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UNITED
  STATESSECURITIES
  AND EXCHANGE COMMISSIONWASHINGTON, DC
  20549

FORM 10-K

| | (MARK ONE)
| | ----------

**x**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT
  OF 1934

For the fiscal year ended December 31, 2003

OR

**o**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934

For the transition period from ________________ to _________________

Commission file number 0-17521

PACIFIC MAGTRON
  INTERNATIONAL CORP.(Exact Name of
  Registrant as Specified in Its Charter)

|Nevada                                                                                            | 88-0353141                                
|------------------------------------------------------------------------------------------------- | ------------------------------------------
|(State or Other Jurisdiction
      of  
      Incorporation or Organization)                      | (I.R.S. Employer
      Identification No.)
|                                                                                                  |                                           
|                                                                                                  |                                           
|1600 California Circle,
      Milpitas, California
      (Address of Principal Executive Offices) | 95035
      (Zip Code)                    

Registrants telephone number, including area code (408) 956-8888

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

|Title
      of Each Class | Name of
      Each Exchange on Which Registered
|------------------------- | -----------------------------------------------
|                          |                                                
|n/a                       | n/a                                            

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

Common Stock,
  $.001 par value(Title of Class)

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

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

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

At June 30, 2003 the aggregate market value of common stock held by non-affiliates of the registrant
was approximately $1,574,000.

APPLICABLE
  ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCYPROCEEDINGS
  DURING THE PRECEDING FIVE YEARS:

Indicate by check
  mark whether the registrant has filed all documents and reports required to
  be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
  to the distribution of securities under a plan confirmed by a court. Yes o
  No o  N/A

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the Registrants classes of common stock,
as of the latest practicable date.

At March 19, 2004 the number of shares of common stock outstanding was 10,485,062

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
  Registrants Proxy Statement relating to the 2004 Annual Meeting of Stockholders
  are incorporated by reference into Part III, Items 10, 11, 12, 13 and 15.

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The following statement is made pursuant to the safe harbor provisions for forward-looking statements
described in the Private Securities Litigation Reform Act of 1995. Pacific Magtron International
Corp. and subsidiaries (the Company) may make certain statements in this Annual Report
on Form 10-K, including, without limitation, statements that contain the words  believes,
anticipates, estimates, expects, and words of similar import,
constitute forward-looking statements. Forward-looking statements may relate to, among
other items, our future growth and profitability; the anticipated trends in our industry; our competitive
strengths and business strategies; and our new business initiatives. Further, forward-looking statements
are based on our current expectations and are subject to a number of risks, uncertainties and assumptions
relating to our operations, financial condition and results of operations. For a discussion of factors
that may affect the outcome projected in such statements, see Cautionary Factors that May Affect
Future Results, in this Report. If any of these risks or uncertainties materialize, or if any
of the underlying assumptions prove incorrect, actual results could differ materially from results
expressed or implied in any of our forward-looking statements. We do not undertake any obligation
to revise these forward-looking statements to reflect events or circumstances arising after the date
of this Annual Report on Form 10-K.

PART I

ITEM 1. BUSINESS

SUMMARY OF OUR BUSINESS

As used in this document and unless otherwise indicated, the terms Company, PMIC,
we, our or us refer to Pacific Magtron International Corp., a
Nevada corporation and its subsidiaries. Our executive offices are at 1600 California Circle, Milpitas,
California 95035 and our telephone number is 408-956-8888. Our website address is www.PacificMagtron.com.

Our primary business is to distribute computer peripheral products through our wholly-owned subsidiaries,
Pacific Magtron, Inc. (PMI), Pacific Magtron (GA), Inc. (PMIGA), and LiveWarehouse, Inc. (LW). Our
business is organized into three divisions: PMI, PMIGA and LW.

Founded in 1989, PMI fulfills the multimedia hardware needs of system integrators, value added resellers,
retailers, original equipment manufacturers, software vendors, and internet resellers through the
wholesale distribution of computer related multimedia hardware components and software. In August
2000, we formed PMIGA for the distribution of PMIs products in the eastern United States. In
December 2001, LW was incorporated as a wholly-owned subsidiary of PMIC, to provide consumers a convenient
way to purchase computer products via the internet.

As part of the
  Companys continued efforts to cut cost and refocus on its core business,
  during the second quarter 2003, the Company disposed of Frontline Network Consulting,
  Inc. (FNC) and Lea Publishing, Inc. (Lea) which were unprofitable in 2003, 2002
  and 2001. The Company sold substantially all the assets of FNC in exchange for
  a note in the amount of $15,000 and Lea for $5,000 in cash and certain electronic
  commerce support services to LW valued at $48,000. The activities of FNC and
  Lea have been reclassified in our financial statements as discontinued operations.
  FNC served as a corporate information services group catering to the networking
  and internet infrastructure requirements of corporate clients. Lea was engaged
  in the development and distribution of software and e-business products and
  services, as well as integration and hosting services.

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On October 15, 2001, we formed an investment holding company, PMI Capital Corporation (PMICC) as a
wholly-owned subsidiary of PMIC, for the purpose of acquiring companies or assets deemed suitable
for PMICs organization. PMICC, which was dissolved in 2003, had no activities since 2002 and
had no assets or liabilities.

Financial information for each group or segment in each of the last three fiscal years is presented
in note 18 to the Companys Consolidated Financial Statements.

INDUSTRY OVERVIEW

WHOLESALE MICRO COMPUTER
  PRODUCTS DISTRIBUTION

The microcomputer products
  distribution industry generally consists of suppliers, wholesalers, resellers,
  and end-users. Wholesale distributors typically sell only to resellers and purchase
  a wide range of products in bulk directly from manufacturers. Different types
  of resellers are defined and distinguished by the end-user market they serve,
  such as large corporate accounts, small and medium-sized businesses or home
  users, and by the level of value that they add to the basic products they sell.

INCREASED RELIANCE ON WHOLESALE
  MICRO COMPUTER PRODUCTS DISTRIBUTION

We believe that the growth
  of the microcomputer products wholesale distribution industry exceeds that of
  the microcomputer industry as a whole. In our view, suppliers, vendors, and
  resellers are relying to a greater extent on wholesale distributors for their
  distribution needs. Suppliers are faced with the pressures of declining product
  prices and the increasing costs of selling directly to a large and diverse group
  of resellers, and they therefore are increasingly relying upon wholesale distribution
  channels for a greater proportion of their sales. Many suppliers outsource a
  growing portion of certain functions, such as distribution, service, technical
  support, and final assembly, to the wholesale distribution channel in order
  to minimize costs and focus on their core capabilities in manufacturing, product
  development, and marketing. Likewise, vendors are finding it more cost efficient
  to rely on wholesale distributors that can leverage distribution costs across
  multiple vendors, each of whom out sources a portion of their distribution,
  credit, marketing, and support services.

On the reseller
  side, growing product complexity, shorter product life cycles, an increasing
  number of microcomputer products, the emergence of open systems architectures,
  and the recognition of certain industry standards have led resellers to depend
  upon wholesale distributors for more of their product, marketing, and technical
  support needs. Due to the large number of vendors and products, resellers often
  cannot or choose not to establish direct purchasing relationships with suppliers.
  Instead, they rely on wholesale distributors that can leverage purchasing costs
  across multiple resellers to satisfy a significant portion of their product
  procurement and delivery, financing, marketing, and technical support needs.
  Rather than stocking large inventories themselves and maintaining credit lines
  to finance working capital needs, resellers are also increasingly relying on
  wholesale distributors for product availability and flexible financing alternatives.

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OPEN SOURCING

Another apparent
  reason for the growth of the wholesale distribution industry is the evolution
  of open sourcing during the past several years, a phenomenon specific to the
  United States microcomputer products wholesale distribution market. Historically,
  branded computer systems from large suppliers were sold in the United States
  only through authorized master resellers. Under this single sourcing model,
  resellers were required to purchase these products exclusively from one master
  reseller. Competitive pressures led some of the major computer suppliers to
  authorize second sourcing, in which resellers could purchase a suppliers
  product from a source other than their primary master reseller, subject to certain
  restrictive terms and conditions. More recently, all major manufacturers have
  authorized open sourcing, under which resellers can purchase the suppliers
  product from any source on equal terms and conditions. Open sourcing has thus
  blurred the distinction between wholesale distributors and master resellers,
  which are increasingly able to serve the same reseller base. We believe that
  open sourcing enables those distributors of microcomputer products which provide
  the highest value through superior service and pricing to be in the best position
  to compete for reseller customers.

INTERNET SERVICES

The internet
  provides wholesale distributors with an additional means to serve both suppliers
  and reseller customers through the development and use of effective electronic
  commerce tools. The increasing utilization of electronic ordering, including
  the ability to transact business over the World Wide Web, has had, and is expected
  to continue to have, a significant impact on the cost efficiency of the wholesale
  distribution industry. Distributors with the financial and technical resources
  to develop, implement and operate state of the art management information systems
  have been able to reduce both their customers and their own transaction costs
  through more efficient purchasing and lower selling costs. The growing presence
  and importance of such electronic commerce capabilities also provide distributors
  with new business opportunities as new categories of products, customers, and
  suppliers develop.

PACIFIC MAGTRON, INC. AND
  PACIFIC MAGTRON (GA), INC. - COMPUTER PRODUCTS

Through PMI and PMIGA, we
  distribute a wide range of computer products, including components and multimedia
  and systems networking products. We also provide vertical solutions for systems
  integrators and internet resellers by combining or bundling our products. Our
  computer products group offers our customers a broad inventory of more than
  1,800 products from approximately 30 manufacturers. This wide assortment of
  vendors and products meets our customers needs for a cost effective link
  to multiple vendors products through a single source. Among the products
  that we distribute are systems and networking peripherals, and components such
  as high capacity storage devices, a full range of optical storage devices such
  as CD-ROMS, DVDs and CDR, CDRW, sound cards, video cards, small computer systems
  interface components, video phone solutions, floppy and hard disk drives, and
  other miscellaneous items such as audio cabling devices, keyboards, computer
  mice, and zip drives for desktop and notebook computers.

INVENTORY LEVELS
  AND ASSET MANAGEMENT

Based on historical
  order levels and our knowledge of the market, we maintain sufficient quantities
  of product inventories to achieve high order fill rates, and believe that price
  protection and stock return privileges provided by suppliers substantially mitigate
  the risks associated with slow moving and obsolete inventory. We also operate
  a computerized inventory system that allows us to look at and deal with slow
  moving inventory. If a supplier reduces its prices on certain products, we generally
  receive a credit for such products in our inventory. In addition, we have the
  right to return a certain percentage of purchases, subject to certain limitations.
  Historically, price protection, stock return privileges, and inventory management
  procedures have helped to reduce the risk of a significant decline in the value
  of our inventory.

However, we have
  recognized losses due to obsolete inventory in the normal course of business.
  Historically, we have not experienced any material losses. Inventory levels
  may vary from period to period due in part to the addition of new suppliers
  or large purchases of inventory due to favorable terms offered by suppliers.

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CREDIT TERMS

We offer various
  credit terms including open account, flooring arrangements, company and personal
  checks and credit card payment to qualifying customers. We closely monitor our
  customers creditworthiness, and in most markets, utilize various levels
  of credit insurance to control credit risks and enable us to extend higher levels
  of credit. We also establish reserves for estimated credit losses in the normal
  course of business.

LIVEWAREHOUSE
   BUSINESS TO COMSUMER E-COMMERSE STORE

In December 2001
  we formed LiveWarehouse, Inc., an e-commerce site aimed at increase sales through
  the internet to consumers through the internet. LiveWarehouse.coms main
  products consist of consumer computer electronics for the computer after-market
  segment as well as storage and related products for general consumer electronic
  devices. LW also distributes certain computer products to resellers.

SALES AND MARKETING

Our sales for our computer
  products divisions are generated by a telemarketing sales force, which consists
  of approximately 12 people as of December 31, 2003 in our offices located in
  Milpitas, California and 5 people in our Georgia location.

The sales force is organized in teams generally consisting of a minimum of three people. We believe
that teams provide superior customer service because customers can contact one of several people.
Moreover, we believe that the long-term nature of our customer relationships is better served by
teams that increase the depth of the relationship and improve the consistency of service.

We provide compensation incentives to our salespeople, thus encouraging them to increase their product
knowledge and to establish long-term relationships with existing and new customers. Customers can
contact their salespersons using a toll-free number. Salespeople initiate calls to introduce our
existing customers to new products and to solicit orders. In addition, salespeople seek to develop
new customer relationships by using targeted mailing lists and vendor leads.

The telemarketing salespeople are supported by a variety of marketing programs. For example, we regularly
sponsor promotions for our resellers where we have new product offerings and discuss industry developments,
as well as regular training sessions hosted by manufacturers. In addition, our in-house marketing
staff prepares catalogs that list available products and routinely produces marketing materials and
advertisements.

Our salespeople are able to analyze our available inventory through a sophisticated management information
system and recommend the most appropriate cost-effective systems and hardware for each customer,
whether a full-line retailer or an industry-specific reseller.

We continually evaluate our product mix and the needs of our customers in order to minimize inventory
obsolescence and carrying costs. Our rapid delivery terms are available to all of our customers,
and we seek to pass through our cost effective shipping and handling expenses to our customers.

LiveWarehouse
  generate sales primarily through its e-store (livewarehouse.com) and operates
  a Yahoo store. Supplemental sales are generated through internet auction sites
  for liquidation electronic products.

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SUPPLIERS

SOURCES OF SUPPLY

Our financial
  and industry positions have enabled us to obtain contracts with many leading
  manufacturers, including Creative Labs, Logitech, Toshiba, Sony and TEAC. We
  purchase our products directly from such manufacturers, generally on a non-exclusive
  basis. We believe that our agreements with the manufacturers are in forms customarily
  used by each manufacturer. The agreements typically contain provisions allowing
  termination by either party without prior notice, and generally do not require
  us to sell a specific quantity of products or restrict us from selling products
  manufactured by competitors. As a result, we generally have the flexibility
  to terminate or curtail sales of one product line in favor of another product
  line if we consider it appropriate to do so because of technological change,
  pricing considerations, product availability, customer demand or vendor distribution
  policies. For the years ended December 31, 2003, 2002 and 2001, one vendor,
  Sunnyview/Real Wisdom accounted for approximately 18%, 11% and 10%, respectively,
  of our total purchases. One other vendor accounted for 17% of our purchases
  for the year ended December 31, 2003. We do not have a supply contract with
  Sunnyview nor the other vendor, but rather purchase products from them through
  individual purchase orders, none of which has been large enough to be material
  to us. Although we have not experienced significant problems with Sunnyview
  or our other suppliers, and we believe we could obtain the products that Sunnyview
  and the other vendors supplies from other sources, there can be no assurance
  that our relationship with Sunnyview and with our other suppliers will continue
  or, in the event of a termination of our relationship with any given supplier,
  that we would be able to obtain alternative sources of supply on comparable
  terms without a material disruption in our ability to provide products and services
  to our clients. This may cause a loss of sales that could have a material adversely
  effect on our business, financial condition and operating results.

DISTRIBUTION

From our central
  warehouse facilities in Milpitas, California and Atlanta, Georgia, we distribute
  microcomputer products principally throughout the United States. No individual
  customer accounts for more than 10% of our sales. A minority of our distribution
  agreements are limited by territory. In those cases, however, North America
  is usually the territory granted to us. We will continue to seek to expand the
  geographical scope of our distributor arrangements.

COMPETITION

All aspects of
  our business are highly competitive. Competition within the computer products
  distribution industry is based on product availability, credit availability,
  price, speed and accuracy of delivery, effectiveness of sales and marketing
  programs and quality and breadth of product lines. We also compete with some
  manufacturers that sell directly to resellers and end-users. Principal regional
  competitors in the wholesale distribution industry include Asia Source and Synnex
  Information Technology, Inc., both of which are privately held companies. Ingram
  Micro Inc. and Tech Data Corporation are among our principal regional and multi-regional
  publicly held competitors. We also compete with manufacturers that sell directly
  to resellers and end-users. Nearly all of our competitors are larger and have
  greater financial and other resources.

Competition within the e-commerce space is primarily based on having the product available and shipping
products ordered on our website expediently and correctly at competitive pricing. Although there
are many competitive e-store websites on the internet, most of them are relatively small and the
market is fragmented. Of the larger e-store competitors, we face competition from companies such
as Buy.com, Amazon.com, Tigerdirect.com and other major e-retailers such as Insight.com, Yahoo.com,
MSN.com and AOL.com.

A number of our
  competitors in the computer distribution industry are substantially larger and
  have greater financial and other resources than we do.

EMPLOYEES

As of December
  31, 2003, we had approximately 69 full-time employees and 4 part-time employees,
  all of whom are non-union, and 2 executive officers. We believe that our employee
  relations are good.

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ITEM 2. PROPERTIES

We own property located at 1600 California Circle, Milpitas, California 95035, which was subject to
mortgages in the amount of $3,169,500 at December 31, 2003. Of this amount, $2,360,900 is subject
to a bank financing which bears interest at the banks 90-day LIBOR rate (1.25% as of December
31, 2003) plus 2.5% and is secured by a deed of trust on the property. The remaining balance of $808,600
is subject to a Small Business Administration loan which bears interest at a 7.569% rate and is secured
by the underlying property. As discussed in note 6 to the Companys consolidated financial statements,
the Company was in violation of certain of the financial covenants in its bank financing agreement,
which violations have been waived by the bank through December 31, 2003. See item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources for additional discussion of this matter. This property of 3.31 acres includes a 44,820
square foot building.

The building contains our executive office and warehouse and we believe it is suitable for the current
size and the nature of our operations. We lease a building in Georgia to house our branch office
pursuant to a three-year operating lease which expires April 30, 2004. We have an option to renew
this lease for an additional 18 months. Future minimum lease payments under this non-cancelable operating
lease agreement for 2004 are estimated to be $27,400.

ITEM 3. LEGAL PROCEEDINGS

We are not involved as a party to any legal proceeding other than various claims and lawsuits arising
in the normal course of our business, none of which, in our opinion, is individually or collectively
material to our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matter
  to a vote of our security holders during the fourth quarter of the fiscal year
  covered by this report.

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PART II

ITEM 5. MARKET
  FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock
  is presently traded on the Over the Counter Bulletin Board (OCTBB). Our stock
  first traded on the OTC Bulletin Board on July 28, 1998. Beginning January 31,
  2000, our stock was traded on the Nasdaq SmallCap Market. The Companys
  common stock was delisted from the Nasdaq SmallCap Market effective April 30,
  2003 because the Company was out of compliance with NASDAQs minimum market
  value and minimum common stock bid price requirements. The following table shows
  the high and low sale prices in dollars per share for 2002 and the first quarter
  of 2003 as reported by the Nasdaq Small Cap Market and for the second through
  the fourth quarter of 2003 as reported by the OTC Bulletin Board. These prices
  may not be the prices that you would sell or would pay to purchase a share of
  our common stock during the periods shown.

|                                          | **High** |      | **Low** |  
|----------------------------------------- | -------- | ---- | ------- | -
|                                          |          |      |         |  
|Fiscal Year
      Ended December 31, 2003 |          |      |         |  
|First
      Quarter                       | $        | 0.45 |         | $
|Second
      Quarter                      |          | 0.56 |         |  
|Third
      Quarter                       |          | 0.20 |         |  
|Fourth
      Quarter                      |          | 0.15 |         |  
|                                         
|Fiscal Year
      Ended December 31, 2002
|First
      Quarter                       | $        | 2.11 |         | $
|Second
      Quarter                      |          | 1.70 |         |  
|Third
      Quarter                       |          | 1.25 |         |  
|Fourth
      Quarter                      |          | 1.03 |         |  

We had 1,194 stockholders of record of our common stock as of March 16, 2004.

DIVIDEND POLICY

We have not paid dividends on our common stock.  It is the present policy of our Board of Directors
to retain future earnings, if any, to finance the growth and development of our business. Any future
dividends will be at the discretion of our Board of Directors and will depend upon our financial
condition, capital requirements, earnings, liquidity, and other factors that our Board of Directors
may deem relevant.

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ITEM 6. SELECTED FINANCIAL DATA

The following table contains certain selected financial data and we refer you to the more detailed
consolidated financial statements and the notes thereto provided in Part II Item 8 of this Form 10-K.
The financial data regarding our continuing operations as of and for the years ended December 31,
2003, 2002, 2001, 2000 and 1999 presented below, have been derived from our consolidated financial
statements. The financial information regarding the discontinued operations in 2003, 2002 and 2001
are presented in note 2 to the Companys Consolidated Financial Statements. Our consolidated
financial statements for the years ended December 31, 2003 and 2002 were audited by KPMG LLP, and
our consolidated financial statements for the years ended December 31, 2001, 2000 and 1999 were audited
by BDO Seidman, LLP.

|                                                | **Fiscal
      Year Ended December 31,** |           
|----------------------------------------------- | ---------------------------------------- | ----------
|                                                |                                          |           
|**Statement
      of Operations Data**          | **2003**                                 | ****      
|                                                |                                          |           
|                                                |                                          |           
|Net sales                                       | $                                        | 74,327,000
|Income (loss)
      from continuing            
|operations
      before other income           
|(expenses),
      income taxes and             
|minority interest                               |                                          | (1,510,500
|Net income
      (loss) from continuing        
|operations                                      |                                          | (1,694,500
|Net income
      (loss) applicable to          
|common
      shareholders                       |                                          | (2,896,600
|Basic and
      diluted income (loss) per share
|applicable to common shareholders:             
|Income (loss) from continuing                  
|operations                                      |                                          | (0.24     
|Net income (loss)                               |                                          | (0.28     

|                                             | **Fiscal
      Year Ended December 31,** |           
|-------------------------------------------- | ---------------------------------------- | ----------
|                                             |                                          |           
|**Balance
      Sheet Data**                 | **2003**                                 | ****      
|                                             |                                          |           
|Current
      Assets                         | $                                        | 10,528,300
|Current Liabilities                          |                                          | 10,094,900
|Total Assets                                 |                                          | 14,772,400
|Long-Term
      Debt                         |                                          | 3,103,400 
|Redeemable
      Convertible Preferred Stock |                                          |          
|Shareholders
      Equity                   |                                          | 1,574,100 

(1)   Includes
  Redeemable Convertible preferred stock of $958,600.

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ITEM 7. MANAGEMENTS
  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The accompanying discussion and analysis of financial condition and results of operations is based
on our consolidated financial statements, which are included elsewhere in this Form 10-K. The following
discussion and analysis should be read in conjunction with the accompanying consolidated financial
statements and related notes thereto. This discussion contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Our actual results
could differ materially from those set forth in the forward-looking statements. Forward-looking statements,
by their very nature, include risks and uncertainties. Accordingly, our actual results could differ
materially from those discussed in this Report. A wide variety of factors could adversely impact
revenues, profitability, cash flows and capital needs. Such factors, many of which are beyond our
control include, but are not limited to, our ability to reverse our trend of negative earnings, the
diminished marketability of inventory, the need for additional capital, increased warranty costs,
competition, dependence on certain suppliers and dependence on key personnel.

LINES OF BUSINESS

As used herein and unless otherwise indicated, the terms Company, we, and our
refer to Pacific Magtron International Corp. and each of our subsidiaries. Our business is organized
into three divisions: PMI, PMIGA and LW. Our subsidiaries, PMI and PMIGA, provide for the wholesale
distribution of computer multimedia and storage peripheral products and provide value-added packaged
solutions to a wide range of resellers, vendors, OEMs and systems integrators. PMIGA distributes
PMIs products in the eastern United States market. In December 2001, LW was incorporated as
a wholly-owned subsidiary of PMIC, to provide consumers a convenient way to purchase computer products
via the internet. LW also distributes certain computer related products to resellers. During the
second quarter 2003, the Company sold substantially all the assets of FNC to a third party. The Company
also sold substantially all assets of Lea, to certain of the Leas employees. The activities
of FNC and Lea for all periods have been reclassified for reporting purposes as discontinued operations.
In the third quarter of 2003, the Company dissolved its PMICC subsidiary. PMICC had no activities
since 2002 and had no assets or liabilities.

OVERVIEW

The computer products
  distribution business is highly competitive. Competition is based on product
  and credit availability, speed and accuracy of delivery, effectiveness of sales
  and marketing programs and breath of product lines. Beginning the fourth quarter
  of 2000, the computer products distribution industry and the Company have been
  experiencing the effect of the economic downturn. As the demand for computer
  products decreases, the pricing pressure becomes intense. As a result, we experienced
  a decreasing sales trend from 2001 to 2002. Consolidated sales for the year
  ended December 31, 2003 increased by approximately 10% compared to 2002, which
  was partly attributable to the economic recovery in 2003. Price competition
  remains intense even though PMIs sales increased by 6.5% in 2003 compared
  to 2002. Gross profit for PMI remained relatively consistent in 2003 and 2002.
  PMIGA experienced a decreasing sales trend. With the economy downturn, PMIGA
  was unable to penetrate into the east coast market, which was dominated by a
  number of larger competitors and experienced a substantial decline in sales
  in 2003. The lack of financial resources and the inability to compete with the
  larger competitors resulted in a loss in market share. LW generated $7,039,200
  in sales and a loss of $258,100 in 2003 compared to $1,591,700 in sales and
  a loss of $166,600 in 2002. LW was in the development stage in 2002. We do not
  anticipate LWs sales will increase at this pace in 2004.

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To refocus on its core business, during the second quarter 2003, the Company disposed of FNC and Lea,
which were unprofitable in 2003, 2002 and 2001. The Company sold substantially all the assets of
FNC for a note in the amount of $15,000 and Lea for $5,000 in cash and certain electronic commerce
support services to LW valued at $48,000. The Company recognized a loss of $13,700 on the sale of
FNCs assets and a loss of $16,000 on the sale of Leas assets.

Effective April 30, 2003, the Companys common stock was delisted from the NASDAQ Small Cap market
because the Company was out of compliance with the NASDAQs minimum market value and minimum
common stock bid price requirements. The dislisting triggered a redemption provision in the Series
A convertible preferred stock agreement. As a result, we have classified the stock at its redemption
value as a current liability. As of December 31, 2003, no demand from the preferred shareholder has
been received. If such demand were to occur, there is no assurance that we would have the funding
necessary to satisfy the liability.

During 2003 the Company replaced its inventory financing facility from Transamerica Commercial Finance
Corporation with Textron Financial Corporation (Textron). As of December 31, 2003, we were in violation
of certain loan covenants under the inventory financing with Textron. Even though a waiver for such
violation was obtained from Textron through March 31, 2004, it is probable that we will be out of
compliance with certain of those covenants in the future. If this were to occur and a waiver for
the violation cannot be obtained, Textron might terminate the credit facility and accelerate the
loan payments. If such termination were to occur, there is no assurance that the Company would have
the funding necessary to finance its future inventory purchases or would able to obtain alternative
financing. During 2002 and 2003, the Company was in violation of certain covenants under the real
estate mortgage loan agreement with Wells Fargo Bank (Wells Fargo). A waiver of the default was obtained
from Wells Fargo through December 31, 2003. It is probable that we will be out of compliance again
in 2004. If this were to occur and a waiver for the violation cannot be obtained, the Company would
be required to classify the bank loan as current, which could cause the Company to be out of compliance
with financial covenants included in its inventory flooring facility with Textron. It is uncertain
as to the Companys ability to obtain alternative financing in the event Textron terminated
the loan facility or Wells Fargo elected to call the loan.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 1 to the consolidated financial statements
included as Part II, Item 8 to this Form 10-K. The following are our critical accounting policies:

REVENUE RECOGNITION

The Company recognizes
  sales of computer and related products upon delivery of goods to the customer
  (generally upon shipment) and the customer takes ownership and assumes risk
  of loss, provided no significant obligations remain and collectibility is probable.
  A provision for estimated product returns is established at the time of sale
  based upon historical return rates, which have typically been insignificant,
  adjusted for current economic conditions. The Company generally does not provide
  volume discounts or rebates to its customers.

LONG-LIVED ASSETS

The Company periodically
  reviews its long-lived assets for impairment. When events or changes in circumstances
  indicate that the carrying amount of an asset group may not be recoverable,
  the Company adjusts the asset group to its estimated fair value. The fair value
  of an asset group is determined by the Company as the amount at which that asset
  group could be bought or sold in a current transaction between willing parties
  or the present value of the estimated future cash flows from the asset. The
  asset value recoverability test is performed by the Company on an on-going basis.
  During 2003 there were changes in circumstances indicated that the carrying
  amount of an asset group might not be recoverable. An asset recoverability test
  was performed using future net cash flows that were estimated based on the expected
  probable outcome of the asset group. As a result of the recoverability test,
  the carrying amounts of long-lived assets as of December 31, 2003 were estimated
  to be recoverable.

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ACCOUNTS RECEIVABLE
  AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company grants
  credit to its customers after undertaking an investigation of credit risk for
  all significant amounts. An allowance for doubtful accounts is provided for
  estimated credit losses at a level deemed appropriate to adequately provide
  for known and inherent risks related to such amounts. The allowance is based
  on reviews of loss, adjustment history, current economic conditions, level of
  credit insurance and other factors that deserve recognition in estimating potential
  losses. Our allowance for doubtful accounts includes receivables past due over
  90 days, returned checks and an estimated percentage of the receivables currently
  due. While management uses the best information available in making its determination,
  the ultimate recovery of recorded accounts receivable is also dependent upon
  future economic and other conditions that may be beyond managements control.
  In addition, it is uncertain as to the continuing availability of cost-efficient
  credit insurance. We are unable to project the future trend of our bad debt
  expense.

INVENTORY VALUATION

Our inventories,
  consisting primarily of finished goods, are stated at the lower of cost (moving
  weighted average method) or market. We regularly review inventory turnover and
  quantities on hand for excess, slowing moving and obsolete inventory based primarily
  on our estimated forecast of product demand. Excess, obsolete and slow-moving
  inventory items, including items that have no purchase and sales activities
  for more than one year, are written down to their net realizable values. Due
  to a relatively high inventory turnover rate and the inclusion of provisions
  in the vendor agreements common to industry practice that provide us price protection
  or credits for declines in inventory value and the right to return certain unsold
  inventory, we believe that our risk for a decrease in inventory value is minimized.
  No assurance can be given, however, that we can continue to turn over our inventory
  as quickly in the future or that we can negotiate such provisions in each of
  our vendor contracts or that such industry practice will continue.

INCOME TAXES

Income taxes
  are accounted for under the asset and liability method. Deferred tax assets
  and liabilities are recognized for the future tax consequences attributable
  to differences between the financial statement carrying amounts of existing
  assets and liabilities and their respective tax bases and operating loss and
  tax credit carryforwards. Deferred tax assets and liabilities are measured using
  enacted tax rates expected to apply to taxable income in the years in which
  those temporary differences are expected to be recovered or settled. The effect
  on deferred tax assets and liabilities of a change in tax rates is recognized
  in income in the period that includes the enactment date. Future tax benefits
  are subject to a valuation allowance when management believes it is more likely
  than not that the deferred tax assets will not be realized.

RELATED PARTY
  TRANSACTIONS

During the first
  quarter of 2002, the Company made short-term salary advances to a shareholder/officer
  totaling $30,000, without interest. These advances were recorded as a salary
  paid to the shareholder/officer during the second quarter ended June 30, 2002.

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The Company sold computer products to a company owned by a member of the Board of Directors of the

Company. During 2003, 2002 and 2001, the Company recognized $102,400, $527,400 and $476,200, respectively,

in sales revenues from this company. Included in accounts receivable as of December 31, 2002 is
$27,000
due from this related party. There was no amount due from this related party as of December
31, 2003.

On June 30, 2003, the Company sold substantially all of Leas intangible assets and certain equipment

to certain of the Leas employees. The Company also entered into a Proprietary Software License

and Support Agreement with the purchaser requiring the purchaser to provide certain electronic
commerce
support services to LW for a term of two years beginning July 1, 2003. The Company received
$5,000
on the transaction closing date and the electronic commerce support services contract valued
at $48,000
which is based on the number of service hours to be provided. The Company recorded a
loss of $16,000
on the sale of the Lea assets.

In 2001 FNC acquired certain assets of Technical Insights in exchange for 16,100 shares of PMIC common

stock. Under the purchase agreement, among other terms, FNC was required to pay $126,000 to the
sellers
upon completion and full settlement of a sale transaction as specified in the agreement.
On October
2001 the sellers became employees of FNC. As a result of the profit sharing arrangement,
the $126,000
payment due to the sellers was recorded as compensation expense by the Company. In
January 2002,
this balance was paid to the sellers/employees under the terms of the purchase agreement.

RESULTS OF OPERATIONS

The following table sets
  forth, for the periods indicated, certain selectedfinancial
  data as a percentage of sales:

|                                                 | **Year
      Ended December 31,** |      
|------------------------------------------------ | --------------------------------- | -----
|                                                 |                                   |      
|                                                 | **2003**                          | **** 
|                                                 |                                   |      
|Sales                                            |                                   | 100.0
|Cost of sales                                    |                                   | 93.9 
|                                                 |                                   |      
|Gross profit                                     |                                   | 6.1  
|Operating
      expenses                         |                                   | 8.2  
|                                                 |                                   |      
|Loss from
      operations                       |                                   | (2.1 
|Other income
      (expense)                     |                                   | (0.2 
|Income tax
      benefit                         |                                   | 0.0  
|Minority
      interest                          |                                   | 0.0  
|                                                 |                                   |      
|Loss from
      continuing operations            |                                   | (2.3 
|Loss from
      discontinued operations          |                                   | (0.6 
|Accretion
      and deemed dividend relating to 
|beneficial conversion of 4% Series A            
|Convertible and Redeemable Preferred Stock       |                                   | (1.0 
|                                                 |                                   |      
|Net loss
      applicable to Common shareholders |                                   | (3.9 
|                                                 |                                   |      

SALES

The computer products distribution
  industry and the Company have been experiencing the effect of the economic downturn.
  We experienced a decreasing sales trend from 2001 to 2002. Consolidated sales
  for the year ended December 31, 2003 increased by approximately 10% compared
  to 2002, which was partly attributable to the economic recovery in 2003.

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PMI

PMIs sales
  decreased from $60,293,500 in 2001 to $56,487,900 in 2002. PMIs sales
  for the year ended December 31, 2003 were $60,138,700, an increase of 6.5%,
  which was attributable to the economic recovery in 2003. However, the pricing
  pressure remained intense in 2003. PMIs gross profit for the years ended
  December 31, 2003 and 2002 was 5.6%, 5.8%, respectively compared to 6.7% for
  the year ended December 31, 2001.

PMIGA

PMIGA experienced
  intense competition on the U.S. east coast market. With the economic downturn
  beginning in 2000, PMIGA has not been able to penetrate into the east coast
  market, which was dominated by a number of larger competitors. The lack of financial
  resources and the inability to compete with the larger competitors resulted
  in a loss in market share in 2003 and 2002. Sales declined from $11,445,300
  in 2001 to $9,374,200 in 2002 and $7,149,100 in 2003. Gross profit as a percent
  of sales for PMIGA declined from 5.4% in 2001 to 4.9% in 2002. During the year
  ended December 31, 2003, management focused on selling certain higher profit
  products and improved in its product management. As a result, gross profit as
  a percent of sales for PMIGA increased to 7.6% for the year ended December 31,
  2003. However, it is uncertain that we can maintain the pricing on those higher
  profit products. We anticipate that PMI and PMIGAs sales will follow the
  condition of the economy in 2004 and the pricing pressure will continue in the
  computer products distribution industry.

LW

LW competes with
  a vast number of e-store websites on the internet. Most of them are relatively
  small, but a number of larger e-stores, such as Amazon.com and Buy.com, dominate
  in the e-commerce space. Competition is based on having the products available
  and shipping expediently and correctly at competitive prices. For the year ended
  December 31, 2003, LW generated $7,039,200 in sales, of which approximately
  $4,139,000 and $2,900,200 were sales to end-users and resellers, respectively.
  During 2002, LW was in a development stage and generated sales of $1,591,700
  to end-users. We do not anticipate LWs sales will increase in 2004 at
  the rate we experienced in 2003 compared to 2002. Gross profit for sales to
  end-users was 11.2% of sales for the year ended December 31, 2003 compared to
  14.2% in 2002. The decline in gross profit is due to an intense price competition
  and product promotions. We expect the intense price competition will continue
  in 2004. Gross profits for sales to resellers are generally lower than sales
  to end-users. LWs gross profit for sales to resellers was 6.2% for the
  year ended December 31, 2003. Sales to resellers were insignificant in 2002.

EXPENSES

The Company has
  been reducing its operating expenses in all areas. Consolidated selling, general
  and administrative expenses decreased from $6,614,900 (excluding a write-off
  of investments of $591,600) in 2001 to $6,238,700 in 2002 and $6,064,300 in
  2003. The decrease in the consolidated operating expenses was partially offset
  by the inclusion of LWs operating expenses of $888,000 and $392,100 in
  2003 and 2002, respectively. Consolidated payroll expense decreased by $34,300
  in 2003 compared to 2002 and by $473,600 in 2002 compared to 2001. Employee
  count for the Company, excluding LW, was reduced from 80 as of December 31,
  2001 to 77 and 67 as of December 31, 2002 and 2003, respectively. LW increased
  its employee count from 4 as of December 31, 2002 to 8 as of December 31, 2003.
  Consolidated bad debt expense decreased from $450,500 in 2001 to $286,300 and
  $98,100 in 2002 and 2003, respectively, excluding the impact of bad debt expense
  in discontinued operations of $45,000 and $26,900 in 2002 and 2003, respectively.
  Our bad debt expense arises out of the fact that we offer various credit terms
  to qualifying customers, closely monitor their credit worthiness and utilize
  various levels of credit insurance to control credit risks. We provide allowances
  for bad debts based on reviews of loss, adjustment history, current economic
  conditions, level of credit insurance and other factors deserve recognition
  in estimating potential losses. While management uses the best information available
  in making its determination, the ultimate recovery of the receivables is also
  dependent upon future economic and other conditions that may be beyond managements
  control. In addition, it is uncertain as to the continuing availability of cost-efficient
  credit insurance. We are unable to project the future trend of our bad debt
  expense.

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INCOME TAXES

In March 2002,
  the Job Creation and Worker Assistance Act of 2002 (the Act) was
  enacted. The Act extended the general federal net operating loss carry-back
  period from 2 years to 5 years for net operating losses incurred for taxable
  years ending in 2001 and 2002. The tax benefit recorded in 2002 and 2001 reflects
  the federal income tax refund attributable to the net operating loss incurred
  for the year ended December 31, 2002 and 2001. The Company will not receive
  a tax benefit for losses incurred in 2003 as they are not covered by the Act.
  As a result, no tax benefits were recorded for the year ended December 31, 2003
  as management does not believe it is more likely than not that the benefit from
  such assets will be realized.

DISCONTINUED
  OPERATIONS

On June 2, 2003,
  the Company entered into an agreement to sell substantially all of FNCs
  assets to a third party for $15,000. The Company recorded a loss of $13,700
  on the sale of these assets. On June 30, 2003, the Company entered into an agreement
  to sell substantially all of Leas assets to certain of Leas employees.
  The Company also received a Proprietary Software License and Support Agreement
  from the purchasers to provide certain electronic commerce support services
  to LW for a term of two years. The Company received $5,000 on the closing date.
  The electronic commerce support services contract was valued at $48,000. The
  Company recorded a loss of $16,000 on the sale of Lea assets.

The operations of FNC and Lea were discontinued after the sales of their assets. For financial statement
reporting purposes, the operating results of FNC and Lea are reclassified as discontinued operations.
The operating results of FNC and Lea for the years ended December 31, 2003, 2002 and 2001 were as
follows:

|                                     | **Year
      Ending December 31,** |          
|------------------------------------ | ---------------------------------- | ---------
|                                     |                                    |          
|                                     | **2003**                           | ****     
|                                     |                                    |          
|FNC:                                
|Net sales                            | $                                  | 1,313,500
|Loss before
      income tax benefit |                                    | (311,600 
|Income tax
      benefit             |                                    |         
|                                     |                                    |          
|Net loss                             | $                                  | (311,600 
|                                     |                                    |          
|Lea:                                
|Net sales                            | $                                  | 179,700  
|Loss before
      income tax benefit |                                    | (122,300 
|Income tax
      benefit             |                                    |         
|                                     |                                    |          
|Net loss                             | $                                  | (122,300 
|                                     |                                    |          

EFFECT OF DELISTING

In April 2003
  we were notified by Nasdaq that the Company did not comply with the Marketplace
  Rule that requires a minimum bid price of $1.00 per share of common stock and
  that our common stock would be delisted from the Nasdaq SmallCap Market effective
  and such delisting took place on April 30, 2003. The Companys common stock
  is eligible to be traded on the Over the Counter Bulletin Board (OCTBB). The
  delisting of the Companys common stock enables the holder of the Companys
  Series A Redeemable Convertible Preferred Shares to request the redemption of
  such shares 60 days after the delisting date. As of December 31, 2003, the redemption
  value of the Series A Preferred Stock was $958,600. The Company has increased
  the carrying value of the Series A Redeemable Convertible Preferred Stock to
  its redemption value and has recorded an increase in loss applicable to common
  shareholders of $743,300 for the year ended December 31, 2003. As of December
  31, 2003, no demand from the preferred shareholder has been received. If such
  demand were to occur, there is no assurance that the Company would have the
  funding necessary to satisfy the liability.

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LIQUIDITY AND
  CAPITAL RESOURCESThe Company incurred
  a net loss applicable to common shareholders of $2,896,600, $3,110,100 and $2,850,700
  for the years ended December 31, 2003, 2002 and 2001, respectively. During 2003,
  the Company triggered a redemption provision in its Series A redeemable convertible
  preferred stock agreement. As a result, we have classified such stock as a current
  liability. While no demand for payment from the shareholder has been received,
  if such demand were to occur, there is no assurance the Company would have the
  funding necessary to satisfy the liability. In addition, the Companys
  common stock was delisted from the NASDAQ Small Cap market effective April 30,
  2003 because the Company was out of compliance with the NASDAQs minimum
  market value and minimum common stock bid price requirements. As of December
  31, 2003, we were in violation of certain loan covenants under the inventory
  financing facility with Textron Financial Corporation (Textron) and as of December
  31, 2003 and 2002, we were in violation of certain loan covenants under our
  mortgage loan agreement with Wells Fargo Bank (Wells Fargo). Even though  waivers
  for such violations were obtained from Textron and Wells Fargo, respectively,
  it is probable that we will be out of compliance with certain of those covenants
  in the future. If this were to occur and  waivers for the violations
  could not be obtained, Textron might terminate the credit facility and accelerate
  the loan payments and the Wells Fargo loan would be required to be classified
  as current liability causing another out of compliance condition on the Textron
  loan. If such termination were to occur, there is no assurance that the Company
  would have the funding necessary to finance its future inventory or would be
  able to obtain additional financing. These conditions raise doubt about the
  Companys ability to continue as a going concern. The Companys ability
  to continue as a going concern is dependent upon its ability to achieve profitability
  and generate sufficient cash flows to meet its obligations as they come due.
  Management believes that the continued downsizing, disposal of its subsidiaries,
  FNC, Lea and PMICC, and continued cost-cutting measures to reduce overhead at
  all of its remaining subsidiaries and an improved economy will enable the Company
  to eventually achieve profitability. However, there can be no assurance that
  the Company will be able to achieve a profitable level of operations in 2004
  or beyond.  Based on our present operations we anticipate that our working
  capital will satisfy our financing needs for the next twelve months provided
  that we can maintain our credit facilities with Textron, Wells Fargo and our
  key suppliers. If one or more of these credit facilites are withdrawn and we
  fail to replace it with comparable credit facilities, we would have to obtain
  additional equity or debt financing or sell a sufficient amount of our assets
  to replace or retire those credit facilities that were withdrawn.  There
  can be no assurance that we will be able to obtain debt or equity financing
  or obtain it on terms acceptable to us.  If we were forced to liquidate
  our assets, through whatever means mosts appropriate to us, there can be no
  assurance that we could raise sufficient proceeds to meet our obligations or
  remain an economically viable enterprise.

If the Company is unable to do so, it would have
  to obtain additional equity or debt financing or sell a sufficent amount of
  its assets to retire the Textron and Wells Fargo credit facilities.  There
  can be no assurance the the Company will gbe able to obtain debt or equity financing
  or obtain it on terms acceptable to the Company.  If the Company was forced
  to liquidate its assets, whether through a bankruptcy proceeding or otherwise,
  there can be no assurance that the Company could raise sufrficient proceeds
  to meet its obligations or remain an economically viable enterprise.

At December 31,
  2003, we had consolidated cash and cash equivalents totaling $1,491,700 and
  working capital of $183,400. At December 31, 2002, we had consolidated cash
  and cash equivalents of $1,901,100 and working capital of $3,112,700. The decrease
  in working capital was partly due to the reclassification of the Series A Mandatorily
  Redeemable Convertible Preferred Stock of $958,600 to current liability as of
  December 31, 2003.

Net cash used
  in operating activities for the year ended December 31, 2003, 2002 and 2001
  was $470,400, $898,000, and $1,634,000, respectively. In June 2003, we discontinued
  the operations of FNC and Lea. Included in the total net cash used in operating
  activities was $146,800, $956,600 and $543,800 cash used in FNC and Leas
  operating activities for 2003, 2002 and 2001, respectively, that we do not expect
  to incur in 2004. The cash used in operating activities was primarily from the
  loss in operations, which was partially offset by the federal income tax refunds
  in June 2002 and in March 2003. However, we do not expect an income tax refund
  in 2004.

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In April 2003, the Company settled a lawsuit relating to a counterfeit products claim for $95,000,
which was paid in the second quarter of 2003. In December 2003, the Company settled a claim against
a customer for a past due account receivable of $734,500. Under the settlement agreement, the customer
agreed to pay the entire balance in 12 equal monthly installments of $61,200 each beginning December
2003. In addition, the customer entered into a UCC-Financing Statement with the Company under which
the customer secured its payments due to us with all its assets, including inventory, accounts receivables
and equipment. For the period from December 31, 2003 to March 30, 2004, the customer has made all
the monthly payments that were currently due. There are various claims, lawsuits and pending actions
against the Company involving matters incidental to the Companys operations. We believe the
ultimate resolution of these matters will not have a material adverse effect on the Companys cash flows.

On May 31, 2002, we received net proceeds of $477,500 from the sale of 600 shares of 4% Series A Preferred
Stock. An additional 400 shares were to be sold after the completion of the registration of the underlying
common stock. Even though we completed the required registration of the underlying common stock in
October 2002, the remaining 400 shares were not sold. There is no assurance that we will be able
to obtain additional capital financing other than the issuance of these shares of Preferred stock.
Upon the occurrence of a Triggering Event, as defined in the preferred stock purchase agreement,
the holder of the preferred stock has the right to require us to redeem the preferred stock in cash
at a minimum of 1.5 times the Stated Value. In April 2003, Nasdaq notified the Company that its common
stock would be delisted from the Nasdaq SmallCap Market effective and such delisting took place on
April 30, 2003. The delisting of the Companys common stock enables the holder of the Companys
Series A Redeemable Convertible Preferred Shares to request the redemption of such shares 60 days
after the delisting date. As of December 31, 2003, the redemption value of the Series A Preferred
Stock was $958,600. As of December 31, 2003, no demand from the preferred shareholder has been received
by the Company. If such demand were to occur, there is no assurance that the Company would have the
funding necessary to satisfy the liability.

Effective April
  30, 2003, Transamerica Commercial Finance Corporation elected to terminate the
  $4 million accounts receivable and inventory financing credit facility we had
  with them. In May 2003, PMI obtained a $3,500,000 inventory financing facility,
  which includes a $1 million letter of credit facility used as security for inventory
  purchased on terms from vendors in Taiwan, from Textron Financial Corporation
  (Textron). The credit facility is guaranteed by PMIC, PMIGA, FNC, Lea, LW and
  two shareholders/officers of the Company. Borrowings under the inventory line
  are subject to 30 days repayment, at which time interest accrues at the prime
  rate plus 6% (10% at December 31, 2003). The Company is required to maintain
  collateral coverage equal to 120% of the outstanding balance. A prepayment is
  required when the outstanding balance exceeds the sum of 70% of the eligible
  accounts receivables and 90% of the Textron-financed inventory and 100% of any
  cash assigned or pledged to Textron. PMI and PMIC are required to meet certain
  financial ratio covenants, including a minimum current ratio, a maximum leverage
  ratio, a minimum tangible capital funds and required levels of profitability.
  As of December 31, 2003, the Company was out of compliance with the maximum
  leverage ratio covenant and the minimum tangible capital funds covenant. The
  Company obtained a waiver from Textron with regard to these covenants through
  March 31, 2004. Based on anticipated future results, it is probable that the
  Company will be out of compliance with these and/or other covenants in 2004.
  If this were to occur and a waiver for the violation cannot be obtained, Textron
  might terminate the credit facility and accelerate the loan payments. Upon termination,
  there is no assurance that the Company would have the funding necessary to finance
  its future inventory purchases or would be able to obtain additional financing.
  We cannot assure you that we will be able to comply with these financial requirements
  in the future or to maintain the Textron flooring line if we continue our losses.
  We are required to maintain $250,000 in a restricted account as a pledge to
  Textron. This amount has been reflected as restricted cash in the accompanying
  consolidated financial statements. As of December 31, 2003, the outstanding
  balance of this loan was $1,369,200.

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Pursuant to one of our Wells Fargo Bank (Wells Fargo) mortgage loans, with a $2,360,900 balance at
December 31, 2003, we are required to maintain a minimum debt service coverage, a maximum debt to
tangible net worth ratio, no consecutive quarterly losses, and achieve net income on an annual basis.
During 2003 and 2002 the Company was in violation of two of these covenants. This constituted an
event of default under the loan agreement and gave Wells Fargo the right to call the loan. However,
a waiver of the defaults was obtained from the bank through December 31, 2003. As a condition for
this waiver, the Company transferred $250,000 to a restricted account in 2002 as a reserve for debt
servicing. Based on our projection, it is probable that we will be out of compliance with these covenants
in 2004. If this were to occur and a waiver for the violation cannot be obtained, the Company would
be required to classify the bank loan as current, which could cause the Company to be out of compliance
with an additional financial covenant included in its inventory flooring facility with Textron. It
is uncertain as to the Companys ability to obtain alternative financing in the event Textron
terminated the loan facility or Wells Fargo elected to call the loan.

The Company purchased a credit insurance policy from American Credit Indemnity covering certain accounts
receivable up to $2,000,000 of losses. The Company also entered into an insurance agreement with
ENX, Inc. for its accounts receivable for one year beginning April 7, 2003. Under the agreement,
the Company sells its past-due accounts receivables from pre-approved customers with pre-approved
credit limits under certain conditions. The commission is 0.5% of the approved invoice amounts with
a minimum annual commission of $50,000. As of December 31, 2003, approximately $687,000 of the outstanding
receivables were approved by ENX. We are seeking renewal of this policy and agreement. There is no
assurance that we can renew the policy and agreement at amounts that are cost-effective. In the event
that we could not renew the policy and agreement with our existing or other insurance carriers, our
future loss on uncollectible receivables would probably be higher compared to 2003, 2002 and 2001.

The Company leases office space, equipment and vehicles under various operating leases. The following
summarizes the effect on the Companys liquidity and cash flows from contractual obligations
of debt arrangements and non-cancelable operating leases as of December 31, 2003:

(Amounts in thousands)

|                                      | **Year
      Ending December 31,** |      
|------------------------------------- | ---------------------------------- | -----
|                                      | **2004**                           | **** 
|                                      |                                    |      
|Debt maturities                       | $                                  | 66   
|Non-cancelable
      operating leases |                                    | 57   
|Redeemable
      preferred stock      |                                    | 959  
|                                      |                                    |      
|Total                                 | $                                  | 1,082
|                                      |                                    |      

INFLATION

Inflation has
  not had a material effect upon our results of operations to date. In the event
  the rate of inflation should accelerate in the future, it is expected that to
  the extent increased costs are not offset by increased revenues, our operations
  may be adversely affected.

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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

OUR INDEPENDENT AUDITORS
  REPORT CONTAINS A GOING CONCERN OPINION

We have received a going
  concern opinion from our auditors. The opinion raises substantial doubts about
  our ability to continue as a going concern.

We incurred net
  losses for the year ended December 31, 2003 and 2002 and 2001 of $2,896,600,
  $3,110,100 and $2,850,700, respectively, and we most likely will continue to
  incur losses in fiscal 2004. Our future ability to execute our business plan
  will depend on our efforts to increase revenues and return to profitability.
  We have implemented plans to reduce overhead and operating costs, and to build
  upon our existing business and capture new business. We are also dependent upon
  the continuing improvement in economic conditons. No assurance can be given,
  however, that these actions will result in increased revenues and profitable
  operations.

WE CAN PROVIDE
  NO ASSURANCE THAT WE WILL BE ABLE TO ACHIEVE PROFITABILITY OR SECURE ADDITIONAL
  CAPITAL REQUIRED BY OUR BUSINESS

In the second
  quarter of 2002, we completed a private placement of 600 shares of our Series
  A Convertible Preferred Stock at a stated price of $1,000 per share for gross
  proceeds of $600,000 and net proceeds of $477,500. As part of the private placement,
  we issued common stock purchase warrants exercisable to purchase 400,000 shares
  of our common stock at $1.20 per share at any time within three years from the
  date of issuance. During 2003, the Company triggered a redemption provision
  in our Series A Redeemable Preferred Stock Agreement. As a result, we have classified
  the stock as a current liability. As of December 31, 2003, no demand from the
  preferred shareholder has been received. If such demand were to occur, there
  is no assurance that the Company would have the funding necessary to satisfy
  the liability.

Based on our present
  operations we anticipate that our working capital will satisfy our financing
  needs for the next twelve months provided that we can maintain our credit facilities
  with Textron, Wells Fargo and our key suppliers. If one or more of these credit
  facilites are withdrawn and we fail to replace it with comparable credit facilities,
  we would have to obtain additional equity or debt financing or sell a sufficient
  amount of our assets to replace or retire those credit facilities that were
  withdrawn.  There can be no assurance that we will be able to obtain debt
  or equity financing or obtain it on terms acceptable to us.  If we were
  forced to liquidate our assets, through whatever means mosts appropriate to
  us, there can be no assurance that we could raise sufficient proceeds to meet
  our obligations or remain an economically viable enterprise.

POTENTIAL SALES
  OF ADDITIONAL COMMON STOCK AND SECURITIES CONVERTIBLE INTO OUR COMMON STOCK
  MAY DILUTE THE VOTING POWER OF CURRENT HOLDERS.

We may issue
  equity securities in the future whose terms and rights are superior to those
  of our common stock. Our Articles of Incorporation authorize the issuance of
  up to 5,000,000 shares of preferred stock. These are blank check
  preferred shares, meaning our board of directors is authorized to designate
  and issue the shares from time to time without shareholder consent. As of December
  31, 2003 we had 600 shares of Series A Preferred outstanding. The Series A Preferred
  are convertible based on a sliding scale conversion price referenced to the
  market price of our common stock. As of December 31, 2003, the Series A Preferred
  would have been convertible into 852,100 shares of common stock based on the
  floor conversion price of $.75. Any additional shares of preferred stock that
  may be issued in the future could be given voting and conversion rights that
  could dilute the voting power and equity of existing holders of shares of common
  stock, and have preferences over shares of common stock with respect to dividends
  and liquidation rights.

|
|

WE HAVE VIOLATED
  CERTAIN FINANCIAL COVENANTS CONTAINED IN OUR LOANS AND MAY DO SO AGAIN IN THE
  FUTURE

Pacific Magtron,
  Inc. (PMI) has a mortgage on our offices with Wells Fargo Bank, under which
  PMI must maintain the following financial covenants:

| | 1) | Total liabilities
      must not be more than twice our tangible net worth;                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                          
| | 2) | Net income
      after taxes must not be less than one dollar on an annual basis and for
      no more than two consecutive quarters; and
| |    |                                                                                                                                          
| | 3) | Annual EBITDA
      of one and one half times the debt must be maintained.                                                               

We were in violation of covenants (2) and (3) as of December 31, 2003 and 2002. We received a waiver
for such violation through December 31, 2003. We cannot assure you that we will be able to meet all
these financial covenants in the future. Based on anticipated future results, it is probable that
we will be out of compliance with certain of those covenants. If this were to occur and a waiver
for the violation cannot be obtained, Wells Fargo may declare us in default and accelerate the loan
payments. As a result, the Company would be required to classify the bank loan as current, which
would cause the Company to be out of compliance with an additional financial covenant included in
its inventory flooring facility with Textron Financial Corporation as discussed below.

In May 2003 we obtained a $3,500,000 inventory financing facility of which a $1 million letter of credit
facility is used as security for inventory purchased on terms from vendors in Taiwan from Textron
Financial Corporation (Textron). Under this financing facility, we are required to meet the following
financial covenants:

| | 1) | Minimum current
      ratio of 1.0 to 1.0;                
| | -- | ----------------------------------------------------------
| | 2) | Maximum leverage
      of 5.0 for PMI and 6.0 for PMIC;   
| | 3) | Positive
      EBITDA on a year-to-date basis for PMI; and
| | 4) | Minimum tangible
      capital funds of $2,500,000.       

As of December 31, 2003, we were in violation of covenants (2) and (4) and a waiver for such violations
was obtained through March 31, 2004. Based on anticipated future results, it is probable that we
will be out of compliance with certain of those covenants. If this were to occur and a waiver for
the violation cannot be obtained, Textron might terminate the credit facility and accelerate the
loan payments. Upon termination, there is no assurance that the Company would have the funding necessary
to finance its future inventory or would be able to obtained additional financing. We cannot assure
you that we will be able to comply with these financial requirements in the future or to maintain
the Textron flooring line if we continue our losses.

It is uncertain as to the Companys ability to obtain alternative financing in the event Textron
terminated the loan facility and accelerated payments or Wells Fargo elected to call the loan.

OUR COMMON STOCK
  IS NOT ACTIVELY TRADED

Our common stock
  was delisted from the Nasdaq SmallCap Market effective April 30, 2003 due to
  our inability to maintain a minimum bid price of $1.00 per share. The Companys
  common stock is eligible to be traded on the Over the Counter Bulletin Board
  (OCTBB). Our stock has not been actively traded since such delisting.

IF WE ARE UNABLE
  TO SECURE PRICE PROTECTION PROVISIONS IN OUR VENDOR AGREEMENTS, THE VALUE OF
  OUR INVENTORY WOULD QUICKLY DIMINISH

As a distributor,
  we incur the risk that the value of our inventory will be adversely affected
  by industry wide forces. Rapid technology change is commonplace in the industry
  and can quickly diminish the marketability of certain items, whose functionality
  and demand decline with the appearance of new products. These changes and price
  reductions by vendors may cause rapid obsolescence of inventory and corresponding
  valuation reductions in that inventory. We currently seek provisions in the
  vendor agreements common to industry practice that provide price protections
  or credits for declines in inventory value and the right to return unsold inventory.
  No assurance can be given, however, that we can negotiate such provisions in
  each of our contracts or that such industry practice will continue.

|
|

EXCESSIVE CLAIMS
  AGAINST WARRANTIES THAT WE PROVIDE COULD ADVERSELY EFFECT OUR BUSINESS

Our suppliers
  generally warrant the products that we distribute and allow us to return defective
  products, including those that have been returned to us by customers. We do
  not independently warrant the products that we distribute. If excessive claims
  are made against these warranties our results of operations would suffer.

WE MAY NOT BE ABLE TO SUCCESSFULLY
  COMPETE WITH SOME OF OUR COMPETITORS

All aspects of our business
  are highly competitive. Competition within the computer products distribution
  industry is based on product availability, credit availability, price, speed
  and accuracy of delivery, effectiveness of sales and marketing programs, quality
  and breadth of product lines. We also compete with manufacturers that sell directly
  to resellers and end users. Most of our competitors are substantially larger
  and have greater financial and other resources than we do.

FAILURE TO RECRUIT
  AND RETAIN QUALIFIED PERSONNEL WILL HARM OUR BUSINESS

Our success depends
  upon our ability to attract, hire and retain highly qualified personnel who
  possess the skills and experience necessary to meet our personnel needs. Competition
  for individuals with proven highly qualifying skills is intense, and the computer
  industry in general experiences a high rate of attrition of such personnel.
  We compete for such individuals with other companies as well as temporary personnel
  agencies. Failure to attract and retain sufficient qualifying personnel would
  have a material adverse effect on our business, operating results and financial
  condition.

WE DEPEND ON KEY
  SUPPLIERS FOR A LARGE PORTION OF OUR INVENTORY, LOSS OF THOSE SUPPLIERS COULD
  HARM OUR BUSINESS

One supplier,
  Sunnyview/Real Wisdom (Sunnyview), accounted for approximately 18%,
  11% and 10% of our total purchases for the years ended December 31, 2003, 2002
  and 2001, respectively. One other vendor accounted for 17% of purchases for
  the year ended December 31, 2003. We do not have a supply contract with Sunnyview
  nor the other vendor, but rather purchase products from them through individual
  purchase orders, none of which has been large enough to be material to us. Although
  we have not experienced significant problems with Sunnyview or our other suppliers,
  and we believe we could obtain the products that Sunnyview and the other vendors
  supplies from other sources, there can be no assurance that our relationship
  with Sunnyview and with our other suppliers will continue or, in the event of
  a termination of our relationship with any given supplier, that we would be
  able to obtain alternative sources of supply on comparable terms without a material
  disruption in our ability to provide products and services to our clients. This
  may cause a loss of sales that could have a material adversely effect on our
  business, financial condition and operating results.

WE ARE DEPENDENT ON KEY PERSONNEL

Our continued success will
  depend to a significant extent upon our senior management, including Theodore
  Li, President and Hui Cynthia Lee, Executive Vice President, and
  head of sales operations. The loss of the services of Mr. Li or Ms. Lee, or
  one or more other key employees, could have a material adverse effect on our
  business, financial condition or operating results. We do not have key man insurance
  on the lives of any of members of our senior management.

|
|

ESTABLISHMENT
  OF OUR BUSINESS-TO-CONSUMER WEBSITE LIVEWAREHOUSE.COM MAY NOT BE SUCCESSFUL

We have established
  a business-to-consumer website, LiveWarehouse.com. LW incurred a net loss of
  $258,100 and $166,600 for the year ended December 31, 2003 and 2002, respectively.
  We cannot assure you that we will achieve a profitable level of operations,
  that we will be able to hire and retain personnel with experience in online
  retail marketing and management, that we will be able to execute our business
  plan with respect to this market segment or that we will be able to adapt to
  technological changes. Further, while we have experience in the wholesale marketing
  of computer-related products, we have limited experience in retail marketing.
  This market is very competitive and many of our competitors have substantially
  greater resources and experience than we have.

WE ARE SUBJECT
  TO RISKS BEYOND OUR CONTROL SUCH AS ECONOMIC AND GENERAL RISKS OF OUR BUSINESS

Our success will
  depend upon factors that may be beyond our control and cannot clearly be predicted
  at this time. Such factors include general economic conditions, both nationally
  and internationally, changes in tax laws, fluctuating operating expenses, changes
  in governmental regulations, including regulations imposed under federal, state
  or local environmental laws, labor laws, and trade laws and other trade barriers.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to one of our bank loans
with a $2,360,900 balance at December 31, 2003 which bears fluctuating interest based on the banks
90-day LIBOR rate. We believe that fluctuations in interest rates in the near term would not materially
affect our consolidated operating results, financial position or cash flow. We are not exposed to
material risk based on exchange rate fluctuation or commodity price fluctuation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This information appears in a separate section of this report following Part IV.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On December 20, 2002, the Companys board of directors passed a resolution dismissing BDO Seidman,
LLP (BDO) as its independent accountant for the fiscal year ended December 31, 2002.
On the same date, the Company appointed KPMG LLP (KPMG) to replace BDO as the Companys
independent auditor for the fiscal year ended December 31, 2002.

The report of BDO for the fiscal years ended December 31, 2000 and 2001 contained no adverse opinions,
disclaimer of opinion or qualification or modification as to uncertainty, audit scope or accounting
principles.

Except for the
  disagreement discussed below, during the Companys two most recent fiscal
  years and subsequent interim periods through the date of dismissal, December
  20, 2002, there were no other disagreements with BDO Seidman, LLP on any matter
  of accounting principles or practices, financial statement disclosure or auditing
  scope or procedures or any other matters considered reportable events as contemplated
  by Regulation S-K 304 (a)(1)(iv)(A) and (B).

|
|

In accounting for the issuance of its preferred stock in May 2002, the Company recorded a deemed dividend
of $303,000 associated with the beneficial conversion feature as a charge against retained earnings
and an increase in Additional Paid-in Capital. BDO reviewed the Companys Form 10-Q for the
quarter ended June 30, 2002, and advised the Company that an additional deemed dividend of $148,300
associated with 300,000 common stock warrants issued to the investor should be recorded as a charge
against retained earnings and an increase in the carrying amount of preferred stock. After further
research and consultation with BDO, the Company agreed to record this additional deemed dividend.
However, the Companys management believed it was proper to increase Additional Paid-in Capital
for both of these deemed dividends and reflected such presentation in the Companys Form 10-Q
for the quarter ended June 30, 2002. BDO reviewed the Companys Form 10-Q for the quarter ended
September 30, 2002, and at the conclusion of further research and consultation, advised the Company
that the $148,300 deemed dividend relating to the common stock warrants issued to the investor should
be reclassified from Additional Paid-in Capital to the carrying amount of the preferred stock. Management
did not concur with the proposed reclassification. BDO discussed the basis for their position, and
the proposed adjustment with the Chairman of the Audit Committee on November 7, 2002. On November
12, 2002, after discussion of the above matter with BDO, the Audit Committee Chairman recommended
that the Company not reclassify this deemed dividend to the carrying amount of the preferred stock
until the Audit Committee could analyze the issue closely during the fourth quarter of 2002. On November
13, 2002, BDO notified the Audit Committee Chairman and management of the Company that there was
an unresolved reportable disagreement regarding the accounting treatment of this deemed dividend.
On November 14, 2002 BDO had a telephone conversation with the Companys outside counsel to
discuss the issue. Following that conversation, the Company elected to reclassify the credit associated
with the deemed dividend to the preferred stock in accordance with the advice of BDO.

The Company did not consult with KPMG during the fiscal years ended December 31, 2000 and 2001, and
the interim period from January 1, 2002 through December 20, 2002, on any matter which was the subject
of any disagreement, including the disagreement reported herein, or any reportable event or on the
application of accounting principles to a specified transaction, either completed or proposed. Further,
the Company has consented to the free consultation of KPMG with BDO, including the disagreement with
management noted above and other matters.

ITEM 9A. CONTROLS AND PROCEDURES

Our Chief Executive
  Officer/Chief Financial Officer has reviewed and evaluated the effectiveness
  of our disclosure controls and procedures as of the end of the fiscal period
  covered by this Form 10-K, which included inquiries made to certain other employees.
  Based on his evaluation, the Chief Executive Officer/Chief Financial Officer
  has concluded that, as of the end of such period, our disclosure controls and
  procedures are effective and sufficient to ensure that we record, process, summarize,
  and report information required to be disclosed in the reports we file under
  the Securities Exchange Act of 1934 within the time periods specified by the
  Securities and Exchange Commissions rules and forms. There have been no
  significant changes in our internal controls over financial reporting, or to
  our knowledge, in other factors that could significantly affect these controls
  subsequent to December 31, 2003.

|
|

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information included under the captions About the Executive Officers, Information
about our Directors and Section 16(a) Beneficial Ownership Reporting Compliance
in the definitive Proxy Statement is incorporated herein by reference.

The Company adopted a Code of Business Conduct that applies to all of our employees and has particular
sections that apply to our principal executive officer and senior financial officers. We posted the
text of our code of conduct on our website, www.pacificmagtron.com. In addition, we will promptly
disclose on our website (1) the nature of any amendment to our code of conduct that applies to our
principal executive officer and senior financial officers, and (2) the nature of any waiver, including
an implicit waiver, from a provision of our code of ethics that is granted to one of these specified
officers, the name of such officer who is granted the waiver and the date of the waiver.

ITEM 11.  EXECUTIVE COMPENSATION

The information under the heading Executive Compensation and Compensation of Directors
in the Proxy Statement is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the heading Ownership of Our Common Stock By Principal Shareholders and
Our Management in the Proxy Statement is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the heading Certain Relationship and Related Transactions in the
Proxy Statement is incorporated herein by reference.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information
  under the heading Principal Accounting Firm Fees in the Proxy Statement
  is incorporated herein by reference.

|
|

PART IV

ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

| | Financial
      Statements
| | --------------------------
| |                           

| | (a) | (1) | Independent
      auditors report of KPMG, LLP and report of BDO   Seidman,
      LLP
| | --- | --- | --------------------------------------------------------------------------------------
| |     |    

| | (2) | Consolidated Financial Statements and Notes thereto of the Company including Consolidated Balance Sheets
as of December 31, 2003 and 2002 and related Consolidated Statements of Operations, Shareholders
Equity, and Cash Flows for each of the years in the three year period ended December 31, 2003.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                          
| | (3) | Supplemental Schedule II - Valuation and Qualifying Accounts                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                          

| | (b) | Reports on
      Form 8-K                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                  
| |     | There were
      no reports on Form 8-K filed during the last quarter of the period covered
      by this report.
| |     |                                                                                                                  
| | (c) | Exhibits:                                                                                                        

|EXHIBIT
      NUMBER | DESCRIPTION                                                                                                                                                              
|-------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     |                                                                                                                                                                          
|                     |                                                                                                                                                                          
|3.1                  | Articles
      of Incorporation, as Amended and Restated (filed as an exhibit to our Form
      10-12G, File No. 000-25277).                                             
|                     |                                                                                                                                                                          
|3.2                  | Bylaws, as
      Amended  and  Restated  (filed as an  exhibit
      to our Form  10-12G, File No. 000-25277).                                                           
|                     |                                                                                                                                                                          
|10.1                 | 1998 Stock
      Option Plan (filed as an exhibit to our Form  10-12G,  File  No.
      000-25277).                                                                      
|                     |                                                                                                                                                                          
|10.2                 | Sony  Electronics  Inc.
      Value Added Reseller  Agreement,  dated May 1,  1996
      (filed as an exhibit to our Form 10-12G, File No. 000-25277).                   
|                     |                                                                                                                                                                          
|10.3                 | Logitech,  Inc.
      Distribution and Installation  Agreement,  dated March   26,
      1997 (filed as an et our Form 10-12G, File No. 000-25277).                      
|                     |                                                                                                                                                                          
|10.4                 | Wells Fargo
      Term Note,  dated February 4, 1997 (filed as an exhibit to  our
      Form 10-12G, File No. 000-25277).                                                
|                     |                                                                                                                                                                          
|10.5                 | Credit Line
      for Inventory Financing with Textron Financial Corporation(filed as an exhibit
      to our Report on Form 10-Q for quarter ended June 30, 2003).      
|                     |                                                                                                                                                                          
|10.6                 | Asset Purchase
      Agreement with Sable Computer, Inc. dated as of May 31, 2003 (filed as an
      exhibit to our Report on Form 10-Q for quarter ended June 30, 2003).
|                     |                                                                                                                                                                          
|10.7                 | Asset Purchase
      Agreement with LiveCSP, Inc. dated as of June 30, 2003 (filed as an exhibit
      to our Report on Form 10-Q for quarter ended June 30, 2003).      
|                     |                                                                                                                                                                          
|21.1                 | Subsidiaries
      (filed herewith).                                                                                                                                     
|                     |                                                                                                                                                                          
|23.1                 | Consent of
      Independent Auditors, KPMG, LLP (filed herewith).                                                                                                       
|                     |                                                                                                                                                                          
|23.2                 | Consent of
      BDO Seidman, LLP, Independent Auditors (filed herewith).                                                                                                
|                     |                                                                                                                                                                          

|31.1 | Certificate
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002 (filed herewith).      
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                 
|32.1 | Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

|
|

SIGNATURES

Pursuant to the
  requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
  the Registrant has duly caused this report on Form 10-K to be signed on its
  behalf by the undersigned, thereunto duly authorized.

| | PACIFIC
      MAGTRON INTERNATIONAL CORP.,
| | ------------------------------------------
| | a Nevada corporation                      
| |                                           
| | By  /s/ Theodore
      S. Li              

| |                        
| | -----------------------
| |                        
| | Theodore S. Li         
| | President and          
| | Chief Financial Officer
| | Date: March 30, 2004   
| |                        

|
|

Pursuant to the
  requirements of the Securities Exchange Act of 1934, this report on Form 10-K
  has been signed below by the following persons on behalf of the Registrant and
  in the capacities and on the dates indicated:

|SIGNATURE           | TITLE                                                             | DATE          
|------------------- | ----------------------------------------------------------------- | --------------
|                    |                                                                   |               
|/s/ Theodore S. Li  | President, Chief Executive 
      Officer, Treasurer and Director | March 30, 2004
|                    |                                                                   |               
|Theodore S. Li      |                                                                   |               
|                    |                                                                   |               
|/s/ Hui Cynthia Lee | Director and Secretary                                            | March 30, 2004
|                    |                                                                   |               
|Hui Cynthia Lee     |                                                                   |               
|                    |                                                                   |               
|/s/ Jey Hsin Yao    | Director                                                          | March 30, 2004
|                    |                                                                   |               
|Jey Hsin Yao        |                                                                   |               
|                    |                                                                   |               
|/s/ Hank C. Ta      | Director                                                          | March 30, 2004
|                    |                                                                   |               
|Hank C. Ta          |                                                                   |               
|                    |                                                                   |               
|/s/ Raymond Crouse  | Director                                                          | March 30, 2004
|                    |                                                                   |               
|Raymond Crouse      |                                                                   |               

|
|

PACIFIC MAGTRON
  INTERNATIONAL CORP. and SubsidiariesCONSOLIDATED FINANCIAL
  STATEMENTSDECEMBER 31, 2003,
  2002 AND 2001

|                                                | 
|----------------------------------------------- | 
|CONTENTS                                        | 
|                                                | 
|REPORTS
      OF INDEPENDENT AUDITORS           | 
|                                                | 
|CONSOLIDATED
      FINANCIAL STATEMENTS         | 
|Consolidated Balance Sheets                     | 
|Consolidated Statements of operations           | 
|Consolidated Statements of Shareholders Equity | 
|Consolidated Statements of Cash Flows           | 
|Notes to Consolidated Financial Statements      | 
|                                                | 
|SUPPLEMENTAL
      SCHEDULE                     | 
|Schedule II - Valuation and Qualifying Accounts | 

|   
|---
|F-1
|   
|   

INDEPENDENT
  AUDITORS REPORT

To the Board of
  Directors and ShareholdersPacific Magtron International
  Corp.

We have audited the accompanying consolidated balance sheets of Pacific Magtron International Corp.
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations,
shareholders equity and cash flows for the years then ended. In connection with our audits
of the consolidated financial statements, we have also audited the related financial statement schedule.
These consolidated financial statements and the financial statement schedule are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Pacific Magtron International Corp. and subsidiaries as of December
31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion the related financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.

The accompanying
  consolidated financial statements have been prepared assuming that the Company
  will continue as a going concern. As discussed in Note 1 to the consolidated
  financial statements, the Company has suffered recurring losses from operations
  and is projecting losses in 2004. Further, during the year ended December 31,
  2003, the Company triggered a redemption provision in its Series A Redeemable
  Convertible Preferred Stock agreement thereby creating a current liability.
  In addition, the Company was in violation of certain of its debt covenants,
  which violations, were waived, and the Companys common stock has been
  delisted from the NASDAQ SmallCap Market. These matters raise substantial doubt
  about its ability to continue as a going concern. Managements plans in
  regard to these matters are also described in Note 1. The accompanying consolidated
  financial statements do not include any adjustments that might result from the
  outcome of this uncertainty.

|                                               | /s/   
      KPMG LLP
|---------------------------------------------- | ---------------------
|Mountain View, California
      March 12, 2004 |                      

|   
|---
|F-2
|   
|   

REPORT OF BDO SEIDMAN LLP, INDEPENDENT AUDITORS

To the Board of Directors and Shareholders Pacific Magtron International Corp.

We have audited the accompanying consolidated statements of operations, shareholders equity,
and cash flows of Pacific Magtron International Corp. and subsidiaries (the Company) for the year
ended December 31, 2001. We have also audited Schedule II - Valuation and Qualifying Accounts as
of and for the year ended December 31, 2001. These consolidated financial statements and schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion
on these consolidated financial statements and schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated results of Pacific Magtron International Corp. and subsidiaries
operations and their cash flows for the year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

Also, in our opinion, the schedule referred to above presents fairly, in all material respects, the
information set forth therein as of and for the year ended December 31, 2001.

/s/ BDO SEIDMAN, LLP

San Francisco,
  CaliforniaMarch 6, 2002

|F-3
|---
|   
|   

PACIFIC MAGTRON
  INTERNATIONAL CORP. and SubsidiariesCONSOLIDATED BALANCE SHEETS

|                                                   | December 31, |           
|-------------------------------------------------- | ------------ | ----------
|
|                                                   |              |           
|ASSETS                                             |              |           
|Current Assets:                                   
|Cash and cash equivalents                          | $            | 1,491,700 
|Restricted cash                                    |              | 395,000   
|Accounts receivable, net of allowance for         
|doubtful accounts of $281,800 and                 
|$305,000 in 2003 and 2002, respectively            |              | 4,350,900 
|Other receivables                                  |              | 673,300   
|Inventories                                        |              | 2,853,100 
|Prepaid expenses and other current assets          |              | 280,800   
|Income tax refund receivable                       |              |          
|Assets from discontinued operations                |              | 233,500   
|                                                   |              |           
|Total Current
      Assets                         |              | 10,278,300
|                                                   |              |           
|Property
      and equipment, net                  |              | 4,157,400 
|                                                   |              |           
|Deposits
      and other assets                    |              | 336,700   
|                                                   |              |           
|                                                   | $            | 14,772,400
|                                                   |              |           
|                                                   |              |           
|LIABILITIES
      AND SHAREHOLDERS EQUITY        
|Current Liabilities:                              
|Current portion of notes payable                   | $            | 66,100    
|Floor plan inventory loans                         |              | 1,369,200 
|Accounts payable                                   |              | 7,140,900 
|Accrued expenses                                   |              | 228,500   
|Contingent settlement of Common Stock Warrants     |              | 55,700    
|Series A Mandatorily Redeemable Convertible       
|Preferred Stock                                    |              | 958,600   
|Liabilities from discontinued operations           |              | 275,900   
|                                                   |              |           
|Total Current
      Liabilities                    |              | 10,094,900
|                                                   |              |           
|Notes Payable,
      less current portion          |              | 3,103,400 
|                                                  
|Preferred
      Stock, $0.001 par value; 5,000,000
|Shares authorized;                                
|4% Series A Redeemable Convertible Preferred      
|Stock; 1,000 shares designated; 600 shares        
|issued and outstanding                             |              |          
|                                                  
|Shareholders
      Equity:                       
|Common stock, $0.001 par value; 25,000,000        
|shares authorized; 10,485,062 shares issued       
|and outstanding                                    |              | 10,500    
|Additional paid-in capital                         |              | 2,036,400 
|Retained earnings (accumulated deficit)            |              | (472,800  
|                                                   |              |           
|Total Shareholders
      Equity                   |              | 1,574,100 
|                                                   |              |           
|                                                   | $            | 14,772,400
|                                                   |              |           

See accompanying
  notes to consolidated financial statements.

|F-4
|---
|   
|   

PACIFIC MAGTRON
  INTERNATIONAL CORP. and SubsidiariesCONSOLIDATED
  STATEMENTS OF OPERATIONS

|                                        | YEARS
      ENDED DECEMBER 31, |           
|--------------------------------------- | ------------------------------ | ----------
|                                        |                                |           
|                                        | **2003**                       | ****      
|                                        |                                |           
|Sales                                   | $                              | 74,327,000
|Cost of sales                           |                                | 69,773,200
|                                        |                                |           
|Gross profit                            |                                | 4,553,800 
|Selling,
      general and             
|administrative
      expenses           |                                | 6,064,300 
|                                        |                                |           
|Loss from
      continuing operations  
|before
      other income (expense),   
|income
      tax benefit,              
|and
      minority interest             |                                | (1,510,500
|                                        |                                |           
|Other income
      (expense):          
|Interest
      income                   |                                | 3,200     
|Interest
      expense                  |                                | (170,500  
|Litigation
      settlement             |                                | (95,000   
|Change
      in fair value of          
|warrants
      issued                   |                                | 105,800   
|Other
      expense, net                |                                | (27,500   
|                                        |                                |           
|Total other
      income (expense)      |                                | (184,000  
|                                        |                                |           
|Loss from
      continuing operations  
|before
      income tax benefit        
|and
      minority interest             |                                | (1,694,500
|Income tax
      benefit                |                                |          
|                                        |                                |           
|Loss from
      continuing operations  
|before
      minority interest          |                                | (1,694,500
|Minority
      interest                 |                                |          
|                                        |                                |           
|Loss from
      continuing operations   |                                | (1,694,500
|                                        |                                |           
|Discontinued
      operations:         
|Loss
      from discontinued           
|operations
      of:                   
|Frontline Network Consulting,          
|Inc., net of tax benefit               
|in 2002 and 2001                        |                                | (297,900  
|Lea
      Publishing Inc., net of      
|tax
      benefit in 2002 and 2001      |                                | (106,300  
|Loss
      from disposal of:           
|Frontline
      Network Consulting,    
|Inc                                     |                                | (13,700   
|Lea
      Publishing Inc.               |                                | (16,000   
|                                        |                                |           
|Loss from
      discontinued           
|operations                              |                                | (433,900  
|                                        |                                |           
|Accretion
      of discount and deemed 
|dividend
      related to beneficial   
|conversion
      of Series A           
|Convertible
      Preferred Stock       |                                | (24,900   
|Accretion
      of redemption value of 
|Series
      A Convertible Preferred   
|Stock                                   |                                | (743,300  
|                                        |                                |           
|Net Loss
      applicable to           
|common
      shareholders               | $                              | (2,896,600
|                                        |                                |           
|Basic and
      diluted loss per share:
|Loss
      from continuing operations  
|applicable to common                   
|shareholders                            | $                              | (0.24     
|Loss
      from discontinued           
|operations applicable to               
|common shareholders                     |                                | (0.04     
|                                        |                                |           
|Net
      loss applicable to common    
|shareholders                            | $                              | (0.28     
|                                        |                                |           
|Shares used
      in basic and diluted 
|per
      share calculation             |                                | 10,485,062
|                                        |                                |           

See accompanying
  notes to consolidated financial statements.

|F-5
|---
|   
|   

PACIFIC
  MAGTRON INTERNATIONAL CORP. and SubsidiariesCONSOLIDATED
  STATEMENT OF SHAREHOLDERS EQUITY

|                                  | Shareholders Equity |           
|--------------------------------- | -------------------- | ----------
|
|
|                                  |                      |           
|Balance at
      December 31,     |                      |           
|2000                              |                      | 10,100,000
|                                 
|Issuance
      of Common Stock in
|exchange
      for advertising   
|services                          |                      | 333,400   
|                                 
|Purchase
      of assets in      
|exchange
      for stock          |                      | 16,100    
|                                  |                      |           
|Exercise
      of stock options   |                      | 56,000    
|                                 
|Tax benefit
      of stock       
|options exercised                 |                      |          
|                                 
|Repurchase
      and retirement  
|of treasury
      stock           |                      | (20,400   
|Net Loss                          |                      |          
|                                  |                      |           
|Balance at
      December 31,    
|2001                              |                      | 10,485,100
|                                 
|Deemed dividend
      associated 
|with beneficial
      conversion 
|feature of
      convertible     
|preferred
      stock             |                      |          
|                                 
|Vesting portion
      of 300,000 
|common stock
      warrants      
|issued as
      payment of       
|consulting
      services         |                      |          
|                                  |                      |           
|Preferred
      stock accretion   |                      |          
|                                  |                      |           
|                                  |                      |           
|Net Loss                          |                      |          
|                                  |                      |           
|Balance at
      December 31,    
|2002                              |                      | 10,485,100
|                                 
|Vesting portion
      of 300,000 
|common stock
      warrants      
|issued as
      payment of       
|consulting
      services         |                      |          
|                                  |                      |           
|Preferred
      stock accretion   |                      |          
|                                  |                      |           
|Net Loss                          |                      |          
|                                  |                      |           
|Balance at
      December 31,    
|2003                              |                      | 10,485,100
|                                  |                      |           

See accompanying
  notes to consolidated financial statements.

|F-6
|---
|   
|   

PACIFIC
  MAGTRON INTERNATIONAL CORP. and SubsidiariesCONSOLIDATED
  STATEMENTS OF CASH FLOWS

|                                                           | YEARS ENDED
      DECEMBER 31, |           
|---------------------------------------------------------- | ------------------------------ | ----------
|
|CASH FLOWS
      FROM OPERATING ACTIVITIES:                |                                |           
|Net loss
      applicable to common shareholders           | $                              | (2,896,600
|Less: Loss
      from discontinued operations              |                                | (433,900  
|Accretion of discount related to Series A                 
|Convertible Preferred Stock                                |                                | (24,900   
|Accretion of redemption value of Series A                 
|Convertible Preferred Stock                                |                                | (743,300  
|                                                           |                                |           
|Net loss
      from continuing operations                  |                                | (1,694,500
|Adjustments
      to reconcile net loss to                
|net
      cash (used in) provided by operating activities:
|Depreciation and amortization                              |                                | 315,700   
|Gain on disposal of property and equipment                 |                                |          
|Provision (benefit) for doubtful accounts                  |                                | (45,400   
|Deferred income taxes                                      |                                |          
|Impairment loss on investments                             |                                |          
|Changes in fair value of warrants                          |                                | (105,800  
|Minority interest in losses of subsidiary                  |                                |          
|Changes
      in operating assets and liabilities:        
|Accounts receivable                                        |                                | 266,300   
|Other receivables                                          |                                | (673,300  
|Inventories                                                |                                | 485,500   
|Prepaid expenses and other current assets                  |                                | (1,900    
|Income tax refunds receivable                              |                                | 1,472,800 
|Accounts payable                                           |                                | (360,100  
|Accrued expenses                                           |                                | 17,100    
|                                                           |                                |           
|NET CASH
      (USED IN) PROVIDED BY CONTINUING OPERATIONS |                                | (323,600  
|NET CASH
      USED IN DISCONTINUED OPERATIONS             |                                | (146,800  
|                                                           |                                |           
|NET CASH
      USED IN OPERATING ACTIVITIES                |                                | (470,400  
|                                                           |                                |           
|CASH FLOWS
      FROM INVESTING ACTIVITIES:               
|Acquisition
      of property and equipment                |                                |          
|Proceeds
      from sale of property and equipment         |                                | 5,100     
|Notes
      receivable from shareholders                   |                                |          
|Deposits
      and other assets                            |                                |          
|                                                           |                                |           
|NET INVESTING
      ACTIVITIES OF CONTINUING OPERATIONS    |                                | 5,100     
|NET INVESTING
      ACTIVITIES OF DISCONTINUED            
|OPERATIONS                                                 |                                | 44,100    
|                                                           |                                |           
|NET CASH
      PROVIDED BY (USED IN) INVESTING ACTIVITIES  |                                | 49,200    
|                                                           |                                |           
|CASH FLOWS
      FROM FINANCING ACTIVITIES:               
|Net
      increase (decrease) in floor plan               
|inventory loans                                            |                                | 467,600   
|Principal

      payments on notes payable                 |                                | (60,800   
|Restricted
      cash                                      |                                | (395,000  
|Proceeds
      from issuance of Common Stock              
|under stock option plan                                    |                                |          
|Net
      proceeds from issuance of redeemable            
|convertible
      preferred stock and warrants             |                                |          
|Proceeds
      from sale of PMIGA stock to                
|minority
      shareholder                                 |                                |          
|                                                           |                                |           
|NET FINANCING
      ACTIVITIES OF CONTINUING OPERATIONS    |                                | 11,800    
|NET FINANCING
      ACTIVITIES OF DISCONTINUED            
|OPERATIONS                                                 |                                |          
|                                                           |                                |           
|NET CASH
      PROVIDED BY (USED IN) FINANCING ACTIVITIES  |                                | 11,800    
|                                                           |                                |           
|NET DECREASE
      IN CASH AND CASH EQUIVALENTS            |                                | (409,400  
|                                                          
|CASH AND
      CASH EQUIVALENTS:                          
|Beginning
      of year                                    |                                | 1,901,100 
|                                                           |                                |           
|End
      of year                                          | $                              | 1,491,700 
|                                                           |                                |           

See accompanying
  notes to consolidated financial statements.

|F-7
|---
|   
|   

PACIFIC MAGTRON INTERNATIONAL
    CORP. and SubsidiariesNOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS


1.  
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

The consolidated financial statements of Pacific Magtron International Corp. (the Company
or PMIC) include its subsidiaries, Pacific Magtron, Inc. (PMI), Pacific Magtron (GA)
Inc. (PMIGA) and LiveWarehouse, Inc. (LW).

PMI and PMIGAs principal activity consists of the importation and wholesale distribution of electronics
products, computer components, and computer peripheral equipment throughout the United States. LW
distributes certain computer and electronics products and sells consumer computer products through
the internet.

In August 2000, PMI formed PMIGA, a Georgia corporation whose principal activity is the wholesale distribution
of PMIs products in the eastern United States market. During 2001, PMIGA sold 15,000 shares
of its common stock to an employee for $15,000. In June 2002, PMIGA repurchased and retired the 15,000
employee owned shares. As a result, PMIGA is 100% owned by PMI.

In December 2001, the Company incorporated LW, a wholly-owned subsidiary of the Company, to provide
consumers a convenient way to purchase computer products over the internet.

In May 1998, PMI formed its Frontline Network Consulting (Frontline) division, a corporate information
systems group that served the networking and personal computer requirements of corporate customers.
In July 2000, the Company formed Frontline Network Consulting, Inc. (FNC), a California corporation.
Effective October 1, 2000, PMI transferred the assets and liabilities of Frontline to FNC. Concurrently,
FNC issued 20,000,000 shares of common stock to the Company and became a wholly-owned subsidiary.
On January 1, 2001, FNC issued 3,000,000 shares of its common stock to three key FNC employees for
past services rendered pursuant to certain Employee Stock Purchase Agreements. As a result of this
transaction, the Companys ownership interest in FNC was reduced to 87%. In August 2001 and
in March 2002, FNC repurchased and retired a total of 2,000,000 of its shares from former employees
at $0.01 per share, resulting in an increase in the Companys ownership of FNC from 87% to 95%.

In May 1999, the Company entered into a Management Operating Agreement which provided for a 50% ownership
interest in Lea Publishing, LLC (Lea), a California limited liability company formed in January 1999
to develop, sell and license software designed to provide internet users, resellers and providers
with advanced solutions and applications. In June 2000, the Company increased its direct and indirect
interest in Lea to 62.5% by completing its investment in 25% of the outstanding common stock of Rising
Edge Technologies, Ltd. (Rising Edge), the other 50% owner of Lea, which was a development stage
company. In December 2001, the Company entered into an agreement with Rising Edge and its principal
owners to exchange the 50% Rising Edge ownership interest in Lea for the Companys 25% ownership
interest in Rising Edge. As a consequence, PMIC owns 100% of Lea and no longer has an ownership interest
in Rising Edge. No amounts were recorded for the 50% Rising Edge ownership interest in Lea received
in this exchange because of the write-down of the Rising Edge investment to zero in the fourth quarter
of 2001. In May 2002, the Company formed Lea Publishing, Inc., a California corporation. Effective
June 1, 2002, Lea Publishing, LLC transferred all of its assets and liabilities to Lea Publishing, Inc.

On October 15, 2001, the Company formed an investment holding company, PMI Capital Corporation (PMICC),
a wholly owned subsidiary of the Company, for the purpose of acquiring companies or assets deemed
suitable for PMICs organization. In October 2001, the Company acquired through PMICC certain
assets and assumed the accrued vacation of certain employees of Live Market, Inc. in exchange for
a cash payment of $85,000. The LiveMarket assets were then transferred to Lea. PMICC was dissolved
in the third quarter of 2003.

|F-8
|---
|   
|   

During the second
  quarter of 2003, the Company sold substantially all the intangible assets of
  FNC to a third party. The Company also sold all the intangible assets and certain
  tangible assets of Lea to certain of Leas employees (see note 2).

BASIS OF ACCOUNTING

The Company incurred
  a net loss applicable to common shareholders of $2,896,600, $3,110,100 and $2,850,700
  for the years ended December 31, 2003, 2002 and 2001, respectively. During 2003,
  the Company also triggered a redemption provision in its Series A redeemable
  convertible preferred stock agreement and as a result, has increased the value
  of such stock to its redemption value and reclassified it as a current liability.
  In addition, the Company was in violation of certain of its debts covenants,
  which violations were subsequently waived. Based on anticipated future results,
  it is probable that the Company will be out of compliance with certain of the
  covenants. If this were to occur and waivers for the violations could not be
  obtained, the Companys inventory flooring line might be terminated and
  loan payments on its inventory flooring line and mortgage loan might be accelerated.
  Further, the Companys common stock was delisted from the NASDAQ Small
  Cap market effective April 30, 2003 as a result of  the Company being
  out of compliance with the NASDAQs minimum market value and minimum common
  stock bid price requirements. These conditions raise substantial doubt about
  the Companys ability to continue as a going concern. The Companys
  ability to continue as a going concern is dependent upon it achieving profitability
  and generating sufficient cash flows to meet its obligations as they come due.
  Management believes that its downsizing through the disposal of its subsidiaries,
  FNC, Lea and PMICC, and its continued cost-cutting measures to reduce overhead
  at all of its remaining subsidiaries and an improving economy will enable it
  to achieve profitability. However, there can be no assurance that the Company
  will be able to achieve a profitable level of operations in 2004 or beyond.If the Company is unable to do so, it would have to obtain
  additional equity or debt financing or sell a sufficent amount of its assets
  to retire the Textron and Wells Fargo credit facilities.  There can be
  no assurance the the Company will be able to obtain debt or equity financing
  or obtain it on terms acceptable to the Company.  If the Company was forced
  to liquidate its assets, whether through a bankruptcy proceeding or otherwise,
  there can be no assurance that the Company could raise sufficient proceeds to
  meet its obligations or remain an economically viable enterprise. The
  accompanying consolidated financial statements do not include any adjustments
  that might result from the outcome of this uncertainty.

USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS

The preparation of financial statements in conformity with 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 revenue and expenses during the reporting period. Actual results
could differ materially from such estimates.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of PMIC and its wholly-owned
subsidiaries, PMI, PMIGA and LW. All inter-company accounts and transactions have been eliminated
in consolidation. During the second quarter 2003, the Company sold substantially all the intangible
assets of FNC and all of the intangible assets and certain tangible assets of Lea. In addition, during
the third quarter 2003, PMICC was dissolved. The activities of FNC, Lea and PMICC have been reclassified
for reporting purposes as discontinued operations for all periods presented in the accompanying statements
of operations and cash flows.

RECLASSIFICATIONS

Certain 2002 and 2001 financial statement amounts have been reclassified to conform to the 2003 financial
statement presentation.

CASH EQUIVALENTS

The Company considers
  all highly liquid investments with original maturities of 90 days or less to
  be cash equivalents.

|F-9
|---
|   
|   

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company grants credit to its customers after undertaking an investigation of credit risk for all
significant amounts. An allowance for doubtful accounts is provided for estimated credit losses at
a level deemed appropriate to adequately provide for known and inherent risks related to such amounts.
The allowance is based on reviews of loss, adjustment history, current economic conditions, credit
insurance levels, and other factors that deserve recognition in estimating potential losses. Our
allowance for doubtful accounts includes receivables past due over 90 days, returned checks and an
estimated percentage of the receivables currently due. While management uses the best information
available in making its determination, the ultimate recovery of recorded accounts receivable is also
dependent upon future economic and other conditions that may be beyond managements control.

INVENTORIES

Inventories, consisting primarily of finished goods, are stated at the lower of cost (weighted average
cost method) or market.

PROPERTY AND EQUIPMENT AND OTHER LONG-LIVED ASSETS

Property and equipment are stated at cost.  Depreciation is provided using the straight-line method
over the estimated useful lives of the assets, as follows:

|Building
      and improvements |  | 39
      years | 
|------------------------------- |  | -------------- | 
|Furniture
      and fixtures    |  | 5 to 7 years   | 
|Computers
      and equipment   |  | 3 to 5 years   | 
|Automobiles                     |  | 5 years        | 
|Software                        |  | 3 years        | 

The Company periodically reviews its long-lived assets for impairment. When events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, the Company adjusts the asset
to its estimated fair value. The fair value of an asset is determined by the Company as the amount
at which that asset could be bought or sold in a current transaction between willing parties or the
present value of the estimated future cash flows from the asset. The asset value recoverability test
is performed by the Company on an on-going basis. As further discussed in Note 16, the Company recorded
an impairment loss in 2001 related to the write-down of its investments in Rising Edge and TargetFirst
to zero. The impairment loss recognized for Rising Edge was based on operations history, projections
and a change in focus of the investees business. The impairment loss recognized for Target
First resulted from an analysis of the investees recurring operating losses and cash available
for use in operations.

REVENUE RECOGNITION

The Company recognizes sales of computer and related products upon delivery of goods to the customer

(generally upon shipment) and the customer takes ownership and assumes risk of loss, provided no

significant obligations remain and collectibility is probable. A provision for estimated product

returns is established at the time of sale based upon historical return rates, which have typically

been insignificant, adjusted for current economic conditions. The Company generally does not provide

volume discounts or rebates to its customers.

ADVERTISING AND PROMOTIONAL EXPENSES

Advertising and promotional expenses, except for certain radio advertising credits, are expensed when
incurred. Radio advertising credits are expensed when utilized and are included in other selling,
general and administrative expenses in the accompanying consolidated statements of operations. Included
in prepaid expenses and other current assets as of December 31, 2003 and 2002 are $61,100 and $150,000,
respectively, representing the outstanding balance of radio advertising credits (See note 14 to the
financial statements). Advertising and promotional expenses were $99,800, $303,900, and $140,000,
in 2003, 2002 and 2001, respectively.

|F-10
|----
|    
|    

WARRANTY REPAIRS

The Company is principally a distributor of numerous electronics products, for which the original equipment
manufacturer is responsible and liable for product repairs and service. Amounts claimed in excess
of manufacturers warranties are estimated and charged to expense based on historical amounts
and the mixed of products recently sold. The Company has experienced an insignificant amount of claims
in excess of the manufacturers warranties.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities

are recognized for the future tax consequences attributable to differences between the financial

statement carrying amounts of existing assets and liabilities and their respective tax bases and

operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using

enacted tax rates expected to apply to taxable income in the years in which those temporary differences

are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change
in tax rates is recognized in income in the period that includes the enactment date. Future
tax benefits
are subject to a valuation allowance when management believes it is more likely than
not that the
deferred tax assets will not be realized.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets,
the Company periodically reviews its long-lived assets for impairment. When events or changes in
circumstances indicate that the carrying amount of an asset group may not be recoverable, the Company
adjusts the asset group to its estimated fair value. The fair value of an asset group is determined
by the Company as the amount at which that asset group could be bought or sold in a current transaction
between willing parties or the present value of the estimated future cash flows from the asset. The
asset value recoverability test is performed by the Company on an on-going basis. As of December
31, 2003, all long-lived assets were estimated to be recoverable. As further discussed in Note 16,
the Company recorded an impairment loss in 2001 related to the write-down of its investments in Rising
Edge and TargetFirst, Inc. (TargetFirst) to zero. The impairment loss recognized for Rising Edge
was based on operations history, projections and a change in focus of the investees business.
The impairment loss recognized for TargetFirst resulted from an analysis of the investees recurring
operating losses and cash available for use in operations.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair value of long-term debt and floor plan inventory loans is estimated based on current interest
rates available to the Company for debt instruments with similar terms and remaining maturities.
At December 31, 2003 and 2002, the fair value of long-term debt, which consisted of a bank loan and
an SBA loan relating to the Companys facility in Milpitas, California, was approximately $3,316,000
and $3,346,300, respectively. The bank loan had an outstanding balance of $2,360,900 and $2,387,500
as of December 31, 2003 and 2002, respectively. The carrying value of the bank loan, which contains
an adjustable interest rate provision based on the market interest rate, approximates its fair value.
The SBA loan had an outstanding amount of $808,600 and $842,800 at December 31, 2003 and 2002, respectively.
The estimated fair value of the SBA loan was $955,100 and $958,800 as of December 31, 2003 and 2002,
respectively. The fair value of the SBA loan was estimated based on the present value of the future
payments discounted by the market interest rate for similar loans at December 31, 2003 and 2002.
The fair values of accounts receivable, other receivable, accounts payable and floor plan inventory
loans approximates their carrying values because of the short maturity of these instruments.

|F-11
|----
|    
|    

LOSS PER SHARE

Basic loss per share is computed by dividing loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities, using the treasury stock method that could share in the earnings
of an entity. During the year ended December 31, 2003, options and warrants to purchase 1,094,000
shares of the Companys common stock and 852,200 shares of common stock issuable upon conversion
of Series A Preferred Stock were excluded from the calculation of diluted loss per share as their
effect would be anti-dilutive. During the year ended December 31, 2002, options and warrants to purchase
1,302,800 shares of the Companys common stock and 818,900 shares of common stock issuable upon
conversion of Series A Preferred Stock were excluded from the calculation of diluted loss per share
as their effect would be anti-dilutive. During the year ended December 31, 2001, options to purchase
794,600 shares of the Companys common stock were excluded from the calculation of diluted loss
per share as their effect would be anti-dilutive.

The following is the computation of the Companys basic and diluted loss per share:

|                                         | Year
      Ending December 31, |           
|---------------------------------------- | ------------------------------ | ----------
|
|Loss from
      continuing operations    | $                              | (1,694,500
|Accretion
      of discount and deemed  
|dividend
      related to beneficial    
|conversion
      of Series A            
|Convertible
      Preferred Stock        |                                | (24,900   
|Accretion
      of redemption value of  
|Series
      A Convertible Preferred    
|Stock                                    |                                | (743,300  
|                                         |                                |           
|Loss from
      continuing operations   
|applicable
      to common              
|shareholders                             | $                              | (2,462,700
|Loss from
      discontinued            
|operations                               |                                | (433,900  
|                                         |                                |           
|Net Loss
      applicable to            
|common
      shareholders                | $                              | (2,896,600
|                                         |                                |           
|Basic and
      diluted loss per share -
|Loss
      from continuing operations   
|applicable to common                    
|shareholders                             | $                              | (0.24     
|                                         |                                |           
|Loss
      from discontinued            
|operations                               | $                              | (0.04     
|                                         |                                |           
|Net loss
      applicable to common     
|shareholders                             | $                              | (0.28     
|                                         |                                |           
|Shares used
      in basic and diluted  
|per share calculation                    |                                | 10,485,100
|                                         |                                |           

|    
|----
|F-12
|    
|    

STOCK OPTION PLAN

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation,
an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this
method, compensation expense is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock-Based
Compensation and FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted
by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based
method of accounting described above, and has adopted only the disclosure requirements of Statement
123, as amended. The following table illustrates the effect on net loss if the fair-valued-based
method had been applied to all outstanding and unvested awards in each period. The Company estimates
the fair value and stock options at the grant date by using the Black-Scholes option pricing model
with the following weighted average assumptions use for grants in 2002 and 2001: no yield; expected
volatility of 311% and 152%, risk-free interest rates of 4% and 5.0% and expected lives of four years for all plan options.

Had the Company adopted the provisions of SFAS No. 123, the Companys net loss and loss per share
would have been increased to the pro forma amounts indicated below:

|                                        | Year Ending
      December 31, |           
|--------------------------------------- | ------------------------------ | ----------
|
|                                        |                                |           
|Net loss
      applicable to common     |                                |           
|shareholders:                          
|As
      reported                       | $                              | (2,896,600
|Add:
      total stock based employee  
|compensation
      expense determined  
|using
      the fair value method for  
|all
      awards, net of tax            |                                | (17,600   
|                                        |                                |           
|Pro
      forma                         | $                              | (2,914,200
|                                        |                                |           
|Basic and
      diluted loss per share:
|As
      reported                       | $                              | (0.28     
|Pro
      forma                         | $                              | (0.28     

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146), requires companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The provisions of SFAS 146 are to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 by the Company had no impact on its financial
position, results of operations, or cash flows.

In November 2002,
  the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
  Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
  Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission
  of FASB Interpretation No. 34 (FIN 45). FIN 45 requires a guarantor to (i) include
  disclosure of certain obligations and (ii) if applicable, at the inception of
  the guarantee, recognize a liability for the fair value of other certain obligations
  undertaken in issuing a guarantee. The disclosure provisions of the Interpretation
  are effective for financial statements of interim or annual reports that end
  after December 15, 2002. The adoption of FIN 45 had no impact on the Companys
  disclosures as of December 31, 2002. The recognition and measurement provisions
  of FIN 45 are effective for guarantees issued or modified after December 29,
  2002. Interpretation No. 45 had no impact on the Companys financial position
  or results of operations.

|F-13
|----
|    
|    

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition
and Disclosurean Amendment of FASB Statement No. 123. SFAS No. 148 amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an
entity that chooses to change to the fair-value-based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that statement to require prominent disclosure
about the effects that accounting for stock-based employee compensation using the fair-value-based
method would have on reported net income and earnings per share and to require prominent disclosure
about the entitys accounting policy decisions with respect to stock-based employee compensation.
Certain of the disclosure requirements are required for all companies, regardless of whether the
fair value method or intrinsic value method is used to account for stock-based employee compensation
arrangements. The Company accounts for its stock option plan in accordance with the recognition and
measurement principles of Accounting Principles Opinion No. 25, Accounting for Stock Issued to Employees.
The amendments to SFAS No. 123 are effective for financial statements for fiscal years ended after
December 15, 2002 and for interim periods beginning after December 15, 2002. Disclosures required
by this Statement are included in Note 1 to the audited consolidated financial statements.

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, which addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (VIE), which was issued in January 2003. The Company will be required to apply
FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in
VIEs created before January 1, 2004, the assets, liabilities and non-controlling interests of the
VIE initially would be measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. If determining the carrying amounts is not practicable, fair value
at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. The adoption of FIN 46R did not have an impact on the Companys consolidated
financial position or results of operations.

In November 2002, the Emerging Issues Task Force (EITF) issued No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. This issue addresses determination of whether an arrangement involving
more than one deliverable contains more than one unit of accounting and how arrangement consideration
should be measured and allocated to separate units of accounting. EITF Issue No. 00-21 was effective
for revenue arrangements entered into in fiscal quarters beginning after June 15, 2003, or the Company
may elect to report the change in accounting as a cumulative-effect adjustment. The Companys
adoption of EITF Issue No. 00-21 did not impact its consolidated financial position or results of
operations.

In May 2003, the
  FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
  Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards
  for classifying and measuring as liabilities certain financial instruments that
  embody obligations of the issuer and have characteristics of both liabilities
  and equity. SFAS No. 150 is effective for all financial instruments created
  or modified after May 31, 2003 and otherwise is effective at the beginning of
  the first interim period beginning after June 15, 2003. Restatement of financial
  statements for earlier years presented is not permitted. FASB Staff Position
  No. FAS 150-3 deferred certain provisions of SFAS No. 150 for certain mandatory
  redeemable non-controlling interests. The Company adopted SFAS No. 150 beginning
  the third quarter 2003. The Companys adoption of SFAS No. 150 did not
  impact its consolidated financial position or results of operations.

|F-14
|----
|    
|    

In December 2003, FASB Statement No. 132 (revised), Employers Disclosures about Pensions and
Other Postretirement Benefits, was issued. Statement 132 (revised) prescribes employers disclosures
about pension plans and other postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains and revises the disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending after December 15, 2003.
The Companys adoption of SFAS No. 132 did not impact its consolidated financial statements.

2.   DISCONTINUED
  OPERATIONS

On June 2, 2003, the Company entered into an agreement to sell substantially all of FNCs intangible
assets to an unrelated party for a note in the amount of $15,000. The Company recorded a loss of
$13,700 on the sale of the FNC assets.

On June 30, 2003, the Company sold substantially all of Leas intangible assets and certain equipment

to certain of the Leas employees. The Company also entered into a Proprietary Software License

and Support Agreement with the purchaser requiring the purchaser to provide certain electronic
commerce
support services to LW for a term of two years beginning July 1, 2003. The Company received
$5,000
on the transaction closing date and the electronic commerce support services contract valued
at $48,000
which is based on the number of service hours to be provided. The Company recorded a
loss of $16,000
on the sale of the Lea assets.

On June 6, 2003 the Board of Directors authorized the dissolution of PMICC. PMICC, which was dissolved
in the third quarter 2003, had no activities since 2002 and had no assets or liabilities.

The operating results, including the loss from disposal of assets, of FNC and Lea for the years ended
December 31, 2003, 2002 and 2001 were as follows:

|                                     | Year Ending
      December 31, |          
|------------------------------------ | ------------------------------ | ---------
|
|                                     |                                |          
|FNC:                                 |                                |          
|Net sales                            | $                              | 1,313,500
|Loss before
      income tax benefit |                                | (311,600 
|Income tax
      benefit             |                                |         
|                                     |                                |          
|Net loss                             | $                              | (311,600 
|                                     |                                |          
|Lea:                                
|Net sales                            | $                              | 179,700  
|Loss before
      income tax benefit |                                | (122,300 
|Income tax
      benefit             |                                |         
|                                     |                                |          
|Net loss                             | $                              | (122,300 
|                                     |                                |          

3.  RELATED
  PARTY TRANSACTIONS

During the first quarter of 2002, the Company made short-term salary advances to a shareholder/officer

totaling $30,000, without interest. These advances were recorded as a salary paid to the shareholder/officer

during the second quarter ended June 30, 2002.

|F-15
|----
|    
|    

The Company sold
  computer products to a company owned by a member of the Board of Directors of
  the Company. During 2003, 2002 and 2001, the Company recognized $102,400, $527,400
  and $476,200, respectively, in sales revenues from this company. Included in
  accounts receivable as of December 31, 2002 is $27,000 due from this related
  party. There was no amount due from this related party as of December 31, 2003.

See note 16 to the financial statements relating to the investment in Lea. On June 30, 2003, the Company
sold substantially all of Leas intangible assets and certain equipment to certain of the Leas
employees (see note 2 to the consolidated financial statements).

In 2001 FNC acquired certain assets of Technical Insights in exchange for 16,100 shares of PMIC common

stock. Under the purchase agreement, among other terms, FNC was required to pay $126,000 to the
sellers
upon completion and full settlement of a sale transaction as specified in the agreement.
On October
2001 the sellers became employees of FNC. As a result of the profit sharing arrangement,
the $126,000
payment due to the sellers was recorded as compensation expense by the Company. In
January 2002,
this balance was paid to the sellers/employees under the terms of the purchase agreement.

4.  
  ACCOUNTS RECEIVABLE AGREEMENTS

On April 1, 2003, the Company purchased a credit insurance policy from American Credit Indemnity covering
certain accounts receivable up to $2,000,000 of losses. This policy expires on March 31, 2004. The
Company also entered into an insurance agreement with ENX, Inc. for its accounts receivables for
one year beginning April 7, 2003. Under the agreement, the Company sells its past-due accounts receivables
from pre-approved customers with pre-approved credit limits under certain conditions. The commission
is 0.5% of the approved invoice amounts with a minimum annual commission of $50,000. As of December
31, 2003, approximately $687,000 of the outstanding receivables was approved by ENX.

5.  
  PROPERTY AND EQUIPMENT

The following is a summary of property and equipment as of December 31, 2003 and 2002:

|**DECEMBER
      31,**              | **2003** | ****      | **2002** |  
|----------------------------------- | -------- | --------- | -------- | -
|                                    |          |           |          |  
|Building
      and improvements     | $        | 3,274,400 |          | $
|Land                                |          | 1,158,600 |          |  
|Furniture
      and fixtures        |          | 374,800   |          |  
|Computers
      and equipment       |          | 693,100   |          |  
|Automobiles                         |          | 116,500   |          |  
|                                    |          |           |          |  
|                                    |          | 5,617,400 |          |  
|Less accumulated
      depreciation |          | 1,460,000 |          |  
|                                    |          |           |          |  
|                                    | $        | 4,157,400 |          | $
|                                    |          |           |          |  

6.  NOTES
  PAYABLE

The Companys wholly-owned subsidiary, PMI, has obtained financing of $3,498,000 for the purchase
of its office and warehouse facility. Of the amount financed, $2,500,000 was in the form of a 10-year
bank loan utilizing a 30-year amortization period. This loan bears interest at the banks 90-day
LIBOR rate (1.25% as of December 31, 2003) plus 2.5%, and is secured by a deed of trust on the property.
The balance of the financing was obtained through a $998,000 Small Business Administration (SBA)
loan due in monthly installments through April 2017. The SBA loan bears interest at 7.569%, and is
secured by the underlying property.

|F-16
|----
|    
|    

Under the bank
  loan, PMI is required, among other things, to maintain a minimum debt service
  coverage, a maximum debt to tangible net worth ratio, and to have no consecutive
  quarterly losses. In addition, PMI is required to achieve net income on an annual
  basis. As of December 31, 2003 and 2002, PMI was in violation of the quarterly
  loss and annual income covenants which constituted an event of default under
  the loan agreement and gave the bank the right to call the loan. Waivers of
  the loan covenant violations were obtained from the bank that extended through
  December 31, 2003. As a condition for these waivers, the Company transferred
  $250,000 to a restricted account as a reserve for debt service. This amount
  has been reflected as long-term restricted cash and included in Deposits and
  Other Assets in the accompanying consolidated balance sheet. Based on anticipated
  future results, it is probable that the Company be out of compliance with certain
  of these covenants. If this were to occur and a waiver for the violation cannot
  be obtained, the Company would be required to classify the bank loan as current,
  which would cause the Company to be out of compliance with another financial
  covenant included in its inventory flooring facility with Textron Financial
  Corporation as discussed in note 7 to the consolidated financial statements.

The outstanding balances of the notes payable as of December 31, 2003 and 2002 are as follows:

|                           | **2003** | ****      | **** | **2002** |          
|-------------------------- | -------- | --------- | ---- | -------- | ---------
|                           |          |           |      |         
|Bank loan                  | $        | 2,360,900 |      | $        | 2,387,500
|SBA loan                   |          | 808,600   |      |          | 842,800  
|                           |          |           |      |         
|                           |          | 3,169,500 |      |          | 3,230,300
|Less current
      portion |          | 66,100    |      |          | 60,800   
|                           |          |           |      |         
|                           | $        | 3,103,400 |      | $        | 3,169,500
|                           |          |           |      |         

The aggregate amount of future maturities for notes payable are as follows:

|Amount     | 
|---------- | 
|           | 
|2004       | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|Thereafter | 
|           | 
|           | 
|           | 

7.  FLOOR
  PLAN INVENTORY LOANS AND LETTER OF CREDIT

On July 13, 2001, PMI and PMIGA (the Companies) obtained a $4 million ($3 million effective October
2002) accounts receivable and inventory financing facility from Transamerica Commercial Finance Corporation
(Transamerica). Under the Transamerica financing facility, the Companies were required to maintain
certain financial covenants. However, the Companies did not meet the minimum tangible net worth and
profitability covenants as of June 30, 2002, September 30, 2002 and December 2002. This constituted
a technical default and gave Transamerica, among other things, the right to call the loan and immediately
terminate the credit facility. On January 7, 2003, Transamerica elected to terminate the credit facility
effective April 7, 2003.

|F-17
|----
|    
|    

In May 2003, PMI
  obtained a $3,500,000 inventory financing facility, which includes a $1 million
  letter of credit facility used as security for inventory purchased on terms
  from vendors in Taiwan, from Textron Financial Corporation (Textron). The credit
  facility is guaranteed by PMIC, PMIGA, FNC, Lea, LW and two shareholders/officers
  of the Company and may be  discontinued by Textron at any time at
  its sole discretion. Borrowings under the inventory line are subject to 30 days
  repayment, at which time interest accrues at the prime rate plus 6% (10% at
  December 31, 2003). The Company is required to maintain collateral coverage
  equal to 120% of the outstanding balance. A prepayment is required when the
  outstanding balance exceeds the sum of 70% of the eligible accounts receivables
  and 90% of the Textron-financed inventory and 100% of any cash assigned or pledged
  to Textron. PMI and PMIC are required to meet certain financial ratio covenants,
  including a minimum current ratio, a maximum leverage ratio, a minimum tangible
  capital funds and required levels of profitability. As of September 30, 2003,
  the Company was out of compliance with the maximum leverage ratio covenant for
  which a waiver was obtained. As of December 31, 2003, the Company was out of
  compliance with the maximum leverage ratio covenant and the minimum tangible
  capital funds for which a waiver has been obtained through March 31, 2004. Based
  on the anticipated future results, it is probable that the Company will be out
  of compliance with certain of these covenants. If this were to occur and a waiver
  for the violation cannot be obtained, Textron might terminate the credit facility
  and accelerate the loan payments. Upon termination, there is no assurance that
  the Company would have the funding necessary to finance its future inventory
  purchases at levels necessary to achieve profitability. The Company is also
  required to maintain $250,000 in a restricted account as a pledge to Textron.
  This amount has been reflected as restricted cash in the accompanying consolidated
  financial statements. As of December 31, 2003, the outstanding balance of this
  loan was $1,369,200 which is classified as a current liability on the accompanying
  consolidated balance sheet.

8.  INCOME
  TAXES

There was no income tax benefit (expense) recoded for the year ended December 31, 2003. For the years
ended December 31, 2002 and 2001, income tax benefit (expense) comprises:

| | **2002** | **Current** |         | **Deferred** |      | **TOTAL** |  
| | -------- | ----------- | ------- | ------------ | ---- | --------- | -
| |          |             |         |              |      |           |  
| | Federal  | $           | 873,000 |              |      | (131,000  | )
| | State    |             | (5,700  | )            |      |          |  
| |          |             |         |              |      |           |  
| |          | $           | 867,300 |              |      | (131,000  | )
| |          |             |         |              |      |           |  
| |          |             |         |              |      |           |  
| | **2001** | **Current** | ****    | **Deferred** | **** | **TOTAL** |  
| |          |             |         |              |      |           |  
| | Federal  | $           | 24,800  |              | $    | 698,500   |  
| | State    |             | (5,300  | )            |      | 6,300     |  
| |          |             |         |              |      |           |  
| |          | $           | 19,500  |              | $    | 704,800   |  
| |          |             |         |              |      |           |  

The following summarizes the differences between the income tax (benefit) expense and the amount computed
by applying the Federal income tax rate of 34% in 2003, 2002 and 2001 to income before income taxes:

|2003                                            |  | 2002 |   | 2001     |  
|----------------------------------------------- |  | ---- | - | -------- | -
|Federal
      income tax benefit                |  |      |   |          |  
|at statutory rate                               |  |      | $ | 723,700  |  
|State
      income taxes benefit (expense),     |  |     
|net
      of federal benefit                    |  |      |   |         |  
|Other
      non-taxable income and              |  |     
|non-deductible
      expenses                   |  |      |   | (33,000  | )
|Change
      in deferred tax assets             |  |      |   | 784,100  |  
|Change
      in valuation allowance             |  |      |   | (784,100 | )
|Net operating loss not
      currently utilized |  |      |   | (689,300 | )
|Benefits
      recognized due to changes        |  |     
|in
      tax laws                               |  |      |   |         |  
|Other                                           |  |      |   | (1,400   | )
|Federal
      income tax benefit allocated      |  |     
|to
      discontinued operations                |  |      |   |         |  
|                                                |  |      |   |          |  
|Income
      tax benefit                        |  |      | $ |         |  
|                                                |  |      |   |          |  

|F-18
|----
|    
|    

The Company reported
  income tax benefits of $1,322,300 for the year ended December 31, 2002 and $1,078,200
  for the year ended December 31, 2001 arising from the losses incurred in those
  years. In March 2002, the Job Creation and Worker Assistance Act of 2002 (the
  Act) was enacted. The Act extended the general federal net operating loss
  carryback period from 2 years to 5 years for net operating losses incurred for
  any taxable year ending in 2001 and 2002. On June 12, 2002, the Company received
  a federal income tax refund of $1,034,700 attributable to 2001 net operating
  loss carried back. On March 20, 2003, the Company received a federal income
  tax refund of $1,427,400 attributable to 2002 net operating loss carried back.
  As a result, the Company recorded a valuation allowance for its net deferred
  tax assets, including its federal and state net operating loss for the year
  ended December 31, 2003. There was no tax benefit recorded relating to the increase
  in deferred tax assets. As of December 31, 2003, the Company had a net operating
  loss carry forwards of approximately $2,027,000 that will expire in 2015, if
  not utilized, available to offset future federal taxable income.

California limits the amount that could be carried forward to 55% of the losses incurred in 2001 and
60% of the losses incurred in 2002 and 2003. As of December 31, 2003, the Company had California
state net operating loss (NOL) carry forwards of approximately $4,723,000 to offset future taxable
income. The net operating loss carry forwards of $3,665,000 and $1,058,000 expires, if not utilized,
in 2014 and 2015, respectively.

Deferred tax assets and liabilities as of December 31, 2003 and 2002 were comprised of the following:

|                                            |  |  | **2003** | ****       | **2002** |  
|------------------------------------------- |  |  | -------- | ---------- | -------- | -
|                                            |  |  |          |           
|Deferred
      tax assets:                  |  | 
|Reserves
      (primarily the allowance for |  | 
|doubtful
      accounts) not currently      |  | 
|deductible                                  |  |  | $        | 130,300    |          | $
|Accrued compensation
      and benefits     |  |  |          | 19,000     |          |  
|Capital loss
      carryover                |  |  |          | 333,800    |          |  
|NOL carryover                               |  |  |          | 1,106,800  |          |  
|Others                                      |  |  |          | 6,900      |          |  
|Accumulated
      depreciation              |  |  |          | (29,300    | )        |  
|                                            |  |  |          |           
|                                            |  |  |          | 1,567,500  |          |  
|Valuation
      allowance                   |  |  |          | (1,567,500 | )        |  
|                                            |  |  |          |           
|Net deferred
      tax assets               |  |  | $        |           |          | $
|                                            |  |  |          |           

Realization of
  the Companys deferred tax assets is dependent upon future earnings in
  specific tax jurisdictions. The Company has evaluated all significant available
  positive and negative evidence, the existence of losses in the recent years
  and forecast of future taxable income (loss) in determining the need for a valuation
  allowance. At December 31, 2003 and 2002, the Company has recorded a valuation
  allowance, relating principally to the capital loss carryover, Federal and California
  net operating loss carryover and reserves not currently deductible, against
  the net deferred tax assets to reduce them to amounts that are more likely than
  not to be realized. The net increase in the total valuation allowance for the
  year ended December 31, 2003 and 2002 was $784,100 and $380,500, respectively.

|F-19
|----
|    
|    

During 2001, the
  Company recorded a $22,100 tax benefit of stock options exercised as a credit
  to additional paid-in-capital.

9.  
  LEASE COMMITMENTS

The Company leases office space, equipment, and vehicles under various operating leases. The leases
for office space provide for the payment of common area maintenance fees and the Companys share
of any increases in insurance and property taxes over the lease term.

Future minimum obligations under these non-cancelable operating leases are as follows:

|                                   | 
|---------------------------------- | 
|
|**YEAR
      ENDING DECEMBER 31,** | 
|                                   | 
|2004                               | 
|2005                               | 
|2006                               | 
|                                   | 
|                                   | 
|                                   | 

Total rent expense
  associated with all operating leases for the years ended December 31, 2003,
  2002 and 2001 was $133,800, $164,700 and $116,900, respectively.

10.  MAJOR
  VENDORS

One vendor accounted for approximately 18%, 11%, and 10% of total purchases by the Company for the
years ended December 31, 2003, 2002, and 2001, respectively. One other vendor accounted for 17% of
purchases for the year ended December 31, 2003. Management believes other vendors could supply similar
products on comparable terms as those provided by the major vendors. A change in suppliers, however,
could cause a delay in availability of products and a possible loss of sales, which could adversely
affect operating results.

11.  EMPLOYEE
  BENEFIT PROGRAM-401(k) PLAN

The Company has a 401(k) plan (the Plan) for its employees. The Plan is available to all employees
who have reached the age of twenty-one and who have completed three months of service with the Company.
Under the Plan, eligible employees may defer a portion of their salaries as their contributions to
the Plan. Company contributions are discretionary, subject to statutory maximum levels. Company contributions
to the Plan totaled $3,400 for the year ended December 31, 2001. There were no contributions by the
Company in 2003 and 2002.

12.  CONCENTRATION
  OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration of credit risk consist
principally of cash and cash equivalents and trade receivables. The Company places its cash and cash
equivalents with what it believes are reputable financial institutions. As of December 31, 2003 and
2002, the Company had deposits at one financial institution which aggregated $1,191,700 and $1,665,900
(including restricted cash of $250,000), respectively. As of December 31, 2003 and 2002, the Company
had deposits amounting to $692,300 and $482,700, respectively, at two other financial institutions.
Such funds are insured by the Federal Deposit Insurance Company up to $100,000 for each bank account.
The Company has another $250,000 deposited into a reserve account with Textron.

|F-20
|----
|    
|    

A significant
  portion of the Companys revenues and accounts receivable are derived from
  sales made primarily to unrelated companies in the computer industry and related
  fields located throughout the United States. For the years ended December 31,
  2003, 2002 and 2001, no individual customer accounted for more than 10% of sales.
  The Company believes any risk of credit loss is significantly reduced due to
  the use of various levels of credit insurance, diversity in customers, geographic
  sales areas and extending credit based on established limits or terms. The Company
  performs credit evaluations of its customers financial condition whenever
  necessary, and generally does not require collateral for sales on credit.

13.  SERIES
  A REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company is authorized to issue up to 5,000,000 shares of its $0.001 par value preferred stock that
may be issued in one or more series and with such stated value and terms as may be determined by
the Board of Directors. The Company has designated 1,000 shares as 4% Series A Redeemable Convertible
Preferred Stock (the Series A Preferred Stock) with a stated value per share of $1,000
plus all accrued and unpaid dividends.

On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement with an investor (Investor).
Under the agreement, the Company agreed to issue 1,000 shares of its Series A Preferred Stock at
$1,000 per share. On May 31, 2002, the Company issued 600 shares of the Series A Preferred Stock
to the Investor, and the remaining 400 shares would be issued when the registration statement that
registers the common stock underlying the Series A Preferred Stock became effective. As part of the
Preferred Stock Purchase Agreement, the Company issued a common stock purchase warrant to the Investor.
The warrant may be exercised at any time within 3 years from the date of issuance and entitles the
Investor to purchase 300,000 shares of the Companys common stock at $1.20 per share and includes
a cashless exercise provision. The Company also issued a common stock purchase warrant with the same
terms and conditions for the purchase of 100,000 shares of the Companys common stock to a broker
who facilitated the transaction as a commission.

The holder of the Series A Preferred Stock is entitled to cumulative dividends at the rate of 4% per
annum, payable on each Conversion Date, as defined, in cash or by accretion of the stated value.
The amount recorded as accretion of the stated value for the years ended December 31, 2003 and 2002
was $24,900 and $14,200, respectively. Dividends must be paid in cash, if among other circumstances,
the number of the Companys authorized common shares is insufficient for the conversion in full
of the Series A Preferred Stock, or the Companys common stock is not listed or quoted on Nasdaq,
NYSE or AMEX. Each share of Series A Preferred Stock is non-voting and entitled to a liquidation
preference of the stated value plus accrued and unpaid dividends. A sale or disposition of 50% or
more of the assets of the Company, or completion of a transaction in which more than 33% of the voting
power of the Company is disposed of, would constitute liquidation. At any time and at the option
of the holder, each share of Series A Preferred Stock is convertible into shares of common stock
at the Conversion Ratio, which is defined as the stated value divided by the Conversion Price. The
Conversion Price is the lesser of (a) 120% of the average of the 5 Closing Prices immediately prior
to the Closing Date on which the preferred stock was issued (the Set Price), and (b) 85% of the average
of the 5 lowest VWAPs (the daily volume weighted average price as reported by Bloomberg Financial
L.P. using the VAP function) during the 30 trading days immediately prior to the Conversion Date
but not less than $0.75 (Floor Price). The Set Price and Floor Price are subject to certain adjustments,
such as stock dividends.

The Company has the right to redeem the Series A Preferred Stock for cash at a price equal to 115%
of the Stated Value plus accrued and unpaid dividends if (a) the Conversion Price is less than $1
during the 5 trading days prior to the redemption, or (b) the Conversion price is greater than 175%
of the Set Price during the 20 trading days prior to the redemption. Upon the occurrence of a Triggering
Event, such as failure to register the underlying common shares among other events as defined, the
holder of the Series A Preferred Stock has the right to require the Company to redeem the Series
A Preferred Stock in cash at a price equal to the sum of (a) the redemption amount (the greater of
(i) 150% of the Stated Value or (ii) the product of the Per Share Market Value and the Conversion
Ratio) plus other costs, and (b) the product of the number of converted common shares and Per Market
Share Value. As the Series A Preferred Stock has conditions for redemption that are not solely within
the control of the Company, such Series A Preferred Stock has been excluded from shareholders
equity. As of December 31, 2003, the redemption value of the Series A Preferred Stock, if the holder
had required the Company to redeem the Series A Preferred Stock as of that date, was $958,600.

|F-21
|----
|    
|    

The Company has
  accounted for the sale of preferred stock and related warrants in accordance
  with Emerging Issues Task Force (EITF) 00-27 Application of Issue No.
  98-5 to Certain Convertible Instruments and EITF 00-19 Accounting
  for Derivative Financial Instruments Indexed to, and Potentially Settled in,
  a Companys Owned Stock.  Proceeds of $477,500 (net of
  $80,500 cash issuance costs) were received of which $222,500 (net of allocated
  issuance costs of $37,500) was allocated to the Series A Preferred Stock and
  $255,000 (net of allocated issuance costs of $43,000) was allocated to the detachable
  warrant based upon its fair value as computed using the Black-Scholes option
  pricing model. The $260,000 value of the beneficial conversion option on the
  600 shares of Series A Preferred Stock was recorded as a deemed dividend on
  the date of issuance. The allocated $46,300 value (net of $53,000 allocated
  issuance costs) of the warrant issued to the broker who facilitated the transaction
  was recorded as a stock issuance cost relating to the sale of preferred stock.
  As a result, a total amount of $397,300 was allocated to the warrants and was
  included in the current liabilities. The related issuance costs of $96,000 allocated
  to the warrants were included in deposits and other assets and are being amortized
  over a 3-year period using a straight-line method. As of December 31, 2003,
  issuance costs of $48,000 have been amortized to expense. As of December 31,
  2003, the carrying amount of the warrants was adjusted to the fair value of
  $55,700. The change in fair value of the warrants from the issuance date (May
  31, 2002) to December 31, 2002 and for the year ended December 31, 2003 was
  $105,800 and $235,700, respectively. The change in fair value of the warrants
  is included as other income. As of December 31, 2003, 852,100 shares of common
  stock could have been issued if the Series A Preferred Stock were converted
  into common stock.

On February 28, 2003, Nasdaq notified the Company that its common stock had failed to comply with the
minimum market value of publicly held shares requirement of Nasdaq Marketplace Rules. On March 6,
2003 the Company requested a hearing before the Listing Qualifications Panel, at which it would request
continued listing. The hearing was held on April 24, 2003. The Company was also notified by Nasdaq
that the Company did not comply with the Marketplace Rule that requires a minimum bid price of $1.00
per share of common stock. Subsequent to the hearing on April 24, 2003, Nasdaq notified the Company
that its common stock would be delisted from the Nasdaq SmallCap Market and such delisting took place
on April 30, 2003. The Companys common stock is eligible to be traded on the Over the Counter
Bulletin Board (OCTBB). The delisting of the Companys common stock enables the holder of the
Companys Series A Redeemable Convertible Preferred Shares to request the repurchase of such
shares 60 days after the delisting date. The Company has increased the carrying value of the Series
A Redeemable Convertible Preferred Stock to its redemption value of $958,600 and has recorded an
increase in loss applicable to common shareholders of $743,300 in the accompanying consolidated statement
of operations. As of December 31, 2003 no demand for payment from the shareholder has been received.
If such demand were to occur, there is no assurance that the Company would have the funding necessary
to satisfy the liability. The Company has included its 4% Series A Redeemable Convertible Preferred
Stock in current liabilities as of December 31, 2003.

|F-22
|----
|    
|    

14. CAPITAL STOCK

INVESTMENT BANKING
  SERVICES

On December 16,
  2002, the Company issued warrants for the purchase of up to 300,000 shares of
  its common stock under terms of an agreement for investment banking services.
  Warrants to purchase 100,000 shares of the Companys common stock were
  to vest immediately and warrants to purchase 200,000 shares were to vest 50%
  on June 16, 2003 and 50% on December 16, 2003. The Company accounted for this
  transaction in accordance with EITF No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS
  THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
  SELLING, GOODS OR SERVICES. On June 16, 2003, the Company terminated this agreement
  and the warrants to purchase 200,000 shares were cancelled. For the years ended
  December 31, 2003 and 2002, the Company recorded $28,500 and $2,400, respectively,
  in expense related to this transaction.

STOCK ISSUED FOR SERVICES

On June 14, 2001, the Company issued 333,400 shares of its common stock to an unrelated party in exchange
for radio advertising services to be received over a three-year period. All of the shares vested
upon issuance and are non-forfeitable, resulting in a measurement date and final valuation of shares
in the amount of $200,000 based upon the market price of the Companys common stock on the date
of issuance. Under the terms of the agreement, one-third of the radio advertising service credits
expire in two years. Radio advertising service credits are expensed when utilized and are included
in other selling, general and administrative expenses in the accompanying consolidated statements
of operations. Included in prepaid expenses and other current assets as of December 31, 2003 and
2002 are radio advertising credits in the amount of $61,100 and $150,000, respectively.

STOCK OPTION PLAN

On July 16, 1998 the Company adopted the 1998 Stock Option Plan and reserved 1,000,000 shares of Common
Stock for issuance under the Plan. Activity under the Plan is as follows:

|                        | Shares
      Available
      for Grant |          | Options
      Outstanding |  | Weighted
      Average
      Exercise
      Price |   | Weighted
      Average
      Fair
      Value |      | Weighted
      Average
      Remaining
      Contractual
      Life |  
|----------------------- | -------------------------------------- | -------- | ------------------------- |  | ------------------------------------------------- | - | --------------------------------------------- | ---- | ------------------------------------------------------------------- | -
|                        |                                        |          |                           |  |                                                   |   |                                               |      |                                                                     |  
|DECEMBER
      31, 2000 |                                        | 706,700  |                           |  | 293,300                                           |   |                                               | 2.78 |                                                                     |  
|Options granted         |                                        | (660,000 | )                         |  | 660,000                                           |   |                                               | 0.94 |                                                                     |  
|Options forfeited       |                                        | 102,700  |                           |  | (102,700                                          | ) |                                               | 2.65 |                                                                     |  
|Options exercised       |                                        |         |                           |  | (56,000                                           | ) |                                               | 0.99 |                                                                     |  
|                        |                                        |          |                           |  |                                                   |   |                                               |      |                                                                     |  
|DECEMBER
      31, 2001 |                                        | 149,400  |                           |  | 794,600                                           |   |                                               | 1.40 |                                                                     |  
|Options granted         |                                        | (30,000  | )                         |  | 30,000                                            |   |                                               | 0.95 |                                                                     |  
|Options forfeited       |                                        | 172,600  |                           |  | (172,600                                          | ) |                                               | 2.41 |                                                                     |  
|                        |                                        |          |                           |  |                                                   |   |                                               |      |                                                                     |  
|DECEMBER
      31, 2002 |                                        | 292,000  |                           |  | 652,000                                           |   | $                                             | 1.11 |                                                                     | $
|Options forfeited       |                                        | 58,000   |                           |  | (58,000                                           | ) |                                               | 2.63 |                                                                     |  
|                        |                                        |          |                           |  |                                                   |   |                                               |      |                                                                     |  
|DECEMBER
      31, 2003 |                                        | 350,000  |                           |  | 594,000                                           |   | $                                             | 0.96 |                                                                     | $
|                        |                                        |          |                           |  |                                                   |   |                                               |      |                                                                     |  

The following table summarizes
  information about stock options outstanding as of December 31, 2003:

|  | Options Outstanding |  | Options Exercisable |        
|- | ------------------- |  | ------------------- | -------
|
|$ | 0.76                |  |                     | 10,000 
|$ | 0.88                |  |                     | 323,800
|$ | 0.97                |  |                     | 206,200
|$ | 1.05                |  |                     | 10,000 
|$ | 1.50                |  |                     | 44,000 
|  |                     |  |                     |        
|  |                     |  |                     | 594,000
|  |                     |  |                     |        

|F-23
|----
|    
|    

Under the terms
  of the Plan, options are generally exercisable on the date of grant and expire
  from four to five years from the date of grant as determined by the Board of
  Directors. The Company applies Accounting Principles Board (APB) No. 25, ACCOUNTING
  FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for
  the plan. Under APB Opinion No. 25, because the exercise price of the Company
  stock options equals or exceeds the estimated fair value of the underlying stock
  on the measurement date, no compensation cost is recognized.

On July 24, 2002, the Company entered into a service agreement with a consultant for a term of 180
days. The consultant was paid by granting options to purchase an aggregate of 200,000 shares of the
Companys common stock. On August 26, 2002 the Company terminated the agreement and cancelled
the outstanding stock options. No expense was recorded by the Company in connection with this arrangement.

In January 2002, the Securities and Exchange Commission adopted new rules for the disclosure of equity
compensation plans. The purpose of the new rues is to summarize the potential dilution that could
occur from past and future equity grants under all equity compensation plans. The following provides
tabular disclosure of the number of securities to be issued as of December 31, 2003 upon the exercise
of outstanding options, the weighted average exercise price of outstanding options, and the number
of securities remaining available for future issuance under equity compensation plans, aggregated
into two categories - plans that have been approved by stockholders and plans that have not.

|Plan Category            |  | Number of 
      Securities to be 
      Issued Upon 
      Exercise of 
      Outstanding 
      Options and 
      Warrants |           | Weighted-average
      Exercise Price of
      Outstanding 
      Options and 
      Warrants |   | Number
      of
      Securities
      Remaining 
      Available for Future 
      Issuance Under 
      Equity 
      Compensation 
      Plans (Excluding 
      Securities Reflected 
      in 1st Column) | 
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                         | 
|                         | 
|Equity compensation      |  |                                                                                                                               |           |                                                                                               |   |                                                                                                                                                                                                                | 
|plans approved by        | 
|stockholders             |  |                                                                                                                               | 594,000   |                                                                                               | $ | 0.96                                                                                                                                                                                                           | 
|Equity compensation      | 
|plans
      not approved | 
|by
      stockholders    |  |                                                                                                                               | 500,000   |                                                                                               | $ | 1.20                                                                                                                                                                                                           | 
|                         |  |                                                                                                                               |           |                                                                                               |   |                                                                                                                                                                                                                | 
|Total                    |  |                                                                                                                               | 1,094,000 |                                                                                               | $ | 1.07                                                                                                                                                                                                           | 

|    
|----
|F-24
|    
|    

15.  SUPPLEMENTAL
  DISCLOSURE OF CASH FLOWS INFORMATION

Cash was paid
  during the years ended December 31, 2003, 2002 and 2001 for:

|             | YEAR ENDED
      DECEMBER 31, |        
|------------ | ----------------------------- | -------
|             |                               |        
|             | **2003**                      | ****   
|             |                               |        
|Income taxes | $                             | 3,600  
|             |                               |        
|Interest     | $                             | 170,500
|             |                               |        

Non cash investing and financing activities for the years ended December 31, 2003, 2002 and 2001 were
as follows:

During 2001, the Company issued 333,400 shares of its common stock to an unrelated party in exchange
for radio advertising services to be received over three-year period. All of the shares vested upon
issuance and are non-forfeitable, resulting in a non-cash transaction of $200,000 based upon the
market price of the Companys common stock on the date of issuance.

FNC acquired certain assets of a computer technical support company in September 2001 in exchange or
16,100 PMIC shares, resulting in a non-cash investing transaction of $20,000 based upon the average
market price of the Companys common stock.

On May 31, 2002, the Company issued warrants to purchase 400,000 shares of the Companys common
stock to the preferred stock investor and the broker in connection with the issuance of preferred
stock. In connection with the issuance of the preferred stock, the Company recorded a non-cash deemed
dividend of relating to the beneficial conversion feature of the preferred stock of $260,000 for
the year ended December 31, 2002. Accretion of the stated value of the preferred stock of $768,200
(including a recording of an increase of $743,300 to the redemption value) and $14,200 was recorded
for the years ended December 31, 2003 and 2002, respectively.

In December 2002, the Company issued warrants to purchase up to 300,000 shares of the Companys
common stock at $1.20 per share for consulting services. On June 16, 2003, the Company terminated
this agreement and warrants to purchase 200,000 shares of the Companys common stock were cancelled.
For the years ended December 31, 2003 and 2002, the Company recorded $28,500 and $2,400, respectively,
in non cash expense related to this transaction and increased additional paid-in capital for the
same amount.

As a consideration for the sale of Leas assets to certain of Leas employees on June 30,
2003, the Company received an electronic commerce support services contract for a term of 2 years
valued at $48,000. The value of the electronic commerce support services is being amortized over
the 2-year term using a straight-line method.

16.  INVESTMENTS

The Company and Rising Edge Technologies, Ltd., a corporation based in Taiwan (Rising Edge), entered
into an Operating Agreement with Lea, a California limited liability company) formed in January 1999.
The objective of Lea was to provide internet users, resellers and providers advanced software solutions
and applications. Prior to June 13, 2000, the Company and Rising Edge each owned a 50% interest in
Lea. The brother of a director, officer and principal shareholder of the Company was a director,
officer and the majority shareholder of Rising Edge (Rising Edge Majority Holder). On June 13, 2000,
the Company purchased a 25% ownership interest in Rising Edge common stock for $500,000 from the
Rising Edge Majority Holder. As such, the Company had a 62.5% combined direct and indirect ownership
interest in Lea, which required the consolidation of Lea with the Company. The Company accounted
for its investment in Rising Edge by the equity method whereby 25% of the equity interest in the
net income or loss of Rising Edge (excluding Rising Edges portion of the results of Lea and
all inter-company transactions) flows through to the Company. During the year ended December 31,
2001, Lea incurred a $191,700 net loss and the equity in the loss in the investment in Rising Edge was $14,500.

|F-25
|----
|    
|    

In December 2001,
  the Company entered into an agreement with Rising Edge Technology (Rising Edge)
  and its principal owners to exchange the 50% Rising Edge ownership interest
  in Lea for the Companys 25% ownership interest in Rising Edge. As a result,
  as of December 31, 2001 PMIC owned 100% of Lea and no longer had an ownership
  interest in Rising Edge.

In connection with the Companys on-going evaluation of the net realizable value of this investment
during the fourth quarter of 2001, based on the operating history, projections and a change in focus
of the investees business, the Company believed the value of its investment was impaired and
wrote off its investment in Rising Edge prior to the exchange of the Rising Edge shares for Lea ownership
resulting in an impairment loss of $468,000 (including the equity in the loss in the investment of
$14,500 during 2001). Because of the write-down of the Rising Edge investment to zero in the fourth
quarter of 2001, no amounts were recorded for the 50% Rising Edge ownership interest in Lea received
in this exchange.

INVESTMENT IN TARGETFIRST

On January 20, 2000, the Company acquired, in a private placement, 485,900 shares of convertible preferred
stock of a nonpublic company, TargetFirst, Inc. (formerly ClickRebates.com), for approximately $250,000.
The Companys investment in TargetFirst, Inc., which represented approximately 8% of the preferred
stock offering, was being accounted for using the cost method. In connection with the Companys
ongoing evaluation of the net realizable value of this investment based on its operating history
and projections, the Company determined that its investment was impaired and recorded an impairment
loss of $250,000 in the second quarter 2001.

17.  ACQUISITIONS

On September 30, 2001, FNC acquired certain assets, consisting principally of furniture and fixtures,
computers and certain vendor reseller agreements, of a computer technical support company, Technical
Insights (TI), in exchange for $20,000 worth of PMIC common stock (16,100 shares). TI has expertise
in computer technical training which enables FNC to better serve its corporate customers in the field
of technical training. The total purchase price of the TI acquisition of $46,600, including acquisition
costs of $26,600, was allocated pro rata to the assets acquired based upon estimates of their fair
values. Under the purchase agreement, among other terms, FNC was required to pay $126,000 to the
sellers upon completion and full settlement of a sale transaction as specified in the agreement.
On October 2001 the sellers became employees of FNC. As a result of this profit sharing arrangement,
the payment to the sellers was recorded as compensation expense by the Company.

In October 2001, PMICC paid $85,000 cash to acquire certain assets, including fixed assets and intellectual
property, and assumed a $20,000 accrued vacation liability of LiveMarket, Inc. The LiveMarket assets
were then transferred to Lea.

18.  SEGMENT
  INFORMATION

The Company has three reportable segments:  PMI, PMIGA, and LW.

PMI imports and distributes electronic products, computer components, and computer peripheral equipment
to various distributors and retailers throughout the United States. PMIGA imports and distributes
similar products focusing on customers located in the east coast of the United States. LW sells similar
products as PMI to retailers and to end-users through a website.

|F-26
|----
|    
|    

FNC provided professional
  services to mid-market companies focused on consulting, implementation and support
  services of Internet technology solutions and computer technical training services
  to corporate clients. Lea was engaged the development and distribution of software
  and e-business products and services, as well as integration and hosting services.
  During the second quarter 2003, the Company sold substantially all the assets
  of FNC to a third party. The Company also sold substantially all the assets
  of Lea, to certain of the Leas employees. The activities of FNC and Lea
  for all periods have been reclassified for reporting purposes as discontinued
  operations. The Company evaluates performance based on income or loss before
  income taxes and minority interest, not including nonrecurring gains or losses.
  Inter-segment transfers between reportable segments have been insignificant.
  The Companys reportable segments are strategic business units. They are
  managed separately because each business requires different technology and/or
  marketing strategies. PMI and PMIGA are comparable businesses with different
  locations of operations and customers. Sales to foreign countries have been
  insignificant for the Company.

The following table presents information about reported segment profit or loss and segment assets for
the years ended December 31, 2003, 2002 and 2001:

|Year Ended
      December 31, 2003: |         |            |               |      |            |      |                |          
|----------------------------------- | ------- | ---------- | ------------- | ---- | ---------- | ---- | -------------- | ---------
|                                    | **PMI** |            | **PMIGA**     |      | **LW**     |      | **Totals**     |          
|                                    |         |            |               |      |            |      |                |          
|Revenues
      from external        |         |            |               |      |            |      |                |          
|customers                           | $       | 60,138,700 |               | $    | 7,149,100  |      | $              | 7,039,200
|Interest
      income               |         | 3,200      |               |      |           |      |                |         
|Interest
      expense              |         | 153,000    |               |      | 3,800      |      |                | 13,700   
|Depreciation
      and             
|amortization
      (1)              |         | 202,500    |               |      | 28,600     |      |                | 7,600    
|Segment loss
      before taxes    
|and
      minority interest         |         | (1,143,300 | )             |      | (366,900   | )    |                | (258,100 
|Segment assets                      |         | 22,707,300 |               |      | 1,087,100  |      |                | 1,687,600
|Expenditures
      for segment     
|assets                              |         |           |               |      |           |      |                |         
|                                   
|Year Ended
      December 31, 2002: |         |            |               |      |            |      |                |          
|                                    | **PMI** | ****       | ******PMIGA** | **** | ******LW** | **** | ******Totals**
|                                    |         |            |               |      |            |      |                |          
|Revenues
      from external       
|customers                           | $       | 56,487,900 |               | $    | 9,374,200  |      | $              | 1,591,700
|Interest
      income               |         | 13,500     |               |      | 600        |      |                |         
|Interest
      expense              |         | 164,400    |               |      | 700        |      |                | 1,000    
|Depreciation
      and             
|amortization
      (1)              |         | 190,800    |               |      | 28,000     |      |                | 800      
|Segment loss
      before taxes    
|and
      minority interest         |         | (1,470,400 | )             |      | (796,200   | )    |                | (166,600 
|Segment assets                      |         | 21,442,300 |               |      | 842,200    |      |                | 412,300  
|Expenditures
      for segment     
|assets                              |         | 58,900     |               |      | 800        |      |                | 1,500    
|                                   
|Year Ended
      December 31, 2001:
|                                    | **PMI** |            | **PMIGA**     |      | **LW**     |      | **Totals**    
|                                    |         |            |               |      |            |      |                |          
|Revenues
      from external       
|customers                           | $       | 60,293,500 |               | $    | 11,445,300 |      | $              |         
|Interest
      income               |         | 85,500     |               |      | 5,500      |      |                |         
|Interest
      expense              |         | 230,700    |               |      | 600        |      |                |         
|Depreciation
      and             
|amortization                        |         | 222,600    |               |      | 27,500     |      |                |         
|Segment loss
      before taxes    
|and
      minority interest         |         | (1,444,000 | )             |      | (619,800   | )    |                |         
|Segment assets                      |         | 19,102,200 |               |      | 1,549,800  |      |                |         
|Expenditures
      for segment     
|assets                              |         | 126,200    |               |      | 32,600     |      |                |         

|    
|----
|F-27
|    
|    

(1)  The
  total of reportable segment depreciation and amortization does not include $32,000
  and $16,000 of amortization expense related to the warrant issuance costs for
  the years ended December 31, 2003 and 2002, respectively.

The following
  is a reconciliation of reportable segment loss before income taxes and total
  assets to the Companys consolidated totals:

|                                               | **2003** |             | **2002** |   | **2001**   |  
|---------------------------------------------- | -------- | ----------- | -------- | - | ---------- | -
|                                               |          |             |          |   |            |  
|LOSS BEFORE
      INCOME TAXES:                |          |             |          |   |            |  
|Loss before
      income taxes and            
|minority
      interest for reportable        
|segments                                       | $        | (1,768,300  | )        | $ | (2,432,200 | )
|Impairment
      loss on investments           |          |            |          |   |           |  
|Change in
      fair value of warrants         |          | 105,800     |          |   | 235,700    |  
|Amortization
      of warrants issuance costs  |          | (32,000     | )        |   | (16,000    | )
|                                               |          |             |          |   |            |  
|Consolidated
      loss before income taxes   
|and
      minority interest                    | $        | (1,694,500  | )        | $ | (2,213,500 | )
|                                               |          |             |          |   |            |  
|ASSETS:                                       
|Total assets
      for reportable segments     | $        | 25,482,000  |          | $ | 22,696,800 |  
|Assets of
      FNC and Lea                    |          | 223,500     |          |   | 1,363,100  |  
|Other assets                                   |          | 132,000     |          |   | 918,300    |  
|Elimination
      of inter-company receivables |          | (11,065,100 | )        |   | (7,711,200 | )
|                                               |          |             |          |   |            |  
|Consolidated
      total assets                | $        | 14,772,400  |          | $ | 17,267,000 |  
|                                               |          |             |          |   |            |  

19. LITIGATION SETTLEMENT AND CONTINGENCIES

In December 2003, the Company settled a claim against a customer for a past due receivable of $734,500.
Under the settlement agreement, the customer is required to pay the entire balance of $734,500 (without
interest) to the Company in 12 equal monthly installment payments of approximately $61,200 for each
installment. The Company has secured all the customers assets, including inventory, accounts
receivable, machinery and equipment as collateral. The Company has received all the monthly installment
payments that are due from this customer. As of December 31, 2003, the outstanding receivable from
this customer was $673,300.

In April 2003, the Company settled a lawsuit relating to a counterfeit products claim for $95,000 which
was included in other expenses in the accompanying consolidated statement of operations.

There are various claims, lawsuits, and pending actions against the Company involving matters incidental
to the Companys operations. It is the opinion of management that the ultimate resolution of
these matters will not have a material adverse effect on the Companys consolidated financial
position or results of operations.

|F-28
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|    
|    

SUPPLEMENTAL SCHEDULE

PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries

SCHEDULE
  II - VALUATION AND QUALIFYING ACCOUNTS

|Beginning
      Balance            |  | Charged to
      Costs 
      and Expense |         | Write-offs
      
      of Accounts |   | Ending 
      Balance | 
|---------------------------------- |  | ----------------------------------------- | ------- | ----------------------------------- | - | --------------------- | 
|                                   |  |                                           |         |                                     |   |                       | 
|Year
      ended December 31, 2001 |  | $                                         | 175,000 |                                     | $ | 450,500               | 
|                                   |  |                                           |         |                                     |   |                       | 
|Year ended
      December 31, 2002 |  | $                                         | 400,000 |                                     | $ | 331,300               | 
|                                   |  |                                           |         |                                     |   |                       | 
|Year ended
      December 31, 2003 |  | $                                         | 305,000 |                                     | $ | 125,000               | 

|Beginning
      Balance            |   | Increases |  | Ending 
      Balance |        
|---------------------------------- | - | --------- |  | --------------------- | -------
|
|Year ended
      December 31, 2001 | $ |          |  | $                     | 402,900
|                                   |   |           |  |                       |        
|Year ended
      December 31, 2002 | $ | 402,900   |  | $                     | 380,500
|                                   |   |           |  |                       |        
|Year ended
      December 31, 2003 | $ | 783,400   |  | $                     | 784,100

|    
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|F-29
|    
|