, 2003 and 2002               
|
| |  | Consolidated Statements of Shareholders
    Equity for the years ended June 30, 2004, 2003 and 2002     
|
| |  | Consolidated Statements of Cash Flows for the
    years ended June 2004, 2003 and 2002                   
|
| |  | Notes to Consolidated Financial Statements                                                               

2. Financial Statement Schedules.



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Schedule II:Valuation and Qualifying is filed herewith under
    Supplemental Disclosures in Note 14 to the
    Consolidated Financial Statements.



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

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

|        |    |             |  |                                                                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Articles of Incorporation of the Company.(1)                                                                                                                                                               
|        | 3  | .2          |  | Amendment to Articles of Incorporation.(54)                                                                                                                                                                
|        | 3  | .3          |  | Bylaws of the Company.(2)                                                                                                                                                                                  
|        | 4  | .1          |  | Form of Rights Agreement, dated as of
    October 31, 1996 between the Company and National City
    Bank.(3)                                                                                              
|        | 10 | .1          |  | Form of Lease Agreement dated as of
    January 1, 1991 between Royal Park, Company and SED
    International, Inc. (Formerly Southern Electronics Distributors,
    Inc.) (SED International).(4)       
|        | 10 | .2          |  | Lease Agreement dated May 16, 1990 between
    The Equitable Life Assurance Society of the United States and
    SED International(5), as amended March 20, 1992.(6)                                       
|        | 10 | .3          |  | Southern Electronics Corporation 1986 Stock
    Option Plan dated September 3, 1986, together with related
    forms of Incentive Stock Option Agreement and NonQualified Stock
    Option Agreement.(7)/*/
|        | 10 | .4          |  | Form of First Amendment dated September 14,
    1989 to Southern Electronics Corporation 1986 Stock Option
    Plan.(8)/*/                                                                                 
|        | 10 | .5          |  | Second Amendment dated November 7, 1989 to
    Southern Electronics Corporation 1996 Stock Option Plan.(9)/*/                                                                                              

44



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .6          |  | Third Amendment dated July 17, 1992 to
    Southern Electronics Corporation 1986 Stock Option Plan.(10)/*/                                                                                                                                                                                                                                                 
|        | 10 | .7          |  | Southern Electronics Corporation 1988 Restricted
    Stock Plan, together with related form of Restricted Stock
    Agreement.(11)/*/                                                                                                                                                                                                                      
|        | 10 | .8          |  | First Amendment dated November 7, 1989 to
    Southern Electronics Corporation 1988 Restricted Stock
    Plan.(12)/*/                                                                                                                                                                                                                                      
|        | 10 | .9          |  | Second Amendment dated July 17, 1992 to
    Southern Electronics Corporation 1988 Restricted Stock
    Plan.(13)/*/                                                                                                                                                                                                                                        
|        | 10 | .10         |  | Form of Southern Electronics Corporation 1991
    Stock Option Plan, together with related forms of Incentive
    Stock Option Agreement and NonQualified Stock Option
    Agreement.(14)/*/                                                                                                                                                               
|        | 10 | .11         |  | First Amendment dated July 17, 1992 to
    Southern Electronics Corporation 1991 Stock Option Plan.(15)/*/                                                                                                                                                                                                                                                 
|        | 10 | .12         |  | Second Amendment dated August 30, 1996 to
    Southern Electronics Corporation 1991 Stock Option Plan.(16)/*/                                                                                                                                                                                                                                              
|        | 10 | .13         |  | Form of NonQualified Stock Option Agreement dated
    as of August 28, 1992 between the Company and Cary
    Rosenthal.(17)/*/                                                                                                                                                                                                                             
|        | 10 | .14         |  | Employment Agreements dated November 7,
    1989, between the Company, SED International and each of Gerald
    Diamond and Jean Diamond (18)/*/, each as amended by form of
    Amendment No. 1 dated September 24, 1991.(19)/*/                                                                                                                          
|        | 10 | .15         |  | SED International, Inc. Savings Plan effective as
    of January 1, 1991, together with Savings Plan Trust and
    Savings Plan Adoption Agreement.(20)/*/                                                                                                                                                                                                 
|        | 10 | .16         |  | Lease Agreement dated November 1992 between
    H.G. Pattillo and Elizabeth M. Pattillo and SED
    International.(21)                                                                                                                                                                                                                                     
|        | 10 | .17         |  | Lease Agreement dated August 9, 1993 between
    New World Partners Joint Venture and SED International and
    Addendum I thereto (NWPJV Lease).(22)                                                                                                                                                                                                    
|        | 10 | .18         |  | Second Addendum to NWPJV Lease dated
    January 10, 1996 among New World Partners Joint Venture,
    New World Partners Joint Venture Number Two and SED
    International.(23)                                                                                                                                                                           
|        | 10 | .19         |  | Third Addendum to NWPJV Lease dated July 24,
    1996 between New World Partners Joint Venture Number Two and SED
    International.(24)                                                                                                                                                                                                                   
|        | 10 | .20         |  | Amendment to Lease for 4775 N. Royal
    Atlanta Drive.(25)                                                                                                                                                                                                                                                                                                
|        | 10 | .21         |  | Form of NonQualified Stock Option Agreement dated
    as of May 21, 1993 between the Company and Cary Rosenthal
    (see Exhibit 10.13)./*/                                                                                                                                                                                                                
|        | 10 | .22         |  | Form of NonQualified Stock Option Agreement,
    dated as of September 13, 1994 between the Company and Cary
    Rosenthal (see Exhibit 10.13)./*/                                                                                                                                                                                                         
|        | 10 | .23         |  | Form of NonQualified Stock Option Agreement for
    Directors.(26)/*/                                                                                                                                                                                                                                                                                      
|        | 10 | .24         |  | 1995 Formula Stock Option Plan, together with
    related form of NonQualified Stock Option Agreement.(27)                                                                                                                                                                                                                                                 
|        | 10 | .25         |  | Adoption Agreement for Swerdlin &
    Company Regional Prototype Standardized 401(k) Profit Sharing
    Plan and Trust, as amended.(28)/*/                                                                                                                                                                                                                 
|        | 10 | .26         |  | Third Amendment dated September 12, 1996 to
    the Southern Electronics Corporation Stock Option Plan.(29)/*/                                                                                                                                                                                                                                             
|        | 10 | .27         |  | Industrial Real Estate Lease (Multi-Tenant
    Facility) dated as of March 6, 1997, between Majestic
    Realty Co. and Patrician Associates, Inc., as landlord (the
    Landlord), and SED International, as Tenant (the
    Tenant), together with Option to Extend Term dated
    as of March 26, 1997, between the Landlord and the
    Tenant.(30)
|        | 10 | .28         |  | Lease Agreement made August 11, 1997,
    between Gwinnett Industries, Inc. and SED International.(31)                                                                                                                                                                                                                                                     
|        | 10 | .29         |  | Lease Agreement made February 3, 1998,
    between First Industrial Harrisburg, L.P. and SED
    International.(32)                                                                                                                                                                                                                                        

45



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .30         |  | Second Amendment to Employment Agreement
    effective July 1, 1998 between SED International and Gerald
    Diamond.(33)/*/                                                            
|        | 10 | .31         |  | Second Amendment to Employment Agreement
    effective July 1, 1998 between SED International and Jean
    Diamond.(34)/*/                                                              
|        | 10 | .32         |  | 1999 Stock Option Plan dated July 20, 1999,
    together with related forms of Stock Option Agreement and
    Restriction Agreement.(35)/*/                                             
|        | 10 | .33         |  | Third Amendment to Employment Agreement effective
    December 16, 1998 between SED International and Jean
    Diamond.(36)/*/                                                          
|        | 10 | .34         |  | Third Amendment to Employment Agreement effective
    July 1, 1999 between SED International and Gerald
    Diamond.(37)/*/                                                             
|        | 10 | .35         |  | Fourth Amendment to Employment Agreement
    effective July 1, 1999 between SED International and Jean
    Diamond.(38)/*/                                                              
|        | 10 | .36         |  | Employment Agreement effective June 1, 1999,
    between SED International and Ronell Rivera.(39)/*/                                                                                    
|        | 10 | .37         |  | Form of Second Amended and Restated Credit
    Agreement dated as of August 31, 1999, among the Company
    and SED International as Borrowers and Wachovia Bank, N.A. as
    Agent.(40)
|        | 10 | .38         |  | Form of Indemnification Agreement entered into
    with each of the directors of the Company and the Company.(41)/*/                                                                    
|        | 10 | .39         |  | Form of Indemnification Agreement entered into
    with each of the officers of the Company and the Company.(42)/*/                                                                     
|        | 10 | .40         |  | Form of Lease Agreement dated as of April 1,
    1999 between Diamond Chip Group, L.L.C. and SED
    International.(43)                                                                 
|        | 10 | .41         |  | Fourth Amendment to Second Amended and Restated
    Credit Agreement dated October 12, 2001 between SED
    International Holdings, Inc. and Wachovia Bank, N.A.(44)                    
|        | 10 | .42         |  | Employment Agreement effective November 11,
    1999 between SED International, Inc. and Barry
    Diamond.(45)/*/                                                                      
|        | 10 | .43         |  | First Amendment to Employment Agreement effective
    June 1, 2001 between SED International Inc. and Barry
    Diamond.(46)/*/                                                         
|        | 10 | .44         |  | Loan and Security Agreement between SED
    International, Inc. and Fleet Capital Corporation dated
    October 7, 2002.(57)                                                            
|        | 10 | .45         |  | Fifth Amendment to Second Amended and Restated
    Credit Agreement dated October 12, 2001 between SED
    International Holdings, Inc. and Wachovia Bank, N.A.(47)                     
|        | 10 | .46         |  | Sixth Amendment to Second Amended and Restated
    Credit Agreement dated October 12, 2001 between SED
    International Holdings, Inc. and Wachovia Bank, N.A.(48)                     
|        | 10 | .47         |  | Amendment to Employment Agreement between Gerald
    Diamond and SED International, Inc., dated
    September 1, 1999. This amendment is effective as of
    November 1, 2001.(49)/*/   
|        | 10 | .48         |  | Amendment to Employment Agreement between Jean
    Diamond and SED International, Inc., dated
    September 1, 1999. This amendment is effective as of
    November 1, 2001.(50)/*/     
|        | 10 | .49         |  | Amendment to Employment Agreement between Mark
    Diamond and SED International, Inc., dated
    September 1, 1999. This amendment is effective as of
    November 1, 2001.(51)/*/     
|        | 10 | .50         |  | Amendment to Employment Agreement between Barry
    Diamond and SED International, Inc., dated
    September 11, 1999. This amendment is effective as of
    November 1, 2001.(52)/*/   
|        | 10 | .51         |  | Amendment to Employment Agreement between Ronell
    Rivera and SED International, Inc., dated November 28,
    1999. This amendment is effective as of November 1,
    2001.(53)/*/    
|        | 10 | .52         |  | Amendment to Employment Agreement between Gerald
    Diamond and SED International, Inc., dated
    September 11, 2002. This amendment is effective as of
    January 1, 2002.(55)/*/   
|        | 10 | .53         |  | Amendment to Employment Agreement between Jean
    Diamond and SED International, Inc., dated
    September 11, 2002. This amendment is effective as of
    January 1, 2002.(56)/*/     

46



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##### Table of Contents



|        |    |             |  |                                                                                                              
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .54         |  | Employment Agreement effective January 1,
    2004 between SED International, Inc. and Mark Diamond(57)/*/   
|        | 10 | .55         |  | Employment Agreement effective January 1,
    2004 between SED International, Inc. and Jonathan Elster(58)/*/
|        | 21 |             |  | Subsidiaries of the Company.                                                                                 
|        | 23 |             |  | Independent Registered Public Accounting Firm
    Consent  Ernst & Young LLP.                               
|        | 24 |             |  | Power of Attorney (see signature page to this
    Form 10-K).                                                
|        | 31 | .1          |  | Rule 13a-14(a)/15d-14(a) Certification by Chief
    Executive Officer Mark Diamond.                          
|        | 31 | .2          |  | Rule 13a-14(a)/15d-14(a) Certification by Chief
    Financial Officer Philip Flynt.                          
|        | 32 | .1          |  | Section 1350 Certification by Chief
    Executive Officer Mark Diamond.                                      
|        | 32 | .2          |  | Section 1350 Certification by Chief
    Financial Officer Philip Flynt                                       



---



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



|     |                                                                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated herein by reference to
    Exhibit 10.12 to Companys 1992 Form 10-K(SEC
    File No. 0-16345).                                                                                     
|    
|(11) | Incorporated herein by reference to
    Exhibit 10.21 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1988 (SEC
    File No. 0-16345).                            
|    
|(12) | Incorporated herein by reference to
    Exhibit 10.26 to Companys 1990 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(13) | Incorporated herein by reference to
    Exhibit 10.15 to Companys 1992 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(14) | Incorporated herein by reference to Annex A
    to Companys Definitive Supplemental Proxy Statement dated
    October 18, 1991 (SEC File No. 0-16345).                                          
|    
|(15) | Incorporated herein by reference to
    Exhibit 10.17 to Companys 1992 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(16) | Incorporated herein by reference to
    Appendix A to Companys Proxy Statement pertaining to
    Companys 1995 Annual Meeting of Stockholders dated
    October 1, 1995 (SEC File No. 0-16345).

47



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##### Table of Contents





|     |                                                                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(17) | Incorporated herein by reference to
    Exhibit 10.18 to Companys 1992 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(18) | Incorporated herein by reference to
    Exhibit 6(a) to Companys Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    1989 (SEC File No. 0-16345).                 
|    
|(19) | Incorporated herein by reference to
    Exhibit 10.13 to Companys 1991 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(20) | Incorporated herein by reference to
    Exhibit 10.15 to Companys 1991 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(21) | Incorporated herein by reference to
    Exhibit 10.24 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1993 (SEC
    File No. 0-16345) (1993 Form 10-K).         
|    
|(22) | Incorporated herein by reference to
    Exhibit 10.25 to Companys 1993 Form 10-K (SEC
    File No. 0-16345).                                                                                    
|    
|(23) | Incorporated herein by reference to
    Exhibit 10.32 to Companys Annual Report on Form l0-K
    for the fiscal year ended June 30, 1996 (SEC File
    No. 0-16345) (1996 Form 10-K).         
|    
|(24) | Incorporated herein by reference to
    Exhibit 10.33 to Companys 1996 Form 10-K(SEC
    File No. 0-16345).                                                                                     
|    
|(25) | Incorporated herein by reference to
    Exhibit 10.26 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1995 (SEC
    File No. 0-16345) (1995 Form 10-K).         
|    
|(26) | Incorporated herein by reference to
    Exhibit 10.29 to Companys 1995 Form 10-K(SEC
    File No. 0-16345).                                                                                     
|    
|(27) | Incorporated herein by reference to
    Appendix B to Companys Proxy Statement pertaining to
    Companys 1995 Annual Meeting of Stockholders dated
    October 1, 1995 (SEC File No. 0-16345).
|    
|(28) | Incorporated herein by reference to
    Exhibit 10.41 to Companys 1996 Form 10-K(SEC
    File No. 0-16345).                                                                                     
|    
|(29) | Incorporated herein by reference to
    Appendix A to Companys Proxy Statement pertaining to
    Companys 1996 Annual Meeting of Stockholders dated
    October 1, 1996 (SEC File No. 0-16345).
|    
|(30) | Incorporated herein by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    1997 (SEC File No. 0-16345).                
|    
|(31) | Incorporated herein by reference to
    Exhibit 10.40 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1997 (SEC
    File No. 0-16345).                            
|    
|(32) | Incorporated herein by reference to
    Exhibit 10.45 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 1998 (SEC
    File No. 01-6345) (1998 Form 10-K).         
|    
|(33) | Incorporated herein by reference to
    Exhibit 10.48 to Companys 1998 Form 10-K.                                                                                                               
|    
|(34) | Incorporated herein by reference to
    Exhibit 10.49 to Companys 1998 Form 10-K.                                                                                                               
|    
|(35) | Incorporated herein by reference to
    Exhibit 10.39 to Companys 1999 Form 10-K.                                                                                                               
|    
|(36) | Incorporated herein by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    1998 (SEC File No. 0-16345).             
|    
|(37) | Incorporated herein by reference to
    Exhibit 10.34 of Companys 1999 Form 10-K.                                                                                                               
|    
|(38) | Incorporated herein by reference to
    Exhibit 10.35 of Companys 1999 Form 10-K.                                                                                                               
|    
|(39) | Incorporated herein by reference to
    Exhibit 10.36 of Companys 1999 Form 10-K.                                                                                                               
|    
|(40) | Incorporated herein by reference to
    Exhibit 10.37 of Companys 1999 Form 10-K.                                                                                                               
|    
|(41) | Incorporated herein by reference to
    Exhibit 10.38 of Companys 1999 Form 10-K.                                                                                                               
|    
|(42) | Incorporated herein by reference to
    Exhibit 10.39 of Companys 1999 Form 10-K.                                                                                                               
|    
|(43) | Incorporated herein by reference to
    Exhibit 10.40 to Amendment No. 1 to the Companys
    Annual Report on Form 10-K/A for the fiscal year ended
    June 30, 1999 (SEC File No. 0-16345).   

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|     |                                                                                                                                                                                           
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(44) | Incorporated herein by reference to
    Exhibit 10.41 to the Registrants (SEC File
    No. 000-16345) 2001 Form 10-K.                                                                    
|    
|(45) | Incorporated herein by reference to
    Exhibit 10.42 to the Registrants (SEC File
    No. 000-16345) 2001 Form 10-K.                                                                    
|    
|(46) | Incorporated herein by reference to
    Exhibit 10.43 to the Registrants (SEC File
    No. 000-16345) 2001 Form 10-K.                                                                    
|    
|(47) | Incorporated herein by reference to
    Exhibit 1.2 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).  
|    
|(48) | Incorporated herein by reference to
    Exhibit 1.3 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2002 (SEC File No. 000-16345).     
|    
|(49) | Incorporated herein by reference to
    Exhibit 2.3 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).  
|    
|(50) | Incorporated herein by reference to
    Exhibit 3.4 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).  
|    
|(51) | Incorporated herein by reference to
    Exhibit 4.5 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).  
|    
|(52) | Incorporated herein by reference to
    Exhibit 5.6 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).  
|    
|(53) | Incorporated herein by reference to
    Exhibit 6.7 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2001 (SEC File No. 000-16345).  
|    
|(54) | Incorporated herein by reference to
    Exhibit 1.3 to the Registrants Revised Definitive
    Proxy Soliciting Materials filed March 26, 2002 (SEC File
    No. 000-16345).              
|    
|(55) | Incorporated herein by reference to
    Exhibit 10.52 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2002.                                                
|    
|(56) | Incorporated herein by reference to
    Exhibit 10.53 to Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2002.                                                
|    
|(57) | Incorporated herein by reference to
    Exhibit 10.44 to the Companys Annual Report on
    Form 10-K for the fiscal year ended June 30, 2002.                                            
|    
|(58) | Incorporated herein by reference to
    Exhibit 10.54 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 31,
    2003 (SEC File No. 000-16345).
|    
|(59) | Incorporated herein by reference to
    Exhibit 10.55 to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2004 (SEC File No. 000-16345).   

(b) Reports on Form 8-K.

The Company did not file any reports on
Form 8-K during the fourth quarter of fiscal 2004.

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SIGNATURES

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



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



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

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

Date: September 17, 2004

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POWER OF ATTORNEY

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

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Company and in the capacities
indicated this September 17, 2004.

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

51